Vancouver: Fundamentals don't apply

The UDI (Urban Development Institute) had member lunch, some 1,100 attendees yesterday. The captains of the real estate industry gave speeches. The general consensus is that prices will be up sharply this year, as they have already surpassed pre-crisis levels.

The real estate market in any city does not stay down for ever. However Vancouver has shown itself to be quite resilient. The Vancouver real estate market corrected in September 2008 but had the shortest stagnation period of any city in North America. In fact, Vancouver has had the quickest recovery of any city in the World.

Its recovery can be attributed to several reasons.

1. Strong immigration to B.C. (Led by Chinese, the strongest growing economy in the world.)
2. Recovering U.S. economy. (Highly doubtful as explored in my previous post)
3. Recovering B.C. economy. (Supported by new immigrants but jobs and overall consumer spending continues to suffer.)
4. Inter migration to B.C. (Driven by favourable market conditions in B.C. and deteriorating market conditions at home)
5. The HOT money from Asia wants to be here. (Stable banking system, world’s best place for living, safe haven for refugees/criminals because of human rights laws)
6. Shortage of inventory for sale. (More buyers than sellers. Sellers market.)
7. Shortage of land. (Properties in prime location are limited.)

When it comes to Vancouver, fundamentals do not apply. After all, this is a market supported by people several times richer than locals. As long as the rich continue buying, it justifies the argument that this city is just that special and good times last.

Wall Street? You can't handle the truth!!

The world is in depression? Maybe so, but bankers are enjoying a large and controversial deluge of annual bonuses. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—"nearly two and a half times the previous annual peak in 2000."

Why? Indeed a good question. "Profitability," adds the state of New York, "has soared because revenues rose while the costs of doing business—particularly interest costs—declined" (in other words, thank you Federal Reserve). As most countries cut their interest rates, this runs true across the board.

Personally the bankers and related are heavily spoiled, and the industry is providing them with reason to be. Those in the financial industry are indeed highly mobile, can and will simply seek work for someone else if they are denied some ridiculous compensation. As such, they argue that record profits should equate to record compensation.

Laughable argument but let us evaluate what this really means.

Exactly where are these alternative job opportunities that warrant leverage for "outsized compensation"?

In case you haven't been paying attention, the "official" unemployment rate for the U.S. is 10% but the actual percentage of working-age people that have a job has fallen to levels last seen in the early 1980s. Of those who are of working age and not in prison (that is, available to work) only a smudge over 58% are employed - a six percent drop, roughly, since the hayday in 2006. Since numbers if interpreted corrected do not lie, that's roughly 98 million people who could be working but aren't. Beyond the "structurally unemployed", some 25 million people were added to the workforce from 2000-2009 yet not one of them actually became employed, while in the last 18 months some 9 million were fired. A very large percentage of those fired, along with many who entered the workforce, are highly-skilled individuals.

So exactly where are these alternative jobs for the "mobile" workforce?

Answer: Nowhere. A job is better than no job, whether you get a $5 million bonus or not. But that is no reason not to feed the greed by making up lame excuses for making 50,000 times what the average low-end worker makes per month.

As for the "record profits", despite what the quarterly report claims, they are simply a grand-scheme fraud to protect the public from mass hysteria and anger at the system.

Simple math. We'll call it "subtraction."

During the bubble years, hundreds of billions of dollars in Home Equity lines were written. A good number of these were securitized and sold off, but not all - there is a huge percentage of them sitting on these bank balance sheets. If the property is worth less than the first mortgage that they are behind, they have zero recovery value in a foreclosure.

This is one of the schemes that was promulgated by "mark to fantasy" accounting adopted in early 2009. These loans were worth nothing, being carried at dramatically above their actual market value, the homes collaterals would go into foreclosure and receive a fat zero recovery. This means that virtually every large bank is still insolvent, as none of these loans can be refinanced if the property is underwater and as a consequence the "recast date" is a hard wall that will force them to default.

Now let's ask the seminal question: What has factually changed about the character of these "assets" on bank balance sheets since March?

Here's the scorecard on the fundamentals behind the valuation of these "assets":

1. Home prices have continued to decline. That is, more homes today are worth less than their first mortgage than were in March of 2009.
2. The "skew", that is, where those declines have happened continues to be centered in Arizona, Nevada, California and Florida, just as it was.
3. Mortgage performance, that is, the percentage of loans that are current has continued to deteriorate. Indeed, it has deteriorated a lot since March of 2009.
4. The so-called "HAMP" program is a dismal failure, having led to fewer than 10% of the so-called "qualified trial mortgages" turning into permanent modifications. While everyone makes excuses nobody pays attention to the elephant in the room - the 2004, 2006 and 2007 warnings from the FBI, HUD and private credit analytics firms that about one in ten of these exotic loans were made to people who actually provided an accurate income. That is, nine in ten HAMP "modifications" are failing not because the program is defective in its design but because the person in the house could not ever and still cannot afford it.
5. The recast wall for OptionARMs is closer today than it was in March of 2009. A disproportionate percentage of HELOCs are behind these sort of tricky loans.
6. The labor rate (percent of employment-age people actually employed) has fallen 1.5% since March of 2009. That is, 3.6 million fewer Americans are working today than were in March - half of them by coming into the workforce anew, the other half as a consequence of losing jobs and dropping out of the workforce.

