Vancouver Condo Info

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.

RBC has released a report on the saving and spending habits of Canadians, apparently we’re saving less than ever, with more Canadians relying on credit cards, loans and mortgages.

Canadians are not prepared - and not preparing - for a rainy day, like an economic downturn, a major bank is warning.

The vast majority of Canadians admit they’re poor savers, with barely one-half having a rainy-day account. And of those, only half have enough to cover a month’s expenses, RBC said Wednesday in releasing results of a spring survey of the saving and spending habits of Canadians.

–

“One need only look at the newspapers or television to see that North America is in an economic downturn,” said Ashif Ratanshi, senior vice-president, RBC Branch Investments and Banking.

“This is the time for Canadians to re-assess their own finances and ensure they are effectively managing their money so that they can withstand any sudden pitfalls or changes in their lives.”

I’ve already run a poll on savings and income that indicates most readers here are in the minority, but since the RBC reports refers specifically to a rainy-day account I’ll pose this question:

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Are you priced out of the Vancouver real estate market? According to the Province, you’re not the only one.  The weekend the Province ran a series of articles on the costly local real estate market:

So who’s buying? 

The answer is anyone with one or more of the following: wealthy boomer parents, equity from previous real estate or extremely high double-income earnings.

But even with those prerequisites, many are stretching their limits.

“Everybody maxes,” says Marty Pospischil, a realtor with Dexter Realty specializing in the west side.

The profile of a typical buyer of a $1.3-million, three-bed, two-bath west-side home is a couple between 35 and 45 years old with one or two young children. They are both professionals who have ascended the ranks — think stockbroker, lawyer, doctor.

They will usually have a down payment of $400,000 to $500,000 — derived from a combination of personal equity, inheritance or a substantial gift from a wealthy boomer parent, says Pospischil.

That means they’re still borrowing between $800,000-$900,000.

Expectations clash with reality:

With the income-to-house-price ratio the highest it’s ever been in B.C., the overwhelming perception — particularly in Vancouver — is that the market has changed the definition of “middle class” and displaced the working poor.

It is increasingly common to see children raised in condos, married couples living in their parents’ basements, young professionals taking on second jobs, workers commuting long hours, the growth of the 40-year mortgage (which 65 per cent of first-time buyers are now using, according to a RE/MAX report) and the realization for some that an inheritance is the only way to a single-family home.

Tsur Somerville: its not a bubble:

“If you say bubble, then at some point it’s going to pop. And if you look at our price increases, they’ve been double-digit, but for the most part they’ve been between 11 to 15 per cent for the past few years. That’s high, but in a bubble you start to see 20-per-cent growth, 30-per-cent growth. Just really rapid acceleration, and we haven’t seen that. That’s what happened in 1981 and 1982 . . . That’s what a bubble looks like.”

Reader feedback:

John: There’s no point complaining about prices. I think people should focus their energy on how they can find new ideas/businesses/solutions to generate more income. If you spend all your time complaining you won’t have enough time thinking about new businesses that can work and make more money!

Thanks to Condohype for sending in the link to this story in todays Vancouver Sun: mortgages move into uncharted waters.  This is a similar article to the one linked to last week about over-stretched buyers fueling the real estate boom, but refers to a Scotiabank report released yesterday focusing on the risks created by relatively new 40 year mortgage terms.  According to the report, longer term mortgages now account for a full two-thirds of all mortgage applications.

In the near term, their introduction — which began in 2006 when Ottawa “unshackled” the Canada Mortgage and Housing Corporation from the traditional 25-year mortgage — will help stabilize a softening Canadian housing market as it draws in a new group of buyers.

Longer term, however, nobody knows what the effect will be, Holt said.

If, for instance, buyers as a group tend to pay back the debt at an accelerated pace, it will increase the risk for the originators of the mortgages and buyers of mortgage-backed securities into which they are folded.

