Thursday, September 27, 2007
Housing starts were well above average, at 1855, during August with developers focusing on starting new multi-family units around the Lower Mainland.
Housing unit completions were above average in August as well with 1386 new units coming available in the Vancouver CMA during August.
Units under construction hit an all time high at 22,421 units under construction in the Vancouver CMA during August. Labour shortages are contributing to the problem of projects taking longer than expected to complete so they stay under construction longer than usual.
Some interesting highlights from the report:
Units under construction in Vancouver City during August 2006 = 7167 and during August 2007 = 5149. That is a big decrease year over year. New projects are being focused in the suburbs.
Units under construction in:
Langley = 1368
Maple Ridge / Pitt Meadows = 1464
New West = 1317
Tri-Cities = 2789
Richmond = 2086
Surrey = 3311
Burnaby = 2608
A number I have been paying attention to in the report lately is the Completed but Not Absorbed metric. It has been increasing drastically representing a fairly severe slowing in new home demand.
Units completed but not absorbed (August 2007 = 1140; August 2006 = 783):
Maple Ridge / Pitt Meadows: 80
One thing to watch here during this fall/winter is the beginning of some competition between developers wanting to unload completed inventory. They will compete with each other and with existing homes for sale in order to avoid carrying the inventory for a long time. This is especially the case when the pipeline is already full of projects just months away from completion.
2008 will surely be interesting.
Wednesday, September 26, 2007
All types of mortgages now being renewed are being renewed at higher rates than the previous term. All adjustments are negative unless the mortgagee decides on a longer amortization to minimize the cash flow pinch.
Every six months, 6% to 7% of all mortgages are renewed. This distribution is pretty consistent across Canada.
BC has the highest proportion of variable rate mortgages, which is pretty scary. The payments on variable rate mortgages do not reset to a higher level when the interest rate increases and so many variable rate mortgage holders end up with a negative amortization (their payment is smaller than the interest charged) during a rising rate environment like the past couple years.
40% of mortgage holders intend to renew for 4-5 years. I would think this is pretty typical across Canada.
Tuesday, September 25, 2007
1) The S&P Case-Shiller House Price index posted its largest decline in 16 years. Wall Street Journal. S&P Press Release.
2) The National Association of Realtors released existing home sales for August. The national inventory of existing homes for sale reached 10 months of supply. This does not include new homes. Here is Calculated Risk's take.
The data out of the US housing market continues to surprise to the downside even for many of the most bearish prognosticators and certainly it seems to have quite a ways to go yet. Every month we hear a new person boldly declaring that "housing has hit bottom" but every month they are proven wrong. I think, based on past downturns, we have 2-4 more years to go before recovery begins.
Before it's all said and done Vancouver may have the title of most expensive single family homes in North America.
The California Association of Realtors released stats today. Highlights of C.A.R.’s resale housing figures for August 2007:
C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in August 2007 was 11.8 months, compared with 5.9 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
Thirty-year fixed-mortgage interest rates averaged 6.57 percent during August 2007, compared with 6.52 percent in August 2006, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.67 percent in August 2007 compared with 5.64 percent in August 2006.
The median number of days it took to sell a single-family home was 55.5 days in August 2007, compared with 50.9 days (revised) for the same period a year ago.
An interesting quote:
“Despite the overall increase in the statewide median price, prices declined in nine regions last month, falling 11.5 percent in the Central Valley region and 12.1 percent in Sacramento,” said C.A.R. President Colleen Badagliacco. “Price softness is even more pronounced when we look at different segments of the market. For example, the statewide median price in the entry-level price range of less than $500,000 fell 5.1 percent in August to $349,360 compared with $368,210 for the same period a year ago."
Friday, September 21, 2007
It is shocking to me to consider that a household must earn nearly $60,000 per year in order to afford the average condo in the Fraser Valley. That is even with an insane 40 year amortization mortgage. And I thought condos were supposed to be affordable for first time buyers and low income earners - phsssssh - so passe - only high income earners, loan application liars and ever-so-prescient real estate speculators can afford the basic condominium now. My former condo was affordable when I bought it but it sure wasn't when I sold it.
Go to the CMHC site and do the calculation for your situation. Tell us what you find. Is rent cheaper than the monthly payment? By how much? Or if you already own your home, would you be able to afford to buy it today with your current income if you had to.
