Someone down in LA/Ventura county California has started up a blog documenting ‘real estate haircuts‘ – money lost in the housing market drop there. Some of these look quite painful, the most recently posted example is an attempted flip that finally ended up selling after 377 days on market for an astounding $456,000 less than the aspiring flipper paid – a drop in value of 33%.
Examples like that make some of the recent foreclosures in Vancouver look not so bad in comparison. Someone over at the Vancouver Housing Blog posted a link to this local example on west 6th, purchased in March for $350k, with the bank now asking $319k for it ‘as is where is’.
I was browsing some news on the US housing market, when I came across this bit about mortgage debt and ARM loans in Newsweek titled Escape from the Money pit. The title was an attention grabber, but it was the subheading that really surprised me though, in bold letters across the top of the column it says:
Home buyers thought they could put their house under their pillow and let the tooth fairy raise its value while they slept. Too bad.
..Which struck me as surprisingly callous for a column in a major publication. While I certainly agree that people are responsible for what they do with their money, I think we could show a little sympathy for people who got in over their heads and are upside-down on their mortgage. Lets be honest: the average person doesn’t have the time or inclination to completely educate themselves on some of the finer points of personal finance. Its not that they aren’t ‘smart’ enough, it’s that life is full of things that demand our attentions but only a finite amount of time to focus on them.
People buy houses for all sorts of reasons and sometimes the timing is off, but how can you blame them for buying at the top when nobody knows what the ‘top’ of a market is except in hindsite? The fact that house prices can go down isn’t a secret, but lets face it: It’s not really the attribute that marketers are going to trumpet and going deeply into debt is the American way.
Marco sent in this link to a Globe and Mail story about a housing affordability study that looked at cities in six nations, comparing housing prices to incomes. They rate each city with a number of years it would take to pay off the average home with the average local income. Canada as a whole is not bad at all, with a median multiple of 3.2, just slightly above the traditional ‘affordable’ multiple of 3.0.
Regina has great affordability, with a median multiple of 2.0, while Vancouver doesnt fare so well on the affordability scale. Vancouver is rated the 13th least affordable city in this study, with a ‘severely unaffordable’ rating of 7.7
The survey was conducted by Demographia, a US consulting and research firm. The full PDF survey report is available here.
The Toronto Star has an article about a condo development called the Bohemian Embassy – a name that was originally used for a series of literary / cultural coffee houses run by Don Cullen. Cullen is unhappy with their use of the name and talks about his first visit to the site:
There was no one to talk to and no literature available, but clearly someone was trying to “brand” their development with a name that sounded suitably hip. The trouble is, I invented that “brand” and the last thing it represented was culture-free, cookie-cutter condos.
Now being so very west-coast, I initally thought they were refering to bohemia townhomes in Vancouver, another development with granite countertops and sisal carpets that seems very un-bohemian.. or is it? Here’s the wikipedia definition of bohemianism:
The bohemian lifestyle is often associated with cafÃ©s, coffeehouses, drug use (particularly opium, the “dark idol”), alcoholism, and absinthe (nicknamed the “green fairy”). Bohemians were associated with unorthodox or antiestablishment political or social viewpoints, which were expressed through extramarital sexual relations and voluntary poverty.
Ok, so maybe I’m wrong. Some of this sounds pretty Vancouverish: the coffee shops, drug use and particularly the ‘voluntary poverty’ bit about buying RE right now – but why so shiny? If we’re going to glom onto the ‘bohemian’ concept it seems like developers could save a lot of money by skipping the clean new materials and simply throwing some absinthe in as a perk.
I think I have just the example too: remember that old porn theater in the downtown east side that is slated to become condos? Why bother with conversion when you could simply throw some old blankets over the seats and live in a true bohemian style. The Venus theater could become ‘The Intra-Venus’ a condo development like no other!
Now pass me that bottle and contract, I’ve got some investing to do!
There’s an article by Bob Ransford in Saturday’s Vancouver Sun titled ‘Its hard to pin down what’s fueling the boom’. Unfortunately the online version of the article is only available to subscribers (here), but I found this section interesting:
It seems like the economic surge that we experienced this last year was almost wholly driven by a real estate-based frenzy that perhaps peaked over the last twelve months but remains the only visible engine of economic growth in these parts.
It was easier to make sense of earlier real estate booms in Vancouver when our resource-based economy used to go through cycles of expansion and contraction tied to commodity price fluctuations. It was even easier to make sense of the record setting real estate boom of the mid-1990’s when a new international market discovered Vancouver as Hong Kong’s sovereignty was about to be handed over from Britain to China.
So that was then, what’s driving the boom now?
Pinning down what exactly fueled our latest trend-setting real estate boom is harder. Job growth is certainly one fundamental driving the market. Many new jobs created by the institutional projects that are part of the pre-Olympic period provided the wealth that brought new home buyers to the market.
The residential construction sector itself also was a significant job creator. Kind of like the chicken and the egg. It is somewhat scary that we have little more than this to point to as our engine of growth.
That got me thinking: In previous booms once demand was absorbed or the driving economic factors were removed the market went through a down-turn with lower house prices. People that needed to sell were faced with a depreciating asset, and it wasn’t uncommon for people that bought at the peak to owe more on their mortgage than their house was worth.
So what about now? If the only driving force behind the boom is the boom itself then we never have to worry about a downturn! If the boom is providing the underlying economic factors for the boom then perhaps we’ve attained the real estate equivalent of perpetual motion!