February 2008 Vancouver CMA CMHC Data

February was a busy month for developers in the Vancouver area. They started construction on 2,446 new homes and completed only 1,484. This pushed the number of new homes under construction in the Vancouver Census Metro Area to a new record high of 26,560.



The number of completed and unabsorbed homes continues to rise in the Fraser Valley markets of Langley, Surrey, Abbotsford, Maple Ridge and Pitt Meadows. The total number of unabsorbed new homes rose to 1,384 which is 24% higher than last year.

With the number of new homes that will complete soon and the number of unabsorbed units rising, one wonders why developers are starting construction on so many projects.

Cost of business rises in Vancouver

It's the most expensive city in Canada, according to KPMG study

Bruce Constantineau, Vancouver Sun, Friday, March 28, 2008

High real estate values have bolstered Vancouver's position as the most expensive Canadian city in which to conduct business, according to a KPMG study.

The study -- which examines 27 cost components and assigns a value of 100 to average costs in the U.S. -- said Vancouver's cost index has risen from 96.9 to 104.2 in the past two years.
Calgary is the second-most expensive Canadian business city, with an index that has risen from 94.7 to 102, while Chilliwack is third, with an index that has gone from 94 to 101.6.

MMK Consulting representative Glenn Mair, an author of the study, said high house prices and other real estate values continue to drive up business costs in Vancouver.

"Industrial property costs, construction costs and office leasing costs are all quite high in Vancouver as a result," he said.

Mair said Chilliwack's proximity to Vancouver has clearly driven up business costs in that Fraser Valley community, which also faces high real estate values and labour shortages that have driven up wages.

The study noted the strong Canadian dollar has taken away much of the business cost advantage Vancouver used to enjoy over Seattle. Vancouver's cost index is just 1.3 points lower than Seattle's but in 2006, it was 7.5 points lower.

"The strong increase in the Canadian dollar has really closed the gap in business costs between Canada and the U.S.," Mair said. "But even with the dollar at par, Canada can still be competitive with the U.S. because of some significant cost-competitive changes that have occurred in the past decade."

He noted federal and provincial cuts to corporate income taxes across Canada have been a major boost to businesses throughout the country.

The study said Canada (99.4), the U.S. (100) and Australia (100.2) are the business cost leaders among nine developed countries surveyed. Mexico, an emerging industrial country, had a business cost index of just 79.5 -- the lowest of 10 countries examined in the study.

Mexican labour costs were the lowest by a wide margin but Canada ranked much higher than Mexico on quality-of-life issues like health care, crime rates and education.

Germany (116.8), Japan (114.3) and Italy (107.9) had the three highest national business cost ratings in the study. The three countries face the added challenge of having the oldest populations -- having the largest proportion of citizens older than 44 and the smallest proportion under 25.

Drop in B.C. business optimism cited as omen for economy

Fiona Anderson, Vancouver Sun, Thursday, March 27, 2008

Business optimism in British Columbia is dropping and it could be a sign of a turn in the economy, according to the Canadian Federation of Independent Business.

B.C.'s business barometer, an indicator developed by the CFIB to measure optimism among small and medium sized businesses, works from a base of 100 set in 1988. It is now at 107.7, above the national average of 104.0, but the lowest B.C. has seen since 2003. It's also the second quarterly drop in a row.

And that's a concern, CFIB's vice-president for Western Canada, Laura Jones, said in an interview.

CFIB's barometer readings are often a leading economic indicator, predicting future trends, Jones said. That's because the survey goes to the source, asking business owners on the ground how they see the future.

"When the B.C. economy turned around in 2003, our quarterly business barometer was one of the first indicators out there," Jones said. "And sure enough, that ended up being the beginning of B.C.'s boom."

"If it's like 2003, this is the prediction of the turn," she said.

So this is not the time for the B.C. government to get complacent about the economy, Jones said.
"In B.C. we're so used to the economic good times it's hard to remember back to when there were bigger challenges," she said. "And there are bigger challenges."

