Vancouver Condo Info

There’s an interesting article in yesterdays New York Times about American debt, complete with interactive features and debt calculators to compare your debt load to others:  Given a shovel, Americans Dig Deeper into Debt.

Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.

While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.

It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.

There’s a meme in the local media that Canadians are more financially conservative than Americans, and while that may certainly be true I wonder about Vancouverites specifically - With our negative savings rate, relatively low incomes and high housing costs are the residents of this city really that different from some of the more extreme US cases?

Looks like the Canadian government is starting to heed the US housing market lesson - the Federal Government will no longer guarantee 40 year or zero down mortgages. The new limit will be a 35 year maximum term and a minimum 5% down payment will be required on all new federally guaranteed mortgages.

The federal government will no longer guarantee 40-year or zero-down mortgages in an effort to avoid a housing crisis like the sub-prime mortgage meltdown experienced in the United States.

In an announcement released today, the government said government-backed mortgages would require a minimum down payment of five per cent and a maximum amortization period of 35 years. The borrower would have to have a consistent minimum credit score and there would be new loan documentation standards.

“Today’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada,” a release issued by the federal Department of Finance said.

The new rules will take effect Oct. 15, 2008 to allow existing mortgage pre-approvals to be used or expire.

So get out there and get your 40 year zero down mortgage while you can, these things are destined to become collectors items! My guess is we’re about to find out how thin of a speculative margin has been driving the Vancouver real estate boom.

I’ve heard a number of times that ‘historically’ a variable rate mortgage saves you money over a fixed rate locked in mortgage. This sounds good, but it’s never been clear to me if that ‘history’ only includes the last 25 years or so when rates went from extremely high levels (in the 20% range) to the extreme lows of this decade.

With the Bank of Canada joining other world banks now expressing concern over inflation the assumption is that mortgage rates will be going up. If you currently have a variable rate mortgage is now a good time to lock in? Rob Carrick at the Globe and Mail says no -although locking in now would get you a pretty good deal, rates would have to rise by at least 1% to make a five year locked in mortgage a better choice.

If you prefer the security of a locked in rate your choices as a Canadian are limited. Unlike mortgages in the US where you can lock in a rate for the entire term of the loan, in Canada the longest lock-in I’ve seen is for 10 years. My own gut feeling is that with a small enough premium the full-term US style lock-in would be the best deal - five years might see you renewing at much higher rates. The problem is that nobody can predict how far or how fast rates will move, and if they start to move quickly the best time to be locked in will have already past.

Even if you’re not a homeowner these expected rate changes will affect on you, either with higher rates on consumer debt, changing bond and equity prices in your portfolio or just higher rates paid to you on high interest savings account. So what do you think - am I being to gloomy in my expectation of higher rates?

There are increasing indications that our reputation of being a financially conservative in Canada is more myth than reality.  As a group, we’re taking on more debt than ever before and finding ourselves with less of a personal safety net should the economy take a dive.  Since 2001 the number of people over 60 that still have a mortgage has been steadily increasing, and the mortgages that we all hold are of more and more exotic varieties.  From todays Vancouver Province: Why we’re up to our necks in debt.

A rash of recent reports paint a scary picture of Canadians as spending like drunken sailors, leading to the prickly question of whether we should be forced to save money.

A Statistics Canada study showed Canadians are finding themselves with two mortgages and deeper in debt than at any time in their lives. They are increasingly house poor, and with housing values sliding, they often owe more on their properties than they’re worth.

…

The StatsCan study came out at the same time that the Office of the Superintendent of Bankruptcy Canada reported that personal bankruptcies reached their highest level in more than four years during April, up 19.3 per cent over the previous month and 18.3 per cent over the previous April.

And things will only get worse if recent numbers showing a gross domestic product decline during the last quarter continue, signalling an economic downturn, and if unemployment rates should start to rise.

As it is, mortgage payments make up 37 per cent of average household spending in 2007, up from 32 per cent a year earlier.

And those mortgages are getting more ‘interesting’.  The common refrain that the Canadian housing market is not as vulnerable to downturn as the US market  because we don’t have ’sub-prime’ mortgages is only part-true.  What we do have is an mortgage insurance market that was liberalized in 2006 and has dramatically changed the landscape in the last few years with the introduction of zero-down, 40 year terms and adjustable ‘teaser’ rate mortgages:

With interest rates dropping, consumers might consider a front-loaded variable- rate mortgage.  This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you decide whether to lock into a fixed rate.

