Cross Canada Check Up

The Canadian real estate market is in a slump from coast to coast.

The average price of a home is down about 10% year-over-year from $310M to $282M.

Sales are down about 12%.

However, the results are not equal across the country. Seven out of ten provinces have actually had price increases year-over-year, Saskactewan, Manitoba, Quebec and the Atlantic provinces. Prices are only down in B.C., Alberta and Ontario.

With those markets where sales and prices are down the most, statistics are not uniform across the province. In Ontario prices are up in Ottawa despite being down in Toronto and Hamilton. In Alberta, prices are only off slightly in Edmonton but are down sharply in Calgary.

However, the BC market is a story unto itself. Sales are off 70%, by far the greatest decline in the country, and prices are down 12% across the board, in all markets.

Despite Canada having such a small population and not having the dominant one city profile that say England, with London, or France, with Paris, exhibits, Canada is experiencing another one of those sharp regional housing price fluctuations it has faced in the past. For instance, someone who sold the average house in Vancouver last December for $577M, and purchased in Ottawa for $271M, would today be ahead by $100M in just 12 months. But someone who sold in Winnipeg for $179M and bought in Victoria would have fallen behind by $80M. Those are huge regional swings, especially because they are in after-tax dollars.

Housing is always a local issue, national numbers are really only soft indicators and can't be used to predict much. Looking at the national numbers however, does led to some questions of price stability in Alberta and B.C. given the drop in oil prices and that B.C. still has lots of room for price to fall further.

The Final Stage Has Begun

On September 1, 2008, we reported that the West Coast market was primed for the final stage of a real estate collapse. That stage occurs when buyers start walking away from sales contracts, foregoing the deposits they made.

That stage is now well underway. In fact, so many buyers are now walking away from sales contracts, that some developments are going into receivership. The H&H condo in Yaletown has been placed in receivership for a number of reasons, including the fact that at least 15 buyers have walked away from their deposits and sales contracts.

A condo development that goes into receivership with a portfolio of buyers walking away from deposits can be a very long term work out, taking from 2-4 years. A market with buyers walking away from sales contracts can take anywhere from 4-10 years to recover. In the meantime prices are certain to drop by 25-35%, sometimes 40% in the case of cookie-cutter type condos in suburban locations.

There are legitimate business reasons to walk away from sales contracts. Developers can sue to recover damages and there are very simple ways for both buyers and developers to mitigate losses. Developers will try to enforce sales contracts, however if the developer is late delivering the product, the buyer cannot meet the financial requirements of closing, or the buyer has no assets in the legal jurisdiction, it is very difficult for the developer to get and enforce judgement in their favour.

Walking away from a deposit is something that depends on an individual's unique profile, the sales contract and the status of the development. We do not recommend that someone simply walk away from a deposit because market prices have changed, however there are times where an individual buyer is best to walk away from a deposit if the completion of the project is in question.

Risks to Recreational Real Estate Purchases

The market for recreational real estate in Canada is at its slowest in a generation.

The four key markets for recreational real estate in Canada are the Laurentiens in Quebec, the Muskoka and Haliburton regions in Ontario, and the interior of British Columbia (including Whistler).

Two of those markets were impacted by very negative news this week.

The anchor of the Laurentians is arguable the resort of Mt. Tremblant which includes the towns of Mt. Tremblant and St. Jovite. The massive billion dollar Versant Soliel project at the Tremblant resort has a ground to a halt and is now several years behind schedule. It was to be followed by a north side project which is no longer on the drawing board. A slowdown at Mt. Tremblant would have devastating effects on the local economy and on real estate investments. Already there are literally thousands of recreational units available, several years of supply and prices are down 25-35% since peaking between 2003-2005.

In British Columbia, the crown jewels of Whistler, Blackcomb and Panarama were already having to contend with parent organization Intrawest being required to suspend investments in the resorts in order to pay higher interest charges on bank debt. Now comes news that Intrawest's parent Fortress Investment Group being close to bankruptcy, and this week suspended redemptions in its largest hedge fund. Fortress has seen its share price drop from about $20 to $1.76. We believe that Whistler, Blackcomb and Panarama are all excellent, stand alone operations, unfortunately they may to liquidate their real estate assets at fire sale prices in order to keep their parent companies afloat.

Where Were You When the Boat Tipped Over?

The people who depend on the real estate market in Vancouver will remember November, 2008 as the month that they threw in the towel, walked away, and started over.

Year-over-year sales dropped by 70%, the biggest drop in market history. In fact, sales levels are now below levels seen more than an entire generation ago, more than 24 years in the past. Many, many local neighborhoods simply have no sales to report.

Price declines are massive. The Greater Vancouver Real Estate Board (GVREB) reports that the "benchmark" price across all categories is now $495M, down from somewhere above $568M in May, 2008. This report is illusory, designed to create the impression that prices are down only about 12% since they peaked in May, 2008. However, prices actually peaked in March, 2008. And GVREB was not reporting "benchmark" prices for all categories in March, 2008, but was relying on, and reporting the "benchmark" price for single, detached homes.