How is it possible for you to make "record profits" while your asset quality continues to deteriorate, payment performance continues to deteriorate, the ability of people to pay loans you gave them continues to deteriorate and the recovery value of the assets behind those loans continues to deteriorate?

You get to define "record profits" by intentionally understating both fair value and reasonably-expected losses. Major institutions are paying out "compensation" with what amounts to fake money that was in fact not earned (due to all the hidden losses) is almost precisely what Madoff did with his clients – albeit a much larger scale. Can someone spell ponzi? Maybe that word is too hard to learn.

Unfortunately, such a strategy is purely temporary as the underlying quality (or lack thereof) of the assets will eventually break light, forcing recognition. By then, these "earnings" will have evaporated, leading questions “Where have my money gone?”.

What really ticks me is bogus valuations that continue to be claimed by institutions and their refusal to come clean about the false profits being made. The fact that these institutions could escape such a levy by breaking themselves up and thus not being subject to it offers a positive. Broken up they would lose their seminal argument for why they should be "too big to fail".

We are past the point when we argue that allowing all of these institutions to go bankrupt would have destroyed the economy or lending generally. If any, it would have destroyed those who bought fraudulent securities and those who issued them, which is actually the only right thing to do.

When the FASB decided to (temporarily) suspend mark-to-market and replace it with mark-to-whatever-you need-to-make-your-quarterly-bonus, it ripped out one of the last pillars of true accountability.

The most common rationale for the move was the idea that banks shouldn't be penalized by short-term movements in the asset price, if their intention is to hold the loan until maturity. Sounds legitimate, until you look under the hood: no rational accountant would have allowed marking bonds at par, simply because of the plan to hold them until maturity. There's another issue at work, namely, the creditworthiness of borrower. Nobody believes these crummy loans are worth a hundred cents on the dollar, including the guy who just sold them for 35 cents.

Similarly, according to The Canadian Press, President Barack Obama said with reference to his proposed plans to impose a $90 billion tax levy on big financial institutions to recoup some of the costs of the financial crisis:

If the big financial firms can afford massive bonuses, they can afford to pay back the American people.

The $90 billion Obama will extract from Wall Street won’t even begin to shrink the monster deficit the Fed has run up. But that is a problem for the next administration (probably Republicans). Who said politics isn’t fun? As Obama’s assistant Rahm Emanuel put it, ‘Its a shame to let a good crisis go to waste.’

Now, do we live in a world of fools that none actually realize when market conditions are characterized by unfavorable valuations, overbought conditions, over-bullish sentiment, and upward yield pressures, the market’s tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere? I think not. Many simply live in denial, hoping to postpone the problems to such time in the future when they would not be around to suffer the consequence.

Everything is going to be alright

Mr. Bob Rennie has a message to tell everyone. He has put up a sign on his building in Chinatown that says "Everything Will be Alright". This sign is actually the work of British artist Martin Creed. The sign is clearly visible from the Georgia Street Viaduct when looking North.

This from Bob Rennie, BC Business magazine, 2 Sept 2009 -

“On the exterior walls of my new offices in Chinatown, I’ve installed a 23-metre neon work of art by Britain’s Martin Creed. It reads, EVERYTHING IS GOING TO BE ALRIGHT. And it will. Yes, we boomers are on the downward side of our peak earning years. Yes, we’ve experienced the biggest financial collapse in our lifetime. We will have to institute dramatic changes in how we entertain ourselves, where and how we travel, what we drive, where we live and how we ultimately pass on wealth to our children. For the enterprising business person, there are many opportunities out there to capitalize on this new reality. But for those praying for a return to yesterday, forget it. It’s gone.”

Just look at Dubai. Some dreams are gone.

Behaviour Finance in Property Market

News Link

May be dry for some, but may help you understand your cognitive dissonance and optimism.

Enjoy.

Real Estate Trends Could Impact Future Path Of Canadian Monetary Policy

TD ECONOMICS REPORT

Released today. It contains some interesting thoughts about monetary policy and the real estate market across Canada.

Real estate bubble and global crisis overview

It is no longer a surprise that following real-estate frenzies, home-owners, developers and major financial institutions end up seriously overleveraged in real estate and real-estate related assets. Credit ratings by major rating agencies are inadequate prediction of bubbles leading to underestimation of the risk involved in subprime and other mortgage instruments.
Ultimately, responsibility for the fate of many failed financial firms must fall on the CEOs who were blinded by the seemingly high profitability of financing the housing market and failed to control risk and leverage of their institutions.

The real estate market is a two-sided mirror, posing grave risk and dangers but also promising great returns when they do deliver. As history has shown, real estate boom leads to bullish stock markets, stronger consumer spending and growth in related industries. Who wouldn’t want a real estate boom?

However, the underlying principle to a sustainable and healthy economy and financial system is that prices need to be justified. Evidence should be readily available to prove the market value is reasonable and affordable by means of true demand and supply. True demand and supply are often hidden under the guise of profitability. It is important to recognize market manipulation, and effectively analyze the effect it has on demand and supply.

Dubai offers an example of things to come if a property bubble develops and then bursts. Dubai real estate, leaping skywards both physically and financially, enjoyed a final blowout in early 2008. It seemed an exciting alternative to wobbly stock markets for what investors' cash remained in the system. But after September, it all turned out to have been a Ponzi scheme in disguise. Dubai's trademark developers had been encouraged to sell off-plan sites low to create a feeding frenzy of "flippers" who sold unfinished properties to each other at ever higher prices.