On the other hand, the report says, “future shock risk is being intensified,” in the event that a large portion of new buyers move into such leveraged products and suddenly face a shock to interest rates or wage growth.

Now, if faced with sudden difficulties, the holder of a 25-year mortgage can move into a 40-year, but it’s unclear what would happen if the 40 becomes the norm and economic difficulties arise.

I’m not sure why it’s so ‘unclear’ what would happen if the majority of buyers have no adjustment room in their mortgages, pay a majority of their income to cover loan interest and ‘economic difficulties’ arise. I don’t need a crystal ball to foresee that such a situation would be ‘problematic’. Unfortunately as we’ve seen in the USA, ‘economic difficulties’ can simply be a drop-off of buyers at over-inflated prices.  Prices in the US started dropping long before problems with sub-prime mortgages and recession fears started looming.

I also find it strange that all these new products were introduced in the midst of a boom rather than when the housing market needed ’saving’ from a collapse.  Seems a bit like using up your nitrous on the drive to the racetrack.  This article also touches on the way these new mortgage products encourage speculation:

Equally significant is the impact changes to the mortgage industry may have on the condo market, Holt said.

Starting last year, Ottawa changed the rules on insured-investor mortgages, allowing buyers to acquire an insured mortgage on a property other than a principal residence.

Holt said he estimates one in four condo buyers is a speculator looking to profit from property price gains and, he forecasts, “This is going to intensify influences of investor sentiment, particularly the condo market over the next few years.

“You’ll see more speculative activity in the market at a time when there’s already a fair amount.”

This can sharpen market downturns, as appears to be the case in Calgary, when prices drop and speculators rush to unload properties.

I’m not sure why this article is located on ‘globe sports’ in the hockey section, but this article about mortgage trends in Canada has some shocking statistics based on a recent RE/Max report and some interesting quotes from a few of the big Canadian banks:

Nearly two-thirds of buyers in major centres now favour extended amortization periods of up to 40 years, while putting little or no money down was prevalent in 38 per cent of regional markets surveyed across Canada.

The country’s real estate industry has played down any similarities to the U.S. when it comes to subprime borrowers. But as new segments of the Canadian population enter the market, the findings raise questions about what’s been driving soaring house prices in recent years.

“The reason we think the market has been staying hotter much longer than anyone anticipated was because of these newer amortization mortgages,” said Craig Alexander at Toronto-Dominion Bank.

“Because it really does change the affordability equation,” Mr. Alexander said.

Canada’s housing market has for years defied predictions of a slowdown. From 2002 to 2007, average home prices rose at about 10 per cent a year nationally, Mr. Alexander figures. A willingness to buy now and pay later explains much of the recent heat. Longer amortization mortgages “have had a very profound impact on the Canadian housing market since they were introduced” in 2006, he added.

Buying a house has become increasingly accessible. The flip side, though, is that more home buyers are now susceptible should the housing or labour markets weaken, or if interest rates change direction.

“We’re more vulnerable than we were in the past, and I think that’s just a factor of financial and mortgage innovation,” said Adrienne Warren at Bank of Nova Scotia. “At the same time, it’s a trade-off - more people are getting into home ownership earlier.”

In their report RE/Max attributes the boom to these new mortgage products:

“Innovative financing has become key to home ownership in today’s environment,” yesterday’s report said. “Entry-level purchasers are adjusting their expectations by sacrificing size, location, and even long-term financial freedom to overcome challenges such as rising prices and serious supply issues.”

Policy changes help explain why so many people have been entering the market. Ottawa extended the maximum amortization period to up to 40 years from 25 years in 2006. In the same year, Canada Mortgage and Housing Corp. began providing insurance to lenders for interest-only mortgages.

Mr. Alexander figures that as many as 70 per cent of first-time buyers are opting for longer amortizations. “It’s a double-edged sword. It brings down your monthly payments. But it will actually double the amount of interest you pay over the lifetime of the loan.”