As a result, a much better example of how much prices have fallen is to compare the "benchmark" price of a single detached property, which the GVREB reported was $921,000 in March, 2008, to today's "benchmark" for a detached property which GVREB reports as $666,525, a decline of 28% since the market peaked.

Sales levels are so low right now it is actually impossible to do a proper statistical analysis of the decline in price, by category and neighborhood, over what has now become an almost two year price drop. It is only possible to point to anecdote examples of product. For instance one condo we know that maxed out at about $480M is now listing for about $350M, a drop of 28%.

Sales are so slow that many sellers have simply let listings expire so that they do not have to keep their house in "best form" in case they might get a showing.

Earlier this year we predicted a price decline of 25%. That price decline has now been met and surpassed. We adjusted our prediction to 25-30% drop. We are now adjusting to 30-35% and believe that we are being conservative.

Viridian Green

The Viridian, also called Viridian Green, is a four-story strata, 22-unit, townhouse development along the south side of 4th just east of Alma. The name Viridian Green is redundant. Viridian is a colour near identical to green.

This project was plagued with a number of problems and construction completion was delayed until after the expected summer 2008 completion, which itself was a delayed date.

Larc Developments is the developer. Larc is privately owned and does not publish financial statements nor release public information.

Construction has now ground to a near halt, with the building appearing about 80% complete, including the interior construction of commercial businesses on the ground floor.

We understand that the developer has placed all unsold units with a 3rd party for sale.

Construction risk is high.

Financing risk is high.

The building is concrete and appears to be designed with full rainscreening. However, the operation of large commercial businesses on the ground floor and the use of not-proven building components create above average operational risk in the first year of occupancy.

Price risk is high. At present, units are being offer for about $819,000 to $1.2 million. These units are significantly overpriced compared to similar product in the neighborhood.

Environmental risk is average.

Recommendation: Pass. For existing owners, we suggest ensuring any deposits are safe and negotiating an exit alternative.

The Santa Barbara

The Santa Barbara is located on the north side of 4th Ave., about 2 blocks west of MacDonald.

This is a strata development which has three levels, including one below grade. There are several unit sizes available.

There is no construction nor financing risk as the project was built in 1998.

As is the case along the west coast, prices at this project are down at this project.

A two-bedroom unit listed for $599,000 in May and sold shortly thereafter. A near identical unit recently listed for $515,900 and has been repriced for $499,000 after not selling. A one bedroom unit likely peaked at $499,000. A one-bedroom unit recently listed for sale at $429,000 and has been reduced to $384,000 after not selling. Price risk is average for similar product in the same neighborhood.

Maintenance fees in this project are higher than average for this type of product. And owners are renovating units in the first 10 years of ownership. North facing units experience higher than normal levels of road noise. Operational risk is higher than average.

We were unable to assess rainscreen capabilities, however the building is rainscreened. Environmental risk is average.

Recommendation: Buy*, with the exception of below grade, and street facing units.

*Recommendations are general in nature. Specific recommendations are based on unique investor requirements and profile.

Other Factors to Consider

"Housing slump deepens as prices drop most in 26 years", reads the headline in today's Globe & Mail in reference to the Canadian housing market

Price is certainly a factor in making home and investment decisions, and the decline in house prices across Canada is big news. However, price should not be the only decision in buying or selling.

The key factor in making decisions should actually be what your objective is with the property under consideration. Is it a principal residence, an investment, a retirement residence etc?

A second key factor is how much it costs to carry the property, including the mortgage, taxes, other fees etc. Lets say you have a property that is dropping in price but has a very low mortgage rate of say 4.5% good for 7 years. Selling that property, but then buying it back in 5 years for $100,000 less may end up costing you more if the best mortgage then is 9%.

There is a new consideration which also may impact on today's decision. Ten years ago, banks provided only token home-equity loans. But five years ago, home equity loans became easy to get, at very favourable rates. But those loans have all but dried up today. However, some people who got their loans over the past 5 years have huge available lines of credit, at rates that are very low. Rather than selling a property to pay off other debts, it may be advantageous to rely on the line of credit in the short term.

Real estate is a long term business decision. And there are a lot of factors to consider.

The Impact of the Athletes Village on The Market

The City of Vancouver disclosed this week that is has provided a financial program, which is called a "$100 million loan guarantee", to Millennium Development Group, developers of the 2010 Olympic Athletes Village.

The details of the program have not been released.

Supporters of the program claim that the city and its taxpayers are protected in the case that Millennium is unable to pay back the "loan".

Those supporters are referring only to the direct risk of a loan default. If Millennium can't pay back the loan, then Vancouver recovers by way of taking back property. Its called realizing on the security. "No risk," those supporters claim.