Now leading in real estate price drop, Dubai real estate is down over 47% by the second quarter of 2009. Some of Dubai's most celebrated companies teetered on the brink of bankruptcy. Do I dare draw comparison to Canada? Multiple offers are back and there are hints of a shift to a sellers’ market. The financial crisis has pushed interest rates down to unthinkable levels but unlike US counterparts, Canadian mortgage credit is still flowing. Housing demand will be dampened if full-time employment continues to decline. The uptrend in part-time employment is not an effective substitute as far as housing markets are concerned. The condo-market is over-supplied. In contrast to the low-rise market, the number of completed but unsold condos is up sharply. Developers are resorting to large price reductions to move condo sales. New construction financing is hard to find. Securitization is still shut-down in Canada and bank lending terms and conditions are expensive for both condo and commercial real estate developers. In the commercial sector, office rents are declining and vacancy rates are rising. Existing tenants are downsizing in an effort to control costs and sub-lease space is up sharply.

The recession in US is likely over in August. The current stock market rally will not last and a second-guessing in global stock markets will probably be kicking in soon. While this should not signal an impending economic stall-out, it would be a reassessment of economic prospects. Note that there has been a discrepancy between stock market and bond market behaviour this summer. Stocks have reflected expectations of a robust V-shaped and a sustainable economic recovery. Bonds have been signaling slow growth and non-existent inflation risk.

Also note that consumer spending and inventories are currently growth drivers, having revived respectably in Canada and US. Unfortunately, inventory levels are still far too high in Canada and inventories will not provide an additional growth boost. Even though consumer finances and the retail outlook are in better shape in Canada, surplus inventories will dampen the initial upturn in output.

Employment, always a lagging indicator, would be helped by less extreme payroll downsizing. Yet faced with a balance sheet recession and the need to remain solvent, companies might continue to cut payroll headcounts and reduce per-worker wage levels, albeit a more comfortable pace.

Canada’s current account balance of payments deficit is running at $44.8 Billion (annualized). This is 3% of GDP, back to the early 90s levels. Normally a C/A deficit this large would be bad news for the CAD as the foreign exchange market does not appreciate C/A deficits this large. However, the CAD has been rising as there has been a big increase in net capital inflows that has more than offset the increase in the C/A deficit. However, the surge in net capital inflows is likely to be temporary while the C/A deficit could be longer term. This translates to downside risk for the CAD as foreign investors might not be as willing to invest heavily into Government of Canada bonds when they realize how far Canada’s government finances have deteriorated (Budget deficits for next 5 fiscal years).

Canada’s leading economic indicator index is not as robust as the US index. More of concern is the decline of Canada’s exports of goods , some 35% over the 12 months ended July. Exports of energy products, down 50% year to year are the largest losers. Given the large continuing surplus in natural gas markets, and historically low natural gas export prices, Canada’s trade performance in energy is unlikely to improve anytime soon. Looking beyond the government induced jump in US auto sales, Canada’s export outlook for automotive and industrial products also remains soft. Job market weakness may therefore rein-in consumer spending growth and home sales. The August increase in employment was entirely attributable to part-time hiring.

Meanwhile, the US economy is growing again but the “recovery” is misleading. Full employment would be delayed until 2013 with improvement in economic conditions hard to detect. Many lagging indicators such as bankruptcies and bank failures will continue to give negative signals. GDP and growth rates have been positive with strong federal government spending and a swing to inventory accumulation. Consumer spending has stabilized. Auto sales, a major industry, will decline rapidly. Residential construction activity is beginning to edge higher while house prices stopped declining in many cities. Business capital spending is also inching higher. Export numbers are at their highest level since last December.

Domestic spending is providing an increasingly important economic boost in the emerging economies. China, being on the center stage is showing huge year to year gains in crude oil consumption and industrial production. Meanwhile China’s exports are running 20% below year-earlier levels. Motor vehicle market in China, India and Brazil is now running well in excess of the trend in US market. As such, unemployment is declining in emerging economies.

The mature overseas industrial countries are beginning to join the emerging country recovery with Germany and France recovering earlier than expected. Starting with noticeable improvement in export order, economic conditions are stabilizing and confidence is improving both for consumers and businesses. This has led to a higher floor for a wide range of commodity prices. Energy and oil are still at desperate levels reflective of weakened demand from US markets. Meanwhile Gold has broken the $1000 mark as nickel and copper are setting new heights, a clear indication that inflation is in progress.

The Brooks - Canad's Greenest Condo Building

The Brook is a collection of ultra-modern, luxury condos on target for LEED Platinum certification.

It features high-efficiency geothermal technology to heat and cool the building, solar thermal hot water, heat recovery ventilation systems that constantly circulate fresh air throughout each unit, water recycling andlow-flow plumbing fixtures. These reduce consumption of greenhouse gases by 87 per cent, municipal water by 83% and energy by 70%.

Delivering Urban living in a suburban setting residences have open floor plans, nine-foot floor-to-ceiling glass window walls, charcoal grey cream polished concrete floors and cut oak cabinetry.

The kitchen is state-of-the-art and the spa-like master ensuites have extra deep soaker tubs, separate walk-in showers and Han Grohe fixtures.

It sets the platform for a greener and more environmentally-conscious lifestyle.

