Friday, March 30, 2007

Friday RE Inventory

Well, its that time of week again - inventory time. Lets have a look at the inventory situation.

Van West Single Family Homes are up from last week but lower than last year.

Downtown / False Creek North Condos are up from last week and much higher than the same time last year.

The Chipman area is up from last week and 25% up from last year.

Selected Fraser Valley areas are up marginally from last week.

Have a great weekend and we'll have a look at the March real estate board statistics next week.

Thursday, March 29, 2007

Downtown condo supply, 1989-2006

Here's a nifty graphic from the City of Vancouver. This shows the amount of condo construction going on in the downtown peninsula. Data is as of Dec 31, 2006, with estimates for 2007-2009. Interesting how we're breaking previous construction records, even with our low population growth.

Money - is it what you think?

Wednesday, March 28, 2007

Financial Planning - Life Insurance

Insurance planning is an important element in most people’s financial plan. Many people need life insurance or other types of insurance for a variety of reasons. Here are a few reasons why someone needs life insurance:

1) Debt – the presence of any level of debt in your financial situation may indicate a need for insurance. Some people like to have enough insurance to pay off all of their debts should they die and other people just have enough to make the payments for a given time providing their survivors with some time to make decisions such as selling a home or car. Generally, it is wise to cover at least the mortgage and car with basic life insurance, especially if you have dependents.

2) Children/dependants – if people depend on you for financial support you need to seriously look at the amount of insurance you need to continue to provide the necessary financial support to them should you die. Review this with a financial planner or insurance professional for an in depth and personalized analysis.

3) Tax and Estate Planning – leaving a legacy to a family member or charity or just paying the final tax bill are also important reasons to consider life insurance in your situation as well. Working closely with an estate planning expert on this type of situation is critical.

There are different types of life insurance for different situations:

1) Term life insurance provides affordable financial protection for a specific period of time that would help your family in the event of your death. Term plans provide a death benefit only and do not include cash values. The premium for term coverage may change periodically, for example, every 10 years. Term life insurance is ideal for the majority of life insurance needs such as providing for dependents or insuring debt because the needs are mostly temporary and term insurance is the most cost effective way to meet this planning need.

2) Permanent life insurance is designed to provide insurance protection for the entire lifetime of the insured person. Many people appreciate this kind of security. If the insured person dies, his or her beneficiaries will receive the tax-free insurance benefit. There are two main types of permanent life insurance:

  • Whole Life Insurance is designed to be kept for your entire life provided premiums are paid as specified in a policy. Premiums are fixed for the duration of the policy's existence (your lifetime or as otherwise indicated in your contract). There is a cash value component that grows over the length of the policy and can be withdrawn if you give up (surrender) the policy, or can be borrowed if you take out a policy loan. Cash withdrawals may be subject to taxation.
  • A universal life insurance plan combines lifetime protection with a tax-sheltered investment fund. The policy is designed to help your family cope when you're gone, but it can also build you another nest egg for your retirement. Based on individuals’ needs, universal life options can, in some cases, be complex.

As always, you should consult with a professional before making any decisions and get a second opinion before being pressured into doing something you aren't comfortable with or don't understand.

Monday, March 26, 2007


Many discussions have centred around the vulnerability of current home buyers to a house price correction because anecdotally we feel that they do not have the equity to ride out a 20%+ price correction. I wanted to see if that feeling was accurate and I found an annual study by the CMHC of people who intend to buy a personal residence in the next 12 months. This study was done in May 2006.

CMHC interviewed 400 people who intend to buy a home in the Vancouver area and asked them several questions about their intent. 3 of these questions centred around their downpayment. First the asked them about the size of their downpayment. Next, they asked about the source(s) of their downpayment. Lastly, they asked about the main source of their downpayment.

I found the results interesting. Keep in mind that this survey is not only first time buyers but it also includes existing home owners.

Have a look through these survey results and tell me what you find interesting. I found it interesting that nearly 1/2 of all home buyers are using 'unconventional financing,' that is, less than 25% downpayment. This proves what I suspected about current homebuyers and downpayment size - these people are extremely susceptible to a negative equity situation if home prices correct.

Click the image to enlarge.

Friday, March 23, 2007

Friday RE Inventory

Inventory is building in many areas in the Lower Mainland as the spring real estate selling season gets into high gear. I have been tracking several areas in the Fraser Valley via the MLS for some time now.

I don't see anything 'crash like' here but there was most definitely an inflection point in inventory in the first week of March.