Across the country, business owners in Prince Edward Island had the least positive outlook at 96.9. Even Alberta --which along with B.C. has led the country in business optimism over the past five years -- was below the national average at 102.8. Topping the barometer were Newfoundland and Labrador with a reading of 119.6, followed closely by Saskatchewan at 116.1.

Optimism also varied across industries, with a gloomy outlook in manufacturing, agriculture and transportation, while businesses in the finance, health care and education sectors saw a rosier future.

In B.C, more than half of businesses that responded to the survey said they expected their businesses to improve over the next 12 months, a drop from the 58 per cent that felt that way in December.

At the same time, one-third of provincial businesses surveyed expected to increase their number of full-time employees, down from 41 per cent.

Sixty-nine per cent of provincial respondents expected energy costs to continue to rise, up from 55 per cent in December.

That may be a reflection on B.C.'s new carbon tax, coming out in July, Jones said. "Energy prices are a huge concern for business owners and introducing a carbon tax into that mix certainly isn't instilling a whole lot of confidence," she said.

But across Canada, 71 per cent of businesses expected energy costs to worsen, even in the absence of a carbon tax. But Jones said B.C. businesses shouldn't be too pessimistic. "We are still higher than the national average," she said. "But the main message for government would be that this is really not the time to get complacent about the economy."

Case-Shiller Index

NEW YORK (Reuters) - Prices of existing U.S. single-family homes slumped in January, with 16 of 20 regions measured posting record annual declines, according to the Standard & Poor's/Case-Shiller home price index reported on Tuesday.

The composite month-over-month index of 20 metropolitan areas fell 2.4 percent to 180.65 from December, bringing the measure down 10.7 percent from a year earlier and 12.5 percent from its July 2006 peak.

"It shows that the housing correction is still under way," said Michelle Meyer, an economist at Lehman Brothers in New York. "The weakness is not contained to the bubble areas."
Home prices in Las Vegas and Miami fell the most of any region, at 19.3 percent year-over-year, while Phoenix, San Diego and Los Angeles also suffered double-digit drops.

S&P said its composite month-over-month index of 10 metropolitan areas fell 2.3 percent to 196.06 for an 11.4 percent year-over-year drop.

Keep this in mind - until home prices stop declining there will be no end to the financial crisis.

Navigating the Labyrinth

Here are a few photographs from my wanderings in California and points between. Glad to be back - sort of. It was a relaxing time and I would be lying if I said I didn't want to stay where the sun shines more than 2 months per year.

Maze of the Madness


Enveloped by Fog

Surrounded by Jellyfish

Last week was an interesting one on the markets and I haven't had time to fully digest what has happened. It also appears that, locally, real estate inventory is truly exploding upwards and the psychology is definitely taking on a more negative / realistic tone.

During my navigations, I observed that Vancouverites, among many other people around the world, are insular and feel that they are different from others, perhaps even granted immunity to worldwide problems. In reality, only a few miles away from our fair city, the realities of a recession and a collapsing housing market are on the minds and lips of the average person.

Wanderings

I'm going away to wander the countryside for a week or so with my wife and baby mohican. Baby mohican seems to be growing up quite fast - where do the days go?

Enjoy these pictures that I took while on a walk in my neighbourhood. All of these pictures were taken within 4 city blocks of each other and here I thought there was no more land left. Boy was I ever wrong!

Sorry about the quality but it was taken in low light with my camera phone.

There was another large vacant lot that was being cleared for 153 condominiums with the sales centre just getting setup. There was another 100+ lots being prepared with no for sale signs.

Five risk factors form the basis of investment returns.

From DFA Canada:


Evidence from practising investors and academics alike points to an undeniable conclusion: Returns come from risk. Gain is rarely accomplished without taking a chance, but not all risks carry a reliable reward. Financial science over the last fifty years has brought us to a powerful understanding of the risks that are worth taking and the risks that are not.


Three Equity Factors


1) Market
Stocks have higher expected returns than fixed income.


2) Size
Small company stocks have higher expected returns than large company stocks.


3) Price
Lower-priced "value" stocks have higher expected returns than higher-priced "growth" stocks.


