All posts by jesse

BC Negative Savings Rate: Does not Compute

A recent post by Ben over at financialinsights highlighted a BMO report on RRSP vulnerability as a savings vehicle in Canada. Most notably, BC stands out like a sore thumb when it comes to savings rates, defined roughly as the percentage of disposable income not spent:

For 1.5MM households with average income of $75,000, a -4.2% savings rate means spending $4.8BB more than the province’s $113BB reported personal income.

The low savings rate is nothing new and Doug Porter at BMO has opined a low savings rate isn’t necessarily a bad thing if asset prices are increasing:

“While debt has risen to record heights, so, too, have financial assets due to a rebound in equities and an underlying rise in savings”

BC Stats, in its heyday, has released a few interesting reports on savings rates. Here (pdf) is one from 1994, where they state the following observations based on analysis of data from the mid-1960s to 1994:

  • there is a positive correlation between changes in the unemployment rate and savings rate
  • Interest rates are also strongly correlated with BC’s savings rate
  • British Columbians have consistently lagged behind other Canadians in terms of how much of their disposable income is saved
  • Lower savings rates may have to do with: higher consumer prices, age demographics, and lower income growth.
  • Remember this report was published 17 years ago now! Since then, BC’s savings rate has moved negative. There was a more recent paper on savings rate published by BC Stats — I cannot find it any more online — where there was more analysis of the savings rate question as a negative savings rate seemed to indicate a structural problem with the provincial economy.

    The question is, therefore, does BC’s chronically negative savings rate portend a significant structural problem with the economy, or are there other factors at play? There are a few potential answers, including:

    • Unreported income, from internal and external sources,
    • High net worth due to assets accumulated during non-residency
    • Borrowing against, or selling, existing asset equity
    • Assets held by BCers are growth, as opposed to value, oriented.
    • Others?

    All must be occurring in a greater proportion to other provinces. A recent TD report provides some guesses on which of these could be having an effect:

    Reflecting the lofty costs of homeownership, households in British Columbia record the highest vulnerability. In particular, B.C. residents on average register the highest debt-to-income ratio,  debt-service cost, and greatest sensitivity to rising interest rates. What’s more, B.C. is the only province where the average savings rate is negative. None of this is new, however, as the province has systematically been the most vulnerable since the start of our data series in 1999. The structural nature of this challenge suggests that there maybe factors at play that are not being captured in the aggregate data. For example, the province’s relatively large economic reliance on its service sector and self-employment – two areas that tend to have higher-than-average incidences of non-reported income – might be superficially driving down income and driving up the various sub-index readings.

    In addition, B.C. households appear to have adopted coping mechanisms, such as renting out basement apartments, which might not be fully factored into the income side. Even if these factors are part of the story, they don’t address the fact that British Columbia’s [debt] index level has recorded the second fastest rate of increase among the provinces over the past half decade. Higher interest rates over the next few years threaten to leave as many as one in ten households in B.C. in a position of financial stress. On the plus side, rapidly-appreciating home prices in the province has left the debt-to-asset ratio – a metric of household leverage – below the Canadian average. Still, with the home price-to-income ratio pointing to some ongoing over-valuation in the housing market, stable B.C. home values are far from assured.

    Emphasis mine.

    Condo Sales and Marketing Tricks Part I

    With a few new and old developments selling quickly in Vancouver it is time once again to open up the hood and take a look at various techniques (dare I say “scams” which I will use interchangeably throughout this post — apologies in advance) used by real estate salesmen and marketeers to move their product. I am expert in neither salesmanship nor marketing but do have a gargantuan tumor of skepticism.

    This is the first in a planned series of posts surrounding sales and marketing tactics used in the real estate industry, focused mostly on BC but many tactics are universally applied pretty much everywhere. Sales techniques generally involve establishing: the good for sale is scarce, trust with the customer, the product has value to the customer, and the product has value to others besides the customer.

    This first post concentrates on condo presales.

    Confidence Scam

    The technique I saw in action in Toronto. What happens here is that many prime units are listed as “SOLD” in big red letters on a big wallboard. Customers are obviously disappointed with this but a sales agent takes their number and will phone them if one comes available. Of course within a day or two they get a call, either indicating the unit is back on the market or the owner of the presale is looking to sell it for a quick profit due to some cash crunch or whatever. This works well when the customer believes they have an inside track to the prime units through the sales agent. In many cases ethnicity or other commonalities are used to their full advantage to foster trust.

