Tuesday, January 29, 2008

Olsen on Our Side?

Here is a synopsis of last night's "Olsen on Your Side" segment of the local CTV News. Highlights are mine. Look for another segment every night this week on the CTV News. Watch last night's segment here.

Will Vancouver's red hot real estate market cool?

Updated: Mon Jan. 28 2008 12:55:48 bc.ctv.ca
Real Estate Forecast


This week we're beginning a five part series on real estate and what's putting pressure on owners and buyers alike.

I think there is an assumption that real estate prices always go up. But that's not always the case. In the US, the sub prime mortgage crisis has slashed prices in many desirable communities as a flood of homes come onto the market.

In just the last three months in California, 32,000 ended up in foreclosure 82,000 more have gone into default on their mortgages; an early indicator of possible foreclosure. In Phoenix 56,000 homes are for sale, many of them foreclosures, 10 times as many as three years ago. And that can't help but effect prices. In Fort Myers Florida, foreclosures have climbed 500 percent in one year while house prices have fallen by 30 percent in two years.

I'm not saying that is our future -- but it was only two years ago when there were stories in the US of real estate booming, prices out of reach for many people, and today, if you hadn't bought then you have a lot to choose from.

While we don't have a sub prime risk here, if the US slips into recession that will effect our economy and there are a number of other factors that could come into play.

Like what if our investors start taking their money to the US to cash-in on the bargains there? We talk about that on Wednesday in our series. And what about affordability? With prices where they are now -it's a real issue in Vancouver and other communities. We'll show you how the market is trying to accommodate first time buyers. And how to get the best price you can whether you're getting in or moving up. That's tomorrow.

And later in the week we also have a reality check story on what sacrifices you need to be willing to make to own a home here.

Real Estate: Where now?

Can the lower mainland's red-hot real estate market keep heating up?

Some experts say the increases we've been seeing just aren't sustainable and they've got a warning for speculators.

Catherine Stofer wants to own her own condo in Vancouver. But it's been tough. "I earn a good living, that's the frustrating part. Here it is at the age I'm at if I amortize, I'll be in my grave before I pay it off," she complains.

As prices have been rising, units have been getting smaller, in an effort to keep first time buyers able to buy something.

At 670 square feet the unit Stofer is looking at is considered a larger unit "Some of the dens we've seen basically couldn't accommodate a computer," she notes.

"I'd say we are somewhere near the top of the cycle," predicts UBC real estate professor Tsur Somerville. He says the numbers tell the story. Real estate prices in Greater Vancouver have been rising 15 percent per year on average for the last four years.

Historically, you'd expect six percent annual increases and we are two and half times that.
"The risk you are facing now is that you have a market that is near a peak. You have employment in major construction projects that is going to tail off. You've got
negative news in terms of Canada's trading partner," calculates Somerville.

And since real estate prices have fallen in the US, will local or foreign investors pull their money out of this market to invest down south where our dollar buys more. What would happen if they did?

"If they sell and people notice prices are softening, are they going to race to sell: and is that going to cause a downturn particularly in the condo market? There are a lot of different ways this could play out and because we haven't had a lot of experience in that we really don't know the way this plays out," says Somerville.

Professor Somerville says if you are buying a place to live in long-term timing the market isn't critical. But speculators face a far riskier market today.

"The person who has over extended himself, is the person most at risk," he concludes.

Catherine just wants a place to call home. "Just keep trying, there has got to be something out there," she muses.

In all markets there is a psychological aspect. People believe that what happened last year will happen this year. If people believe prices will keep going up, then prices rise faster than the economy that supports them. But remember, expectations can also change quickly and that will affect the market too.

With a report from CTV British Columbia's Chris Olsen

25 comments:

Clarke said...

As per usual, Tsur Sommerville provides expert commentary that is about as useful as a screen door on a submarine......

Olsen may have done the first balanced piece on RE I have seen.

freako said...

Olsen's second shot at this. I agreed with the segment last year, but obviously premature.

As per usual, Tsur Sommerville provides expert commentary that is about as useful as a screen door on a submarine......

That is the most bearish I have seen Tsur to date. Maybe re-posturing a bit to salvage some credibility. Which BTW, Chipman seems to be doing as well.

patriotz said...

In the US, the sub prime mortgage crisis has slashed prices in many desirable communities as a flood of homes come onto the market.