Wrong.

The total financial deal for both land and buildings has a book value of $1.1 billion. Most of the financing was provided by Fortress Investment Group, through its lending subsidiary Fortress Capital, by way of a $750 million loan. The supporters of the $100 million loan have conveniently ignored that Fortress must be paid back the $750 million BEFORE the city can realize on its security, which are the land and buildings. In addition, part of the security are buildings and land the city was going to get anyway - at least 100 units of affordable housing plus green space.

So there is a direct risk to the city of Vancouver. The risk is that the $1.1 billion dollar project is worth only $750 million at completion, a very real risk, and after Fortress gets paid, the city gets nothing. In addition, as part of the original deal, the city is on the hook for up to $190 million in shortfalls to the $750 million Fortress is owed. So if after everything is sold, Fortress gets only $600 million, then the city kicks in $150 million more, and loses the other $100 million.

But there are also two indirect risks to Vancouver taxpayers and investors that have yet to be disclosed.

First, only 265 out of 700 condo units have been presold. The total number of condo units eventually available for sale appears to be about 1,000. Those 265 pre-sales must be considered a VERY low number in a real estate market which is stagnant. Even more worrisome is that we are convinced that at least 50-75 of those pre-sales were likely made to what are called "related parties", such as sub-contractors. Those sales were conditions of the sub-contracting agreements, in some cases sweeteners to agreements because the contractors figured they could flip the property for a quick profit. Those sales must be considered very soft with little likelihood of closing. So the city of Vancouver may well realize on security, but simply get 3 empty condo buildings. And cities aren't good at managing such assets.

The second risk is to investors and home owners. If the city realizes on security and gets 600 empty condo units to sell, it will have to sell them at fire sale prices. It will take a year or more, with huge downward pressure on prices.

Millennium Water will be a work out project in about two years. Similar work outs take anywhere from 2-5 years. We recommend a pass on this project, at this time.

Sales & Prices Fall But By How Much

The Real Estate Board of Greater Vancouver reported sales activity for October, 2008. As is consistent with the Board, disclosure is clouded by the use of multiple metrics, not standard, and not easy to compare from one reporting period to the next. Below, the black text represents the Board's most recent press release, the red text represents previously released Board information, and the blue text represents our analysis.

Sales Volume

Residential property sales in Greater Vancouver declined 55 per cent in October 2008 to 1,364 from the 3,028 sales recorded in October 2007.



Benchmark Prices for Detached Properties

The benchmark price for detached properties declined 4.7 per cent from October 2007 to $695,962. Since May 2008, the benchmark price for a detached property in Greater Vancouver has declined 9.8 per cent.

The last three immediately available benchmark prices provided by REBGV are $920M in spring 2008, $808M in early summer 2008 and $726M in September, 2008.

We calculate that the price decline from the peak in spring 2008 ($920M) to October 2008 ($695M) to be almost 25%.


All Market Price Changes

The Real Estate Board of Greater Vancouver (REBGV) reports that residential benchmark prices, as calculated by the MLSLink Housing Price Index®, declined 8.8 per cent between May and October 2008, resulting in a 3.9 per cent year-to-date price reduction for detached, attached and apartment properties in Greater Vancouver between Octobers 2007 and 2008. In May 2008, the overall residential benchmark price was $568,411, compared to $518,668 in October 2008.

In September, 2008, the REBGV reported that the price was $557,114, down from about $580M in September, 2007.

We calculate the price decline from September 2007 to October 2008 to be about 11%.

Prices Predicted to Fall

The Central 1 Credit Union has joined in the chorus of predictions for declines in prices for BC housing.

http://ca.news.yahoo.com/s/cbc/081023/canada/vancouver_bc_housing_recession_3

The Credit Union reported, "Since a high in March 2008, B.C.'s residential house prices have fallen 12 per cent, and will fall another 13 per cent in 2009, bringing the provincial median to $310,000."

Our pricing models are near dead-on with the Credit Union. We have been predicting the 25% price drop since May and we believe that prices will bottom out somewhat around a 30% drop from the peak.

We, like the Credit Union, also project a possible deeper drop in prices in 2009 in the event that the economic conditions deteriorate more than expected. The Credit Union suggests that 2009 might well see a 25% decline in price. We agree that type of decline is possible, although a worst case scenario.

Reorganization at Intrawest

As posted here earlier in the week, Intrawest, owner of Whistler, Blackcomb and Panorama in the West, Blue Mountain in Ontario and Tremblant in Quebec is attempting to re-negotiate about $1.7 billion in bank debt.

We are of the opinion that Intrawest will be successful. However, to close the transaction, Intrawest will have to make certain commitments and abide by loan covenants (rules) that will put downward pressure on real estate prices in those markets in which Intrawest operates.

