Saturday, May 29, 2010
Tuesday, May 25, 2010
British Columbia — Unaffordable and becoming riskier
Rapid price increases are quickly undoing last year’s improvement in affordability in British Columbia. In the first quarter, RBC affordability measures surged between 0.9 and 4.0 percentage points, by far the sharpest deterioration among the provinces. In the past three quarters, the measures reversed between one-third and one-half of their sharp drop in 2008 and early 2009. B.C. housing markets have been on a tear since last summer – with resale activity fully recovering to predownturn levels by the end of 2009 – although some signs of slowing have emerged since the beginning of this year. Nonetheless, the strong price momentum has continued largely unaffected in recent months, returning RBC affordability measures closer to their all-time highs in early 2008. Such poor affordability levels represent an element of risk for the province’s markets.
Risk - in real estate - say it ain't so.
Wednesday, May 19, 2010
One situation I have often come across quite often is the approach toward real estate ownership and financial risk management. The risks I speak of are common to all people: Death, Divorce, and / or a Loss of Income. One of these things can happen unexpectedly at any time and how you prepare for these events is of critical importance in your and your family's long term financial health. Relating specifically to real estate ownership, what happens to the family home when one of these risks turns into reality. How will the mortgage, taxes, maintenance, fees get paid?
Death - a common answer with a couple is "I'll just sell if Bill dies." or "We'll find a way to make it work." - a poor strategy to be sure and one frought with risks. What if the sale price is below what you need? What if it takes 6, 12, 18 months to sell? Where will you live? Will you be in any state to move and uproot in a time of emotional turmoil? Will you have the financial capacity and physical capability to make the necessary payments are do the necessary maintenance? Life insurance is a more appropriate strategy and the costs of that insurance should be added to the monthly budget.
Divorce - this clearly never happens to anyone and certainly isn't going to happen to the couple in front of me! "We'd just sell and split the proceeds." is the typical answer but this is also full of pitfalls. What if one person is emotionally attached to the property? What if one person wants to sell for much more than the other person and there is a stalemate about the sale strategy (very common)? Will you be in any state to move and uproot in a time of emotional turmoil? The key to managing this risk probably lies in the mate selection process but more practical advice would be that couples shouldn't overextend themselves beyond what either of them is comfortable taking on by themselves if it became necessary.
Loss of Income - Job loss or a disability can happen any time as well and despite the loss of income, the bank, strata, government still wants to be paid all at a time of diminished capacity to meet these demands. The common answer here again is "I'll just sell." but again will you be able to sell? Or more appropriately, will you be able to sell it quickly at the price you want? This is really the key question, since you can always sell your home if price isn't a consideration, but it always is. If you lose your job or become disabled, do you have enough of a financial cushion to make all of the necessary payments for 12 - 18 months or longer? Again, disability insurance can be helpful here but it is no solution for job loss. The best advice to to have a large cushion of savings that you can draw on if necessary. Retirement savings withdrawals are possible as long as you commit to replacing the funds as soon as possible so that you do not derail your long term retirement plans.
My impression is that people are very comfortable with the fact that in the past few years real estate has been an asset with good liquidity and rising prices so these concerns seem unfounded when coming from their financial planner, especially when their friends and family are able to sell their houses quickly and for more than they were asking. The question is, was that normal? Should we expect a much different market in the future with dramatic implications for personal risk management? Many people wonder how they can build up an emergency fund, savings or pay insurance premiums when they are stretched to the limit with mortgage payments. My advice is that you should get out of that situation as fast as possible because you may not be able to sell at the price you need.
Wednesday, May 12, 2010
Sunday, May 09, 2010
Those who remember my old blog will recall that booming population growth was shown to be nothing more than a myth. Population growth has indeed been positive. But it is very small relative to what was seen previously in BC.
The house price boom has been around about 10 years now. So, let's look at the 10-year population growth rate for BC.
See that little hook at the far right of the chart? That's as good as it gets. No boom.
To make this more stark, let's rank the decades.
Ouch. The 2000s are last among the previous 5 decades. The worst decade for population growth in 50 years. Nice population boom.
Now let's break that down even further into 5-year time periods.
There you have it. The last two 5 year periods are the worst two in the last 45 years. And 1995-1999 is in 3rd last place, to boot.
We had unprecedented construction levels and paltry population growth. I wonder who will be living in all those houses?
Wednesday, May 05, 2010
Our existing home sales and average price forecast for 2010 is largely unchanged since December 2009. We still expect 475K transactions to take place, with an average annual price
nearing $350K, an increase of 9% over 2009.
However, this hides an underlying shift occurring over the course of this year. While we anticipated sales and prices to be strong in the first half and to cool in the second half, we now expect this contrast between the two halves will be sharper.
A surprisingly robust economic recovery provides some offset in the form of higher employment and income, but a combination of factors suggests a weaker handoff to 2011 than previously expected.
One crucial factor is the supply side response (listings) to higher home prices. While it was slow to appear, it is now stronger than had been expected. Housing starts have also been slightly higher than anticipated at 200K units in Q1/2010.
While we previously expected the average home price to gain a modest 1.6% in 2011 (stagnating in real, or inflation-adjusted terms), we now expect a modest pullback of 2.7% at the national level, with 7 out of 10 provinces experiencing lower prices.
Tuesday, May 04, 2010
Active listings are increasing at the same pace as 2008.
Sales are still brisk but May could mark a turning point as it did in 2008.
Months of inventory is at the high side of normal and looks to be matching 2008. It will take a drop in sales to get to the extremely elevated levels of market distress we saw in 2008.
Correlation between MOI and price changes is extremely robust and we should be looking for price decreases through the summer if normal seasonal patterns hold up.
Monday, May 03, 2010
"...there was some discussion about whether Canada is in a real estate bubble. Everyone pretty much agrees about Vancouver, but here are a couple of points that were made about the national scene:
1. It is reasonable to claim that there is not a housing bubble in Canada because only certain areas are over inflated.
2. Vancouver's very high prices skew the national average and cause Canada to look worse than it really is.
One thing I think we can all agree on is that the US did have a housing bubble. Well I put together a spreadsheet that I feel shows that affordability is about as bad across Canada as it was in the US at their peak. It also shows that Vancouver is not skewing our national data any more than the most overpriced cities in the US were skewing their data. In order to measure affordability I used house price to personal income ratios. I compared the 20 cities used in the Case Shiller Housing Index to the 6 cities used in the Teranet Housing Index. The US data is from 2006 while the Canadian data is from 2009.
I think the following graph most clearly illustrates my point:
(Highlighting above is mine.)
Vancouver is the only Canadian city with a ratio over 9, while the US had 3: LA, San Fran and San Diego. Toronto is the only Canadian city with a ratio between 5 and 9, the US had 9 in this range. The under 5 range looks bigger for Canada but we have more population covered by our index than they do by theirs. The important thing is that the percentage of each nations population living in cities with elevated ratios is similar.The distribution and average ratios for both countries are almost identical.
These data would be less of a concern if sales volume were low but, based on the volume of sales in the past several years, we know a not-insignificant portion of the population have bought at high prices. In addition we know the make-up of personal debt in Canada has been trending into the "unsustainable" territory, throwing into serious question the argument that future income gains justify high prices, even in part.
Gird yer loins!