Looks like we are trending far above last year in the Chipman area even accounting for the adjustments.

It seems VW SFH supply is the same as last year.
Downtown and False Creek North condo supply is 20% higher than 2006.

$200 Million Development for Guildford area of Surrey

Surrey Leader article by Kevin Diakiw.

"A $200-million residential tower development is in the works for North Surrey, complete with what is being described as affordable housing. United Properties Ltd. is planning five 18-storey towers at 15399 Guildford Dr., a few blocks southeast of 108 Avenue and 152 Street. One of the towers will be dedicated to 129 units of rental housing, while the suites in another of similar size will be sold at 10 per cent less than market prices. That’s made possible through a “spring mortgage” which will cover the reduced price. If the unit is sold before 10 years, the 10 per cent goes into a fund for the city.

Victor Setton, president of United Properties, is offering the “affordable housing” and spring mortgage in exchange for city approval to build a higher density than current zoning allows. He noted the buildings will be state of the art. “The project will be constructed using our innovative pre-cast system of hollow core planks with steel columns and beams,” Setton said. “Our environmental consultants have determined that there will be a 29,000 tonne reduction in the production of greenhouse polluting gases due to this method of construction.” Other environmentally friendly elements of the project include permeable surfaces on all driveways and parking areas and a centralized heating control. “This is going to be the most energy efficient building ever built in B.C.,” Setton told council. The project is expected to come to a land use meeting in the near future."

Apparently there is an 'affordability' problem in good ol' Surrey otherwise why would these people be barking off about making this development 'affordable.' Has anyone ever heard of the type of fundng formula they are talking about here? I wonder what kind of tenants / buyers this development may attract.

Wednesday, March 21, 2007

GVRD Housing and Population Statistics

This is just a quickie post. I like statistics (though I'm very glad that I'm not a statistician), and last night boy did I ever find some interesting ones.

Here's GVRD's Regional Growth Key Facts site. Visit it, play with the numbers, and leave a comment as to what you see in them.

Here's what I noticed:
-GVRD 2001-2005 (inclusive) 5-year pop growth: about 130,000 people.
-GVRD housing starts in the same period: 80,000.
-In other words, 1.6 persons per housing start.
-From 1961 to 2001, on average for the GVRD the number of people living in each housing unit has been consistent, at about 2.6.
-This means there's about 30,000 excess housing units that have been started in the last 5 years. We've been building like we were in a population growth boom, except that the population isn't booming.

In Vancouver, the numbers are a little more striking:
-2001-2005 population growth (inclusive) was about 18,000 people
-Housing starts over the same period: 23,000.
-In other words, 0.8 people per housing start!
-Vancouver's people-per-housing unit has been consistent over a hella long time, at 2.3 ppl per unit.
-This means that in Vancouver alone, there was about 15,000 excess housing units started in 2001-2005!

What do you read out of the GVRD's statistics?

Tuesday, March 20, 2007

Free For All

It's a free-for-all kind of day today.

We could discuss:

Inflation - it's up
Federal Budget - spending is up, taxes are down (kinda)
Housing - it's silly - inventory is rising, sales are declining
Markets - ambivalent

You lead the way.

Monday, March 19, 2007

Personal Finance: Budgeting

Without a budget, many of us just muddle through, trying to stay one step ahead of our bills, living paycheque to paycheque. If the word "budget" makes you squirm, think of it like this:

  • summarizing how you spend your income
  • creating guidelines for your spending

Thinking of a budget as a financial restriction is a sure way to set you up for failure. A budget is simply:

  • a tool to increase your consciousness of how and where you spend your money
  • a guideline to help you spend your money on the things that are most important to you

How do I start budgeting?
The first step is setting up income and expense categories to track. Basic categories such as housing, utilities, insurance, and food are a good place to start but we also each have expenses that are unique to our personal situation. The plan is to become more aware of where your money goes so you can be more aware about your spending decisions. You can use a budget program, a simple spreadsheet, or a piece of paper.

The next step is to start putting amounts into the fields of the spreadsheet or budgeting program you have decided to use. To get started, gather as many of your pay stubs, bills, and receipts as possible. Work out your average monthly gross income, including average salary, commission, bonuses, dividends, and interest.

Next, go through your bills and receipts for the last three months and list all your monthly expenses on a budget worksheet. Make your categories detailed enough to provide you with useful information about your spending habits, but not so detailed that you become bogged down in trivial details.