Intrawest will be paying considerably more in interest payments, which will curtail its ability to invest in new infrastructure for resorts. A reduction in infrastructure investment will limit growth.

Intrawest will also likely be required to reduce its debt by disposing of unsold condo inventory, and surplus land. It is very difficult to measure the amount of unsold inventory at each resort as a % of total product since Intrawest does not make this information public. The same measurement problem exists with the land bank Intrawest holds. However, we have completed site inspections at three Intrawest resorts - Tremblant, Blue Mountain and Whistler and are able to report that Intrawest has a seemingly vast inventory of both condos and land, particularly at its Tremblant resort. A fire sale of condos and land would likely result in at least a 10% immediate reduction in prices, and a reduction in rental income for existing investors.

The Scoreboard Can't Keep Pace

Have you ever watched a baseball game in Fenway Park, Boston?

If yes, you know that Fenway has an old time scoreboard, where someone has to physically change the score, the status of the inning etc. A few years back, I watched the Yankees and the Red Sox in a slugfest. Run after run scored, wild pitchs were common, home runs left the ballpark faster than new hip-hop songs on the Billboard 100. And the one guy trying to update the scoreboard, well..., he just could not keep up.

That is what is happening to the West Coast real estate market right now. Before investors and other stakeholders had time to digest the news that Intrawest is 48 hours from receivership and Fortress may not be able to finance the Olympic Village, came a further barrage of negative news.

The Ritz Carlton, developed by Holborn, stopped construction and the sub contractor vacated the premises.

Full story:

http://www.cbc.ca/canada/british-columbia/story/2008/10/21/bc-ritz-carlton.html

Simon Lim of Holborn claims that construction was halted due to the need for design changes. But only about 50% of excavation was complete. And regardless of what they design will be, full excavation is required. Holborn announced that its other project, The Hills, at Nanimo & Kingsway, is on hold.

And news crews barely had time to file reports before they were told that work on the downtown Hilton is also suspended. A second Hilton project is also on hiatus.

In fact, so many projects have ground to a halt, or are now in receivership that we cannot report them all. So we are including a link to an interactive map that CBC has put up. We thank CBC for their work. This map is not complete as it includes only the marquee projects, mostly in central Vancouver.

http://www.cbc.ca/bc/features/construction/

Could the Mighty Casey Strike Out?

The British Columbia real estate market has faced an onslaught of bad news this past six months.

But nothing prepared people in BC for the ominous development with the jewel in the crown that was disclosed today.

Intrawest, the developer and operator behind Whistler, Blackcomb and Panarama, is on the verge of receivership.

Intrawest has a massive debt maturing on Thursday. Fortress, the investment management company, that is the parent of Intrawest, can no longer guarantee the debt. So an attempt is being made to renegotiate the debt with all the banks involved.

The problem is that Intrawest's debt is trading at only 70 cents on the dollar in the debt trading market, so the market does not see Intrawest continuing in its current form. The company will be restructured. It has good assets. But, the new lenders are not likely to allow Intrawest to invest in the operations of its resorts the way it has over the past 20 years. In several Intrawest resorts, there are hundreds of unsold condominiums. We can say, with almost virtual certainty, that this inventory will be sold off, quickly, to raise much needed cash, but at big discounts from today's list prices. We saw this happen a few years back in New Jersey where Intrawest discounted their entire inventory by 25% to sell product.

The restructuring of Intrawest is THE body slam to BC real estate that will cripple it, from both an operational and reputational respect. The body slam is part of the 1-2 count on the way to 3 count. It has not yet been reported broadly, but Fortress plays a key role in the 2010 Olympics. Fortress is financing the $1 billion Olympic Village. And Fortress itself is also in serious financial trouble. Its share value has dropped 80% to just over $5.00. And it holds other real estate investments, not just Intrawest, just require massive restructuring including a large portfolio of real estate in Germany.

With the exception of principal residences, or investment properties that have little debt, we are on the verge of recommending an-accross-the-board sell for all real estate on the Canadian Pacific Coast.

The First Nail in the Coffin

The massive Infinity Condominium project in Surrey is now in receivership. Construction was halted in August. On October 8, the receiver padlocked the doors.

Hundreds of buyers, maybe as many as 500 are impacted. The project was supposed to be three or more towers, however only one has been built.

The developer is from South Korea and is facing financing problems at both the individual project level as well as at the holding company level.

Buyers who have placed deposits have their deposits protected, but only the value of the deposit not the promise of a condominium. So someone who placed a $40,000 deposit on a $250,000 condo, has their deposit protected BUT, some people placed deposits as much as 2 1/2 years ago, and the $250,000 condo now costs $400,000, so they could have their deposit returned but no longer afford to be able to buy anything.

The same developer is responsible for the Sky project, also in Surrey. We already know that financing for the Sky project has been pulled, and we predict Sky to go into receivership in a few days.

