Vancouver Condo Info

Crashcow posed an interesting question the other day:

“Most regular posters of this blog understand the dynamics of housing bubbles well. What is also an interesting puzzle is why some people naturally understand these concepts while others don’t?

One reason might be Education – especially in an analytical field. But there are people with no post-secondary training that get it while many analysts, economists, accountants and engineers clearly don’t. It seems that some of these “professionals” are hopeless – no matter how much evidence and explanation you provide them, they just don’t comprehend.

Another reason that comes to mind is: Experience. If you have stuck a hair pin in an electrical socket once, chances are you won’t be doing that bright idea again. But experience still doesn’t explain it. After prices plunged 20% in 2008, everyone was given a hard lesson that housing doesn’t always go up. But many erased that valuable lesson in less than a year and back for the socket they went.

This is a deep question, but what are the psychological factors that lead to blind optimism?”

In hindsight you can see some pretty foolish choices made in the US bubble markets, or in the Vancouver market by people who should know better. What is the difference between someone who decides the play the odds on a bubble or those that choose to sit it out? Does the string of wins that comes from a bubble inflating make some people more willing to stretch their luck with the idea that it’s different this time?

No Longer Looking points out this great editorial in the Vancouver Sun. I’m trying to figure out if it’s intent is the calm people about the Vancouver real estate market slow down, or freak them right out:

I penned this editorial to calm fears that the real estate market in Vancouver was collapsing and I’ve added some brief comments at the end.

Living in Canada’s most expensive housing market, residents of the Lower Mainland are obsessed with real estate prices and mortgage rates.

And no wonder. The benchmark price for detached homes in Metro Vancouver last month was $793,193. A down payment of 25 per cent would leave the buyer with a mortgage of $594,894, in which case a difference of just one percentage point in the interest rate can vary monthly payments by $500.

In comparison, the average price of a house in the Greater Toronto Area is $420,482. The standard down payment brings the mortgage to $315,316 and the interest rate impact to $260.

They recommend NOT walking away from an underwater mortgage – just keep paying more than they house is worth, after all:

..it might be a few years, perhaps a decade, before real estate prices return to the heady levels of 2007. But there’s a good chance they will.

Jonathon sent in a link to this great ‘blast from the past’ interview with developer Sam Zell about whether there was a real estate bubble in Miami.  He makes some very compelling arguments about why there is no real estate bubble, and some of them sound remarkably familiar somehow.

Q But U.S. home prices are up about 40% in three years. How can this not be a bubble?

A Econ 1001: Prices have gone up because the demand has been much greater than the supply. The country is producing all it can in terms of supply, but what you see is more demand. Over the next 10 years we’re going to add a million new household, much of that’s due to immigration.

Econ 1001 is very advanced, so you may not understand that.  Here’s something you will understand:

Q How bad could it get?

A Worst-case scenario? A flat housing market. Look, all I can tell you is we’re the largest owner of apartments in the U.S. and among the largest converters of apartments to condos. If there was a danger of a bubble, would we be in this business? I’ve never been accused of being a Pollyanna, I’m the Gravedancer. Americans don’t understand that we have the cheapest housing in the world. London and Tokyo are more expensive than New York. Why do you think everyone is going to South Florida from Europe? It’s because prices here are cheap compared with there.

Understand?  South Florida is cheaper than other places, and everyone wants to live there.  Ergo, there is no housing bubble in Miami condos.  All of those arguments just happen to be applicable to Vancouver BC as well.

Here’s the ‘flat market’ in Miami since that argument was made, but always remember: ‘it’s different here’.

There are two ways to think about a purchase – you can focus on the price, or you can focus on the ‘value’. Local developer James Shouw points out that you shouldn’t really worry about all the numbers and stats because ‘Value’ is forever.

For example, in April, 2009, the number of real estate transactions both declined and increased locally.

The headlines focused on a year-over-year decline, news that would have certainly concerned real estate agents, but that should not have concerned real estate owners: whatever took place in April 2009 was not a reflection of value. In fact, in that month, the number of transactions increased more than 30 per cent from the previous month and the value of the average transaction increased three per cent.

Those numbers offer important lessons. As a developer, I’m primarily concerned about value. As a real estate broker, I’d likely be more concerned with volume. Value and volume can fluctuate in parallel, or in opposition, depending on underlying market dynamics.

There’s more. You can read the whole thing over at the Vancouver Sun. See if you can find some value in it.

Canadian Mortgage Trends has an article about getting your mortgage approved before prices fall.

When home prices do fall, it makes it tougher for certain people to qualify for a mortgage—especially for refinances. When prices start dropping, appraisals come in lower, insurer valuation systems become more conservative, and lenders tighten up in general.

Vince Gaetano, a broker with Monster Mortgage, tells the Financial Post that people are already trying to get approved “before there is a correction in the real estate market.”

Of course prices may fall in the rest of Canada, but we all know they won’t fall here in Vancouver right guys?

Over at the LA Times Walter Murch and Lawrence Wechsler make a convincing argument that it’s time to retire the term ‘bubble’ when it comes to speculative excess:

The word “bubble” just has an inescapably happy feel to it, conjuring up kids and parties and sudden iridescent poppings, screams of laughter, the giddy clapping of happy hands and an overall lack of consequence. That was fun; now where’s the cake?

Even more so when the word gets paired with “tulip” or “South Sea.” Where could the harm possibly be in such blithe and fragrant things? Certainly not in the words themselves: exotic petals, swaying grass-skirted maidens, spheres of trembling insubstantiality.

So what do they suggest as a more appropriate term?

