How will a US slowdown effect Vancouver?

There are a couple of articles in today’s Globe and Mail that are interesting.. The first is about a report from National Bank Financial that says US house prices could drop another 10%. This report disagrees with the National Realtors Associations chief economist David Lereahs claims that “This is the price correction we’ve been expecting – with sales stabilizing, we should go back to positive price growth early next year”.

Stéfane Marion, an economist at National Bank, disagrees with the NAR’s statement that the faltering U.S. housing market has hit a trough and prices will start climbing again. “In our opinion, this forecast is way too optimistic.”

“…rising interest rates, higher house prices and surging costs for heating homes have triggered a severe slowdown. In recent weeks, the housing correction has become the dominant topic of conversation, fuelling talk about a possible U.S. recession.”

The second article examines what impact a U.S. recession would have on Canada:

“Canada sits ominously at the top of a list compiled by Merrill Lynch economists of countries that are most dangerously exposed to the slowing U.S. economy. After Venezuela, this country leads the world as most dependent on the U.S. economy for its well-being. And the United States, as becomes more evident with every new economic report, is in trouble.

Over at HSBC PLC, economists have gone through a similar list-making exercise, and they, too, found that “Canada is at the top of the tree” in terms of exposure to the weakening U.S. economy, surpassing Mexico and Latin America.

Merrill Lynch believes the rest of the world has enough momentum to pick up some of the slack left behind by the United States, while HSBC believes the U.S. will drag down most of the world with it. But they agree that Canada — with its open economy, its proximity to the U.S., and its dependence on trade — is more vulnerable than pretty well any other country to a U.S.-led global slowdown.”

It’s not all gloom and doom though – both reports suggest that even if the US economy tanks the Canadian economy may be able to get through with just a few “bumps and bruises”.

“..consumer demand and business investment are expected to remain strong, fuelling the Canadian economy from the inside, instead of relying on the global economy for strength.

The U.S. slowdown could change that momentum, but it will take years to slow down domestic demand, said Merrill Lynch’s chief economist in Canada, David Wolf.”

But what impact would this scenario have on the Vancouver housing market? How much are we counting on property values to be driven by future demand from outside Vancouver?

To buy or not to buy.

The financial facelift in today’s Globe and Mail focuses on a vancouver couple that would really like to buy a house, but are priced out of the market. Or are they?

“George and Colleen have a sympathetic banker. He has offered to finance the purchase of a house with the understanding that there would be no payments until George has finished his training. That’s very accommodating, but five years of compound interest would be a huge sum to pay, the planner adds.”

Their situation is looked at by a financial planner from Kelowna, Derek Moran who points out that they could stretch to buy a condo, but doesn’t recommend it right now:

“George and Colleen could downsize their plans. A condo for $400,000 would be an alternative to a house. Some banks will lend up to the full value of a home. Without any down payment, a mortgage at 5.3 per cent with a 25-year amortization would cost $2,395 a month, not including property purchase tax, GST and mortgage insurance costs. It would be paid off by the time George is 57 and Colleen 59.

Is it worthwhile to take on a $400,000 debt to buy accommodations similar to those they already rent for $1,200 a month? In spite of the advantages of ownership, it makes sense to continue renting, Mr. Moran insists. Buying would cost twice as much each month in mortgage charges as current rent and would expose the couple to the risk of a housing collapse as well as property tax increases and rising interest rates.”

It’s interesting that they bring up the possibility of a housing collapse, and even put some potential numbers on that situation:

“If George and Colleen find that real estate prices soften, they could save as much as $100,000 on a $400,000 condo. With the financing costs added in, that saving would actually be $296,368 by the time the mortgage is paid off.”

Isn’t it amazing how $100,000 becomes almost $300,000?

We’re number 1! (in lack of affordability)

RBC just release a report on housing affordability in canada. There’s a story in the Globe and Mail:

“In the third quarter, “Alberta and British Columbia had the sharpest erosions in affordability, driven largely by double-digit annual price gains,” the Royal Bank division said Tuesday. “However, Alberta’s soaring price gains still leave the province below past affordability stress points.”

Housing in Calgary and Edmonton remains more affordable than in Toronto, Montreal and Vancouver, relative to incomes.

“Vancouver, however, is entering uncharted waters as it sets new records for poor housing affordability in two out of four classes, and the other two will likely do so later this year,” the report says.”

See? Vancouver is number one in lack of housing affordability with a record-setting level of unaffordability. I’m sure that comes as a big suprise to everyone here.

