Saturday, June 30, 2007

Happy Canada Day! Open Thread and Inventory Update

Hodge Podge for the long weekend.

First a tribute to Canada. Canada, for all its faults, is a pretty darn nice place to live. Its mostly free, mostly clean, mostly peaceful, and delightfully uninteresting in most respects!

Next, a local real estate market inventory update courtesy of realtor Rob Chipman. Inventory is following an almost identical path to last year with the significant difference of being 30% higher! July is the month when we should start to see the beginning of the fall inventory build up and I expect the Chipman area will break 13,000 for the first time ever in July sometime.


Finally, the June Real Estate market information should be out on Tuesday from the REBGV and FVREB. What do you think it will indicate? I expect marginally higher prices from May, higher inventory than last year and lower sales than last year. Months of inventory should continue rising but all in all no big surprises. The real action will probably start in the fall.

Wednesday, June 27, 2007

Updated VHB Charts

Well I thought it was time for a bit of a spruce up and a change of appearance as I was getting a little bored of the old template. Let me know what you think of the new one.

Today's feature comes courtesy of regular poster 'woodenhorse' and here are some much anticipated and newly updated VHB "You Are Here" graphs with inflation adjusted real estate prices. These price graphs use the quarterly Royal Lepage data set, which is quality adjusted then the prices are adjusted for inflation by the Stats Canada published CPI.




As of Q1 2007:
Nominal Prices for Bungalows are up 18.18% Yoy, real prices up 16.38% yoy
Nominal Prices for Condos are up 14.29% Yoy, real prices up 12.54% yoy

Thanks for the updated data and charts woodenhorse.

Tuesday, June 26, 2007

The Cycle of Market Emotions

I have seen a variety of renditions of this chart popping up and I thought I would post it here for interest sake. I think this piece has value in two respects:

1) It educates us that our emotions play a role in how we evaluate investments.
2) It educates us that most people's emotions go through a variety of phases regarding their investments.



What do you think? Can you relate? Have you had an investment experience that caused you to feel these emotions?

Sunday, June 24, 2007

Inventory Update




Well last week saw a sizeable increase in inventory.

On a personal note, the wife and I are very seriously thinking about selling and renting. It is really starting to make a lot of sense for our lifestyle and financially right now. Renting is sooooo much cheaper (30-50%) than buying and we really would like a larger space but can't justify the price and the sacrifices that would go with that price.

Wednesday, June 20, 2007

Bill Good Talks Real Estate

I was in the car this morning and I caught 10 minutes of the Bill Good show on CKNW and from what I could gather the entire hour between 9:00 AM and 10:00 AM was talk about housing affordability in Greater Vancouver.

Mr. Good had all the usual suspects on the show:
  1. Obligatory real estate industry "economist" - Cameron Muir from the BC Real Estate Association.
  2. Obligatory 'objective' acedemic economist - Tsur Somerville from the UBC Sauder School of Business.
  3. Obligatory 'entrepreneurial' real estate investment guru - Don Campbell, who has written books on real estate investing in Canada.
My impression from the 10 minutes I heard was about enough to make me lose my breakfast and spit up my coffee. All the usual junk about how Vancouver is such a nice place to live and that the market perfectly determines prices, downplaying the US housing market situation, Vancouver is different, residents are making it work somehow, low unemployment, Olympics, hot economy, real estate agents are wonderful, Olympics, real estate offers fantastic wealth generation opportunities, and on and on and on.

Anyone else listen to the entire show and have some different impressions. I usually find Bill Good fairly informative and balanced but his choice of guests today was far from balanced. He is also a notorious Vancouver Olympics pumper so that may have played a part in his choices.

My theory here is the Bill Good show may represent the 'magazine cover indicator' for the Vancouver market in 2007.

Tuesday, June 19, 2007

Personal Risk Management

People insure themselves and their belongings for various types of risks: Theft, Fire, Accidents, Injury, Death, and Illness. Some things are more likely to happen than others – death for example – 100% chance versus a very low chance of - say - a meteor strike!

In recent years, it has become possible to insure yourself for major illnesses so a lump sum of cash becomes available should you suffer a major illness – this type of insurance is called Critical Illness Insurance. Available in Canada only since 1996, Critical Illness insurance was devised by a pioneering heart surgeon who was concerned that the post-operative stress caused from the financial burden associated with recovery was killing his patients.