In the category - what are you smoking - another bank releases a milque-toast economic report on how Canada's housing market is undergoing a soft landing. I'd like to see the TD Economics department relocated to downtown Vancouver and we could see those poor economists struggle under the burden of a crushing mortgage payment double what they pay in Toronto for a similar property. Here are the comments about the Vancouver market that defy logic:
Vancouver – A balanced market within sight
Existing home prices are expected to post a 12% gain from last year. TD Economics forecasts that this softening in price growth will continue into 2008, where the yearly average resale home price gain is expected to come in at 7%. Okay brilliant TD economist, how much did wages rise or interest rates fall? Wages were up approx. 3% and interest rates rose thus making houses more unaffordable than ever. How exactly will we sustain another 7% rise in prices?
What lies beneath this outlook? We have profit goals as a bank for next year and the profits hinge on us reaching our lending goals so we were reluctant to release the real analysis that we did because we wanted to keep our job. Oops . . . I mean . . . First, a higher number of existing homes listed for sale. This dampens new home demand and helps ease relative demand pressures for existing homes. As more homeowners look to lock in price gains from recent years, listings are expected to continue feeding supply more than enough to meet demand.
The second main driver behind our forecast for softer price growth lies on the demand side: affordability. Not only is affordability poor on a level basis, it has been deteriorating significantly in the last couple of years. Hmmmm . . . . really - you don't say!? Typical mortgage carrying costs for a median-priced home in Vancouver required close to 10 percentage points more of the median market household income in 2006 than it did a year earlier. I guess no more food for junior and we are going to have to drive that old Honda for another 10 years. As the lagged effect of this significant deterioration works through the system, it will continue to dampen demand going forward.
Whereas sales might increase at most 2-3% from last year, new listings are expected to increase by twice as much in per cent terms. After exhibiting the characteristics of a strong seller’s market since the turn of the decade, Vancouver’s market is heading back towards more balanced conditions (see textbox for discussion of overall market balance measure). Indeed, the demand-supply ratio for Vancouver’s housing market is inching towards the balanced market range of 0.4-0.6. So how exactly will demand (sales) going to increase when you just said it would decrease? I don't understand.
On the new home market front, housing starts continue to downshift after having peaked in 2004. However, the number of starts should remain lofty throughout the forecast horizon. A lean inventory of completed but unabsorbed units, along with high construction costs, have helped continue an upward trend in new home price growth that is six years long and still running. Extrapolation at its finest - prices have gone up so they will continue to go up. Brilliant!
Residential construction continues to face challenges like a shortage of skilled trades, high land prices, and increasing competition for resources from the non-residential sector. This is illustrated by the recent increase in building permits that has not been accompanied by rising starts to match. In other words, builders have purchased permits, but have not broken ground. Unless sufficient resources can be made available to catch up with building intentions, this is likely to put continued upward pressure on new home prices and to further erode an already strained new home affordability. This is why framers and guys who pour concrete without high school education make more money than well educated financial planners who manage millions of dollars of other people's money! I'm not bitter!
In terms of resale home price growth, Vancouver was the first western market to cool from its peak of 20%. Thankfully, the easing from such a break-neck pace of growth is proceeding gradually. Demand remains well supported by a pace of job creation that only Alberta has been able to outmatch. But Vancouver’s job market is also less vulnerable to downside risks tied to the volatile resources sector, and employment growth is expected to outpace the Canadian average by 2.5 times. Therefore, we are expecting the market to remain relatively tight. But as the supply of homes continues to grow, while demand softens as a result of eroding affordability, price growth should head back down towards a more sustainable pace. Yes we have robust employment in Starbucks baristas, retail, tourism, and yes, of course, construction employment. All of which are low paid, non-house-affording jobs except for the construction employment. And how exactly is our employment not directly tied to the volatile resource sector? Isn't the BC economy 'resource based' like cutting trees and digging up rocks?
TD Economics - you get the mohican what are you smoking award - hooray.
Thursday, September 20, 2007
I guess the attraction to the story is the psychology involved with round numbers or multiples of 10. I don't know why round numbers have such a psychological impact but they do. Maybe we are all just a little obsessive compulsive.
On a contrarian investing note, it is likely that now would be a good time to invest into solid companies the USA (GE, Pfizer, Johnson and Johnson, Proctor and Gamble, Monsanto, Intel, Microsoft for some decent examples), unhedged to the Canadian currency. On a personal consumption note, it is certainly a lot more attractive to go on vacation to Hawaii, Florida or California now than it ever has been in my memory.