Outlook on Canadian Commercial Real Estate

PriceWaterHouseCoopers bearish on Canadian commercial real estate

“The credit crisis and ensuing recession have dragged commercial real estate markets into very trying times, marked by value losses, rising foreclosures, and reduced property revenues,” says Frank Magliocco, partner and leader of PwC’s Real Estate practice in Canada. “There is simply scarce money and therefore limited buyers.”

“Owners need to immediately implement monthly or quarterly cash flow reviews to understand exactly what their short-, medium- and long-term capital needs are and, perhaps even more importantly, immediately identify what options are available to overcome inevitable refinancing hurdles,” notes Magliocco. “In some cases, a formal restructuring process, equity injection or other non-traditional strategy may be beneficial.”

Furthermore, certain owners of CRE should consider divesting non-core or underperforming properties as a means to generate cash or capitalize on growth. On the other hand, well-capitalized investors may want to see if value can be extracted from the downturn via opportunistic acquisitions.

How can I be surprised? Businesses are suffering because of the weakened economy and will likely suffer more with hyper-inflation. Better to be prepared and bearish than optimistic and bull----- crap.

You might also be interested to know:

Canadian companies scaling back on investment plans

Canadian construction employment dropped by 18,000 in July

Daily Commercial News: Employment in Canada declined by 45,000 positions in July, with construction employment decreasing by 18,000, bringing total losses in that sector since October to 120,000, according to numbers released today by Statistics Canada. The national unemployment rate remained unchanged at 8.6 per cent, as fewer people participated in the labour market. There were increases in retail and wholesale trade jobs (+24,000), while employment in manufacturing was little changed in July. Most of July’s employment losses were in Quebec (-37,000), as well as in Saskatchewan (-5,000) and Newfoundland and Labrador (-2,800). Employment was little changed in all other provinces. Employment in Ontario edged up in July as continued declines in construction were offset by gains in the services sector, StatsCan said. Since the start of the downturn last fall, employment has decreased by 2.4 per cent at the national level, with the largest declines in Ontario (-3.3 per cent), Newfoundland and Labrador (-2.8 per cent), British Columbia (-2.7 per cent) and Alberta (-2.4 per cent). Nationwide, young people bore the brunt of the downturn, with employment in July among those aged 15 to 24 dropping by 38,000 and by 23,000 among women aged 25 to 54. Since the peak in October 2008, employment among those aged 15 to 24 has decreased by 205,000 and by 201,000 among men aged 25 to 54. July’s unemployment rate for students climbed to 20.9 per cent, a 7.1 percentage point increase from July 2008. This was the highest July unemployment rate for these students since comparable data became available in 1977, StatsCan said. Employment among private sector employees fell by 75,000 in July, bringing total losses since October to 436,000. But this was offset by the number of self-employed, which increased by 35,000 in July. Since October, self-employment has risen by 75,000, mostly in finance, insurance, real estate and leasing; professional, scientific and technical services; and “other services,” StatsCan said.

As predicted, as the Olympic projects approached full completion, there will be less and less demand for construction works.

Recently, there has been so much discussion about the HST coming out next July, those in the construction industry has reflected their priority to rush projects to be completed before. the HST dateline So after next July, there will be huge drop in both construction employment as well as real estate prices.

One good thing for developers if they can complete the project before next July, they can pay off the GST first at 5% and hold off till after HST is in place to put up the properties for sale at either the price before tax adjustment or at a higher price. Either should benefit the developers.

The New HST - 12% sales tax

The newly proposed HST, which will result in a harmonized sales tax of 12 per cent as of July 1, 2010. Among others, the proposed HST will affect the buying public. Consumers will have to pay a higher tax on new houses, a higher tax on renovations, and a higher tax on REALTORS’® fees and other real estate related fees like notary services, home inspections and appraisals. In other words, the HST will result in a significant increase in cost to the real estate buying public.

The HST will remove more than $2 billion in costs for businesses. It will also mean consumers will be paying an additional 7% for goods and services previously exempted from PST. The only bright side if any, harmonizing the sales tax system simplifies our overly complicated tax system. So Gordan Campbell decided that the HST eliminates the PST on business inputs, things like machinery, equipment, and supplies, and that will make B.C. a more competitive place to invest. That will attract new investment and help make existing businesses more competitive and productive. That will boost the provincial economy over time. Lower business costs and more productive companies should eventually lower prices to consumers and mean more jobs and higher wages.

Now my problem with this new regulation is simply one of timing. We are undergoing one of the worst times economically and recovery not certain. Is this really the right time to be throwing in higher taxes? Ultimately, taxes are paid by people, not businesses -- business taxes are hidden in the cost of products. Even if this reform creates a more transparent tax system and make the government more accountable to the public, it is hard to imagine the Canadian public being at all appreciative of bearing the higher costs of living. I don't even want to begin pointing fingers on how tax-payers money is being wasted and misused. If you need a clue, Winter Olympics is coming.