Unlike long-term disability coverage that will pay out only in the case of protracted recovery periods, Critical Illness policies will pay a lump-sum non-taxable benefit, usually 30 or 60 days from the onset of any one of certain specified medical conditions, diseases or ailments. No extended convalescence or proven disability is required to collect; only the fact of diagnosis is required. The funds can be used for any purpose - to supplement lost income, take early retirement, pay off a mortgage or other debts or defray the expenses associated with medical treatments, recovery or rehabilitation. If death occurs within the waiting period, the premiums paid will be refunded to a named beneficiary. Some plans will return premiums paid if the contract matures without a claim.

The covered diseases typically include such things as: Heart Attack, Cancer (including stage A prostate & colon cancer), Paralysis, Multiple Sclerosis, Major organ transplant, Coma, Loss of Speech, Stroke, Parkinson’s, Kidney Failure, Alzheimer’s, Severe Bums, Deafness, Coronary Bypass, Blindness, Loss of Limbs, Occupational HIV Injury, Motor Neuron Disease
Some insurers offer a choice between basic and enhanced coverage options (Heart Attack, Cancer, and Stroke). These policies are finding favour particularly with older workers, who are enjoying their prime earning years at the very time that, statistically, they are more prone to serious illnesses such as heart disease, cancer and stroke.

Financially, it can be prudent to insure yourself for such risks if you are the main income earner for your family, if you would suffer a significant setback in earning potential should you become severely ill with a possibly long recovery period, and if you would like to have the peace of mind that your finances would not suffer unduly should you become quite ill.

Personal disclaimer: My wife and I personally have critical illness insurance policies insuring us for 22 major illnesses. This provides us with peace of mind and it is quite reasonable - relatively speaking. I do not sell or receive compensation for the sale of insurance policies.

Friday, June 15, 2007

Housing (non) Affordability

I read the RBC Housing Affordability Study for June this morning and I am mystified as to how affordability improved in Vancouver as mortgage rates went up and prices of homes went up.

From the RBC Affordability Study

British Columbia — Demand shifts to condos
"Solid income gains outstripped softer house price growth in the first quarter to make way for another slight improvement in affordability for two-storey homes in the province. The improvement is welcome relief for prospective buyers attempting to tap into the already high-priced property market. Affordability slipped in the remaining three home segments as prices continued to move higher. British Columbia’s market is unique among the western provinces because it appears to have already reached a saturation point. The pricey housing market, particularly for stand-alone homes, has already priced out many prospective homeowners. In reaction, the focus has shifted to the condo market, which has become the only affordable homeownership option for many. Looking ahead, the increased supply of homes on the market will further restrain price growth."

Aah, there we go - "solid income gains" - did you get a raise because I sure didn't?! Oh, and wait, affordability improved only in two storey homes but deteriorated significantly in townhomes and condos. Now it makes more sense.

Lets have a look at qualifying gross incomes for different housing types in Vancouver as per the mohican mortgage calculator.



Posted 5 year mortgage rates have risen approximately 0.85% in the past two months so as an example I did a calculation of what price decrease would be necessary to keep payments the same at the new mortgage rate compared to the old rate.

For example, a $500,000 mortgage at 5.3% rate with at 25 year amortization has a payment of $3011. Now the rate is 5.9% and the payment is $3191 for an increase of $180 per month. If payments were to stay constant the mortgage amount would need to decrease to $471,800 for a 5.6% drop in amount.

Supply Overhang, Doverschlang!

In the words of VHB - What rhymes with overhang? - clearly the answer is 'doverschlang.'

This chart is courtesy of the VHB's private treasure trove of charts and data. It is a long-term chart tracking new housing supply through CMHC's starts, completions, and under-construction data. The area is the Vancouver Census Metropolitan Area.


What I find interesting here is that the 'under-construction' number has never risen above the completions number until 3 years ago. This leads me to believe that we are in unprecedented territory in the Vancouver CMA in regards to the potential supply overhang that is about to hit once all of the units under construction right now complete and the occupations take place. It is also interesting to note that normally the units completed falls approximately 6 months after starts fall (starts are falling right now) and normally the units under construction falls along with completions. This is not the case right now for whatever reason.