You can see how effective the campaign has been to blame the US housing collapse on poor people and darkies, er, "sub prime lending".

Sub prime lending was predominant in marginal communities, not desirable ones. One would think that would be self-evident.

House prices started falling a year before the sub prime collapse in early 2007. Falling prices were the cause of the sub prime crisis, not the other way around.

Prices started falling simply because they were too damn high. Supply exceeded demand.

High prices were the result of lending against prices far exceeding what was justified by fundamentals, in all loan categories.

patriotz said...

Professor Somerville says if you are buying a place to live in long-term timing the market isn't critical.

Is this clown for real? Like buying a house at a real price that is unlikely to be reached again for a generation, if that, and is unlikely to return a yield approaching rent for just as long, is not going to have a critical effect on one's financial well-being?

Has this idiot even figured out that RE is cyclical? That people who bought south of the border in 2005 or 2006 are going to be in big trouble for a long time?

Clarke said...

"That is the most bearish I have seen Tsur to date. Maybe re-posturing a bit to salvage some credibility. Which BTW, Chipman seems to be doing as well."

It is one thing to change one's opinion based upon continual review of the evidence. This is commendable, and is what everyone should do. But, this is not what either of these two are doing.

This is a very cynical exercise in repositioning oneself after realizing the wind is decidedly starting to blow in the other direction. Tsur seems to be reverting from unabashed cheerleading, which only by his standards is a dramatic departure. In reality, in his comments he really is not saying anything.

I have also noticed this on Chipman's blog too, where he has actually made some dramatically bearish comments recently.

Measuring these recent comments compared to what either of these "experts" have said in the past few years, my own verdict on both would be -only partially stupid, but really dishonest.

jesse said...

"Maybe re-posturing a bit to salvage some credibility. Which BTW, Chipman seems to be doing as well."

Maybe these blogs have brow-beaten people enough to take a more bearish stance. At least I'd like to think so.

Aleks said...

On the topic of affordability, I found this post on Investing Intelligently pretty surprising, even though I expect a correction. Specifically, that for housing to be considered affordable based on income the median price in Vancouver would have to be $179,700. That kind of drop could destroy the economy for decades.

Which leads into another thought... if Vancouver is tops in North America for break-ins and auto theft now, when unemployment is at record lows and any idiot can get rich flipping condos, what happens in a recession? Can it actually get worse?

Sam said...

the median price in Vancouver would have to be $179,700. That kind of drop could destroy the economy for decades.

Whoa there aleks - why does it follow that house prices returning to a normal level, where normal people can get on with life, would "destroy" the economy?! I would argue the opposite - people destroying wealth by spending 70% of their income, basically to service debt, will destroy the economy.

Plenty of those downtrodden people you see who go off the rails woudl instead be able to get a job and own a home. Or rent for less.

We've got to get away from this idea that it's somehow beneficial to the economy to have bubbles in house prices.

mohican said...

In a highly leveraged and debt laden economy like ours a collapse in asset prices whether they be bonds, stocks or real estate can have a devastating impact due to the amount of leverage at work and the critical role that financing plays in business investment and consumption. This is why the bond and stock markets are so volatile these days.

Specifically relating to Vancouver real estate, I estimate that we could have a very sizeable correction (40-50%) and it not impact our economy terribly. Granted it would devastate a select few groups - construction, developers, speculators but as a whole it would be beneficial - especially to local businesses, new home buyers and renters.

In fact it could have some tremendous long term benefits. Namely the ability to attract top talent to local businesses and the dramatic freeing up of cash flow that formerly went to housing costs and debt servicing.

Siobhan said...

I agree with Sam, A little blood letting would be good for the economy. If prices corrected to the point where John and Jane Doe could afford a home again this would stimulate the economy.

In my opinion, a sudden and severe drop would be better than having a prolonged correction over several years. The sooner the correction is over - the sooner the economy recovers.

Sam said...

indeedely do. This is the crux I think - if Joe Blow spends 30% of his income on his mortgage instead of 70%, this frees up money to spend on other goods and services, as well as investments.

It's destroying wealth to simply tie up more and more of the FTBs money so that others can "trade up" by simply taking on more debt through either buying larger, equally overpriced houses or by buying totally nonproductive buy-to-let investments.

Metaldwarf said...

the median price in Vancouver would have to be $179,700. That kind of drop could destroy the economy for decades.