These two projects were pre-sold 2 or more years ago. There are many more projects pre-sold much more recently, many of these will also be restructured, and with these projects people will be best advised to walk away from their deposits, rather than wait 4-5 years to get potential completion of a condo they purchased for $500,000 but is only worth $250,000.

BTW, the Canadian Real Estate Board (CREB), based in Ottawa, reported yesterday that Greater Vancouver housing sales were down 43.2% in September from a year earlier, while the average sale price dropped 8% to $535,598 over the last year.

Cash is King and Other Noteable Quotes

Like Dr. Priscepionka, one of my university professors, would say, "the graph is almost impossible to read, but what it shows is really important."

So, if you want to better read the graph, click on it. At least our graphs use colours, not like the good doctor's combination of white, grey and black.

What the graph shows are the declines in real estate prices across several major North American markets. A good place to be is near the top and to the far right. The two worst places to be are, at the bottom of the chart since that means your city has experienced the greatest price drops or, to the furthest left of the chart since that means your city is falling faster than those cities to the right.

Which city is that with the fastest falling prices in North America. Oh-oh, that's Vancouver. Yep, the same city that, in the spring of 2008, some experts claimed would experience a 5-9% price increase this year. Now we don't like to say, "we told you so." BUT. We forecast the drop in price. And like Yogi Berra said, "you can look it up." Just scroll down a few blog postings. But even we didn't think the drop would be so far, so quick. But we continue to predict a bottom 25-30% from the top.

There is another quote that we know, "all statistics can be made to lie, and all....." We hope you remember the quote. So lets see what the Real Estate Board of Greater Vancouver (REBGV) says about prices. Again, if you scroll down you will see why I get so annoyed with the way the REBGV reports prices. The REBGV is reporting that prices are down about 6% from their peak, for what the board calls a "benchmark" detached property, whatever that means. What we do know is that the same benchmark property (we think its the same benchmark property) was about $920M earlier this year, then dropped to $808M, and is now $726M. Perhaps the board can't do basic math or maybe there is an eyesight problem. To paraphrase from Gene Hackman to Nathan Lane in The Birdcage "then you need glasses because that is definitely a boy." A drop of about $200M from $920M is a darn sight more than 6%. Actually Hackman also says something about "a darn sight" in the Birdcage.

So as Mr. Rogers might say, "what do we do next boys and girls?" Well, we hoard all our cash. Because cash is king. I don't remember who said that. And we don't go into the water until its safe again.

Vancouver Real Estate Board's Poor Disclosure

For the second consecutive month, the Vancouver Real Estate Board released different sales figures locally, then it reported to the Canadian Real Estate Board.

In August 2008, the Vancouver Real Estate board reported locally that average prices in its market area were up only about 2% year-over-year.

However, the same board reported to the national association that prices were down 5% year-over-year to $557,114.

When reporting locally the Vancouver Board has been consistently over-reporting sales prices for going on six months. The over-reporting appears to be an attempt to make the collapse of the local market not appear as bad as it is. It is an effort to inflate prices and does not make for efficient markets. Proper reporting is necessary for sellers to correctly price product, for sellers to make informed offers and to assist other market participants such as banks.

The Vancouver real estate market is in a tailspin. It is not a correction nor a return to normal levels. It is a bear market with prices falling daily.

Collapse Deepens and Accelerates

The Real Estate Board of Greater Vancouver (REBGV) reported today that residential property sales in Greater Vancouver totalled 1,568 in August 2008, a decline of 53.7% from the 3,384 sales in August 2007, and a 47.7% reduction from the 2,998 sales recorded in August 2006.

REBGV uses so many different standards to measure average prices that, month-to-month and even year-to-year, comparisons are difficult. However for the past three to five months, prices in virtually ever category are down about 4-12%. For instance, a single-family, detached house selling for $921,000 some five months ago is now selling for $808,000, a drop of 12%. And, on a year-to-year basis, real prices are down about 1% overall, but some categories have fallen near 10%, particularly in suburban areas.

Once September's numbers are in, we are projecting the first year-over-year decline in nominal residential property prices in Vancouver since 2001.

With respect to sales levels, a year-over-year decline of 50% is even greater than what we projected. Sales are now so low that it would take almost a year to sell just the properties listed for sale in August.

Ominous News for Vancouver Real Estate

The Brilla is a strata development on West 4th Ave at Alma in Vancouver. The project was pre-sold in 2006 and was completed soon after. The project appears to have been planed as a 30-unit development, but was scaled back to 22 units.

The developer is the Toyu Group out of Richmond. Toyu is privately owned and does not appear to issue financial or other reports.

Brilla appears to have been placed in receivership, or the equivalent, with at least 6 units unsold. This development is in a prime location with excellent quality. For this type of development to fail to sell out is highly unusual, or it used to be, in Vancouver. Of the remaining units, 1-bedrooms are listing for $419,000 which, we understand, is about 10% less than what the developer was offering them for sale last fall. The developer prices were firm, the offer prices are soft.