    This line of salesmanship is particularly offensive — it comes across as a gambling house scene out of the movie The Sting. The atmosphere is loud, fast-paced, and it’s hard not to think “something bigger” is going on and you need in on it. Phone calls from salespeople are filled with background noise and conversations are fast and interrupted, giving further sense of urgency. Include the trusted “insider” shepherding the buyer to the till, and the fix is in.

    Now or Never

    This works particularly well if you’re in the middle of a lineup. Salespeople can be pushy and fast, “requiring” you to sign a thick and complicated contract quickly. If you don’t buy now, they say, there are dozens more waiting in the line. The sense of urgency is thick, and an ultimatum is often given. Luckily in BC there is a cooling off period after signing a contract, where you can renege if you get cold feet. One hopes the adrenaline and endorphins wear off before that period ends.


    Don’t laugh. Salespeople will cry to get a sale. Remember Gil, the Glengarry Glen Ross-esque salesman from the Simpsons? Don’t fall for it. There are many things to cry about in life; walking away from a “hard up” sales agent doesn’t even come close.

    Lineups and Media Hype

    The idea here is to produce the appearance of impending scarcity by producing lineups in lengths far exceeding the number of units being sold. If successful — and it often isn’t — the media are often quick to pounce on the opportunity of an easy story, and the positive feedback loop is closed. Lineups beget lineups and the development sells out quickly. The same technique is used at night clubs. We witnessed this recently with the new Metrotown Bosa condo/hotel development and to a lesser extent with the Village at False Creek.

    Pre-selling to Insiders

    This technique was used most recently by condo marketing virtuoso Bob Rennie on the Village at False Creek, where he claimed 30 units were sold to a select few “insiders” who got first kick at the can. This technique is useful because it shows customers that industry insiders have confidence in the market so the investment is a good one. In the case of the Village at False Creek, the astute will have noticed it was unclear whether or not the 30 presales actually completed. The wording of the press is a bit ambiguous:

    “Rennie said it’s his initial goal to try to sell 60 condos in 60 days and he might already be more than halfway there. Last week, he did some market testing and got offers on 31 units, he said.”

    Hm. He got offers but did he close? You need to close, man.

    Bait and Switch, Lost Leaders, and Discounts

    This is simply offering specific units at discounted prices but only having more expensive or less desirable units for sale. This is pretty common everywhere. Discounts are, again, pretty straightforward: slap an “up to 50% off” sticker on a billboard and witness a feeding frenzy ensue. The obvious question, of course, is up to 50% off what, exactly?

    False Comparables

    I’ve never witnessed this first-hand but, if a developer has other projects on the go close by, they can temporarily inflate asking prices, giving the sense that a particular unit is priced to market.

    Condo Fee Discounts and Other Incentives

    This is where the developer will, through agreements and warranties (some legally required, mind), provide a lower strata/maintenance fee for buyers. This can sometimes be done through straight incentives (offering to pay a certain % of fees for N months) or through a prepaid warranty. When these incentives end and the strata is flying solo, fees can escalate significantly. Other incentives include discounted financing rates (0.5% APR or whatever), cars, additional parking spots, paying the HST, the list is endless.

    Add-on Fees

    This applies to condos as much as cars. The sticker price isn’t necessarily what you’ll be paying. Be sure to look at the bottom line.


    This is where presale buyers are only given a very short time to do a walk-through to look for deficiencies. Often only one hour is allotted. Any deficiencies (mostly cosmetic; large deficiencies are usually covered under warranty) not noted are the responsibility of the buyer. Think about this for a second: you buy a $500,000 asset and are given only one hour to find deficiencies?!? Does that seem reasonable?

    Layout Changes

    Often presale contracts are worded such that the developer has the ability to change suite layouts and this is laid out in the contract. CBC Marketplace did an exposee in early 2008 on this and other dirty tricks about 3 years ago. Make sure you know what you’re getting. If it’s ambiguous, well, I guess you know better next time. Go to the link for more useful tips on how not to get shafted. A derivative of this scheme is to produce showrooms with dimensions on the large side of what actual units will be. Vaulted ceilings and lighting are used to make a suite seem larger than it really is.