Longer amortization periods, now up to 40 years, also are new.  Holt estimates longer-term mortgages now account for three quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.

So will following the US lead into the area of ‘exotic’ mortgages lead to a similar result?  Only time will tell, but it is interesting to see that this topic seems to be getting more attention within the government.  That first article had this bit of info that was new to me:

Finance Minister Jim Flaherty recently suggested it might be wise to outlaw 40-year mortgages.

With up to a third of new mortgage applications opting for the longest term, removing that option could have a dramatic impact on our housing market at a time when it appears to be already slowing due to affordability concerns.

A cautionary tale in todays Vancouver Sun for those seeking high returns AND security in a real estate investment: Two time real estate loser leaves investors high and dry.

A former bankrupt, Hauff made his first stab at developing the 35-acre residential project on Bullock Lake near Ganges in 1996. To fund the development, he borrowed millions of dollars from Multimetro Mortgage Corp. at up to 20 per cent per annum.

Multimetro, run by Vancouver businessman Ken Megale, raised most of the money from mom-and-pop investors. He promised them extremely high rates of return and assured them it was a safe, fully secured investment.

In fact, the project was mismanaged from start to finish, and ended in foreclosure. Multimetro lenders, who were owed $11 million including accrued interest, lost everything.

… but dreams die hard, so Hauff bought the property back out of foreclosure for $9 million and started all over, this time with money from Calgary based Gibraltar Mortage Corp at a 24% per annum rate.

Like Multimetro, Gibraltar raised the money from many small investors, promising them high returns on a supposedly fully secured basis.

Alas, under Hauff’s stewardship, the project once again stalled. In February 2007, Gibraltar called its loans and David Bowra was appointed receiver.

Subsequently, the resort lodge and spa burned down. The insurer has agreed to pay $7.4 million compensation. The property, as is, is estimated to be worth another $18 million to $20 million. So in total, creditors might realize anywhere from $25 million to $28 million.

Meanwhile, there is about $36 million worth of debt on the property, most of it owed to Gibraltar investors. Interest is accruing at the rate of about $600,000 per month. There are also property taxes and professional fees to be paid. So even on a best-case scenario, creditors are going to take a serious hit.

Read the full article here.

A couple of economic bad news stories posted by Via on this weekends Friday Free-for-all post: The spring selling season so far has us looking at a very different market from previous years. Sales have dropped and inventory has risen dramatically, at the beginning of June we’re looking at close to 18,000 listings for sale in Vancouver. As it becomes harder to sell the number of foreclosures have doubled in the lower mainland:

Kap Hiroti, who tracks Lower Mainland foreclosures at ForeclosureList.ca, says foreclosures stand at 20 per week, up from 10 per week in 2006.

“For one reason or another, they didn’t pay the mortgage, or insurance, or property tax,” says Hiroti, who advises real estate owners looking to foreclose or prospective buyers looking to buy a foreclosed property. “Or they get behind in their strata or condo fees, or face a one-time cost such as a roof or a leaky condo, which might set them back 40, 50 or 60 thousand dollars.”

…

Hiroti believes the Lower Mainland real-estate market has “flatlined,” meaning investors who were counting on making a profit no longer see an upside.

As a result, some have chosen to lose their investments through foreclosure rather than hanging on with no sign of a significant upside return.

“They were kind of speculating that the market would go up, but when the market flatlines, some people just choose to get out. Local people are getting priced out of the market.”

At the same time BCs unemployment rate has been creeping up - the jobless rate is now at 4.5% as positions are lost in trade, transportation and agriculture. The unemployment rate is particularly high for young people at 8.8% and for recent immigrants with an unemployment rate of 9.8%.

The bright point in the jobs data remains construction which has been the key driver in the BC jobs market for the last 5 years. The question is: how long can you have a jobs market driven by construction?

Courtesy of todays Vancouver Sun and Statscan - Canadian home ownership levels are at their highest since 1971 but the rush to own has meant soaring debt levels and longer mortgage terms.  A growing number of ‘owners’ may never pay off their mortgages, essentially renting the debt in perpetuity.

The report also shows that British Columbians are paying the highest proportion of their income among all Canadians to housing costs, as nearly a third are spending more than 30 per cent of their income to keep a roof over their heads.