Now that you've listed estimates for your budgeted amounts, don't forget to record your cash expenditures. Write them down in a little notebook as you spend the cash or figure out something that works for you. You may be surprised at where your cash goes, especially if you make frequent ATM withdrawals. Some people use credit cards or debit cards to track all of their monthly expenses and carry very little cash.

The Truth Comes Out!

Now that you have successfully tracked your income and expenses, subtotal the income and expense categories and subtract the total expenses from the total income to arrive at your net income and now you know the amount of money you have left over for savings, emergency funds, etc. If the number is negative, your expenses are greater than your income. Don't be depressed because it’s likely your situation can be greatly improved by changing your spending behavior.

If you're fortunate enough to have a positive net income, be sure to transfer most of it to a savings or investment account at the end of each month because extra money left in your regular account has a way of getting spent.

Sticking with the Program

After you've tracked your actual spending for a month or two, you'll be better able to identify where you can make changes to start saving money. Consider it a process of self-discovery. Many people don't have a clear idea of where their money goes until they start tracking their spending, and then they are usually very surprised at how much they spend in certain categories over time. You can't control your money until you know how much you have and where it goes.

Once you've got the budgeting process in place, take an in-depth look at your largest spending categories, research new ways to reduce spending in specific categories, and set sensible goals. Don't overlook the smaller spending categories, either. Sometimes these are the easiest to make cuts in because the spending may be more discretionary, and small amounts can add up very quickly.

If you stick with tracking your income and expenses past the first month or two, you'll begin to see a pattern in your spending, and you'll be able to identify areas where you can painlessly save money that you can use to save. It may sound unlikely, but discovering ways to save becomes a challenge that can be very rewarding, especially as you see your savings grow. Following a budget can set you free from the burden of living paycheque to paycheque and the constant worry that you won't be able to get ahead financially.

Saturday, March 17, 2007

New Contributor - M-

Read the post below for some great analysis from a new contributor to the blog "M-" who is an engineer with some great analytical skills.

House Prices Always Rise (over the long term)

As a follow-up to Mohican's post from March 10, here are some files I've been working on recently.

I've tracked 3 sample properties-- a Vancouver westside bungalow (what I'd like to move up to), a Vancouver westside townhouse (what I currently own, bought during the lull in 2004), and a Richmond bungalow (my father-in-law lives in one). My interest in developing these charts was to discover how prices rise over time-- it seemed expensive when I bought my place, but not outrageous. Prices have, of course, risen since then.

First chart: a westside bungalow over 30 years. The mean curve rises at roughly 1.5x the rate of inflation. Note the thin dashed line-- that shows the property price as though it was rising at the mortgage rate. Prices have, over 30 years, never sustainably rised at the mortgage rate. Note that this house left the mean in 2003.

Second chart: a westside townhouse over 20-some years. The mean curve also rises at roughly 1.5x the rate of inflation. This property left the mean shortly after the Vancouver bungalow.

Third chart: a Richmond bungalow over 30 years. Interestingly, prices only rise at the rate of inflation here. Perhaps the lower "mean" line is due to the "desirability" of the westside? This property didn't leave the mean until 2005!

Fourth Chart: all three properties, all together. 5-year mortgage rates and inflation rates are also overlaid onto the chart. (I couldn't figure out how to get Excel to have a second scale for the percentages, so I had to wildly scale them up).

-Westside properties tracked up at 1.5x inflation.
-Richmond property tracked up at 1.0x inflation.
-Long-term, prices tend to rise at *less* than mortgage rates, making housing a poor speculative investment.
-During booms, housing is probably a great speculative investment!
-Neither the Richmond bungalow nor the westside townhouse benefitted much from the Hong Kong migration-- perhaps those investors were looking for land with a better investment value?

With all three sample properties, it'll take 15 years for any of the means to catch up to current property values! (unless selling prices drop or inflation goes up)

I'm willing to bet that the three sample properties have a 20-33% (nominal) drop in store over the next five years. However, until housing starts fall off a cliff (which will happen maybe a year after prices go flat-- perhaps early 2008?), and until much of the Olympic contruction is finished (~2009), I don't think we'll see significant drops.

Right now, our local economy is artificially-supported by government spending projects (Olympics) and speculator-sponsored condo development. Once the Olympic construction is done, the government will have finished building an amazing amount of infrastructure, and they (the government and us taxpayers) won't be keen on more deficit-spending to build more infrastructure-- hwy 99, Olympic venues, Athlete's Village, the new Convention Centre, RAV, Green Line (Coquitlam light rail, I think), Port Mann's twin, the Golden Ears bridge (I can't remember its name-- the one that goes from Maple Ridge to Port Kells)...

