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.
Monday, September 15, 2008
Wednesday, September 3, 2008
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.
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.
Monday, September 1, 2008
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.
Saturday, August 16, 2008
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.
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.
Friday, August 15, 2008
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.
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.
Sunday, July 13, 2008
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.
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.
Monday, July 7, 2008
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.
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