This got me thinking, WHAT IS THE AVERAGE HOME IN VICTORIA?

To figure that out we would need to how many homes (apartments, condos, townhouses, duplexes, SFH) are there in Victoria? What the average cost is per category and what the average income of the people who live in them is.

This is mostly just the ramblings that goes on inside my head but its an interesting thought experiment. PLEASE NOTE: my numbers are purely fictional.

Lets assume there are 100,000 homes in Victoria. of those 40,000 are SFH, 30,000 are condos and 30,000 are rental apartments. For the sake of simplicity there are no duplexes, townhouses, rented houses etc. only SFH condo and rental apartments.

Assume the cost of the homes evenly follows the distribution of wages in Victoria. The average wage can afford the cheapest 50% of the market but not the higher 50%. Therefore, the average wage earner can comfortably afford a high end condo or just barely afford a low end SFH. People below average income can afford condos of various quality and the poorer folks have to rent an apartment. Conversely those slightly better off then average can afford bigger and better SFH.

If this is the case (and it is not)then the average home is a pretty nice condo that costs $179,700. That doesn't sound too bad. I could happily live and afford an upper class condo development (Bear Mountain, Richmond gate, Hudson etc) for $180K

Of course if the distribution of homes and incomes was not even like in my example the average would be different. My challenge to the community. What is the average home in Victoria? We know what the average SFH and condo prices are but if you counted up all the homes in Victoria what is the average is it a condo a SFH or something entirly different?

patriotz said...

The average wage can afford the cheapest 50% of the market but not the higher 50%. Therefore, the average wage earner can comfortably afford a high end condo or just barely afford a low end SFH.

This is true for rents because rents are paid from incomes, not with borrowed money or capital transfers (bank of Dad).

But prices in Victoria (and in all of southern BC) have detached from rents - i.e. it's a bubble.

When prices return to traditional multiples of rents (i.e. the yield on housing exceeds fixed income), your hypothesis will be true for prices too.

patriotz said...

the median price in Vancouver would have to be $179,700. That kind of drop could destroy the economy for decades.

Well the 40% drop in the early 1980's didn't destroy the economy for decades, did it? Quite the opposite, it make it possible for industries like high tech and film production to grow because - gasp - their employees could actually afford to live here.

I find it sad and absurd that everyone understands that if, say, cars or computers got so expensive that nobody could buy one, or if energy got so expensive that nobody could drive or heat their house, it would be bad for the economy.

Yet ludicrously high house prices, which result in huge numbers of people taking on staggering debts, overbuilding of shoddy housing, and departure of productive - i.e. non-RE - jobs, are supposed to be a good thing? Lower prices are the solution, not the problem.

People have to get it through their heads that inflated asset prices are not a source of income, but are only an illusion of wealth. The US has been running on this illusion for a decade and is going to pay a very high price for it.

I tell you, that reality train, which started in San Diego and is currently passing through Seattle, can't pull into to this city soon enough.

wizardofozziejurock said...

Ah...the "reality train". I like that metaphor. A few of us bought our tickets a long time ago and we've been standing on the station platform waiting for that slow train a comin' for far too long. But come it will. In fact I think I can hear the distant chug-a-chugga right now.

condohype said...

Patriotz, I like your comparison of rising housing prices to rising energy costs. For some reason, unaffordable housing is "great" yet when transportation or energy prices go up, this is "terrible" news that harms growth and productivity and everything else.

The reality is that the high cost of housing severely impacts productivity and economic growth. Rising home prices might fuel the construction sector but it's only temporary. The long-term effects are negative. Wonder why the service sector can't find anyone? Isn't this supposed be the biggest growth area of B.C.'s future economy? Well, I'm not gonna count on it. Not because there isn't a market -- there is -- but because the wages the sector pays are so low that employees can't afford to live here. Those jobs, necessary for economic growth, thus go unfilled.

For middle income earners, the severe unaffordability of Vancouver means being ultra-aggressive in demanding salary increases that employers are reluctant to provide, so employee turnover is becoming more and more of an issue. In the last four years, I've switched jobs twice in order to "ladder" myself into better paying positions. Some of the firms I didn't mind working for but because of housing costs, I wasn't prepared to sit around and earn less than I could earn elsewhere.

Clarke said...