All those projects ending at the same time. How many construction-related workers moved to Vancouver for those projects? How many of them bought houses or condos? How many bought a handful of presale condos because prices always go up? How many of them will sell their places once the government freezes new infrastructure development after the Olympics?

Note: these charts use Royal LePage pricing data up to Sept 2006, and inflation/mortgage rate data from Sauder. Where data was not available, it was interpolated or omitted.

RBC Affordability Study

Here are the highlights of the RBC Housing Affordability Study for housing market data up to December 2006.
  • Housing affordability conditions improved in Canada in the final quarter of 2006. The improvements at the national level were chiefly driven by faster income growth in tight labour markets, moderating house price increases, a small decline in mortgage rates and lower utility bills.
  • Although the current housing market correction varies dramatically across the country, the dominant trend in the fourth quarter was a weaker pace of resale activity, an increase of inventories on the market and more moderate price growth.
  • These key fundamentals point towards more balanced housing market conditions in the coming year and the potential for more affordability improvements in 2007 — especially in western Canada.
  • The stark east-west divide in provincial housing markets appears to be softening. The western provinces continue to show signs of price growth topping out with British Columbia, Alberta and Saskatchewan all likely having reached pinnacles in the pace of price appreciation.
  • While Alberta saw its fifth consecutive across-the-board affordability deterioration, the latest numbers indicate that the pace is trending downward with the potential for affordability improvements this year.
  • The remaining western provinces reported affordability improvements: two-storey and townhome segments in British Columbia; two-storey homes in Saskatchewan; and, the two-storey, detached and condo segments in Manitoba.
  • Across-the-board affordability improvements were delivered in Ontario, Quebec and Atlantic Canada as housing markets continued to soften alongside weaker economic growth. Toronto, Ottawa and Montreal all reported substantial and widespread improvements — buoyed by a sharp drop in monthly utility bills.
  • Mortgage quality remains solid in Canada and the sub-prime mortgage market is tiny. Canada, therefore, does not face the same mortgage market risks as the United States. Even U.S. mortgage market fears have gotten out of hand — a little more than one-third of households do not have a mortgage and 49% of households have prime-rated mortgages that are very healthy.

Thursday, March 15, 2007

Merril Lynch Research

I could not resist posting this article off the Reuters newswire. A prediction of a national 10% decline in house prices by a major brokerage house is a big deal.

NEW YORK (Reuters) - House prices could tumble 10 percent this year and raise the chances the United States may slip into recession unless the Federal Reserve cuts interest rates to cushion the fall in economic growth, Merrill Lynch said in research notes this week.

If correct, the prospects of this scenario will prove troubling for equities investors, who could face a stock market decline of 30 percent or more as measured by the S&P 500 index (.SPX ), the brokerage said.

Merrill said the biggest concern is that tighter lending standards in the mortgage market, even if confined to lower-quality borrowers, will constrain overall housing demand and hamper recovery in the struggling housing market.

"It is not inconceivable (given what is happening now to mortgage originations) that we end up with something closer to a 10 percent decline in home prices this year," Merrill Lynch said.

Merrill said this alone would slow the economic expansion to a rate of about 1.5 percent to 1.75 percent this year, which it termed a "growth recession."

The traditional definition of a recession is two consecutive quarters of declining gross domestic product.


Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.

Greenspan said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.

Gong Show: Income Taxes

Okay, today I'm bringing the Canadian Income Tax system to the gong show for you to decide if it gets the gong. Here are the reasons why I think the Income Tax system should get the gong:

1) It is more complicated than necessary
2) It penalizes people for being innovative, for being more productive and for working harder.

I'm not talking about abolishing income taxes here but my biggest gripe is with the fact that our income tax system penalizes people who are trying to improve their family's well being and the general well being of our country. Let us use an example:
Imagine Bill. He owns his own company and he works hard to find new ways to serve his customers through better products and services. Lets pretend that Bill, because he works hard, makes a personal income of $100,000 per year. In BC, under our tax system, ignoring personal deductions, he pays $28,187 in income taxes, leaving him with $71,813 to feed, house, and cloth his family. This seems alright since Bill is a proud Canadian and doesn't mind paying some tax to help run his country and his average tax rate seems reasonable at 28.1%.

