Landcor BC Q1 2012 Report

British Columbia Q1 2012 Residential Sales Summary

Vancouver, BC - May 30, 2012  The regional BC real estate markets are collectively up a tree, staring at the danger below. The mood is a bit scared, a bit scarred, the euphoria of earlier broad-based gains long evaporated.   Branch-wise, some submarkets still maintain a decent grip, others not so much. Adding to the uncertainty, a weighty panda bear has climbed up in the tree too - the regional-centric yet deeply influential influx of foreign residential and resource-industry investment buyers.      The living-dead mess in the euro zone, knock-on worries in Asia, the usual suspects everywhere. Global, national and provincial economies shift in concert, the winds affect the whole forest and our relatively small yet overloaded tree sways and creaks. Hang on...    Click here to download the full report. (307 KB) For a hard copy of the report and more information, contact: Rudy Nielsen, President and Founder Landcor Data Corporation (604) 604.606.7914 info@landcor.com

The Home-Investment Duality

Similar refrains echo through my ears comparing real-estate-related articles in Vancouver to those cities with real estate booms in full swing in the US not seven years ago. Nonetheless after an uncharacteristic emotional outburst I had on Twitter regarding the mainstream media's failure to put forward with what I think a reasonable bearish argument for why Vancouver prices are too high, I was somewhat pleased to see the Vancouver Sun at the hands of Harvey Enchin dealing with the "home as an investment" mantra bearish RE bloggers have been highlighting for years now. A few excerpts from the Sun article:

Vancouver homeowners can be forgiven for thinking they've won the lottery.  

House prices have nearly tripled in the past decade and those who successfully timed the market have earned chortling rights. Long-term owners who bought their homes in 1987 for $200,000 could sell them today for $900,000 or more; a gain in the order of $700,000 or 350 per cent! 

But view those numbers like an investor would and a different picture emerges.

The article goes on to highlight a few issues with what property investors look at, including:

• Inflation adjustment
• Opportunity cost on downpayment
• Pointing to past bouts of house price volatility
• Changing asset liquidity
• Sales costs
• Capital gains tax exemption for owner-occupiers
• Financing costs

All valid points, though the summary at the end is interesting:

The notion that one's home is an investment vehicle rather than a consumption good is a relatively recent concept and it's not one that sits comfortably with many homeowners. People buy houses to settle down, start a family, raise children and become part of a community. It's where we conduct the business of living our lives. A house is more than a store of wealth, one homeowner opined, it is a store of memories.

Indeed that is what home ownership offers 70% of Canadian households. There is still, however, the 30% who rent, much of the stock owned by investors, so it seems that home ownership (not "one's home") as an investment is not a "relatively recent concept". Nonetheless it's interesting to see a reporter forage a bit deeper into the home versus investment train of thought and seemingly imply that some are, ahem, taking the home investment concept a bit too far without understanding the investment side too well.

So is a home an investment or just a place to live? Yes. It always has been; a house provides imputed rent, the net monetary value of the services a homeowner receives from a dwelling.

But the most important thing to garner from experiences in other countries and ours -- in all past real estate boom-bust cycles of which I'm aware -- is that investment returns, not homeowners' desires, eventually set the marginal price. I dealt with this concept here a few years ago if you want to understand the argument. In quick summary, investors receive no consumer surplus from ownership as would owner-occupiers, and will eventually set the marginal price of rental properties regardless of the surpluses placed by owner-occupiers, in part because investors make up a significant fraction of available property purchases in any given month (at least for certain property types*).

If you can get past that investors, not owner-occupiers, will set marginal prices, it then becomes incumbent upon all homeowners to understand what gives real estate its value in the long run. A simple, but reasonable, model is using discounted cash flows to estimate an investment's value, and a derivative of this model is validated by CalculatedRisk who shows price-rent ratios have reverted to their long-run average in the US. We should expect no different in Canada and Vancouver. (I outlined the model and derived its link to the price-rent ratio here, with a few caveats).

My advice, for what it's worth, is to get past this home-vs-investment mantra and look at investment returns, compare them to other similar investments available to investors, look critically at the actual risks property investments involve, and figure out why long-term returns in some US markets -- markets destroyed by 7 years of falling prices -- are finally starting to attract investor interest at price-rent ratios far lower than those broadly available in Vancouver.

(See my previous posts here and here for some cursory real estate investment calculations I've seen used by smaller-time real estate investors. In a future post I'll concentrate on the qualitative aspects of real estate investment risks, and how these risks are akin to a reverse lottery. For a sneak-peak at some of these risks and more important a view into how a property manager with years of experience views the current market and general issues surrounding residential property management (based in the GTA but still mostly relevant for Vancouver), I recommend reading Rachelle's wonderful posts over at LandlordRescue.)

