Friday, February 20, 2009

BC Budget: Junky assumption

I didn't look at the BC Budget in too much detail, but something on the radio caught my ear. Sure enough, I confirmed it on this pdf on page 87.

The BC Budget hinges on the projected unemployment rate averaging 6.2% in 2009. Have a look at the January 2009 numbers here. The January number is 6.1%. Does anyone really think that we won't see that go higher in February and then farther up from there?

I think the budget projection is pie-in-the-sky. I would say a more realistic projection, given the construction sector dry-up, is 8.7% by the end of 2009, with an average of 7.5% for the year.

The 2010 projection is 6.0%. By then, most condos under construction will have completed. Construction employment will be back below historical averages. The Olympics will be over as well. Unless every other sector suddenly pulls up the slack, there is a serious risk of double digit unemployment rates. 6.0% is a total joke.

12 comments:

Van Housing Blogger said...

And no, a couple new bridges and roads will not help out too much. The scale of residential construction dwarves the employment effect of a bridge or two.

jesse said...

Unemployment is going higher because any time there is a sharp drop in employment, as happened in the past 2 months, higher unemployment is sure to follow after severances are used up.

The capital projects will help but it looks like their locations will not be matched by where the job losses are. Site C in the Peace hardly does wonders for Vancouver's employment situation.

It seems obvious to me the assumptions are valid until mid May of this year.

patriotz said...

It seems obvious to me the assumptions are valid until mid May of this year.

Just like Stephen Harper's assumptions were valid until October 14, 2008.

Been there, seen that.

Chad_MPNP said...

I just looked at a very new downtown (Georgia) 2 bedroom condo being sold for $430,000, apparently $100,000 below assessed... It's a beautiful unit and I didn't expect to find a brand new condo for $430,000, I'm just curious to know if you guys think this is fair value and if anyone would actually consider buying a place like this?

mohican said...

Obviously, they just want to get re-elected and then they will pull a 'hoocoodanode.'

Not surprising to anyone who has watched politics for any amount of time.

VHB - the infrastructure projects are big vote getters and they do provide some jobs but you are correct that the level of employment is dwarfed by the residential construction sector. The residential construction sector is currently undergoing to biggest contraction since the early80s and it is only starting.

Chad_MPNP said...

Just as a follow-up to my question, what do you all predict fair value will be in a year or two for a 2 bedroom condo downtown or Kits? $400,000 seems good but if everything is pointing to MUCH lower........

Warren said...

I'd agree that their estimate is pie-in-the-sky, but I notice they don't really provide participation rate numbers. Maybe they are assuming many older people will simply retire from the workforce.

That said, they (only) forecast a $500m deficit, while Alberta is talking over $1b. I can see BC going into debt between 1-1.5b for 2009, which is way above estimates, but the sky won't fall.

patriotz said...

Just as a follow-up to my question, what do you all predict fair value will be in a year or two for a 2 bedroom condo downtown or Kits?

I don't know how long it will take to get there, but fair value for any condo is 100-120x monthly rent, tops.

Houses got down to that multiple in the 80's.

Skye said...

@Chad - read back on this blog and vancouvercondo.info for information on calculating fundamentals. Nobody knows where the bottom is but if you ask on a bear blog, you're going to get told that buying right now is catching a falling knife. Look at this inflation adjusted chart and ask yourself what the trend might be based on the bubble.

http://www.nicholasmeyer.net/wp-content/uploads/2009/01/2008-price-graph4th-quarter.jpg

macho slob said...

Skye, "if you ask on a bear blog....."

Who'd be dumb enough to start a bull blog at this stage of the cycle???

veej said...

Chad

Fair value is a relative term. Fair in comparison to what? I stopped by a recent Omni auction where new units were being "liquidated" at 30-40% off. No one seemed to be curious as to 30-40% off what. What was really surprising is I walked across the street, I'm talking 100 feet, and units made by the same developer a year earlier were being re-sold by the misguided speculator who bought them for less than the auction units across the street by 30-40K. It was ridiculous. I stood at the entrance to the exact same unit priced at $370K after a few price reductions and watched people across the street lining up to pay considerably more. I just had to shake my head. Sheeple may be too kind. As to where that same unit will be in 2 years from now? I am anticipating 50% from the peak in May 2008.

patriotz said...

Fair value is a relative term. Fair in comparison to what?

Rents, of course, which is the market's price of what the shelter is actually worth.

Condos should be cash flow positive right from the point of purchase, all costs, with 5/35 financing. If you pay more than that, you will lose money compared to renting. Condos eventually become worthless. There really isn't more to it than that.