Bill is considering implementing a new service in his company and he would earn an extra $100,000 per year if he implemented this new service. His customers would be very well served and this would be a tremendous innovation for his industry. The drawback is that Bill would have to invest a little, risk losing his idea, work longer hours and be away from his family in order to implement this innovation. Bill does some figuring and looks at what he should do since his family could really use the money to pay for braces, education, a family vehicle and a family vacation. Bill figures that if he implemented his new service and worked the extra hours he would earn $100,000 extra per year, bringing his gross income up to $200,000. He also figures that he would go from paying a reasonable $28,187 in income taxes to paying an excessive $71,339 in income taxes and he would go from a net income of $71,813 to a net income of $128,661 - an increase of only $56,848 for all that investment, risk and effort - leaving him with an average tax rate of 35.7%.

Unfortunately, for his customers, Bill decides that the investment, risk, and extra work is not worth $56,848 per year and makes the choice to postpone the implementation of this service until it makes more sense.
This situation is actually all too common in Canada because successful and innovative people like Bill make economic choices everyday based on the net benefit to them, their company, and their family. Our tax system unfairly taxes the people who would likely create new jobs, invest in equipment and provide innovative new services given the right incentives. I'll talk more about our tax system again soon.

Find out your own personal tax rates here.

What do you think? Gong?

Wednesday, March 14, 2007

Investing - Falling Knives: Part 2

A continuation from Part 1.

The results of the Brandes Institute study indicate that falling knives appear to offer potential for substantial out-performance. At the same time, these stocks also seem to carry a material risk of bankruptcy. This presents an obvious challenge: when contemplating investing in falling knives, how can investors distinguish between “butcher knives,” which might be headed for bankruptcy, and “butter knives,” with more promising characteristics?

First, we note that an investment in any falling knife by itself may entail more risk than is appropriate for most investors—and Brandes does not offer a foolproof means of distinguishing between winners and losers. Accordingly, we believe investors considering falling knives should do so with guidance from their financial advisor and in the context of a diversified portfolio. Put another way, we think the challenge is not just spotting butter knives—it’s catching them with a diversified “bucket” of other holdings.

In his books Security Analysis and The Intelligent Investor, Ben Graham—widely considered the father of value investing—urged investors to search for opportunities among out-of-favor stocks. Underlying this approach is that, in the short term, investor psychology sometimes pushes prices for these stocks well below their true long-term values. By purchasing out-of favor stocks, value investors aim to benefit from the broader market’s impulses and mistakes. Falling knives certainly qualify as out-of-favor stocks: their rapid, substantial price declines are obvious signals of intense investor disdain.

So how do value investors decide which to invest in and which to avoid?
Core elements of the value strategy—the calculation of intrinsic value, the incorporation of a margin of safety, and the maintenance of a long-term perspective—are designed to pinpoint and profit from attractive opportunities among falling knives and other stocks. We believe that these principles help investors avoid potentially dangerous investments and focus on compelling prospects.

What is intrinsic value, exactly? And how is it calculated in practice?
To answer the first question, we’ll share a definition provided by Warren Buffet in a 1996 publication to shareholders of his company, Berkshire Hathaway. “Intrinsic value can be defined simply,” Buffet wrote. “It is the discounted value of the cash that can be taken out of a business during its remaining life.” In other words, a company’s intrinsic value is equal to the value today of all of the money it will deliver in the future.

So how is intrinsic value calculated?
Value investors emphasize an approach based on thorough research and analysis of current and historical fundamental company information. The company’s product lines, for example, are studied in great detail, and its strengths and weaknesses relative to its competitors are appraised. Historical profit margin figures are gathered and evaluated, with particular attention paid to results during difficult times. Financial strength is measured using metrics such as ratios of debt-to-equity and cash flow-to interest expense. From there, value investors typically calculate intrinsic value by focusing on earnings, cash flow, and other indicatorsof the company’s wealth creation potential. Alternatively, an intrinsic value estimate is sometimes calculated based on an analysis of the value of the company’s assets less its liabilities. Once calculated, intrinsic value is divided by the number of shares outstanding to arrive at an estimate of intrinsic value per share. Then, this per share value is compared with the company’s stock price. If the stock price is low enough to offer a significant discount to intrinsic value, the stock is purchased. Importantly, value investors don’t expect to be able to come up with intrinsic value estimates for every stock in the market. Firms operating in nascent, rapidly changing industries, for example, are often surrounded by levels of uncertainty that make any estimates of underlying worth dubious. In cases like these, value investors recognize the limits of their abilities and move on to evaluate other companies.