More than one-third of the new mortgages being taken out in Canada are now amortized for more than 25 years, a portion labelled by one expert as “phenomenal” for a relatively new mortgage product, and the expectation is that the percentage for B.C.’s homebuyers would be at least that high.

“From the fall of 2006 through the fall of 2007, 37 per cent of all new mortgages in Canada were for amortizations longer than 25 years,” said Jim Murphy, president and chief executive of the Canadian Association of Accredited Mortgage Professionals. “Of all the mortgage products that have been introduced, the ones longer than 25 years are the most popular.

“Thirty-seven per cent is quite high. It is phenomenal for a product that is relatively new.”

Among all outstanding mortgages last year, some nine per cent were pegged with payoff dates stretching more than 25 years all the way to 40 years.

“That number will obviously increase every year,” said Murphy.

…and a little further down:

The dream of burning the mortgage appears to be a more elusive one for Canadian owners, with the percentage of mortgage-free owners declining between 2001 and 2006, bucking an expectation that aging baby boomers would be paying off their mortgages by now.

“The share of owner households with mortgages has not been at such a high level in Canada since 1981,” the report said.

Huh. I guess a bunch of people must have paid off their mortgages right after 1981?  Or perhaps it was the foreclosures.

.. and in an unrelated example of how silly some of these loans have gotten, how about giving an 85 year old man a 4.8 million dollar mortgage on a 5 million dollar home?

From the ’sun predicted to set’ department of todays Province comes this article: BC developer warns of cooling condo market.

B.C.’s development industry must be nimble, disciplined and well-financed to survive the cooling of the provincial market, a veteran developer says.

The Lower Mainland has yet to experience the full impact of the U.S. housing slowdown and the troubles sweeping the Interior’s forest sector, Concert Properties president David Podmore said yesterday.

“I do think you’re going to see a continued slowing of our economy as . . . what’s happening in the Interior and the U.S. spill over,” Podmore told a conference on the future of B.C.’s housing industry.

“You’re going to have to really sharpen your skills to be successful and to compete effectively.”

Podmore said developers should stop relying on pre-sales, which he called a phenomenon of the past eight to 10 years.

The market is heading into a period where projects may take half-a-year to sell out, he said.

Disciplined developers will pull the plug on projects if it becomes clear they can’t succeed, he said.

There will be opportunities for well-financed developers to take over idled projects - but they must be fast on their feet, he said.

The ‘pulling of plugs’ has already started to happen on some projects like the Eden group Elyse.  Those that don’t pull the plug when they can get it pulled for them and go into recievership Sophia, H+H, Gardencity, etc.  There’s good news though, as the US housing slowdown continues it’s forecast that material prices will moderate.

Even after years of falling real estate prices in Miami it’s still cheaper to rent than to buy according to this article in the Wall Street Journal, sent in by bcbuds.  As prices are falling so are rents.

It’s a dilemma for owners, do you try to wait out a recovery and pour money into the condo you’ve got rented out at a loss, or do you stop the bleeding and sell in a down market?  Many are choosing to wait out the market and hoping for a recovery soon.

…But that has created a new, predictable situation. “Rents are falling,” says Miami broker Leslie Cooper. “You and your brother and everyone else is trying to rent your new condo out. So no wonder. But the rents won’t even cover your costs.”

I looked a number of fabulous condos in new developments on Brickell Avenue in downtown Miami. Their prices had been slashed drastically from peak levels. Some are now in forced sales.

You can get a two-bedroom condo in some places for $400,000 or less. And that’s considered a great deal.

Of course the problem is that even these reduced prices aren’t justified by the rental income.  The article goes on to examine the numbers- even if you aren’t renting the money and have the $400k cash interest free to buy one of these condos it’s still a losing proposition in a post-boom era of property depreciation.

Another lower mainland condo project in trouble, this one in New West. Story at the CBC:

United Properties, the developer behind The Anvil in New Westminster, has run out money, and that means pre-sale buyers are being asked to pay an additional $20,00 to $40,00 if they want to keep their condos.

Pre-sale buyers have received letters from the developer saying they have 14 days to decide whether they want to pull out and get their deposit back or pay the additional costs. The project needs an additional $4 million to meet its financial obligations.

“Development is a tough game and United Properties has been at it for some time, so it is quite unique to have such a developer run into this kind of difficulty,” said real estate lawyer Ron Usher.

Apparently the Anvil is currently 18 months behind schedule. Insert appropriate Wile E. Coyote comment here.

Thanks to Macchiato and Exx for the story link.