The Bear Cave

Update: I am awaiting the release of the Fraser Valley Real Estate Board and Greater Vancouver Real Estate Board statistics for the month of February and I will post when I get a copy and I am able to do my analysis for month end.



Hey, its time for the bear cave again. In the spirit of all things bearish we could talk about the following:

• How real estate prices must decline 20% - 25% so normal, hard-working people can afford to purchase a home.
• How yesterday's selloff on the market was really no big deal - at least to the bulls - because as all bulls know - all you need is unbridled optimism for the market to continue to rise. Forget about those fundamentals since it's just about the spin.
• How rampant speculation seems to be par for the course these days whether we are talking about real estate, stocks, mortgage backed securities, high-yield debt, etc?
• Whatever else has got your knickers in knot. Just don't ask me to untie them.

Worst risk to market? Subprime mortgages

The story quoted below appeared in the February 26 USA Today outlining some extremely serious credit problems in the US right now that are only just beginning to materialize. No, we are not immunized against these types of financial risks in Canada. Our economy is tightly intertwined with the US Economy and we have our fair share of "Subprime Lenders" here in Canada, including:
www.capitaldirect.ca
www.hometrust.ca
www.equitabletrust.com
www.mortgageintelligence.ca
http://www.mcapmortgage.com/products/prime.asp
http://www.firstline.com/access.html

I fully expect that we will follow the US market, perhaps not as deeply or as sharply, through this credit contraction and home price correction. As seen in the US, home prices merely have to not appreciate for a credit crunch to become a problem and the vicious cycle will start.

By Sue Kirchhoff, USA TODAY
WASHINGTON — Growing trouble in the subprime mortgage industry poses the greatest risk to financial markets right now, according to a survey of business economists to be released Monday. The forecast by the National Association of Business Economics (NABE), which polled 47 top economists, called the subprime sector a more serious concern than hedge funds, which came in second.
Subprime mortgage lenders provide higher-priced loans to consumers with impaired credit. Defaults and delinquencies among subprime borrowers have jumped since late 2006, and a number of lenders have shut down or scaled back their operations.
On Wednesday, for example, shares of subprime lender NovaStar Financial plummeted more than 42% to $10.10 after it announced a fourth-quarter loss of $14.4 million. Company officials said they weren't sure they'd post a profit in the next five years.
While the NABE finding illustrates concern about escalating problems in the subprime sector, it doesn't mean economists expect the difficulties to spark broader financial stress. Overall, they expect steady economic growth in 2007. "The outlook for consumer spending, which is the one that might be hit the highest by mortgage delinquencies and defaults, was actually revised upward," says Carl Tannenbaum, NABE president and an economist at LaSalle Bank.
The economists predict that the U.S. economy will expand at a 2.5% to 2.6% annual rate in the first half before accelerating to around 3% later this year. Growth is expected to average 2.8% for the year, in line with earlier NABE reports.
Housing will continue to be the biggest drag on growth. After five years of a boom market, housing starts have plunged in the past year.
The jobless rate, now 4.6%, is expected to inch up to 4.7%, the NABE says. Corporate profits, which rose by an estimated 19% last year after taxes, are projected to rise by a far more modest 5% in 2007.

More Apartment Supply for Surrey

More on Surrey Developments. Who is going to buy all of these condos?

Ooooh, ooooh, ooooh, I know, I know - - - - - IT'S THE SPECULATORS SILLY. Very few of these people are actually buying these units to actually live in them. Housing is not for living in, it's for investing dummy!

By Kevin Diakiw - Staff Reporter - Feb 23 2007

21- and 25-storey structures planned for 108 Avenue and West Whalley Ring Road. Two more huge residential towers are in the works for Whalley. Century Group Lands Corporation plans to build two structures – 21 and 25 storeys – at 108 avenue and West Whalley Ring Road. Total cost of the project is expected to be about $75 million. Located across the street from the Gateway SkyTrain station, the towers will contain a total of 452 suites. Graham McCollum, vice-president of development for Century Group Lands, said if all goes well, the buildings should be complete by 2009. The project proposal will go to public hearing Monday. It’s the second large project announced in the Whalley area in the past week. An 1,100-unit project was announced Monday, only a few blocks away on 108 Avenue. McCollum said the area is gaining market momentum. “This particular area is obviously an area in transition, so we want to be part of it,” McCollum said, adding access to SkyTrain was key in choosing the location. He predicts more development like it in coming years. “I bet 10 years from now, that area is going to look totally different than it is now,” McCollum said. The project is before Surrey city council Monday at 7 p.m.

More Developments:

Land rush in Whalley
By DHARM MAKWANA, 24 HOURS

Residents in North Whalley should get ready to welcome new neighbours. Quattro Phase One, a 140-new home development near Gateway Station, sold out in four hours, scooping up $36 million in the process. Homebuyers lined up hours in advance to lay claim to the Lower Mainland's least expensive housing project with units starting as low as $119,900. The 10-acre development has drawn so much attention that the second building will be fast tracked, giving priority to bidders who missed out on the first building. In total eight buildings will be constructed, offering units that increase in price at $10,000 increments.