HST - Another case of hypocrisy

June Greater Vancouver Stats

July 3, 2009 - June Stats

Market conditions drive strong June housing sales VANCOUVER, B.C. – July 3, 2009 – The combination of low interest rates and more affordable pricing helped propel Greater Vancouver home sale numbers to the second all-time highest total for the month of June. The Real Estate Board of Greater Vancouver (REBGV) reports that sales of detached, attached and apartment properties increased 75.6 per cent in June 2009 to 4,259, from the 2,425 sales recorded in June 2008. The figure is just short of the record-breaking 4,333 sales which occurred in June 2005. New listings for detached, attached and apartment properties declined 17.9 per cent to 5,372 in June 2009 compared to June 2008, when 6,546 new units were listed. However, new listings increased 13.5 per cent from May to June of this year. Total active listings in Greater Vancouver currently sit at 13,252, down 27 per cent from June 2008 and 2.9 per cent below the active listings count at the end of May 2009. “Price reductions and low interest rates have created an improvement in affordability, which is causing the number of sales to rise to levels comparable to 2003 to 2007,” Scott Russell, REBGV president said. “Many people who were reluctant to purchase a home last fall and earlier this year are returning to the market because they see conditions that appeal to their personal and financial needs,” Russell said. “However, the current marketplace is such that buyers are more inclined to walk if they don’t like the terms of an offer.” Residential benchmark prices, as calculated by the MLSLink® Housing Price Index, declined 8.2 per cent to $518,855 in June 2009 compared to June 2008. The number of sales of detached properties increased 81.6 per cent to 1,667 from the 918 detached sales recorded during the same period in 2008. The benchmark price for detached properties declined 8.4 per cent to $701,384 in June 2009 compared to June 2008. The number of sales of apartment properties in June 2009 increased 69.3 per cent to 1,790, compared to 1,057 sales in June 2008. The benchmark price of an apartment property declined 8.2 per cent from June 2008 to $356,880. The number of attached property sales in June 2009 increased 78.2 per cent to 802, compared with the 450 sales in June 2008. The benchmark price of an attached unit declined 7.3 per cent between June 2009 and 2008 to $441,620. BRIGHT SPOTS IN GREATER VANCOUVER IN JUNE 2009 COMPARED TO JUNE 2008: Detached: Burnaby up 109.7 per cent (151 units sold from 72) Coquitlam up 122.2 per cent (160 units sold from 72) Delta - South up 107.7 per cent (56 units sold from 27) Maple Ridge/Pitt Meadows up 54.3 per cent (162 units sold from 105) New Westminster up 104.8 per cent (43 units sold from 21) North Vancouver up 96.2 per cent (153 units sold from 78) Port Moody/ Belcarra up 120 per cent (33 units sold from 15) Richmond up 77.4 per cent (204 units sold from 115) Squamish up 107.7 per cent (27 units sold from 13) Sunshine Coast up 33.9 per cent (75 units sold from 56) Vancouver East up 71.2 per cent (238 units sold from 139) Vancouver West up 85.2 per cent (200 units sold from 108) West Vancouver/Howe Sound up 117.8 per cent (98 units sold from 45) Attached: Burnaby up 81.8 per cent (140 units sold from 77) Coquitlam up 80 per cent (54 units sold from 30) Maple Ridge/Pitt Meadows up 48.6 per cent (55 units sold from 37) North Vancouver up 121.2 per cent (73 units sold from 33) Port Coquitlam up 82.6 per cent (42 units sold from 23) Port Moody/ Belcarra up 77.3 per cent (39 units sold from 22) Richmond up 84.5 per cent (155 units sold from 84) Vancouver East up 118.5 per cent (59 units sold from 27) Vancouver West up 121.8 per cent (122 units sold from 55) Apartments: Burnaby up 60.4 per cent (239 units sold from 149) Coquitlam up 93.9 per cent (95 units sold from 49) New Westminster up 57.1 per cent (121 units sold from 77) North Vancouver up 71.4 per cent (120 units sold from 70) Port Coquitlam up 58.1 per cent (49 units sold from 31) Port Moody/Belcarra up 128.6 per cent (48 units sold from 21) Richmond up 54.1 per cent (225 units sold from 146) Vancouver East up 58.7 per cent (165 units sold from 104) Vancouver West up 87.2 per cent (627 units sold from 335) West Vancouver/Howe Sound up 155.6 per cent (23 units sold from 9)