We do not know if Brilla's status reflects any risk with the developer Toyu Group. Based on our experience, we recommend any buyers who have contracts with other Toyu under-construction projects to assume their contracts and any downpayments are at risk.

Toyu is not the only condo/strata project unable to sell units in Vancouver. In the same neighborhood, construction has stopped at the Viridian project under the direction of Larc Developments. Again, Larc is privately owned and public disclosure is non-existent. We believe that Viridian will be placed into receivership, or the equivalent, shortly. Contracts and downpayments for Viridian product is at risk.

There is yet another strata development that has been completed that may shortly be placed in receivership in the same neighborhood. Again, it is a small project with near 30% of its inventory unsold a year after completion.

There are three stages in a declining market, each one creating more risk and indicating a sharper downward trend than the previous. The first stage is a growing resale inventory with reduced sales & prices. Stage one started in Vancouver in early spring of this year. Recent buyers who lose the ability to make their mortgage payments and speculators start taking financial hits. The second stage of a declining market are developments being placed in receivership. That stage started in the past two weeks. Builders, contractors and late-to-the cycle or even medium term buyers start taking hits. Speculators cash out, some at a loss. The third stage are owners and buyers walking away from contracts and giving up downpayments/deposits/negative equity in order to protect their total financial wealth. Stage three becomes most public as a result of power-of-sale signs, and large holes in the ground with "To be Completed" signs with dates two years ago. Once the third stage commences, the bottom of the market can usually be predicted to level off with a trough of a 25-35% decline from the top. In stage three everyone takes a haircut, except the lawyers and the restructuring experts.

We recommend than buyers of not yet completed construction projects in Vancouver consider ways to protect their deposits and downpayments which may now be at risk.

The Multiple Offer Trap

When offering real estate for sale, some brokers will suggest to clients that they set a low selling price, open the property for showings for a short time, then set one day for offers. The brokers are attempting to create multiple offers which they think will result in a price higher than market. The broker is trying to simulate a silent auction where bid prices are not known. Staging a property for multiple offers is very risky to everyone except the real estate agents involved. We advise against ever being involved in a potential multiple offer situation, either as a buyer or a seller, especially for a principal residence.

As a seller, one risk is that all the offers you receive will be above your list price, but below the price you expected to sell your property. You do have the choice to decline all offers (provided they all had conditions), but then are faced with having to re-launch the sale of your property. This can be a big issue if you have committed to purchasing a new property, but not included the sale of the existing property as a condition. There is also the risk that you get only one offer, but that one is at, or only slightly above, your list price. If that offer comes with no conditions, Canadian contract law technically requires that you accept the offer. I have never known a real estate agent to explain this risk to sellers. An additional risk is that regularly buying and then selling property using a multiple offer process could be deemed by the Canadian Revenue Agency (CRA) as a business and result in taxes being paid on the difference between the list price and the selling price.

As a buyer, there are many risks associated with multiple offer situations. In one situation, buyers, desperate for a specific property, bid 15% higher than the list price. They won the bid, but their bank, after getting an appraisal well below the bid price, declined the pre-approved financing. The buyer was placed in a situation where they had to forfeit a $10,000 deposit in order to get out of the sales contract. In another situation, the bid was successful, and the financing squeaked through, but a number of other costs such as land transfer tax, which is based on a % of selling price, proved too burdensome and the deal fell through. Most concerning was a client of ours that became involved in a multiple offer situation where the other prospective buyers turned out to be shadow numbered corporations of the seller! The broker who represented the seller advised that if we had concerns to complain to the real estate association. We knew that was a waste of time. Instead we swore out a criminal complaint against the seller and their agent. There are also insurance coverage issues that come into play. We are not insurance experts so we advise anyone who goes into a multiple auction sale to discuss insurance issues with their insurance advisor.

There is one situation where we advise that it might be ok to be involved with multiple offers. That situation is where there is a legitimate open auction, and all bids are known by all bidders. And only where conditions with respect to pre and post auction inspection and disclosure are accepted. Even then, there are still risks especially if a property is not fully completed or there are disputes about the actual definition of the property.

If a client insists that they want to offer in a multiple offer situation then we recommend this approach:

Put the offer in a sealed envelope and deliver the envelope with a contractual letter attached that reads - "opening the offer envelop will cost the seller $20,000, an amount to be waived in the event that the offer is accepted. " This approach is standard in other businesses where multiple offers are used.

Where Did the Market Go?

The Pacific Coast of British Columbia, in particular the lower mainland, is the riskiest market in Canada to invest in housing.