Remember that nearly every completion means another available rental unit or unit available for sale. Because population growth is low the demand must come from within the Vancouver CMA.

UPDATE: Area Breakdown



Look at all those units under construction. Crazy.

Thursday, June 14, 2007

Canadians not saving enough to retire:

Report By Ottawa Business Journal Staff
Thu, Jun 14, 2007 12:00 PM EST

Younger baby boomers are not saving enough money to cover even their basic household expenses in retirement, according to a study released Thursday.

A study by the University of Waterloo's Department of Statistics and Actuarial Science found that only one in three Canadians expecting to retire around 2030 are saving enough to meet basic household expenses in retirement. They are left with the option of retiring in poverty or working past the age of 65 unless they significantly increase their retirement savings.

The study, titled "Planning For Retirement: Are Canadians Saving Enough?", was carried out in April and focused on baby boomers born in the early to mid-1960s. two different income levels were examined: households earning the Average Industrial Wage ($40,000 in 2005) and those earning twice that amount. The study was sponsored by the Canadian Institute of Actuaries. "The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement," said institute president Normand Gendron.

"Governments need to provide Canadians with more education about the role that different savings vehicles can play in generating retirement income, and provide tools and incentives that encourage more households to save."

The study found that diversity is the key to saving enough. The one-third of households that is saving enough is doing so through a combination of home equity, company-sponsored pension plans, registered retirement savings plans and personal savings, the study found. These sources of income would supplement the modest monthly cheques from Old Age Security and the Canada/Quebec pension plans. Households that depend on only one type of savings vehicle for retirement consistently fall short of what they will need.

The study found that home equity is an important element for many Canadians, so much so that it suggests the government should make interest paid on a residential mortgage tax deductible. "We found that home equity can make a significant contribution to narrowing the gap, provided your home is paid for when you retire," said Steve Bonnar, one of three actuaries who directed the University of Waterloo project team. "Yet while home equity is important, on its own it is not enough to close the gap."

The study suggests many Canadians fail to appreciate how much money they will need to retire comfortably, since its results contradict a poll the institute also commissioned in April. The poll, conducted by Pollara Inc., found that "55 per cent of Canadians aged 40 or older feel some level of confidence that they will have the financial resources to retire comfortably."

Mohican's blunt evaluation is that it is very true that the average Canadian DOES NOT save enough to even meet basic expenses in retirement and I don't know where they expect the money to come from - the magic money fountain in the sky I guess.

As far as making mortgage interest tax deductible, that idea is bunk! bunk! bunk! If the government wants to encourage saving for retirement they should make it more lucrative for companies to have pension plans, encourage group retirement savings plans, and give bigger deductions for RRSP contributions. Encouraging people to buy a bigger house through mortgage interest deductability is not a good way to encourage savings.

Wednesday, June 13, 2007

Mortgage rates rise again

Update: Renewal Gap Chart

Higher mortgage rates across the board means that anyone renewing a mortgage right now is looking at a potentially sizeable increase in their interest rate.
Canadian Press
June 13, 2007 at 2:08 PM EDT
TORONTO — Residential mortgage rates are moving upward again as bond-market yields bounce around five-year highs.

The Royal Bank of Canada said Wednesday it is raising posted rates by between 0.05 and 0.20 percentage point, depending on the term. Effective Thursday, the five-year closed rate goes up 0.15 point to 7.44 per cent.

It's the fourth rise in less a month during a series of increases taking the five-year rate up by 0.85 point, from 6.59 per cent on May 17. The other chartered banks have in recent weeks followed the lead of RBC.

The upward trend reflects a slump in prices and rise in yields in the international bond market where banks get their funds for mortgage lending, as central banks in most major economies have either raised interest rates or indicated they expect to, in order to contain inflation.

Tuesday, June 12, 2007

Open Thread



Open to your thoughts today. Feel free to talk about anything but here are some questions I would like answers to.

- Why is Seattle real estate half the price of Vancouver real estate?
- Why is real estate cheaper in places with higher average incomes than Vancouver?
- Why don't BC residents save money?

Monday, June 11, 2007

Warren Buffett



Arguably, the most successful investor of the modern era, Warren Buffett knows how to pick stocks and control his emotions about his investments. I respect him for being very principled and I think we can learn from what he has to say here.