The story really should be about the devaluation of the US dollar and not the rise of the Canadian but we have home country bias and see things through a Canadian lens. I remember hearing Marc Faber say that his investment thesis for the next 25 years was the systematic and competing devaluation of currencies around the world. He said that he expected the US dollar to lead and the devaluations will come in fits and starts but that countries around the world, in order to prop up their exports, will purposefully devalue their currency. I don't know whether his thesis will prove true but it is interesting food for thought. The alternate side of that is that every other country around the world could say 'screw off USA, you are more trouble than you're worth!' I doubt the latter.
Tuesday, September 18, 2007
Well I am feeling a little weary of this current real estate discussion and financial markets appear to be apathetic to the current risk climate so I thought I'd stray a little from the debate and the analysis to do a post about myself.
For starters, I'm married and I have been for a few years now. We have a young son who was born a few months ago and he has been a wonderful addition to the family with grandparents, uncles and aunts all taking time to enjoy his company. I never imagined how wonderful fatherhood could be and I am planning on cherishing every day. More children are planned.
My wife and I are very practical people who grew up in families of very modest means. My wife's father died in a tragic accident when she was young and finances and family life, although adequate, were never comfortable for her, her mother and siblings. This taught her about prudent financial management among other important lessons.
I also grew up in a family who made choices about lifestyle that meant financial and material sacrifice. I am the oldest of four children and the most meaningful sacrifice that my family made was enabling my mother to stay home for most of my and my younger siblings growing up years. This has had obvious benefits and I am appreciative of the sacrifice my parents made. This also taught me some valuable lessons about personal choice and freedom, namely that it is not necessary to conform to the typical pattern of North American life.
My wife and I are both commited Christians and have been for most of our lives, not without much distraction and wandering on my part. My beliefs play a large role in forming my views on family and finances as I believe God has a place for everything and it is our role to discover the ideal way and put what He has given us to the best possible use - this is a way of thinking called stewardship. This includes how I use my time, talents, belongings, and finances. I am not intending to be preachy here and I've never used this blog as an outlet for that but I believe this part of my life is so formative of my views that I must inform you of it.
I wandered a great deal on an interesting and challenging path of discovery as a teenager and young man. I have always been a hard worker and I was an avid saver during my teenage years. As I gained more freedom as a young man I did not control my spending and consumption habits and got myself into a great deal of debt. I realized that my pattern of consumption was going to end me up in self imposed slavery if I didn't do something drastic so I stopped spending money. I gradually, over a period of 5 years paid off all of my debts and actually started saving money and investing it into some very basic mutual funds at my bank.
Having come out of that experience I wanted to help other people realize that they do not need to be slaves to their finances and that they could take control of the situation by implementing 3 simple steps:
1) stop spending so much
2) pay off debt fast
3) start saving as much as possible
Pretty basic procedure I must admit. At this point the attraction of helping others with their finances was so great I decided to leave my very successful career in the telecommunications field and go into financial planning. This meant a meaningful pay cut and a career restart but I had to do what I felt was right. I do not regret my decision.
I have had two different positions with two different companies since making the decision to go into finance and the one I have now is immeasurably better than the first one. The first job I had was a fully commissioned role with a large insurance company. I did pretty well but I could not come to grips with the fact that I had to sell certain products to the exclusion of others in order to make a decent living.
After one year, I switched companies after a friend told me about an opportunity with one of the big five bank's brokerage division. The institution I work for now pays me a base salary and some small bonuses. The focus is on writing financial plans for my clients and ensuring they are on the right track. I enjoy this role immensely more and I appreciate not having the continual pressure to sell certain products or rely on a commission payout. After helping my clients with a financial plan I help them with their investments, which for the type of clients I have, mostly means mutual funds, bonds and GICs. I do not receive commissions based on what I sell.
I hope that wasn't terribly boring but I like knowing where people are coming from and I thought you might too. Cheers.
Monday, September 17, 2007
Sorry for having fallen off the face of the Earth lately. I'll try to be more reliable now that the rain seems to have come back.
This is a slightly cheap post, but I think an important one. In yesterday's Financial Times Alan Greenspan had some of the following choice comments:
US house prices are likely to fall significantly from their present levels
...the decline in house prices “is going to be larger than most people expect”.