City of Surrey Development Permits - SUPPLY, SUPPLY, SUPPLY

I was curious about how many development permits were issued and in process during 2006 in the City of Surrey so I did some data mining and discovered a few things:

1. There is a CRAP LOAD of development ongong and slated to begin here in the beginning of 2007 (over 11000 housing units in the City of Surrey).
2. 4000 units permitted in the last 12 months
3. 7300 units entered into the approval process in the last 12 months (not including approvals)
4. In North Surrey the story is Condos (over 3500, which does not include those currently under construction)
5. In South Surrey and Cloverdale the story is townhouses and yet more townhouses (3300 townhouses in development or slated for development in those two areas alone)
6. A surpisingly large number of senior's related developments (over 1500 units)

Note: Not all of those development permits applied for will be approved but I also did not go farther back than January 2006 to look for applications. Even assuming 1000+ units drop out of the process we are still looking at over 10000 units scheduled to be in construction or begin construction sometime in the next 12 months. I think the introduction of all of this supply will put some very serious price pressure on the market in the next 12 to 18 months.

THE 2007 BRITISH COLUMBIA BUDGET

From TD Economics - Released on February 20, 2007

HIGHLIGHTS

• Planning surplus estimated at $2.8 billion in FY 06-07
• Further black ink targeted over the next few years
• 10% personal income-tax cut the budget’s centrepiece
• Announced measures to address the affordable housing challenge

British Columbia’s Golden Decade continues at full throttle, .... Today, the government turned the spotlight on the province’s housing challenge, although many of the measures presented today will accomplish multiple aims.

Fiscal 2006-07 another banner year
Owing to a booming economy, total revenues stormed in $2.7 billion higher than planned .... Not all of the windfall flowed through to the bottom line, as the government booked an additional $900 million in spending, some of which was related to new measures announced today, such as the establishment of a $250 million Housing Endowment Fund. Meanwhile, with the risks to 2006-07 forecasts now having diminished, the government has scaled back its forecast revenue allowance by $550 million. If not used, the remaining $250 million cushion would transform the year-end tally to $3.15 billion, surpassing last year’s rosy performance and the highest on record.

Tax cuts to take a bite out of revenue growth
....

The cornerstone of this year’s budget on the tax side was an announced 10% reduction in personal income taxes for individuals earning up to $100,000, effective January 1, 2007. Although this tax cut was “sold” in the budget as a measure that will help defray the costs of home ownership, the implications are much broader. Indeed, at this threshold or lower, B.C. will surpass Alberta as the jurisdictions with the lowest PIT bill among the provinces. The measure is slated to save an individual earning $50,000 per year $315 and $864 for someone earning $100,000.

Other more modest tax reduction initiatives tabled today included an increase in the threshold for the First Time Home Buyers’ Program for property transfer tax exemption, a beefed up Home Owner Grant and sales tax rebate for the purchase of hybrid cars. Together, these measures are projected to shave about $1.5 billion from revenues.

Program spending is expected to increase by a moderate rate of 4% per year during the forecast period, with much of the increase front-end loaded into 2007-08. There were a slew of housing-related measures, including increased funding for shelter beds, a lifting of the shelter rate for individuals on social assistance and housing support for low income seniors. Still, the usual suspects – health care and education – were far from forgotten. In fact, new funding in these areas still accounted for more than half of the total new spending.

...

Tax supported debt
...

Bottom Line
British Columbia’s improving fiscal path, and falling debt burden, continue to increase its flexibility in confronting head on the province’s longer-term challenges – a fact recently supported by Moody’s decision to upgrade the province’s credit rating to AAA. While housing topped the headlines today, the environment is poised to become a dominant theme in future budgets. The good news is that taking measures to improve the environment – and at the same time dealing with the province’s Achilles Heel, weak productivity – are not mutually exclusive goals. The benefit to both areas of shifting the overall government revenue mix from income taxes to consumption taxes/user fees is case in point.

I don't comment much on politics because it tends to get emotional but I couldn't resist commenting on the BC Budget for 2007 because of the spin it has been given - making housing more affordable for BC residents.

Clearly, by allowing BC residents to keep more of their own money by reducing income taxes and the property transfer tax, it will free up more money to spend or save. They may decide to spend it on housing but they may not. Economically speaking, giving potential buyers or renters more money actually gives incentive for prices to rise, assuming demand will rise with the 'newfound wealth' we will all experience (a few hundred dollars a year is hardly worth writing about but every little bit counts)!

That said, if prices rise, supply should increase as well, providing some downward pressure on prices but I think we've already seen the supply situation explode so I'm not sure the budget will have any significant effect on the housing situation relative to these effects given the relatively minor nature of the tax cut. Assuming the the BC government knows that the BC housing situation is precarious on the pricing front, I am wondering at this point whether the government is going to try to 'take credit' for improving affordability in the future by positioning the budget this way.