    Forgetting about Parking

    Many people incorrectly assume a condo comes with a parking spot. Not necessarily…

    Developer Financing

    This isn’t necessarily a scam but some developers have agreements with financing outfits to allow buyers to obtain mortgages. This can be an advantage or a disadvantage but, given how much other hanky-panky could be going on, I would be cautious dealing with these outfits. It may turn out to be a good deal due to reduced overhead or the developer throwing in incentives (mentioned above), but it may not be as good a deal as you think.

    How to Protect Yourself

    So what are the methods available to bolster a defense against being taken to the cleaners? Some people suggest using  a buyer agent to help guide you through the morass. To this I suggest, even then, it pays to tread carefully. If a buyer agent is paid only on a successful closed sale, there is an inherent and unavoidable conflict of interest to close the deal. I would even suggest using an agent on a fixed retainer, and use someone who you know well, if that’s possible. Additionally, if you have a trusted friend or family member who knows some of the pitfalls to avoid when buying, employ them and get multiple angles of advice. Friends and family, in my experience, have often been more lucky than competent so even that advice should be evaluated carefully. It should be self-evident to retain a lawyer who is working for you, and paid the same regardless of your end decision.

    As an additional aid, I prefer to concentrate on the numbers and blatantly ignore sales tricks. It comes down to the price and what income (imputed or rental) I reap from it. If you know what you’re willing to pay beforehand, it’s dead easy to walk away. I haven’t been into a condo or presale sales room for a while now simply because the numbers don’t work for me and it’s doubtful the price could be negotiated sufficiently lower to where they do.

    You can attempt to change clauses in the presale contract more to your advantage. Given the complexity of the contracts this is no small feat. If sales are slow, however, it can’t hurt to try crossing off every clause that is not to your advantage. Remember how much money is at stake: hundreds of thousands of dollars of your income, past and future. In the corporate world, a contract of that size typically go through several revisions, sometimes major, before they are signed, as well as many hours confirming the contract is in the best interests of the company. Why not with a condo purchase?


    Condo sales and marketing is fraught with different techniques designed specifically for extracting as much money from you as possible. I have attempted to list a smattering of the usual tricks for your perusal. Check out the comments for more tips and warnings from our loyal readers. This is not to say that buying a presale condo is always a bad idea; this blog would simply encourage you to properly account for the risks and be cognizant of the sales tactics used.

    The Village Selling Well

    This blog has highlighted many of the stories surrounding the Vancouver housing market with a bearish tinge. But often I find myself cheering for the other side, most notably with the sad state of affairs over at the Millennium Water Village at False Creek development, where thaumaturgist Bob Rennie and a maniple of marketeers have been tasked with selling the remaining units to recoup some of the money the City borrowed to complete the project. I provided some estimates of projected losses a few months ago, based on average price per square foot. Hoodsurf provides the quicksheet of the approximate pricing.

    Well wonder of wonders, it looks like the opening weekend was a stupendous success. The BC forum/Gong Show Realestatetalks has filled in some anecdotes from the front lines. Apparently over 70% sold over the weekend with an additional waiting list of 100.

    Is this a bullish sign for Vancouver? Well I don’t know about that. A look across the water from the development yields well over 1000 condo units for sale. Here’s a map search of a small smidgen of the downtown core courtesy MLS map search:

    Why aren’t these units selling? Was the Village at False Creek well-priced, or was it simply the red “30% off” stickers on the unit doors? What we do know is that there are now over 100 fewer people who will be available to buy these units already for sale. The weekend was marvelous for showing, a crisp sunny weekend, and that couldn’t have hurt.

    It’s useful to pay attention to the tactics employed by Mr. Rennie, including

    • Withholding specific price information, only ranges
    • Pre-selling certain units to “insiders”, giving the pricing some semblance of acceptability
    • Blitzing the print and TV media in the week leading up to the event
    • Telling City Hall to go into a room and talk to nobody

    Heavens knows what went on behind closed doors…

    I commend Bob Rennie for ostensibly pulling this matzo ball out of the fire, at least in part. The discounts were significant and apparently “aggressively priced” compared to comps. That certainly helped, along with his ability to tap into the local media and his many years of experience punting real estate. In my view, based on cap rates alone, even at current price the development is significantly overpriced, as are most if not all condos in Vancouver these days.