"Specifically, that for housing to be considered affordable based on income the median price in Vancouver would have to be $179,700. That kind of drop could destroy the economy for decades."

I agree with most posters that this would not be devastating by any stretch, and overall a healthy thing. I have one caveat.

There has been a lot of market activity during the current cycle, and the bulk of the buyers are local. Many of them have pushed the affordability envelope to buy. The collapse of prices will either nail people to the property they bought, compel them to take big haircuts if they are compelled to sell, or get their property foreclosed on.

A lot of people will face negative equity, and given the level of the correction, it could be a lot of negative equity.

Sam said...

Agreed. Basically, people who made foolish and greedy decisions, and were naive and ill-informed, will incur losses. Again, a healthy and fair outcome.

patriotz said...

The collapse of prices will either nail people to the property they bought

You're talking as though the collapse of prices is some kind of external misfortune for those buying during the bubble. If you think about it, it is the buyers themselves who are responsible for the inflated prices, and it is the inflated prices themselves which are responsible for the subsequent collapse.

If nobody were willing to buy at unreasonable prices, prices would be reasonable.

The buyers made their own bed, let them sleep in it.

Aleks said...

"The collapse of prices will either nail people to the property they bought, compel them to take big haircuts if they are compelled to sell, or get their property foreclosed on.

A lot of people will face negative equity, and given the level of the correction, it could be a lot of negative equity.
"

That's what I was thinking. A drop of that magnitude will not only put all of the recent FTBs under water, but also a lot of people who have taken out HELOCs or refinanced. The debt doesn't go away when the asset price drops. Ignoring whether they "deserve" that outcome, it's going to destroy a lot of people's finances.

Add that to the other things coming down the pipe, like the end of the construction boom, the end of the realtor boom, lower tax revenue to fund the public works construction boom, and the Olympic hangover, and it just looks pretty bleak. Maybe not for decades, but for years anyway, until forestry picks back up.

Sam said...

Ignoring whether they "deserve" that outcome, it's going to destroy a lot of people's finances.

A lot of silly people who gorged on credit so they could have it all now. This is natural selection.

We're going to have to figure out something to do in this province that actually creates wealth by being productive, or we'll be stuck in these cycles forever. But that aside, the creative destruction process that will wipe out the finances of people who overextended themselves is a good thing - it will burn their fingers and society will learn in time not to stick their collective tongue to the hot stove (to mix a metaphor).

We could analogize with the coal miners in the UK in the 80s. It was painful for them, but it was necessary to drag the economy into the 20th century. Now, the UK is suffering due to being overinvolved in finance. Still, they made shedloads the last 10 years, and if they'd stuck with pottery and coal mining they'd be a lot worse off, having not made all the money on finances in the meantime. The UK economy will dust itself off and get on with finance, pharmaceuticals, etc, while Canada is still digging holes in the ground and moaning about the end of the construction boom, crying "what next?".

Sam said...

Ironically, one of the only profitable, productive, sustainable industries in this province is weed. It doesn't consume any forests or drive to extinction any salmon, as it's solar powered. And it enhances the enjoyment of life for hundreds of thousands of people, providing insight, amusement, and perspective, all without any (significant) consumption of fossil fuels or any poor workers being exploited.

And it's the one major industry that's illegal and from which no productive taxes are generated.

Drachen said...

Bleed them 'till it hurts.

Maybe then when the next bubble rolls around people might have the sense to not get involved.

If they hadn't gambled it all away on housing they'd have gambled and lost somewhere else.

Fools and money.

patriotz said...

The debt doesn't go away when the asset price drops. Ignoring whether they "deserve" that outcome, it's going to destroy a lot of people's finances.

Yes but the debt doesn't go away if the asset price doesn't drop either. That's the real issue. Those buying now have locked themselves into debt servicing costs more than twice the yield on the asset. They've already destroyed their finances. That's a real loss of disposable income in the long term.

The longer prices stay high, the more people will get into this situation. People selling their properties at break-even or at a profit does not change anything in the aggregate. The debt servicing burden is just passed on to a greater fool. High asset prices are not a source of income.

This is what's killing the US economy and will kill the BC economy.

It just looks pretty bleak. Maybe not for decades, but for years anyway, until forestry picks back up.

Forestry will not start to recover until the US housing market recovers, and that's not before 2012. We are in for a much slower recovery than from the 1982 recession.

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