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.