In The Intelligent Investor, Benjamin Graham challenged himself to “distill the secret of sound investment into three words.” He chose “margin of safety.” Simply put, the margin of safety represents the difference between a company’s stock price and its intrinsic value. Value investors believe that the larger this margin, the safer the investment. By buying stocks trading at substantial discounts to their estimated intrinsic values, Brandes aims to create a protective barrier at the portfolio level that insulates against future uncertainty. Some holdings will inevitably encounter the occasional stumbling block, and a margin of safety helps provide protection. Value investors expect that, as the broader market recognizes the inherent worth of an undervalued company, its share price will climb toward its intrinsic value. Of course, this process often takes time. As a result, Brandes exercises patience and manages holdings from a long-term perspective. Typically, we expect to hold a stock for 3 to 5 years, or until the company’s stock price climbs to our estimate of its intrinsic value. Another important quality at the foundation of the value philosophy is independence—the willingness to think differently. As believers in the opportunity inherent in out-of-favor stocks, we don’t follow the investment crowd. Instead, we search for prospects that the crowd has neglected or—as in the case of falling knives—that the crowd has scorned.

Overall, we recognize the risks associated with falling knives. At the same time, we think that select falling knives offer strong potential. And we believe that value investing—with its emphasis on concepts like fundamental analysis, a margin of safety, and a long term perspective—can help identify the most promising falling knives and incorporate them into a diversified portfolio.

Sunday, March 11, 2007

How Much Mortgage Should You Have?

Some quick 2006 stats from the Canadian Institute of Mortgage Bankers and Lenders.
  • At present there are about 8.35 million owner-occupied dwellings in Canada.
  • Of these, according to the survey results, 65% have mortgages (the share of home owners who have mortgages is increasing – at the time of the 2001 Census the estimated share was about 55%). This indicates that there are about 5.4 million home owners with mortgages at present.
  • 21.5% of home owners with mortgages have renewed their mortgage during the past year.
  • Of these, 33% increased their mortgage principal.
  • The average increase in mortgage principal was about $26,100.
  • Combining these factors, the total amount of increase in mortgage principal due to equity take-out is calculated as $10.1 billion.

So the question is how much mortgage should an individual have or not have?

My general rules are:

  • Never borrow more than 3 times your annual reliable income (if you're have commission or bonus income, don't include 100% of the commission - be conservative - don't include 'expected' raises)
  • Never amortize your mortgage past your expected retirement date.
  • Attempt to amortize over as short a period as practical - 15 years or less is best
  • Try to structure your mortgage payments so you are paying more in principal than interest every month.
  • If you are young and planning on starting a family, do not borrow the maximum based on both people's incomes. Try to base your mortgage on one person's income.
  • Plan on a 2% increase or more in interest rates when renewing (rates go from 5% to 7%) to be conservative.
  • Ask yourself - Could I make this payment for at least 6 months if the worst happened? - job loss, illness, disability, etc.

I didn't mention some things that some people may feel are important, including down payments and percent income devoted to payments but I feel if the above rules are followed that becomes somewhat irrelevant. As an additional note on those two items though:

  • Use a down payment that reduces your transactions costs. I'm mostly referring to the CMHC mortgage insurance here. If you have non-registered investments that earn less than 1.5% more than your mortgage interest rate then you should use those investments as a downpayment or put them into a registered plan where taxation isn't an issue.
  • My personal feeling is that no more than 25% of gross income should go to TOTAL housing costs including mortgage payment, taxes, maintenance, fees, and utilities.

As always you should consult a professional financial advisor who can give you the ins and outs of any given plan.

Saturday, March 10, 2007

Greater Vancouver House Price Index

All previous market corrections in Vancouver were preceded by market tops in the first half of the year. Q1 1981, Q2 1990, and Q1 1995. Are we seeing a market top in Q1 2007?

Here is what a 1995 - 2000 market price correction would look like.

Here is what a 1981 - 1985 style correction would look like.