Everything we have learned about expected returns in the equity markets can be summarized in three dimensions. The first is that stocks are riskier than bonds and have greater expected returns. Relative performance among stocks is largely driven by the two other dimensions: small/large and value/growth. Many economists believe small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.


Size and Value Matter



In US dollars. Developed markets value and growth index data provided by Fama/French. The S&P data are provided by Standard & Poor's Index Services Group. US Small Cap Index is the CRSP 6-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Small Cap index data: 1970-June 1981, 50% UK small cap stocks provided by the London Business School and 50% Japan small cap stocks provided by Nomura Securities; July 1981-present: simulated by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE Index countries, market-capitalization weighted, each country capped at 50%. MSCI data copyright MSCI 2005, all rights reserved. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Compound returns have an assumed rate of return, are hypothetical, and are not representative of any specific type of investment. Standard deviation is one method of measuring risk and performance, and is presented as an approximation.

Two Fixed Income Factors

1) Maturity
Longer-term instruments are riskier than shorter-term instruments.

2) Default
Instruments of lower credit quality are riskier than instrumentsof higher credit quality.

Dimensional approaches fixed income primarily as a strategy to maximize overall portfolio benefit. Shorter-term, high-quality debt instruments tend to have less risk. Dimensional engineers lower-risk bond strategies so investors can temper their total portfolio volatility or take more risk in equities, where expected returns are greater.

Vancouver CMA Housing Starts

Developers started construction on 2174 condos and townhouses in February. This, in addition to 272 single family home starts, pushed the number of homes under construction in the Vancouver Census Metro Area to another all time high.

773 of these starts were in Vancouver City.
745 of these starts were in Surrey.

Bring on the supply.

Home of Insanity

Whalley seems to be the home of insanity this spring. MLS # F2800307 is listed at a delusional $1 Million for the not-so-prestigious Whalley address. Here is the description:

Executive lifestyle living in this spectacular Penthouse, featuring panoramic views from every room. The professionally designed formal dining/living room will capture the most discerning buyer. The elegant gourmet kitchen, complete with granite counter tops, stainless steel appliances awaits a "Master Chef". Relax and entertain on the top of the world, on your own private, one of a kind, 1000 SF rooftop deck, complete with new hot tub, water feature, lighting and a spectacular panoramic views.

I am not sure what kind of views you are expecting but I don't call looking down onto King George Highway, the local Canadian Tire, and homeless people living under tarps in the local park a "panoramic view."

I have no idea what kind of 'executive' would want to live there but whatever company he/she is running - I'm running away!

Compare this Whalley condo listing with MLS # F2802965 a home listed in the Fraser Heights area of Surrey for $100,000 less. If I were in the market for a $1 Million home I would buy 4300 square foot home in Fraser Heights and buy a very comfortable vehicle for the extra $100,000.

Both homes are grotesque displays of overconsumption but value for dollar is certainly lacking in the Whalley condo. This type of price compression is typical near market tops where realtors persuade their clients to list at ever more ridiculous prices and detachment from market reality becomes pervasive. I mean really how many Whalley 'executives' are there. Is he/she going to commute on SkyTrain after walking past the drug addicts and the local McDonalds! I seriously doubt it. I'm really glad that the Whalley area is being cleaned up and that more people are going to live and work in the area but no 'executive' in their right mind would choose the condo over the home in Fraser Heights.

Abbotsford Condo Project goes Bust

Courtesy of CBC News.




Another residential development in southwestern British Columbia has been put on hold after failing to find enough buyers willing to shell out up to $1.1 million for the luxury condominium units. A 28-floor residential tower in Abbotsford, B.C. is on hold after the project failed to find sufficient buyers. Construction crews have abandoned the 28-floor Brio project in Abbotsford. It was advertised as the tallest residential condominium development to be built between downtown Surrey, B.C., and downtown Calgary

Real estate industry officials say the target market that developer Matsqui Land Corp. was going after didn't materialize in spite of inducements that included the use of luxury cars and valet parking.