He said the price of risk had fallen to unsustainably low levels beforehand, with investors addicted to asset-backed securities that offered some additional yield over Treasury bonds as if they were “cocaine”.
Interesting that Greenspan is finally acknowledging a situation he helped create. We also pick up this tidbit:
As Fed chairman, Mr Greenspan had talked about “froth” in the housing sector, but never said there was a bubble in the market as a whole. His successor Ben Bernanke has also avoided the word “bubble”.
But Mr Greenspan told the FT that froth “was a euphemism for a bubble”.
He said he still thought froth – a collection of bubbles – was a better description, because of the variation in house price appreciation in different local housing markets. But he said “all the froth bubbles add up to an aggregate bubble”.
Friday, September 14, 2007
c) disciplined savings.
Thursday, September 13, 2007
Here is the report.
Here are some quotable quotes:
"There is little doubt that current trends are unsustainable. The current housing boom is now the longest of the post-war era (going on nine years) and has seen one of the largest cumulative real price gains (more than 60%). Builders have become more cautious as mortgage rates drift up and cost pressures mount, but total housing starts are still well above annual household formation levels of around 180,000.
Moreover, there is growing evidence of overvaluation in home prices in some parts of the country — a precursor to a period of softening conditions. To identify which domestic markets may be more vulnerable, we have calculated the percentage deviation of real house prices from their long-term trend. While a relatively simple benchmark, it nonetheless provides an indication of current valuations relative to historical norms. Our analysis looks at 15 major markets across the country for which comparable data are available."
"Nevertheless, the further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction. The 1976 and 1989 housing peaks were both followed by some adjustment in real prices. In the past, this adjustment has normally occurred though a period of inflation erosion as opposed to nominal price declines."
They also gave specific overvaluation numbers for each of the 15 major cities in Canada with Vancouver being 13% overvalued compared to some long term trend which I don't quite understand yet. I'll have to give it a more thorough read when I get the time.
In all the report is fairly balanced and is by no means a doom and gloom report. It takes national view and stays away from commenting too much on certain markets.
Tuesday, September 11, 2007
A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.
When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip it quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.
The bigger fool theory or greater fool theory (also called Survivor Investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to some one else for an even higher price.
It might be on some occasions a valid method of making money in the stock market -- however, the market participants eventually realize that the price level is too outrageous and the speculative bubble pops. The bigger fool theory relies on market optimism concerning a particular stock, an industry, or the market as a whole.
The opposite of the bigger fool theory is value investing, which tries to discount market psychology. Value investors such as Warren Buffett believe that it is corporate profits which are the normal returns from stock investments, and any higher return is only possible due to the bigger fool theory.
The bigger fool theory holds for any pure value transaction, not just speculative ones. When a commodity with a universal value is traded then, no matter how the situation is interpreted, either the seller or the buyer has made a mistake.
However, the majority of transactions are not pure value transactions: the value (or utility) that a given product has is dependent on a wide variety of factors, which will often be very different between the buyer and the seller.
For instance, in a bartering economy, there might be a tomato farmer living next to a cherry farmer. The tomato farmer has a large supply of tomatoes, and very little demand, so for him tomatoes have very little value; but he has a small supply of cherries and a higher demand, so for him they are much more valuable. The situation is reversed for the cherry farmer, so a trade of tomatoes for cherries would be a profitable transaction for both parties.
Monday, September 10, 2007
As one would expect, starts lead, under construction follows and finally completions follow approximately 6 months later. Some interesting observations here are that the number of units under construction has never exceeded either the number of starts or completions but we find ourselves in a situation now where the number of units under construction is far exceeding the number of starts and completions. This could be due to a variety of factors such as a skills shortage or the nature of the projects under construction. The result of so many units under construction is that it is taking longer than in the past to see supply in reaction to demand thus giving the illusion of a hotter real estate market than perhaps is warranted by fundamental supply and demand.
An interesting note on this graph is the uptick in housing starts I notice in 2001. The question I have is how did developers make money with your average single family home selling for under $400,000. What was motivating them to build more starting in 2001 and sell homes for under $400,000? What has changed over the past 6 years? Have materials (lumber, steel, concrete, fixtures) costs risen that much? Has labour become doubly expensive in the past 6 years?