Price risk is systemic in the market, with unpredictable short term, real price increases always followed by long term (more than 8 years), real price declines, or, at best, nominal increases. For example, after more than a 100% increase in prices from 1979-1981, real prices dropped so much and for so long that they needed until 2002 - 2004 to surpass the 1981 high. A 1995 buyer did not see a real price increase until 2005. Price disclosure is clouded by the fact the local real estate board regularly issues inconsistent reports. For instance, in July this year, the Vancouver board reported locally that prices in Vancouver were up about 5% year-after-year but reported a different set of numbers to national real estate association which showed a 1% year-after-year decline.

Construction risk in this market is the highest in Canada. The leaky condo crisis of the late 1990s resulted in the collapse of the BC New Home Warranty Program, something unparalleled in Canada. While the crisis may seem to be over, many condos/strata still do not comply with rainscreen standards. The costs to buyers of resale condos/strata can range from $30M to $200M in repairs. We consider legislative requirements for reserve funds to be inadequate given the risk. Building code and municipal by-laws/standards are weak compared to Ontario and Quebec standards. For instance, owners of wood framed condos/strata are not prohibited from having propane equipment on their exterior decks, with the result that wood frame buildings suffer extreme damage from source-localized fires. Sprinkler systems are required, but we are well aware that sprinkler systems reduce insurance claims for infrastructure rebuilding but have no virtually impact on individual owner, non-structural property replacement such as furniture.

This risky market is now in decline. A plummet would be best how to describe it. Sales are off almost 50% year-over-year in Vancouver. Prices are down, drastically in some cases, but price declines are difficult to track because of the way prices are reported.

In many local areas, prices have no-where to go but down, and far down. There are some condos in signature buildings, such as the Shangri-La and Ritz Carlton, listing from $12-29 million. We have seen such condos, in other markets, marked down by 60-70% in order to sell them. And we have watched near identical projects, such as the proposed Toronto Ritz Carlton, fail. In addition, the business model of mixed use condo/hotel/commercial buildings is fraught with problems (Tower 3 of the Peninsula development in Puerto Vallarta, and 1 King West in Toronto are examples) and seldom meet cash flow projections. The Coal Harbour area of Vancouver boasts an average price of over $800M for condos. These condos rent for $2,000 to $4,000 per month, which means that on a cash flow basis, they are worth between $240M to $480M depending on assumed interest rates.

How bad will it get here. We projected a 25% decline in price in this market. We now consider that number to be very conservative. We are now projecting a 25-30% decline in prices depending on neighborhood and property type. Single family homes in good locations such as West Vancouver and North Vancouver are best protected from price declines. Expensive, large-square-foot, cookie-cutter, high rise condos in such areas as Yaletown and Coal Harbour, or in suburban locations, are at the greatest risk of 30%+ price declines.

In case these projections seem pessimistic we can provide the following proven historical price declines from other markets:

Hong Kong real estate 1997-2001 - down 60% in price

Toronto real estate April, 1989 - October, 1996 - down 35%

Panama City, Florida Condo prices April 2006 - April, 2008 - down 33%

Mt. Tremblant real estate April 2003 - August 2008 - down 25%

Any recommendations we make depend on a buyer/investor's individual circumstances. However, we do recommend that anyone considering selling in this market in the next 4 years, do so now. We would be hesitant to issue any buy recommendations, again dependent on specific circumstances and objectives.

Variations in Price Create Considerable Risk

Over the past 28 years, within Canadian cities, and between large Canadian cities, property prices have fluctuated greatly. Today, for instance, Vancouver's average home is about $500,000, while Toronto is $400,000 and Ottawa just shy of $300,000. It wasn't long ago that all three cities had virtually identical home prices.

In 1980 in Vancouver, prices shot up by about 100%, only to fall by 40% in the next year. Edmonton experienced a similar profile. Between 1985 and 1989 in Toronto, prices rose by nearly 180%, only to drop by 35% over the next 7 years. These large fluctuations in price were unheard of prior to the baby boom entering the housing market. The average price for a property in Ottawa and Vancouver were near identical from the time statistics were kept until that explosion in Vancouver prices in 1980. Ottawa, Montreal and Toronto had near identical house prices of $29,000 in 1969, and those remained near identical at $107,000 in 1985. But four years later, Toronto prices reached $280,000, Ottawa $140,000 and Montreal just $125,000.

Canada's housing market was very stable from the end of World War II until the spectre of inflation and the first oil crisis in 1972, neither which were on the radar of most economists just two years earlier in 1970. Prices advanced almost yearly after WWII but only in the mid single digits. Most Canadian cities continued to be very similarly priced. For the next few years after 1972, prices increased more rapidly, but remained similar across most markets. It was in Western Canada in 1980 that everything started to change. Purchase price risk had now been introduced into the Canadian housing market, particularly for first time buyers, people moving from one city to another and second home buyers.

The last eight years have been very good for the Canadian housing market, primarily as a result of the lowest mortgage rates since the 1960s, again something that no economists had on their radar screens when we were all scrambling to capture that Y2K bug in the late 1990s or when the teck bubble went burst in 2000.