Friday, March 09, 2007

This Week's Canadian Housing News

Scotiabank's Economics department released a report on the state of the Canadian and US housing markets on Wednesday. The highlights were:
  • Expected continuing relative strength in Canada versus the US housing market
  • Some softening of demand as "pent up demand" has been met and prices are unaffordable
  • The differential between the typical monthly mortgage payment on a new home and the average rent on a two-bedroom apartment is close to $800, its highest level since the early 1990s.
  • Affordability will likely be a constraining factor on first-time buyer activity in four of the 23 centres: Victoria, Vancouver, Calgary and Toronto. In each of these cities, the buy-versus-rent premium approaches or exceeds $1000.
Notable quote:

At this late stage in the cycle, affordability favours lower-priced multiple-unit housing such a condominiums over single-detached homes. “Move up” buyers who have already built up equity in their homes will likely be more active than first-time purchasers. Renovation activity should outpace new construction and sales, sustained by the record number of existing home sales in recent years.
TD Economics released their analysis of the Canadian Housing Starts release on Thursday. The highlights were:

  • After January’s surge, retreat was expected
  • Decline is broad-based across singles, multiples, and regions
  • Annualized rate of building starts is trending below 200,000 units now after two years of record high starts.
  • YOY price gains for new construction are trending above 10% over last year.
RBC Economics will release their Affordability report later this month. I expect we will see a continued erosion of affordability across the country with the most unaffordable being - - you guessed it - - world class Vancouver - - where incomes are low and prices are high!

Thursday, March 08, 2007

Paul Volcker Speech

I stumbled across this video the other day and thought I would give you the opportunity to watch as well.

Paul Volcker was the Federal Reserve Chairman from 1979 until 1987 until Alan Greenspan succeeded him. He isn't too happy with the state of the fiscal predicament it appears that the US is in right now.

Watch Paul Volcker speak at the Stanford Institute for Policy Research in 2005 (still pertinent today).

He mentions a few things worth noting:

1) Negative Savings Rate
2) Rampant speculation on housing
3) Unsustainable fiscal imbalances

Wednesday, March 07, 2007

Investing - Falling Knives: Part 1

The entirety of this article relates to the results of the Brandes Institute study on falling knives found at

In 2003, The Brandes Institute published the study, “Buying the Wrong Stock for the Right Reason”, which explores the validity of the Wall Street adage “never catch a falling knife.” This longstanding maxim advises investors to avoid purchasing stocks that have declined sharply in a short period of time.

According to the study, when it comes to bankruptcy risk, the warning may be warranted. While the annual bankruptcy rate for publicly traded companies is under 1%, a full 13% of the “falling knives” identified in the study went bankrupt within three years. However, investors who “never catch a falling knife” might be missing an opportunity to earn significant returns. On average, the falling knives in the study—including those that went bankrupt—outperformed the S&P 500 Index by an annualized 8.6% over the three years following their identification.

At Brandes Investment Partners, we recognize the risks inherent in investing in companies that may qualify as falling knives. At the same time, we also believe that in some instances, falling knives can represent compelling investment opportunities. This document examines the factors that can lead to sharp stock price declines over a short period of time—why they fall—and points to some examples among the falling knives identified by the Brandes Institute’s study. From there, we explore the components of an investment approach that can help distinguish between “butcher knives,” which might be headed for bankruptcy, and “butter knives,” or those with more promising characteristics.

We recognize three primary types of reasons: (1) company-specific problems, (2) top-down issues such as geopolitical changes or industry difficulties, and (3) elements of investor psychology, which can create additional downward pressure on an already-decreasing stock price.

1. Company problems
A wide variety of company specific issues can contribute to a sharp decline in stock price over a short period of time. For example, bankruptcy fears stemming from high levels of debt relative to cash can push down stock prices quickly. Similarly, profitability concerns on the heels of overreaching expansion could lead to steep price declines. A third type of company-level difficulty is fraud: revelations of corporate malfeasance can drag down a company’s stock price rapidly. Fraud disclosure contributed to stock price declines for Cendant, one of the falling knives identified by the Brandes Institute’s study. In 1998 (shortly after its formation via the merger of hospitality giant HFS and direct marketer CUC International) Cendant revealed that pre-merger accounting irregularities at the latter company had inflated its revenues and pre-tax profits by roughly $500 million. Cendant’s stock price proceeded to plummet, and the company entered the study in September 1998, when its stock’s 12-month decline reached 62.5%. In the year following this collapse, Cendant’s stock rebounded strongly, earning a total return of 52.7% versus 27.8% for the S&P 500.

2. Top-down issues
Like company-level problems, a variety of top-down issues can lead to rapid, substantial stock price decreases. Geopolitical changes including currency devaluation or political upheaval can influence a range of companies in a particular country or region. Additionally, fast-developing difficulties such as new regulation, technological change, or cyclical shifts in supply and demand might cause sharp declines for several companies in a given industry. In 1998, industry and geo-political concerns affected the price of De Beers Consolidated, the world’s leading diamond producer. De Beers entered the falling knife study in August 1998, after a 64.1% one-year decline in the price of its ADRs (American Depositary Receipts). Some market observers believed that the Russian government—in need of hard currency—would withdraw from the global De Beers diamond cartel, and that diamond prices around the world would plunge as a result. As this top-down concern subsided, however, the price of De Beers ADRs surged, rising 148.0% in the year ended August 1999 versus a 39.8% gain for the S&P 500.