Inventory Update



Flat inventory last week.

Saturday, June 09, 2007

Housing in the Depression



How quaint - spending less on your mortgage than rent! It's a wonder my grandparents did quite well for themselves considering their unsophisticated financial decisions.

Friday, June 08, 2007

CHMC Vancouver Starts, Completions and Under Construction

CMHC publishes housing starts, completions and units under construction every month and the VHB diligently kept some historical records of this and I have decided to carry the torch, so to speak. I think the numbers can help us gauge a part of the supply picture in the local real estate market and thus give us insight into possible future price adjustments.


Units under construction is running near the 22,000 unit level and has been at that level for about a year now. Starts have come down from their highs of over 2000 per month and completions are also running lower. It appears that labor availability is having a negative impact on the ability of developers to complete projects in a timely fashion.

As mentioned in the previous post, population growth has been low so the current construction completions are competing for fewer people than before.

Interesting numbers, I am a little surprised at how low the new people per completion is. Especially considering we have an average household size of 2.6.

Thursday, June 07, 2007

Population Growth

By popular demand here are the population growth statistics for Vancouver CMA and BC as a whole. Thank you to the VHB for compiling these stats and making them available to us.
Needless to say the chart indicates completely anemic population growth for the past 8-10 years. I hear more anecdotes every month of more and more people leaving the area than coming in so I don't really understand where the idea comes from that there are so many people moving to the area.

Where is this so called population boom?

Wednesday, June 06, 2007

Home of Insanity - Renfrew V643849


This morning we are featuring MLS V643849, a classic stucco covered Vancouver bungalow in the lovely Renfrew neighbourhood, situated between two larger homes (people with low self esteem need not pursue this listing). Buying this listing as a rental property would mean that you have some cajones and a big bank account. You can show off to your friends by telling them how much more your mortgage is than the rent.

Yes, this home with a 'low basement ceiling,' looks like the yard hasn't been maintained, and really needs a coat of paint, some new steps, and windows, is currently rented out at $1050 per month. The cost buying this property at list price by borrowing money and paying it back over 25 years is $3,259.84 per month. Add on some property taxes and basic upkeep and yes that's right you can subsidize your renter to the tune of $2500 per month.
Home of Insanity.

Monday, June 04, 2007

May 2007 FVREB Statistics

May statistics were released today by the Fraser Valley Real Estate Board on their spiffy new website. Not surprisingly, sales were down from last year (-4%), inventory was up (+52%) and prices were up. I am a little surprised by the strength in sales but a little surprised by the inventory number as well - its more than I expected. I expected a small decline in Months of Inventory in May and it fell from 4.4 in April to 3.9 in May. The MOI number is much higher than the last two years for which I have statistics and is poised to head much higher throughout the rest of this year if the trend in sales and listings holds.



Median Prices in May:
Detached - $473,000
Attached - $315,000
Apartment - $210,000


Oops! $400 million down the drain.

Fraser threatens housing development

Partly built subdivision sits on what was flood plain next to Bedford Channel

Kent Spencer
The Province
Monday, June 04, 2007

CREDIT: Parklane's housing development Bedford Landing along the Fraser River in Langley is bracing for spring freshet with a new set of regulations handed down by the government. Most of the newly constructed home's basements will be one metre below the flood level.

A $400-million housing development on the banks of the Fraser in Fort Langley is in danger from the rising river. "We're in the process of understanding what the implications are in relation to water rising," said Randy Dick, manager of the Bedford Landing development for ParkLane Homes. "We're up high. That's the good news. "It's too early to say what the solution is in the long term. For the short term, with the freshet coming, we're going to keep the water table down with flap gates and pumps."

The development bills itself as "waterfront living in the heart of Fort Langley." The partly built subdivision sits on what was once the flood plain next to the Bedford Channel. Basements of the Bedford homes sit at 6.6 metres. But when protection levels were raised from 6.6 to 7.6 m in January, the basements fell below standard. The standard was adjusted after officials realized their 1969-based models were missing key factors, such as runoff caused by pine-beetle devastation.