    This development was facing off the taxpayers of Vancouver — and the public services it offers — versus individuals who can afford to buy expensive real estate. In speculative bubbles like this one, for me it’s not about who wins and who loses, it’s the depraved entertainment of seeing wild animals fight over scraps of meat. But on this specific occasion, I was rooting for Bob from day one and, for today, to him I tip my hat. Well done.


    A bearish blogger

    Silly Math for Speculators

    If I had a nickel for every time I had to endure some property investor telling me about how much money they made, I’d have enough to buy a condo in Phoenix. But just for fun I decided to run some numbers on a stereotypical flipper and what conditions s/he would require to make a “profit” on a flip. Before beginning, remember the mindset: opportunity cost stays in the textbook — what is being measured is whether or not the flipper has more money in a year than when he bought. So we can calculate the approximate profit of a flipper, assuming he bought a year ago and sold today. The profit reaped is therefore:

    Profit = Sales Price – Purchase Price – Interest – Expenses + Rent – Sales Fees

    Sales Price – Purchase Price = Pi*(1+a),  (where Pi is purchase price and a is annual appreciation)

    Rent-Expenses = Pi*CR, (where CR is the cap rate (generously about 5%))

    Sales fees = Pi*f, (where f is the sales fees from a sale (say about 3%))

    Interest = Pi*LTV*i, (where LTV is the loan-to-value ratio and i is the mortgage rate)

    It is approximated, for simplicity, the loan is interest-only (which is reasonable with a 35 year am). We sub:

    Profit = Pi*(a + CR – f – LTV*i)

    To achieve a positive return, a+CR-f-i*LTV > 0; solving for a,

    a> LTV*i – CR + f

    So we have a required capital appreciation to ensure the flipper makes money on paper, a huge psychological barrier needed to elicit a sale. We can plot appreciation versus LTV for various interest rates, assuming 5% cap rate and 3% closing costs:

    So what do the numbers mean? Well at current interest rates of 4%, a flipper requires capital appreciation of 1.3% to ensure he doesn’t lose money. I ran the numbers with a 3% cap rate (typical of some detached dwellings and some condos):

    And assuming the flipper keeps the unit vacant:

    If the unit is at 3% cap, the 20-1 leveraged flipper requires a 3.8% annual appreciation; when the unit is held vacant, this increases to 7%.

    This cursory exercise shows how leverage with low earnings requires continued capital appreciation to stave off a paper loss, a case made clear when analyzing the simple case of a flipper with a 1 year tenure under various scenarios. When interest rates go up, the required capital appreciation increases at a time when we expect increasing costs of capital to weigh heavily on upward price movement. With high leverage, interestingly, it is an absolute necessity to have prices increase, even for those with variable rate mortgages at around 2%.

    A Tale of Two Cities

    Average Vancouver detached prices to the moon! Check out Larry Yatkowsky’s graph.

    Alas all is not well in BC. The Vancouver Sun shows a few Okanagan MLS listings, highlighting what a cool 550,000 smackeroonies gets you, compared to the EastVan McGill Speedway placeholder (pictured below). Kelowna has been experiencing a significant inventory glut over the past year and prices are starting to fall:

    While Metro Vancouver’s home prices continue to rise, prices in the Okanagans have experienced a significant slide, local realtors said Monday.

    One local agent says vacation properties are “feeling the pinch,” as buyers focus on their home markets during the economic turmoil in the past few years.

    So the euphemism du jour is “pinch”. Not exactly the best of times up there. Let’s look at a couple of these “vacation” properties. What’s the difference between a vacation property and a principal residence exactly?

    2919 MCGILL ST Vancouver

    545 San Cabrio Court, Kelowna area

    965 Monashee Place, Kelowna

    Ah but location is everything you say. Meh, I’ll use these props as a baseline and revisit what $550K buys in our Two Cities later on this year.