http://globaleconomicanalysis.blogspot.com/2011/11/vancouver-real-estate-bubble-in.html
A million dollars can buy you a ‘liveable’ house in deepest east van..
This post was submitted by Mansur al-Hallaj.
Greenhorn has recorded this Global piece aired last night on families moving away from BC due to the high price of housing:
Summary: families moving away due to the high cost of housing.
Is the Vancouver real estate market being driven by foreign buyers? At least one former city councilor seems to think so:
Peter Ladner says Vancouver’s home prices are out of control, and with China and Australia already restricting foreign ownership, Vancouverites should at least examine whether the idea makes sense.
Tsur Sommerville thinks it’s a non issue:
“If you go back to the 1980s, and the worry about Hongcouver, and all these kinds of things, Vancouver has been through this story before and I think most people think this city is better off now than it was in 1987,” said Somerville.
Full article at the CBC.
This post was submitted by Mansur al-Hallaj.
Much has been made of the availability of credit promoting asset price bubbles. If the availability of credit is loose and an asset is seen as scarce, asset prices tend to rise. But what if there was an ability to quickly supply new product onto the market, such that an asset cannot be seen as scarce for long periods? This is the argument of Demographia and their annual house price survey. This survey is famous for marking Vancouver as one of the most unaffordable metropolitan markets in the English speaking world. The authors of the survey argue that while loose credit conditions lead to bubbles, the inability for a market to quickly react to changes in investor and owner demand can exacerbate bubbles:
Higher land prices have been the principal contributor to rapidly increasing housing prices in unaffordable markets. These land prices include the cost increasing influence of land supply restrictions (such as urban growth boundaries), excessive infrastructure fees and other overly strict land use regulations. In Australia, 95 percent of the increase in inflation adjusted new house (and land) costs were attributable to land, rather than construction from 1993 to 2006. In more restrictively regulated San Diego, house prices were 250 percent higher than in Dallas-Fort Worth in 2007, yet cost only 15 percent more to build.
It may be easy to quickly discount this report’s arguments as, of course, asset bubbles are not prone to form without the propagation of relaxed lending. Remove the loose lending, remove the bubbles. But I would argue it’s worth a deeper and critical look into what the authors are stating. Unconventional Economist A.K.A. Leith Van Olsen has written dozens of posts on a similar theme, that cities that experienced or are experiencing severe asset bubbles also have severe land use restrictions.
The posts are long and the comments are equally as interesting as the posts themselves. An important point in the debate is that Van Olsen and others are arguing about supply responsiveness, not total supply. Indeed we know that supply must at least equal demand, or rents would be increasing significantly. Van Olsen clarifies:
Readers should note that unresponsive housing supply is a different issue to the ‘undersupply’ of homes or ‘housing shortages’ commonly mentioned by mainstream commentators. The former relates to the speed and cost at which new (generally fringe) housing supply is built, whereas the latter refers to the physical quantity of homes available for the population.
In my view, Australia does not have a housing shortage. But housing supply is certainly unresponsive and overly expensive on the urban fringe of Australia’s cities and towns. As a result, the critical ‘inflation vent’ provided by cheap fringe housing in places like Texas and Atlanta (despite very high population growth) is missing from the Australian housing market. As such, there is no supply mechanism available to quickly dampen house price inflation before it turns into a speculative bubble (and later bust).
So, he argues, there is opportunity to maintain price stability by decreasing response time of new and desirable supply becoming available on the market. Faster response times can be accomplished by: reducing permit and planning application times, removing centrally planned blanket zoning restrictions (such as agricultural reserves), and providing more local authority and accountability on land use. Interestingly this approach has been used in bubble-averse Switzerland and Germany, as investigated in Bigger, Better, Faster, More: Why some countries plan better than others by Alan W. Evans & Dr Oliver Marc Hartwich, who, when comparing the plights of the British Isles and Australian housing markets to their European continental brethren, state:
In Ireland and Australia,with planning systems derived from the UK’s, restrictions on the supply of land, densification policies and central planning fail to provide the kind of homes people want, and lead to high real house price inflation. Successful planning systems, as found in Germany and Switzerland, leave planning decisions to local planners and politicians while ensuring that they face the full costs and benefits of their decisions.
Applications to Vancouver
There is some argument that the Vancouver area faces multiple Byzantine tiers of land use policies and restrictions, from the Agricultural Land Reserve, shared utility and resource planning at district and provincial levels, and municipal-level zoning change and permit application processes. While all serve a purpose, from time to time it may be instructive to take a step back and look at the successes and failures in other jurisdictions in avoiding destructive asset price bubbles.
A rational debate around the role of land use planning has been notably absent from BC’s mainstream media. It is unlikely any of us would live to see a significant overhaul of land use policies in the city and province, but studying land use policies and other supply side impedances (such as flexibility of labour markets) in other jurisdictions — and their purported catalytic effects on asset bubbles — does serve to provide some context to Vancouver’s prospects in the coming generations.
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
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.
Sincerely,
A bearish blogger
Anybody remember 1999? Back then the CMHC would only insure mortgages for a maximum of 25 years. Then the Canadian government decided the housing market would be a great way to goose the economy since it was working so fantastically in the US. In 2005 the max amortization went to 30 years, in 2006 to 35 and in 2007 we saw the introduction of 40 year terms with zero down to compete with private companies like AIG and Genworth.
Now there are worries about the debt load of the Canadian consumer and the government is trying to slowly take away the juice without causing a mess. Last year we saw the 40 year term vanish and go to 35. Now we have the most recent round of changes.