Chinese Drywall Creating Crisis

TheStar Article Bob Aaron The issue of toxic Chinese drywall may well become the biggest environmental crisis to hit North American homeowners and builders in decades. The defective Chinese drywall emits toxic hydrogen sulphide, sulphur dioxide and other gases. It is believed that humidity in the air causes the sulphur in the drywall to off-gas, or migrate into the indoor air. This creates a noxious odour, and can result in serious health conditions and illnesses, such as breathing problems, eye irritation, fatigue, dizziness, insomnia, sore throat, bloody nose, and headaches. When the sulphide gas comes into contact with normal home humidity, it gives off a rotten egg smell, and begins to corrode any exposed copper or lead in the home. Affected homeowners have reported blackened and scorched wiring behind wall plugs and switch plates, and corroded evaporator coils on air conditioning units. Light bulbs and fixtures may also stop working. Appliances and other electrical equipment may fail prematurely, and personal jewelery and silverware as well as the wiring in cable televisions and converters can turn black. Hundreds of millions of sheets of the defective drywall were imported into the United States between 2001 and 2007. It has been reported in as many as 14 states, and may have been used in an estimated 100,000 renovated and newly-built homes, with up to 40,000 in Florida alone. In addition, an estimated 929,000 square metres arrived in Canada through Vancouver in the same period. Much of the product imported into Canada was used in the lower B.C. mainland, but some may have reached the Prairies and as far east as Toronto. In addition to being used in new construction and renovations, a huge amount of the Chinese drywall was used to repair thousands of homes damaged by Hurricanes Katrina and Wilma in Louisiana, Mississippi, Florida, and Texas. Sadly, many will have to be rebuilt a second time. One prevalent theory about the toxicity in the drywall is that it was manufactured in gypsum mines in China using fly ash, a by-product of coal-powered electrical generation. Coal fly ash can become airborne and emit toxic sulphur compounds. (Coincidentally, defective fly ash was the critical ingredient in ready-mix concrete used in the crumbling foundations of hundreds of homes in Eastern Ontario. This resulted in 16 years of litigation, almost $20 million in damages and another $20 million in court costs.) Several lawsuits and class actions, including one by a group of Florida homeowners, have been launched against German drywall company Knauf Gips KG, a Chinese subsidiary and a number of American home builders. The Environmental Protection Agency, the federal Consumer Product Safety Commission and the Florida Department of Health in the United States are all investigating the extent of the problem. In the United States House of Representatives, the Drywall Safety Act was introduced in April. Currently under study in a House committee, it would mandate a recall of drywall imported between 2004 and 2007. Houses built or renovated with contaminated Chinese drywall cannot be repaired. The only possible fix for affected homes is to have the owners move out for several months, gut the house and rebuild the interior. Anything inside the house that may have been contaminated by the sulphur gases will also have to be destroyed and replaced. Industry watchers have estimated that as few as three sheets of drywall in a house can be enough to contaminate it to the point of making it uninhabitable. House insurance policies do not normally cover environmental issues, and there have been reports of some home insurers refusing to pay for replacement of drywall. In cases like these, homeowners could be facing financial ruin. Thomas Martin, president of America's Watchdog, says the crisis is "the worst case of sick houses in U.S. history." The full effect of the Chinese drywall crisis in Canada remains to be seen. If you suspect you have this product in your home, consult an environmental engineer or qualified home inspector.

Mass hysteria, paranoia or just the ugly truth behind the walls? Meanwhile, the Chinese will continue to bear the tarnished reputation of being unethical, corrupted and will-do-anything-for-money.

Property Woes Slam Cities Across Continent, But Not Vancouver

WSJ: Property Woes Slam Cities Across Continent, But Not Vancouver In most cities in the U.S. and Canada, sales activity has frozen to a standstill. Would-be sellers are unwilling to accept the steep drops in value of office buildings, shopping centers and other commercial property. Even if they were, buyers can't get financing. But then there's Vancouver, a city of about 578,000 people with views of the Pacific Ocean and the Coast Mountain range. Its office market has logged seven building transactions this year capped off by Germany-based Deka Immobilien's recent $263 million purchase of Bentall V, a 33-story tower in the heart of the city's district. Just as impressive, prices have held up well. By contrast, only five office properties valued at $5 million or more have sold in Manhattan in the first two quarters of this year, and average prices paid are off 32%, according to Real Capital Analytics, a New York-based real-estate research firm. So what gives? First of all, Vancouver's office market hasn't suffered the sharp increase in vacancies seen in most other cities. Vacancies are ticking up and putting pressure on rents. But the diversified economy, driven by a mix of companies that include mining, lumber and port-related businesses, and a lack of significant new construction leave it better positioned to weather the stormy global economy, brokers say. The first-quarter office vacancy in downtown Vancouver was 4.2%, below downtown Toronto's 5.7% and downtown Calgary's 6.9%, according to CB Richard Ellis. "It's quite incredible compared to the rest of the country," says David Eger, senior director with the Toronto-based Altus Group. Such a high volume of sales is unusual for Vancouver, a city where small investors and pension funds are known for buying and holding properties. The seven office transactions that took place this year through May in downtown Vancouver, a city with a total of about 21 million square feet of office space, compared with two transactions in the year-earlier period, according to CB Richard Ellis. But amid the global financial crisis, institutions have looked first at properties that have retained value as a less painful means of unlocking equity in their portfolios. The seller of Bentall V was SITQ Vancouver Inc., a real-estate subsidiary of Canadian pension fund Caisse de dépôt et placement du Québec. SITQ says it wasn't under pressure to sell the building and only did so after getting an unsolicited bid. "We made a profit. That's why we sold it," says Amelie Plante, an SITQ spokeswoman. "It was very satisfying." Buyers in Vancouver have included Canadian pension funds and private investors, CB Richard Ellis says. Deka Immobilien Investment GmbH is a real-estate asset manager and a subsidiary of the DekaBank Group. The seven deals this year have had a total value of C$502 million (US$449 million). By contrast, Manhattan, with some 1.6 million residents and about 366 million square feet of office space, saw the number of large office transactions this year through May slip to just five deals valued at a total of $984 million, from 45 sales in the year-earlier period, according to Real Capital Analytics. The average price paid per square foot in Vancouver this year fell just 2% to C$355 from the year-earlier period, compared with a 32% drop in Manhattan to $451. The Bentall property sale price also has given hope to area sellers worried by deep discounting seen elsewhere. The nearly 100%-occupied building sold for a price that equates to a capitalization rate in the 6% range, just slightly higher than the 5.5% range it might have traded at during the height of the market a year or so ago, according to Jim Szabo, executive vice president with CB Richard Ellis, which represented Deka Immobilien in the transaction. Cap rates are closely watched valuation metrics in the commercial real-estate industry derived by dividing a building's net operating income by the price paid.

Meanwhile, CGA study finds Canadian foolish with money, which leads me to question whether Vancourites are actually smarter than the other Canadians as a result of lifestyle.