“The RBC Affordability Index measures the proportion of pre-tax household income needed to service the costs of owning a home.

The higher the index, the more costly it is to afford a home. For example, an Affordability Index of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

The most affordable housing class remains the standard condo, with an index of 27.5 per cent.

A standard townhouse is next at 31.4 per cent, followed by a detached bungalow at 39.4 per cent. A standard two-storey home is still the least affordable housing type in the country with an index reading of 44.8 per cent.”

So those numbers are for all of canada, what do the numbers look like for affordability in just the west, specifically in Vancouver? Ah, here we are:

“RBC Affordability Index for a detached bungalow for Canada’s largest cities is as follows: Vancouver 68.2 per cent, Toronto 43.9 per cent, Montreal 36 per cent, Calgary 34.6 per cent and Ottawa 30.3 per cent.”

68.2 percent of the average pre-tax income.. I wonder why they use pre-tax income? It’s not like you can write off your mortgage here like you can in the states.

Correction: Federal government WILL review leaky condo crisis

Seems to be lots of leaky condo news lately – the federal governments review of the lower mainlands leaky condo crisis is back on:

“Prime Minister Stephen Harper won’t break his election promise to review the federal government’s alleged culpability in the $1.5 billion leaky condo disaster, a federal official said Monday.

A spokeswoman for Human Resources Minister Diane Finley said a new option has emerged since the minister wrote to owners in July saying it would be inappropriate for the government to even consider initiating a review while the issue is before the courts.”

I wonder if they got many complaints after news broke that they were unable to carry through on their election promise to review the leaky condo situation here. Whatever happened I think that a lot of people in affected buildings around Vancouver will be pleased with this turn of events, particularly if it leads to some sort of future solution. For a ‘world-class’ city Vancouver has some pretty awful architecture and some suprisingly shoddy construction, lets hope this gets us moving in the right direction.

This renewed claim to look into the leaky condo crisis is pretty vague at this point, hopefully some more specific information will be forthcoming:

“We’re currently studying options as to how we can proceed without compromising current legal proceedings, as we have recently learned that there may exist review options that will not interfere in these proceedings,” Colleen Cameron, Finley’s director of communications, wrote in an e-mail to The Vancouver Sun today.

“Unfortunately, I can not provide detail about these options at this time-only assure you that we remain committed to a review.”

story in todays vancouver sun.

$29 million to build, $40 million to repair.

More depressing news on the local leaky condo front, this hot on the heels of the federal governments announcement that it is dropping its election promise to review culpability for the Lower mainlands leaky condo crisis:

“Owners in a leaky condominium project that cost $29 million to build in 1994 may now have to pony up a total of $40 million to keep the buildings standing.

The City of Vancouver ordered Gardenia Villa, at the corner of Nanaimo and East Broadway, to get an engineer’s report after an inspection showed various parts of the complex were at risk of failing structurally. The city also ordered immediate shoring to one of the buildings in the complex because of imminent danger.

Normally, it’s the strata council that decides to get an engineering report done and the city doesn’t get involved until there is an application for a building permit to do the work, Vancouver’s chief building official, Dave Jackson, said in an interview. But in this case, some of the owners complained to the city that maintenance wasn’t being done.

Following an inspection, the city was concerned that the building “might be damaged to the point where something might fall,” Jackson said. In its order, the city also referred to “water … leaking out of structures in several locations and … algae growing extensively on the building’s exterior stucco.”

If all repairs are done to this building it will end up costing an average of $160,000 per unit, an astounding figure considering that some of the units were originally purchased for much less than that amount.

“Options the owners will be considering today, according to a notice of the meeting, include doing nothing, proceeding with the repairs, suing the parties who designed and built Gardenia Villa, and dissolving the strata corporation and selling the land.

But legal action against the developer may prove difficult as Maple Resource Investments was dissolved in 2003 for not filing annual reports. And Jackson said doing nothing was also not an option. “Ultimately, we expect them to do the repairs and if they don’t, we would eventually order them to,” Jackson said.

Once the strata does the repairs, the city will require letters from structural engineers to ensure it has taken care of the safety issues related to the structure, Jackson said. The city will also need letters from envelope specialists that repairs meet minimum standards of the Vancouver building code.

Tony Gioventu, executive director of the Condominium Home Owners’ Association would not talk specifically about the Gardenia Villa project. However, he did say other projects with large assessments have been able to spread the repairs over a number of years, “which eases the financial burden on the owners.”

Full article in todays Vancouver Sun.