* It is true that certain property types are heavily owner-occupied so the price-rent ratio and the concept of marginal investor pricing isn't valid for these dwellings, at least directly. However for the purposes of analysing property as an investment, leave these property types aside for a moment and consider markets with a more healthy mix of owner-occupiers and investors, say condominiums. If it turns out condos are heavily overpriced it is probable, though not certain, that property types with a high owner-occupier percentage will track condos towards lower prices.

Canadian Mortgage Market Primer and Some History

TD published a mortgage market primer (PDF) back in 2010 written by Eric Lasalle. Lasalle outlines some succinct information about financing methods and regulations surrounding Canadian mortgages, including differences to the American model, outlines some numbers in terms of the mortgage market size and composition, and comments on his take on the stability of CMHC and banks given this backdrop, all dated 2010.

Also an interesting read is the history of mortgage financing since World War 2 in chapter 6, written by James Poapst, from the CMHC-published book House, Home, and Community: Progress in Housing Canadians, 1945-1986.

This all is nerdy, but readable, stuff, for those who take it upon themselves to pronounce over what ails the current Canadian housing and mortgage markets. You know what they say about history...

CMHC Insurance and Tragedies

There is nothing worse than watching a tragedy in real life, better it be left to the theatre. Nonetheless I couldn't help but notice the site http://www.cmhc-class-action.com in which a person facing personal bankruptcy comes face to face with what a mortgage, and mortgage insurance, actually is:

I started this blog in the hope of hearing from people who are being raked into bankruptcy or poverty by the concealed  tactics of CMHC when a foreclosure takes place. 

I believe that when a contract is entered into, ALL the terms and conditions should be laid out so that both parties know exactly what is being offered and what the risks are. CMHC does not, and has never revealed to would be home buyers exactly what they do in the event of a foreclosure. this is in fact, a withholding of a material fact, a very important material fact that, I believe should void any contract with CMHC.

And it so continues. In a bout of my own moral weakness I decided, in my curmudgeon-like interests of batting a hornet's nest, I might respond. What follows is my response.

It’s a tragedy, perhaps, that you were allowed to make significant financial decisions with what I can only assume is pages upon pages of paperwork and contracts without obtaining better guidance; in most corporate environments a contract for a multi-hundred-thousand-dollar transaction would be scrutinized for days, the terms and conditions fully understood, and lawyers reviewing the contract for days to ensure there are no gaps. This is all done, most of the time, by people seasoned in the industry and understanding the implications of getting a single clause of a contract wrong. Not so with mortgages. 

Perhaps it is a tragedy that, when asked to sign a document that you did not fully understand, you deferred much of the due diligence to a lawyer who has to second-guess your level of knowledge of mortgage contracts. If you hadn’t any experience with them, perhaps spending a few more hours with him would have cleared up some misunderstandings. 

Perhaps it is a tragedy that friends and family did not countenance caution signing a complicated contract without understanding the obligations it places on you should unforeseen events occur. To that I hope they can all do some navel gazing of the sometimes harsh realities Canada, a free market economy, can mete on those who sign things they don’t understand. 

But above all else perhaps it’s a tragedy that it is considered acceptable for us to borrow vast sums of money multiples of our annual incomes without so much a thought for the “what ifs” if things should sour and asking those who have drafted and understand these contracts the difficult questions, like “So what happens if I miss a payment?”. 

This is other people’s money — not yours — and you should expect to be beheld to their prudent management of their assets, which in this case is a fraction of your earnings every month and superior rights on your other assets should you renege on your obligations. 

I hope your experience can be a lesson to others to understand not everyone — not least the government — is after your best interests, and more importantly not all those close to you are capable of offering you the proper and uncomfortable advice you so desperately needed in retrospect. 

jesse on Twitter

I comment on the local Vancouver housing blogosphere as "jesse", and thanks to mohican I post on this blog, and now on Twitter I use the account @YVRHousing. I usually cross-post items I pick up on blogs and newsfeeds on Twitter and reiterate my thoughts on the general state of the housing market, mostly on Vancouver but also, occasionally, on the North American, Asian, European and Australian housing markets, as these markets provide wonderful lessons and parallels to the local Vancouver market worthy of study and consideration.

Disclosure: I have no direct ties to any financial institution (indeed all data used for my analysis is in the public domain), am not remunerated for any of my online forays into housing analysis (as it were), and I am generally bearish on Vancouver housing. My views are my own; please value them for no more than you're paying for them (at least not without some critical thought)!

Please also check out who I follow on Twitter, more than a few great tweeters there who also follow Vancouver housing a bit closer than the average bear!