Why Condo Projects Going into Receivership will have a negative impact on the local real estate market.

In light of news this past week that 3 more condominium projects in the Vancouver area are being forced into receivership, I figured I'd pen my thoughts on why it will have a profoundly negative impact on the Vancouver real estate market. Here is the news story.

First, some debunking, as some people are claiming that because these projects aren't being completed it will put positive price pressure on existing inventory. This is a ridiculous statement for a couple reasons:
1 - the construction workers who were working on those projects are now working on other projects that will complete quicker;
2 - the Sophia, H&H, etc projects will be completed by the receiver at some point;
3 - the number of units we are discussing here is miniscule compared to the total number of households and available housing inventory in Greater Vancouver; and
4 - perhaps only 10% - 20% of the total number of units in question here was destined to be purchased by an actual owner-occupier so there is not a pent up demand for these housing units except for the pent up demand of the speculator to buy a new BMW. See quotes below.

Now lets talk about the main reasons these receivership proceedings will cause such a negative effect. There are two main reasons:
1 - speculators are going to get cold feet as they realize that risk is part of trying to make money in real estate - the days of putting your name down on any pre-sale and selling the assignment or completed condo at a highly inflated price are coming to a close. I figure that this may begin a 'rush for the exits' type of scenario where speculators begin clamouring over each other to get out of the market. This will flood supply at a time when demand is dropping. Econ 101 anyone?
2 - Psychology - this has a huge effect that is immeasurable but as it becomes apparent that the original pre-sale buyers at these projects will have lost their stake in the Vancouver real estate game many will question the wisdom of playing the game at all.

Here is some choice quotes from CBC News:

"When asked about buyers left scrambling to find a home because of construction delays, Eden said he believed most buyers were actually real estate speculators who would not need the homes to live in, and who know pre-sale agreements are always a risk.

The executive director of the Condominium Home Owner's Association, Tony Gioventu, agrees that buying pre-sale condos is a game of speculation.

But he says there are people who buy them who aren't in it for the investment and don't realize the risk.

"Normally, only between five to 30 per cent of pre-sale buyers plan to live in the condo once it's built, estimated Gioventu, "but those who aren't in it for the investment need to protect themselves."

If you are new then check out the comprehensive review post.

Bubblier than the Bubbliest

Well why not celebrate. Vancouver is the number 2 bubbliest of the bubbly cities in North America and the only one that is yet to pop. At an index value of 276 versus the peak index value for Miami of 279 why not celebrate since Vancouver real estate values will never fall and we will surely have rising prices for another 100 years thus taking over the top spot in short order and retaining that spot for eternity. Champagne will flow in the streets and we will pave them with gold because our real estate will be so precious that the very wealthiest of the wealthy will be the only ones to afford homes in Vancouver.

The fact that Miami prices have fallen 20% since that peak should in no way concern us because you know Vancouver has invincibility to financial turmoil and is a safe haven from all of those messy recessions and credit problems. Just ignore the developments going into receivership and the rampant speculation on pre-sale condos. Just ignore the rapidly growing inventory of unsold existing and new homes. Just ignore the collapse of the forestry, tourism and film industries. Don't worry . . . nothing to see here.


The index is normalized for the US$ / CAN$ exchange rate and is set to an index value of 100 in the year 2000. US prices are from the Case Shiller index values and Vancouver prices are from the REBGV Nominal House Price Index. Click on the chart to make it bigger.

Additional January 2008 CMHC Data

The January 2008 CMHC Housing Now report for the Vancouver / Abbotsford area came out today.

Here are some highlights that I found interesting.

Units under construction in (during some stage of being built):

• Entire Vancouver CMA = 25,598
• Vancouver City and Endowment Lands = 6,752
• Surrey / White Rock = 5,090
• Tri-Cities = 3,022
• Burnaby = 3,081
• Langley = 1,159
• Maple Ridge / Pitt Meadows = 1,221
• New West = 1,286
• North/West Vancouver = 1653

Completed but Unabsorbed Units (Vacant/unsold and complete housing units; I'm looking for these numbers to skyrocket this year and next as the number of completions begins to catch up):

• Entire Vancouver CMA = 1,407
• Surrey / White Rock = 430
• Langley = 199
• Maple Ridge / Pitt Meadows = 136
• Vancouver / Endowment Lands = 290

If you are thinking about buying a new home in any of these areas you should be able to put a lot of pressure on the developer to cut you a good discount because they are sitting on a higher level of inventory than they are used to. Of course I think you'll probably get an even better deal if you wait a little while longer.

US Home Prices

This chart is brought to you by the Mess That Greenspan Made and the S&P Case Shiller Index.



My goodness the prices just keep getting lower and lower. Let's just file this one under "You Ain't Seen Nothin' Yet."

Miami - wow. Los Angeles - whew - I'm feeling dizzy. Every single market is declining and many have just started but those steep curves for LA and Miami are something to behold.

Oh how I remember the days when the US housing bubble bloggers were being lambasted for saying that house prices were going to fall - many critics said it couldn't happen and that their area was different. Sweet vindication of their point of view only soured by the knowledge that real families are being financially ruined as we speak.

Coming soon to a city near you.

Tax-Free Savings Account—A Savings Plan for All Canadians

From the Federal Budget

Savings provide a means by which Canadians can invest in the future and improve their standard of living. For individual Canadians and their families, the accumulation of personal savings brings the security and peace of mind that come with the knowledge that funds will be available in the event of an emergency or for individuals to achieve their goals, such as starting a small business, purchasing a new home or a new car, or taking a vacation. In these ways, savings contribute to a higher standard of living for Canadians.

In support of the economic agenda set out in Advantage Canada, and to improve incentives for Canadians to save, the Government proposes to reduce the taxation of savings through the introduction of a Tax-Free Savings Account (TFSA)—a flexible, registered general-purpose account that will allow Canadians to earn tax-free investment income.

How the Tax-Free Savings Account Will Work

• Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
• Contributions will not be deductible.
• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
• Withdrawals will create contribution room for future savings.
• Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
• Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

The TFSA will provide a flexible savings vehicle for Canadians. Since not everyone is able to save each year, individuals who are unable to contribute $5,000 in a year will be able to carry forward unused contribution room to future years. In addition, in recognition of the fact that most people are likely to have multiple savings objectives at the various stages of their lives—e.g. to purchase a car, home or cottage—the full amount of withdrawals may be re-contributed to a TFSA in the future, to ensure that there is no loss in a person’s total savings room. In recognition of the fact that couples often make their savings decisions and plan for their financial security on a joint basis, individuals may contribute to the TFSA of their spouse or common-law partner, subject to the spouse or partner’s available contribution room.

Canadians will also benefit by being able to use the TFSA to start saving early for a range of needs they may have in the future. Many Canadians may prefer to use a TFSA to save for pre-retirement needs given the absence of tax consequences on withdrawals and the ability to avoid the use of RRSP room for non-retirement savings needs.

The TFSA will also provide seniors with a savings vehicle to meet any ongoing savings needs, something to which they have only limited access once they are over the age of 71 and are required to begin drawing down their retirement savings. Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA.

This is a fantastic new measure for many Canadians. It will benefit low income Canadians the most who may not realize a large benefit from RRSP tax deductions or who have government benefits clawed back because of their income level. It is also my hope that it will encourage investing and saving more than the current lacklustre level.