"The average price for condos [in the Fraser Valley] is $180,000,'' said Jim McCaughan of the Fraser Valley Real Estate Board. "Brio was selling some for over $1 million," he said.
Only 20 of the 174 units were sold before construction stopped several weeks ago.

News that Brio is on hold follows reports that a handful of condominium projects in the Vancouver area have run into financial difficulty, leaving dozens of purchasers in limbo.
Two recent examples are the Chandler Development Group Inc.'s H&H Yaletown project in Vancouver and the Garden City building in Richmond, which are in the hands of a receiver.
However, Brio buyers appear to have emerged relatively unscathed, even though their dreams of living in a luxury condo may take more time to realize.

All of the presale Brio purchasers got their deposits back with interest, a project spokesperson told CBC News. However, the spokesperson was unable to say when construction will resume.
In order to speed development at Brio, construction crews were being offered catered food service.

The residential tower was originally scheduled to be complete by April 2009.
Apartments ranging in size from 670 square feet to 2,028 square feet were priced between $279,000 and $1.1 million for the top-floor suites.

$1.1 Million to live in a shady part of Abbotsford?!!?!! Nucking Futs . . . No wonder they couldn't find buyers. Demand exhaustion here we come. I mean really, who wants a 'luxury' condo in Abbotsford.

No matter what promises of a new paradigm and continued appreciation are made there comes a point in every bubble where people are UNABLE to buy the bubble item. The reaching of this point signals the end of the bubble and the start of the painful and precipitous drop to reality. Look out below.

February 2008 FVREB Data

The Fraser Valley Real Estate Board released the February statistics package today and here are the results of the sales and listing activity during the last month.

Sales were down 7% from last year. Listings were up 30% from last year. We are on a similar trend as US markets that have entered the decline stage already with listings increasing and sales decreasing it is only a matter of time. Months of inventory typically falls until April / May but in a cooling market at the limits of affordability we could be surprised at inventory levels that refuse to fall which would put a lot of pressure on prices.

Amazingly, prices were higher in all categories. I don't know where people get the money but they must be getting it somehow.

Year over year price changes seem to be levelling off in the 7-8% range. We saw a big increase in the Benchmark House Price Index during February with a 1.9% appreciation.

Months of inventory was 6.0 during February which indicates a fairly balanced market with not too much upward or downward price pressure. Any amount of supply greater than 7 is highly bearish and a sustained level above 6 is quite bearish.


These numbers blow me away. I did not expect sales to be as strong as they were proving once again that human behaviour is difficult to predict and that mortgage money must be still quite easy to come by. Oh well, the higher we go the farther we fall.

For comparison purposes here is a chart from Calculated Risk outlining the Months of Inventory for the US housing market. The Fraser Valley area looks comparable to February 2007 on this chart right now. If we see sales continue to slow and inventory shoot up during the spring months then we will see big price decreases by the end of the year just like the US did last year.

Markets Work

From DFA Canada:

Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk.

A Picture of Growth
Growth of $1

In US dollars. For the eighty years from 1926 to 2005, the compound annual growth rate of return was 11.77% for the Small Cap Index, 10.36% for the Large Cap Index, 5.50% for the Long-Term Government Bonds Index, 3.70% for T-Bills, and 3.05% for Inflation (CPI). Large Cap Index is the S&P 500 Index®; Long-Term Government Bonds Index is Twenty-Year US Government Bonds; T-Bills are One-Month US Treasury Bills; Inflation is the Consumer Price Index. Small Cap Index provided by the Center for Research in Security Prices (CRSP), University of Chicago. The S&P data are provided by Standard & Poor's Index Services Group. Bonds, T-Bills, and Inflation provided by © Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work of Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong stocks at the wrong time. Meanwhile, capital economies thrive—not because markets fail but because they succeed.
The futility of speculation is good news for the investor. It means that prices for public securities are fair and that persistent differences in average portfolio returns are explained by differences in average risk. It is certainly possible to outperform markets, but not without accepting increased risk.

Silly Skits

Reader "Matt" sent me these goofy videos. Enjoy.