Underestimating the Pool

Whether it is the surreal strengthening of the Canadian Dollar, the sharp rebound of BC's real estate sales or the liquidity-driven stock rally, there seems to be this apparent contradiction between the gloom in the real economy and the exuberance being experienced in the market to know when to jump in.

The market has so quickly stabilized or so it seems, as a result of the following factors:

1) The irresponsible financial entities around the world have been pulled out of near collapse by the infusion of US and European tax-payers money. You do not need to print money to be deep in debt.

2) Interest rates around the world have been slashed to near zero to stimulate spending and free up credit lending.

3) Commodities (especially oil, gold and copper) has gotten a boost(inflationary pressure), and that has helped mining and oil producers. However natural gas for which provide the Province a huge % of it's revenue has continued to drop.

4) The normal seasonal bounce in housing sales that occurs in spring.

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There are really quite a few indications that we are still in midst of a bear market.

My sources tell me that foreclosure numbers have jumped considerably in BC, and the reason why these numbers have not been publicized is because there is a 6 months redemption period in which companies or individuals in debt can try to find a way to repay their liabilities. To spell it out, sometime in September or October, the redemption period will be up, foreclosure news will explode and it is not hard to imagine a market correction once again.

While I marvel at some of the nearly completed RAV lines, I remember that soon there will be an overload of workers without new projects. Since most workers are renters, the rental market will most likely take a hit. If you need to renew a lease, you need to pick your timing well.

Employment is likely going to be weak for some time. The job-buying program of both the US and Canadian governments is yet to have any appreciable affect. Deficits are growing which warrants attention. Murphy's law suggests that there will be a correction coming, if so, then this is nothing more than the calm before the next storm.

Now, the doomsday philosophy is really based on the assumption that the supply of morons or suckers or gamblers will eventually run dry. Yesterday on the Vancouver Suns, Vancouver's landmark Bentall 5 building sells for $300 million. Well...... the pool may be deeper than I expected. Or perhaps, I did overestimate humans.

REBGV May Statistics

June 2, 2009

Increased demand steadies housing market in Greater Vancouver

A continued increase in buyer activity over the last four months has resulted in increased home sales and lessened the downward pressure on housing prices in Greater Vancouver.

The Real Estate Board of Greater Vancouver (REBGV) reports that the number of residential property sales in Greater Vancouver totalled 3,524 in May 2009, an increase of 17.4 per cent from the 3,002 sales recorded in May 2008, and an increase of 18.9 per cent compared to last month.

Since the beginning of the year, the MLSLink® Housing Price Index (HPI) benchmark price for all residential properties in Greater Vancouver has increased 4.5 per cent to $506,201 from $484,211. However, home prices compared to May 2008 levels are down 10.9 per cent.

“The increased level of buyer activity over the last few months has had a stabilizing effect on home prices across our region,” Scott Russell, REBGV president said. “MLS® data continues to show a trend toward a balanced market in the region.”

New listings for detached, attached and apartment properties declined in Greater Vancouver, down 36 per cent to 4,733 in May 2009 compared to May 2008, when 7,390 new units were listed. At 13,641, the total number of property listings on the Multiple Listing Service® (MLS®) declined 4.7 per cent compared to last month and 16 per cent compared to May 2008.

Sales of detached properties increased 16.5 per cent to 1,402 from the 1,203 detached sales recorded during the same period in 2008. The HPI benchmark price for detached properties declined 11.8 per cent from May 2008 to $680,320.

Sales of apartment properties in May 2009 increased 17.2 per cent to 1,458, compared to 1,244 sales in May 2008. The benchmark price of an apartment property declined 10.2 per cent from May 2008 to $349,987.

Attached property sales in May 2009 are up 19.6 per cent to 664, compared with the 555 sales in May 2008. The benchmark price of an attached unit decreased 9 per cent between May 2008 and 2009 to $435,848.

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Bright spots in Greater Vancouver in May 2009 compared to May 2008:

Detached:

Burnaby up 48.9 per cent (140 units sold from 94)

Maple Ridge/Pitt Meadows up 13.4 per cent (144 units sold from 127)

North Vancouver up 31.4 per cent (134 units sold from 102)

Port Moody/Belcarra up 52.6 per cent (29 units sold from 19)

Richmond up 14.0 per cent (170 units sold from 142)

Vancouver East up 11.1 per cent (180 units sold from 162)

Vancouver West up 59.5 per cent (193 units sold from 121)

Attached:

Burnaby up 31.5 per cent (96 units sold from 73)

Maple Ridge/Pitt Meadows up 43.8 per cent (46 units sold from 32)

North Vancouver up 31.8 per cent (58 units sold from 44)

Vancouver West up 54.5 per cent (102 units sold from 66)

Apartments:

Burnaby up 32.6 per cent (187 units sold from 141)

North Vancouver up 22.6 per cent (103 units sold from 84)

Richmond up 27.4 per cent (200 units sold from 157)

Vancouver East up 28.7 per cent (139 units sold from 108)

Vancouver West up 25.4 per cent (529 units sold from 422)

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Download complete stats package here.

The Real Estate industry is a key economic driver in British Columbia. In 2008, 24,626 homes changed hands in the Board's area generating $1.03 billion in spin-offs. The Real Estate Board of Greater Vancouver is an association representing more than 9,400 REALTORS®. The Real Estate Board provides a variety of membership services, including the Multiple Listing Service®. For more information on real estate, statistics, and buying or selling a home, contact a local REALTOR® or visit www.rebgv.org.