The number of persons per household in the GVRD has remained fairly stable at 2.6 persons over the past 20 years. When starts / completions exceed the number demanded by population growth one would expect it to be in reaction to previous undersupply or an expectation of further population growth. During our most recent construction boom we have seen no such growth in population and population is not expected to grow at a faster rate than currently evidenced. The question here being - who is living in all of the new homes being built?
The answer to this question could be complicated and no statistics exist (to my knowledge) that quantifies who is buying new or existing homes. I have heard myths about rich foreign buyers and the illegal drug trade but neither of those explanations should account for such a dramatic change in prices which are set by the typical home buyer who buys their home by qualifying for a mortgage which they intend to pay off over a number of years.
Thursday, September 06, 2007
Clearly there are good times to buy and bad times to buy - guess which time we are in! Generally speaking, as a financial planner I would never recommend an individual buy a home unless mortgage payments are less than equivalent rent.
Mortgage Payment is calculated by using the Benchmark Greater Vancouver House Price, putting 25% downpayment towards the principle and having a 25 year mortgage with blended principle and interest payments. As an aside, the payment is $300 less when using a 20% down with a 40 year mortgage. I don't really know of too many buyers who have $150,000 required as a downpayment though.
Rent data is from CANSIM and purchased with your generous contributions. I would appreciate the feedback on the rent data I used. Here is my issue: CANSIM has rent data for 1, 2, and 3 bdrm apartments but not for single family homes. For comparison purposes I used a multiple of 2.3 times the 2 bdrm apartment rent data to approximate the benchmark SFH rental rates. Do you feel this is too high, too low, or whatever? Should I just use the 3 bdrm and ignore any potential differences?
Wednesday, September 05, 2007
There were 1763 Sales and 8286 Active Listings representing 4.7 Months of Inventory. I expect inventory to explode upwards in the next few months and the months of inventory to be above 6.0 by October. There is a very strong correlation between the Months of Inventory and Quarterly Price Changes.
Median Price of a detached house was $485,000.00
Median Price of an apartment was $212,000.00
Median Price of a townhouse was $310,000.00
House Price Index of 220.3
9.3% Year over year increase in prices
2.2% quarterly increase in prices
1.3% month over month increase in prices
This chart represents the past data and my future expectations if inventory shoots up and sales drop off substaintially. If inventory is stable and sales are strong then my expectations are out the window!
Tuesday, September 04, 2007
What do we see here? The quality and sales mix adjusted house price benchmark (adjusted for inflation too) is represented by the yellow line. It is really high right now (highest ever) and it has risen for 6 straight years.
The blue line represents the average individual Greater Vancouver Income adjusted for inflation. It has risen and fallen within a basic range for nearly 30 years and it is at its highest level since 1980.
The red line (IMPORTANT) represents the number of years of the average worker's income it would take to purchase the benchmark single family home in Greater Vancouver. This number is at the highest level (by a long shot) that it has ever been.
Let us take a lesson from history. In the past 30 years, every time the ratio of the benchmark house and the average income has exceeded 8.0 the ratio has fallen. House prices must fall or incomes must rise in order to bring the ratio within a historical normal range of 6.5 to 7.5.
If you are returning from summer vacation today, looking over some of the posts you've missed in the past few weeks and wondering which ones are worth a read you should check out:
CMHC Housing Data
Long Term House Price Data
Fraser Valley Housing Data Release
And this video of Robert Shiller
We are awaiting the local August Housing Data Release in the next couple days and I will provide analysis once I have the data in hand. I have a hunch we will see higher prices in August but fairly subdued increases compared to the past. Inventory has taken a noticeable slide and it will be interesting to see how this develops in the fall.
On another note I wanted to use the beginning of the fall routine to ask you, my readers, what sorts of things you would like to see here in the next few months. Use the comments to tell me what you think. I enjoy doing the charts and data analysis. I also like staying up to date on market developments and looking at things from a historical perspective. What would you like to see?
I have received some generous donations from some of you and I thank you. I intend to use the funds to purchase StatsCan data for further analysis this fall. On my list of things I would like to accomplish is:
1) Long Term Price Earnings Ratio for Greater Vancouver Real Estate which will require long term rent data. This has been extremely difficult to get my hands on but I will persist. Any leads are appreciated.
2) Some more historical / philosophical analysis of markets and market psychology. In particular I am interested in doing some more observation and discussion of past financial manias and the popular psychology surrounding them. There is some fairly interesting literature on the matter that I have read and plan to read.