With the exception of an environment of lowered mortgage rates, it is virtually impossible to predict the direction and magnitude of housing price changes. The reasons for this are that housing prices seem most dependent on shocks, both positive and negative, to the system, that did not exist in the prediction model. In the past 4 years in Canada, house prices in Alberta have shot up faster than anywhere else in the country, as a result of a booming oil-based economy driven by $140 barrel oil, something no-one thought possible in 2004.

So when is a good time to buy a house. That answer has traditionally depended on local market conditions and what you can afford. However, given the need to now manage the large fluctuations in Canadian house prices, particularly for anyone that is moving from one city to the next, house purchases should only be considered after a thorough financial review. That review must consider: your financial objectives, your overall financial profile including possible career transfers or retirement plans, and at what stage in life you are in.

Real estate agents tend to be experts on market conditions and mortgage lenders can provide assistance determining what you can afford.

But you can only rely on independent advice regarding objectives, financial profile and stage in life from an independent financial consultant. That consultant should also be focused on wealth creation and protection, as well as risk management, all of which have become much more important given the fluctuations of price in the Canadian housing market.

Home Equity Loans Can Be Cheaper

Using equity in a home for investments, purchase of a second home, vacations etc. has become commonplace.

If you have an existing home equity line of credit, it may appear to be a simple way to borrow.

And it is simple, but tax-inefficient and very expensive.

There are ways to structure a home equity loan so that interest payments are tax deductible, and so that you only pay interest on the money you are immediately using rather than paying interest on the entire home equity loan.

Someone who takes out $200,000 from their home equity line of credit can pay as much as $14,000 per year in interest. But with proper financial structure, that interest can be reduced to only $3,000 per year.

Your banker will generally not explain how to reduce your interest payments since that reduces their income. And your real estate agent is not qualified to explain how to take advantage of home equity lending options. Rely on a fee based financial consultant to assist you.

Prices, Sales Drop, Inventory Increases

Summer Arrives on the West Coast

Kitts Beach in Vancouver was busy last week as people took advantage of record high temperatures to catch some sun. By the weekend, temperatures had returned to normal.

And after a record setting eight year expansion, by all metrics, Greater Vancouver's real estate market has also returned to normal.

The region saw 2,425 sales registered through the Multiple Listing Service in June, a 43-per-cent decline from the same month a year ago.

At the same time, owners listed 6,546 properties, an 18 per cent increase from the same month a year ago.

At June 30, Greater Vancouver's inventory of unsold properties stood at 18,260, a 54-per-cent increase from a year ago. That is nine months of inventory, a key indicator of a buyer's market and a harbinger of declining prices.

June's average price dropped from May, a trend that started in March. Prices are up about 6% year-over-year.

With the flattening of the real estate market along both the West Coast and all of Canada, real estate joins a number of other investment categories showing little or no opportunities. Mutual funds, the equity markets and fixed income markets are all weak. The only growth appears to be in select commodities, a market which is highly specialized and not-at-all for the average investor.

Any recommendations we make are general in nature only, and specific investor objectives and circumstances will impact recommendations. In general, this is a very good time for real estate investors to consolidate their positions and remain liquid by holding assets easily converted to cash, as well as having lines-of-credit pre-approved. Investors who know they have to sell real estate on the West Coast in the next 2-4 years should sell now.

The Lower Mainland Real Estate Market

Spring in Vancouver, British Columbia

Spring arrives in British Columbia earlier than it does in the rest of Canada. The cherry trees have been in full blossom for two weeks, the tulips all red, yellow and purple for three weeks.

A slow real estate market here has also arrived this spring. Real estate sales were down 14% for the first three months of the year, a trend that gained momentum into April. Listings, at an all time high, were up 25% year-over-year.

Prices in Vancouver, although up year-over-year, are down about 10% from their highs earlier this year, a much steeper decline than expected. The decline appears to be a trend which has accelerated since the first week of March.

This is not a good time for home sellers. It is a good time for home buyers. However, they would still be buying near the top of the market. Vancouver and British Columbia real estate prices have historically dropped rapidly after a steep run up. In the early 1980s, prices dropped 40% in just 12 months, after a two-year 100% run up. And a four year run up has just ended.

The fundamentals impacting the investment, retirement and recreational markets are not good. Credit for recreational and investment properties has been tightened, pricing already reflects the 2010 Olympic rental income potential, Americans are staying away in droves, and with real incomes continuing to fall in British Columbia, the supply of available buyers is declining. Although not as overbuilt as some markets, the traditional recreational markets in British Columbia are at risk of becoming speculative. Cash rich Albertans are helping keep the markets going in the short term.

As with all our recommendations, advice must be tailored to the individual investor. However, any investor who knows they will sell in the next two - four years would be wise to sell now, using a lower price as the key selling point. Anyone considering buying, would be wise to wait until after 2011.