..new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
Secondly, Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
Thirdly, Ottawa will withdraw government insurance backing on lines of credit secured by homes.
You can find some interesting analysis of what these changes mean in our forums. What effect do you think this will have on the Vancouver market. Would our home prices be where they are today if there never where government insured 40 year zero down mortgages? Can this end well?
The rental market is open – wide open.
In mid-October 2009, people were lining up at the Pique office first thing Thursday morning to get copies of the paper fresh from the printer to secure one of the few rental units posted. At that time the Pique classifieds included 130 long-term suites, houses and apartments available in Whistler and Pemberton combined.
This October there are 269 long-term rental units available for the same region.
Squamish has stayed steady with 36 rental units available last year and 37 this year, but it is clear the Whistler market favours renters for the first time in years.
Part of the increase in availability over the past year can be attributed to rentals held back by owners who tried their luck in the vacation market during the Winter Olympics. Development and a more accessible ownership market in Whistler has also contributed to the surplus. New, affordable housing at Cheakamus Crossing and Rainbow has encouraged more people to buy, leaving an excess of rentals available in their wake.
Read the full article in the Pique News
This post was submitted by Peter Pan.
In a previous post The Pope highlighted a spreadsheet looking at the City’s loan to Millennium to fund the Olympic Village construction and how much of the loan amount could be recouped should only sales revenue from this development be used. The calculations ignore interest payments, ongoing management of the whole process, land value, unpaid property taxes and strata fees amongst a handful of other (comparatively) small expenses.
The outstanding loan was $731MM. Millennium recently repaid $192MM of this amount. I’ve updated the spreadsheet to reduce the primary debt owed to the City.
The big item ignored, of course, is going ruthlessly after the collateral of the debtor, Millennium, which the City is now doing according to fearless City reporter Frances Bula:
Vancouver is taking aggressive action to secure the corporate and personal assets worldwide of the Olympic village’s private developer after acknowledging that the developer did not pay the full amount of its first $200-million loan payment to the city. …
As well, the city, which took over financing the village construction in February of 2009 after Millennium’s original lender refused to continue making payments because of cost overruns, has told Millennium that it either has to pay out the $561-million it owes the city or prove that it has a solid plan for making the loan payments that were originally scheduled.
The City is starting to put feelers into Millenium’s holdings to uncover how much additional collateral is available to repay the loan. But it’s unclear how much collateral Millennium actually has. Many of its holdings are highly mortgaged and it’s uncertain, at least to me, if the owners can face judgment against their personal holdings. Long story short, the City won’t be the only creditor represented at a bankruptcy hearing.
It may well be Millenium will go insolvent. But given how many tiered creditors Millenium has, we don’t know how quickly the City can recoup the money it is owed beyond the collateral of the OV itself.
On the plus side, the City just got $192MM from Millennium. How does that change the calculations? If Millennium does go technically insolvent before its next scheduled debt repayment, we have the following approximate shortfalls:
At $700psf, there is a $200MM shortfall; selling all the rentals and retail space reduces this to about $100MM. (Interest payments to the City’s creditors on the total balance outstanding will be on the order of $25MM for a year.)
$600psf – $250MM shortfall ($170MM if rentals/retail sold)
$500psf – $300MM shortfall ($230MM)
$400psf – $350MM shortfall ($300MM)
The question is, what will be the average price of the market units? If we do a bit of analysis based solely on rental income and assuming some “rosy” rental rates of $2.75psf/mo (500sqft flat $1500/mo) and a “rosy” 150 price-to-monthly rent ratio, we end up with a market “value” around $450psf.
I think the sales staff for the Olympic Village can do better than this. It involves, in my opinion, finding people who are willing and able to pay well above rental rates for a building with unproven infrastructure and a less-than-whole strata. But it will involve selling these condos reasonably quickly or the price will likely continue to drop.
In summary, it looks like Millennium has come up with some cash to reduce the City’s shortfall on this project. That is a good thing for ratepayers. Loss estimates are now better but still ostensibly in the neighbourhood of $250MM-$300MM, minus any additional funds Millenium coughs up. Better, but still one helluva mozza ball.
This post was submitted by jesse.
Petr and Ola are the creative duo behind Crackshack or Mansion, the online quiz that serves up very clear visual examples of lunacy in the Vancouver housing market. They recently updated the game to a second version. Can YOU tell the difference between a crack shack and a million dollar house in Vancouver BC?
They have agreed to do an open format interview that will let you ask the questions. Post any questions you have for them in the comment section and vote up the ones you’d like to have answered. I’ll send on the top rated question comments to them and post their answers next week. Ready? Ask away!
According to the Organization for Economic Cooperation and Development, Canada is in a recession and heading for a deficit. And who’s to blame? Ontario and BC.
Across Canada EI claims actually dropped month over month, except for in Ontario and BC where they surged 14% over the year in Ontario and 11.5% in BC. Ontario has the auto manufacturing sector to blame for the downturn, while here at home we’re seeing an alarming decline in forestry revenues not to mention the sharp downturn in the housing market where prospects are looking more grim with each passing month, particularly when it comes to downtown Vancouver condos.
Meanwhile in the financial sector Canadian banks have started asking Ottawa for a major cash injection to help stem a rising tide of bad loans. BMO figures show bad loans have already exceeded the peak reached in 2001 after the dot com crash, and are well on their way to levels seen in the last recession almost 20 years ago.
The bright side? If you’re looking for temporary office space to sublease in Vancouver, it looks like you have lots of options right now.