Most Fraser Valley dikes are about 8.5 m in height. During the catastrophic flood of 1894, the river reached a height of almost eight metres above sea level. Forecasters say the Fraser could reach six metres soon if hot weather continues. Langley has ordered ParkLane to come up with a plan to keep water off the Bedford site. The developer is installing pumps, valves and flap gates. The pumps will take excess water away and the flap gates will prevent river water from flowing backwards up the storm drains.

Protection measures include shoring up the riverbank and repositioning a section of the dike. Ramin Seifi, Langley Township development manager, said the extra flood protection will cost between $1 million and $10 million. It will be paid by ParkLane, which Seifi said the developer was not happy to hear about. "These things are not cheap, especially a retrofit," said Seifi. "[But] ParkLane realizes these things are unavoidable." Dick, the project manager, said he was not upset about the cost: "We had to put in a number of works anyway . . . It's too early to say what the final cost will be."

Connie Blundy, who bought her half-million-dollar home just 200 m from the river three weeks ago, said she was reassured by the developer's commitment to make homes that would withstand a one-in-a-100-year event. She said she was told it took two years to fill the 31-hectare site with sand from the river bottom, elevating it from the lower-lying flood plain. "Perhaps I should be [concerned], but I'm not really," she said. "The water could cover the basement to a depth of one foot. It would not be the end of the world."

The muddy waters are rising noticeably, said a group of teens suntanning near the Bedford construction site. "It's not so much frightening, as inconvenient," said Fort Langley's Shelby Cairns. "School might have to be relocated." Langley Township didn't maintain a right-of-way to an old dike on the edge of the development when it sold the land to the developer. Seifi said the dike was rendered unnecessary because of the landfill put in by the developer. But provincial dike inspector Neil Peters said the B.C. government would like to see Langley have the right-of-way. "We want to have a right-of-way documented for a future dike," he said.
© The Vancouver Province 2007

Sunday, June 03, 2007

Inventory Update



Well, a short update on the Greater Vancouver Real Estate inventory and it appears that the sales rate this May is much lower than last year so we are not seeing the drawdown on inventory that we witnessed last year. This sets the stage for a higher Months of Inventory number later this year, and, as I have argued, it will take over 6 months of inventory to see any real negative price pressure on our local housing prices.

Real estate market statistics will be out this week and it will be interesting to see what the trend is - I predict more inventory, lower sales, and higher prices for the time being.

In a slightly related topic, I saw a great piece of analysis over at Seattle Bubble Blog. It talks about various US housing markets and the number of months from the peak of year over year appreciation to negative year over year appreciation. The average among US markets is 19.6 months from peak appreciation rate to negative. Locally, appreciation in Greater Vancouver peaked May 2006 at 21.8% YOY. Appreciation peaked June 2006 in the Fraser Valley at 23.6% YOY. If we are average, this means we should hit negative YOY appreciation by December 2007 or January 2008.

Friday, June 01, 2007

Dividend Investing

Many investors think of dividend-paying companies as boring, low-return investment opportunities. Compared to high-flying small-cap companies in hot industries, whose explosive nature can be pretty exciting, dividend-paying stocks are usually more established and predictable. Though this may be boring for some, the combination of a consistent and increasing dividend with an increasing stock price can offer a potential return potent enough to get interested in.

This chart tracks the value of 1000 shares in a major Canadian Bank. The Canadian banks and insurance companies have been great dividend payers and growers in the past. The bank highlighted, like all of the banks, has grown its dividend payout over the past 10 years by more than triple and its share prices has also risen substantially by more than 12 times the original value over the past 10 years. The original $5500 investment has grown into $69,000.



I'll be the first to admit this might not be the most ‘sophisticated’ investment strategy out there. On the contrary, it is quite simple, but over the long run, investing in companies with a strong earnings, solid balance sheet and a sustainable and growing dividend payout is a proven strategy to earn exceptional investment returns. In fact, the bank highlighted in this example has returned a compounded annual rate of return, including reinvesting dividends, of 23.5%. Pretty good show for a boring strategy.

If you are not into picking stocks and prefer someone else to do the stock picking for you, every bank and mutual fund company in Canada has a decent dividend fund. Some of my favorites are the AGF Canadian Large Cap Dividend Fund and the TD Dividend Growth Fund. As always you should consult your financial advisor before making any investment decisions and you should ensure that any investment chosen meets your risk tolerance and investment objectives.