All posts by jesse

BCREA Calls for Price Drops. WAIT WHAT?

BCREA in a recent report is forecasting “stability” in the housing market, but at the same time is also forecasting (average) price drops in most areas:

After declining 12 per cent in 2010, residential unit sales through the Multiple Listing Service® (MLS®) in BC are forecast to rise by 3 per cent to 77,000 units in 2011 and a further 4 per cent to 80,000 units in 2012. However, BC home sales will remain relatively low by historic measures, falling short of their 10-year average of 87,600 units. While low mortgage interest rates are expected to persist through 2012 accommodating housing demand, headwinds in the global economy will act to restrain BC economic and employment growth.

BC economic growth slowed from an Olympic charged 3.8 per cent in 2010 to a forecast 2.1 per cent this year. Lackluster economic performance is largely the result of weaker than expected US economic activity, some belt tightening and deleveraging by households, and the Euro-zone debt crisis. Employment growth in the province is estimated to fall to 1.1 per cent this year. While emerging Asian markets have tilted some BC exports in an upward trajectory, domestic demand has stagnated. Retail sales in the province are estimated to increase just 1.5 per cent this year after climbing 5 to 6 per cent per annum over much of the last decade. Against this backdrop, moderate consumer demand for housing and relatively flat home prices are forecast through 2012.

Despite more moderate consumer demand, average home prices have climbed dramatically this year. The average annual BC MLS® residential price is estimated to increase 12 per cent to $564,600 in 2011. Rather than reflecting market conditions, the upward skewing of average price data was the result of a change in regional demand patterns and a shift in the mix of home types sold rather than as a result of a return to pre-recession market froth. By the winter months, most of the upward bias in average price data will have dissipated which will contribute to the average annual BC MLS® residential price decline of 2.5 per cent to $550,500 in 2012.

For flat to falling prices, that means months of inventory averaging about 6 for the entire year. That means longer times to sale and more delistings.

Credit and Duration Mortgage Story

VMD brought this article to our attention from by Rob McLister: The Incredibly Shrinking Variable Discount

Just weeks ago you could find variable-rate mortgages at prime – 0.80% (P-.80%) or better. Consumers thought they were here to stay, but the tables turned…fast.

Economic troubles and lender profit motives have shrunken variable discounts beyond expectations. Banks are now commonly quoting prime rate, for example, with little discounting.

Once the last few holdout lenders with P-.50% disappear, discounted variables could move towards P-.25%…or worse. Some lenders even suggest that prime or prime plus could be the new normal.

Credit risk seems to have increased of late. Some industry operatives provide some thoughts (emphasis mine):

While variables have cost less than 5-year fixed mortgages a majority of the time in the past, favourites don’t win every game.

More importantly, assumptions are key when it comes to rate studies. Two important factors have impacted the research quoted above:

  1. A multi-decade bias towards falling rates
  2. Use of posted rates (instead of discount rates)

“Interest rates have been trending downward for two decades,” BMO Capital Markets Senior Economist Benjamin Reitzes told us in a recent interview. By default, he says, that’s tilted the table more in favour of variables than it otherwise would be.

Looking ahead, rates are no longer able to drop over one percent. The most we can realistically hope for is an extended period of horizontal rate movement. (The BoC can still cut rates slightly, but the European and American crises and sub-2% core inflation won’t delay hikes forever.)

As a result, Reitzes says, “Going forward, borrowers won’t see the same advantage to variable rates as they have in the past 25 years

The second factor that’s largely ignored when citing rate research is the actual mortgage rates used for backtesting. Each of the three studies above uses posted rates in their historical analysis…

According to [Moshe] Milevsky, “…The historical probability of doing better with the floating rate mortgage…hovered around 70% to 80%” when the borrower used deep discount rates (based on a 1965-2000 study period).

Using today’s discounts, that 70-80% drops to just 53%, based on our findings from 1970 to 2006. (Obviously today’s spreads would not have applied historically but, as Milevsky maintained in his research above, that is beside the point.)

In other words, the fixed/variable decision would have been a coinflip, based on today’s spreads.

Mortgage loan duration decisions is always a hot topic around dinner tables of real estate investors. Given how shallow the long-short mortgage curve is, it’s an even tougher choice now. Still, looking at either 5-year or variable rates, the difference in payments between owning and renting is evidently still tipping some into ownership; October sales in Vancouver are up year-on-year. I get the sad feeling that people are not heeding the Bank of Canada’s reminder about how 30-year-amortized debt remains past a 5-year mortgage term.

Village at False Creek and Elections

It’s been about a year since I did a quick “stress test” on the Millennium Water Village at False Creek development in terms of recouping a loan by liquidation of Millennium’s assets. Well now NPA mayoral candidate Suzanne Anton would like an update on how things are going:

NPA Candidate for Mayor Suzanne Anton is calling on City Hall to release information on sales, social housing and the overall financial position of the Olympic Village project.“The Olympic Village at Southeast False Creek has been an ongoing financial concern for Vancouver residents,” says Anton. “And Mayor Robertson promised during the last election to be open and transparent on this. They need to report on the village by November 1.”A receiver was appointed to oversee the development in November 2010. Anton says the last financial reporting by the city was in April 2011. She believes a report would be of great interest to voters at this point.

And a response from Ballem:

Market (For Sale) Condominiums

Total sales: 427 sold out of 737 market units (60% sold)

Sales since February 2011 launch: 164 (164 units over 156 days – just over one per day) to mid September 2011

Total rented: 26 market units have been rented

Total market units occupied: 453 out of 737 units (62% occupied)

Market Rental Units

Total rented: 119 out of 119 rental units (100% rented)

Commercial Spaces

TD Bank and Legacy Liquor Store open

Terra Breads: successfully opened Saturday, Sept. 24, 2011

Laundry/Drycleaning Store: tenant improvements under way with anticipated opening by end of year

Urban Fare: scheduled to open in June 2012 but they are attempting to open in May 2012

London Drugs: anticipated to open by end of May 2012

City Owned Commercial Spaces

Creekside Community Centre – Village Kitchen Restaurant scheduled to open in the spring of 2012

Salt Building: City is in negotiations to finalize long term tenancy – in the meantime, the Salt Building is being used for short term tenancies

Affordable Housing

The two City buildings (on Parcels 5 and 9) – both 100% occupied (total of 168 units)

Co-op (Parcel 2) – ~80% occupied (66 of 84 units)

Overall occupancy of the Village is 73%

I think it would be good to get an update on the finances, not just occupancy, as well. As of a year ago, the City had a $530 Million loan, never mind the land value. As this project has progressed things have become rather confusing. I’m hoping the illustrious City managers can clarify the situation, in the interests of “great interest”. I’ll do my best to wade through the accounting but it’s not looking good. There are still 284 units to be sold, it seems and a few plots have been reserved for a cooperative and rental units. For the sake of City taxpayers, let’s hope the greater fool bin hasn’t been bled dry.

Global with Bearish Story 2.0

Another news clip from Greenhorn AKA SethM.

May favourite clip at 4:50: a bartender living in a downtown condo bought by her parents. She pays them rent. Horror, you say? Apparently not: “It’s not that simple. They’re pretty strict. They’re just like a bank.” LOL We’ll see!