What if, instead of that playful word bubble, we tried something a bit more accurately descriptive when growth at any cost became the goal. Say, “tumor”: “the dot-com tumor,” “the subprime tumor,” “the derivatives tumor.”

Would anyone seriously gainsay the highest possible vigilance over the proper functioning of their own body or doubt the need for strong regulation? Who, facing the prospect of a tumorous outbreak or living with a body demonstrably prone to such outbreaks, would entrust that body to a band of physicians blithely committed to laissez faire regarding these fatal bubbles of flesh?

Words matter. Metaphors frame thought. Pay them heed and tend them well.

Read the full editorial over at the LA Times website. The Vancouver housing tumor?

No, not the little half-million dollar mortgage debt you may be carrying, I’m talking about the big debt. Government debt. Everybody’s doing it, but there isn’t a lot of comfort in the numbers right now. Investors around the globe are showing more and more fear of big unmanageable debt loads and defaults.

A recent report out of BMO Capitol Markets goes so far as to recommend moving into ‘cash or cashlike instruments‘.

So lets presume you’ve got money rather than debt. What are you doing to protect it and make it grow? Are you moving into or out of equities or are you burying it in a jar in the backyard?

Tickets are still available to the Vancouver Real Estate Roller Coaster. Critics are calling it the Summer blockbuster that’s not to be missed!

“..a useful image when thinking about asset prices in general today and always. Human behaviour and leverage drive our asset price cycles. If we always keep the roller coaster image in mind, we will never be able to relax and fall asleep after a period of very steep climbs; nor will we be as inclined to throw in the towel after a period of very steep falls.”

Danielle Park – Juggling Dynamite

“..a wonderful illustration of financial storytelling. Metaphor can be a wonderful tool, the reason this one works is that it takes an over used cliché and makes it real.”

Stewart Marshall – Financial Storyteller

“A vomit inducing ride.”

The Georgia Straight

“The only thing I had a problem with is that [it implies] what really is going to happen is we’re going to fall off the roller coaster and sink into the water. Investments are volatile. If you want low volatility then buy low-volatility GICs.”

Tsur Sommerville – UBC Center for Urban Economics and Real Estate

May 29, 2010
by Crashcow

I woke up this morning with a massive hangover. Wow, what a 40% sales-to-list party that was! But with today being Alumni Weekend, I decided to check out my Alma Mater and tour the empire of new condos she’s been feverishly building.

Even though we’re now essentially in June, the day was cold, wet and wintery. But as any Vancouverite will tell you, this only a small sacrifice to live in the Best Place on Earth. A minor inconvenience, if you will.

As I entered into UBC and drove passed some new buildings, I became confused. My navigation sense turned dismal. If you haven’t visited UBC in over 5 years, chances are you will not recognize this place either. Entire communities the size of the Olympic Village have recently been built multiple times over. According to U-Town, there are now eight emerging communities, with Wesbrook Village being the largest. Talk about inventory glut.

The Sales office at Wesbrook Village sat empty. Balloons walloped in the wind. I saw no people and no amenities, except for a Save-on-Foods. The villages felt like ghost towns; it was quite the sobering contrast to Rennie’s sunny and euphoric circus at the Olympic Village. But then we ran into a friend that I hadn’t seen in ages. It turned out she was living in one of these new communities and had an interesting story.

She is a first-time buyer that entered the market a few months ago during the climax of the buying frenzy. After getting bruised several times in bidding wars, she toughened up to outbid the hounds. Victory was hers, as were the keys to a new UBC condo for over $600/sq.ft on leased land. The conversation was very insightful:

Me: “What shaped your decision to buy in UBC?”
Her: “I bought this condo as an investment. UBC is quickly becoming a world-class university and is increasing its student capacity. There is always going to be strong housing demand from students and families. My goal now is to build a portfolio with as many condos as possible. You should really take this opportunity to own here.”
Me: “Actually, I’m really enjoying renting at the moment. I did own a condo, but then sold it in fall of ‘07.”

This comment stirred a puzzled reaction in her.

Her: “Why? Do you think the market is going to…”

For some reason, she had trouble finding the next word. Any one of “drop”, “fall”, “correct”, “tank” or “crash” would have done just fine. Instead, she silently motioned a dive with her hand. This was clearly a fragile person.

It utterly amazes me that someone with higher education would consider leveraging themselves to the moon in order to snap up as many condos as possible without even seriously considering a drop in prices. It’s no surprise to us that politicians, real estate agents, brokers, bankers and developers have failed us. But it’s sad that our academic institutions have not equipped us with the most basic of financial street smarts.

I look forward to The Great Cleansing ahead.

-crashcow

Observer pointed out this blog article over at the Vancouver Sun, which does an excellent job of rounding up some of the issues we’ve gone over about the CMHC and the Canadian Banking system:

Not only has the Harper government felt it necessary to prop up Canadian banks it was this same government which created financial system risk in the first place. In 2007 the Harper government allowed US competition into Canada which prompted the CMHC to dramatically change its rules in order to compete: it dropped the down payment requirement to zero per cent and extended the amortization period to 40 years. In August 2008 Flaherty moderated those rules in response to the US mortgage meltdown. CMHC then “securitized” an increasing number of its loans into bond-like investments (if you have a typical Canadian mutual fund, you’ve got some.)

At the end of 2007 there were $138 billion in securitized pools outstanding and guaranteed by CMHC –17.8 per cent of all outstanding mortgages. By June 30, 2009, that figure was $290 billion and by the end of 2010 it was $500 billion.

Read the full article, it’s full of interesting facts and figures.