3. Investor psychology
Investor psychology represents another important source of additional downward pressure on a slumping stock price. Because of a tendency to extrapolate improperly, for example, an investor may view a steep stock price decline over the short term as a reliable indicator of continued declines in the future. Similarly, a propensity for overreaction might lead an investor to conclude that the recent bad news weighing on a company’s stock price is ominous enough to doom the company entirely. Other psychological stumbling blocks include anchoring, where one given number unduly affects a person’s estimate of a second unrelated number, and framing, where asking a question in improper context can lead to dangerous answers.

Overall, tendencies like these can be important contributors to the price declines that distinguish falling knives. In addition, as we explore in Part 2, investor psychology also might play a key role.

Tuesday, March 06, 2007

How High is Too High?

Well, since real estate prices aren't falling to earth this month, how high is "too high" for prices to go. The average price of a single family home in Greater Vancouver is nearly $750,000. Could that average be $1,000,000 (10% increase per year for 3 years) or $2,000,000 by 2010? Would that be "too high" or just right?

The median price of a townhouse in the Fraser Valley is just over $300,000. Is that "too high" or just right? What if that price rose to $500,000 or $750,000 in the next couple years?

The TSX Composite Index is trading just under 13,000. Is that too high? What if it was trading at 15,000 or 30,000? What level can it go to before you say it's too high?

A 2007 Toyota Camry is $26,000. Could they charge $35,000 or would that be too high a price?

My point here is that everyone is going to have a "too high" price for a given item. For me all of the above mentioned items are currently priced "too high" and I won't buy them for what the asking price is.

What about you? How high can the balloon fly before the air is too thin to breathe? How high would be "too high" a price for the biggest of bull believers?

Monday, March 05, 2007

Greater Vancouver House Prices

I finally got a copy of the REBGV February stats release and here are some updated charts based on some of the historical data I have (I am still waiting to get my hands on VHB's googlepages data). It seems that after four months of price declines we are suddenly back at all time highs. Record low affordability and higher prices across the board.

The price compression phenomenon is still in full swing.

Benchmark prices for February 2007 across Greater Vancouver are:

Detached: $666,983 YOY +11.4%
Attached: $419,061 YOY +15.1%
Apartment: $335,024 YOY +15.3%

Average transaction prices:

Detached: $743,222
Attached: $462,184
Apartment: $367,596

Completely ridiculous is all I have to say.

Sunday, March 04, 2007

World Class Stupid?


Well I was inspired by freako's comment in the previous thread about other city's housing prices so I wanted to compare our insane home prices with other insane home prices. Here we go:

How world class is Vancouver?

US house price data is from John Burns Consulting. Exchange rates are from the Bank of Canada. Local house price data is from the December 2006 RBC Affordability Index study.

Friday, March 02, 2007

Fraser Valley Real Estate Board Statisitics

Well, I got a few minutes to look at the FVREB stats for February and here are the results.

Sales are up from January but down from 2006. Listings are up from January and down from 2006. The inventory is continuing to build and more newly completed construction is coming into the supply every month. Approximately 500 - 600 dwelling units per month of new construction are coming into the Fraser Valley supply side for the next 24 months, which is not directly reflected in these statistics.

Months of inventory are down significantly from 6.1 months in January to 4.5 months in February because of higher sales volume. Looks like a fairly normal seasonal variation in a fairly busy sales market. Demand seems remarkably resilient. I am still amazed at the continually high inverse correlation exhibited by relationship between the months of inventory and the quarterly price changes.

Median prices are up across all housing types.
Detached - MOM +3.3% YOY +18.3%
Townhouses - MOM +3.3% YOY +19.3%
Apartments - MOM +4.2% YOY +24.1%

Looks like further price compression between housing types.

The quality adjusted house price index is also up significantly.

It looks to me that there is still lots of demand out there even at these prices. I get anecdotal stories of more people using unconventional financing such as 40 year mortgages and 0% down to make the purchase. At this point of the real estate cycle only the most financially illiterate are buying with these financial vehicles and I get the feeling this is currently where the marginal demand that sets prices is coming from.