The Canadian $ Rally

While many trading businesses are joyous over the Canadian Dollar's recent strength, it does not bode good news for the barely revitalized local BC real estate market which as previous analysis has suggested has been supported mainly by foreign investors. So as Canadian $ goes for par, it will be increasingly expensive for the foreign investors even if the real estate price still remains steady.

It is not difficult to predict that housing starts will continue falling as developers wait for the market to stabilize but more importantly, credit lendings are almost a lockdown for banks, leaving developers no choice but to accept exuberant rates from private lenders thus cutting sharply into whatever little profit margin they have left. Here are CMHC released April housing data for Vancouver and Abbotsford.

Highlights are as follow:

Year to Date Starts 2008 - 6691
Year to Date Starts 2009 - 2302

Year to Date Completions 2008 - 5540
Year to Date Completions 2009 - 5377

Under Construction April 2008 - 26253
Under Construction April 2009 - 22494

Completed but Unabsorbed 2008 - 1445
Completed but Unabsorbed 2009 - 2368

Hotels and tourism are also heavily affected. Last I heard, Shangri-La Hotel was giving away free valet parking and a $100 credit towards the mini-bar and restaurants for a night's stay.

Canadian Home Prices Continue Decline

I just checked out the House Price Index May Report which indicates that Canadian home prices are still heading downhill:

More deflation, Montreal holding up best Canadian home prices in March were down 5.8% from a year earlier, according to the Teranet-National Bank National Composite House Price Index™. It was the fourth consecutive 12-month decline. March was also the seventh straight month in which the composite index was down from the month before - the longest run of monthly declines since the beginning of index coverage in February 2000. The composite is now down 8.5% from its peak of last August. Teranet – National Bank National Composite House Price Index™

Of the six constituent city indices, four were down from a year earlier: Vancouver (−9.6%), Calgary (−8.4%), Toronto (−6.7%) and Halifax (−0.8%). While prices were still up from a year earlier in Montreal (3.2%) and Ottawa (2.8%), the 12-month increase in those two cities has decelerated markedly in recent months. In Calgary, prices have been correcting for well over a year now - since August 2007 - and are now down 12.7% from the peak of that month. Calgary has shown monthly declines in 16 of the 19 months posted since then, including every month from last July through March. Vancouver prices have also shown nine consecutive monthly declines, and are down 11.7% from peak. Toronto prices have declined seven months in a row and are down 10.8% from peak. Ottawa prices have declined five months in a row and are down 4.3% from peak. A run of three monthly declines in Halifax was interrupted in March, but prices there are 3.0% below their November peak. Montreal prices have held up better. In March they were flat from the month before, down 1.6% from the peak of last September after monthly declines in four of the six intervening months. Teranet – National Bank House Price Index™ The historical data of the Teranet – National Bank House Price Index™ is available at http://www.housepriceindex.ca/

Rent: A Fundamental Driving Force

I remember a short 4 months ago, pessimism was the consensus for the local (BC) real estate and predictions were made for 30,000 of inventory by 2009 Summer. Now, you see listings getting multiple offers with prices over the asking and deals made within a couple of days on the market. What has changed?

To answer the question, we must first understand that the population and housing count in Vancouver are pretty much fixed. Immigration has been slowed so there has not been as much population boost as the past couple of years. So our situation is that there is a significant increase in housing stock above what population growth can fill.

But data has shown that inventory has dropped compared to last year. Sales in the past 3 months have been climbing and not showing signs of slowing. The low interest rates have prompted people to become home-owners using their properties to generate rental income. Others just want to hop on the wave.

This brings us to the underlying problem: the number of landlords and renters must balance. That means, effectively, for every landlord, there must still be a renter available to fill the property. With more and more people shifting from being renters to home-owners, the balance will be disrupted.

Let’s not forget we are in midst of an economic crisis. Lack of job security, lower wage and credit crunch all put rents under pressure. As securing rentals become more and more difficult, the demand for home ownership will decline. Ultimately the utility provided by housing, in the form of the rents, is all that backs prices.

The current real estate market activities are not backed by fundamentals which is a clear indication that it is driven by speculators. People keep telling me that the market is hot AGAIN. I tell them to cool down.

Overbought, Overbuilt, Oversold.

TD Bank Special Report : Canadian Real Estate Overpriced, Overbuilt

To summarize, the report from TD Bank explains that Canada was in a real estate boom from 2002 - 2008, a time of unsustainable price increases. What is happening now is basically a market adjustment as "affordability eroded severely over the last two years demonstrating an unsustainable disconect between house prices and incomes that was due for a correction.".

In any case, all these rear-view mirror reports do not give us a clear direction to expect in the coming future. But we can be sure that we are indeed overpriced and overbuilt. Many expect the full unwind of the suffering Canadian economy to be in high gear in Fall 2009 after many of the construction projects are finally completed.

Well, if the upcoming flood of inventories that the market cannot digest does not worry you, you still have the developers in receivership and projects shelved. Meanwhile, there are still optimists spreading rumors that the BC real estate is picking up as evidenced by the following news.

B.C. sees 86-per-cent surge in value of February building permits

Just so you know, based on volume, the City is extremely dependent on Condos. In January, there are no large condo permit applications and February has one.

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So, let us backtrack and ask the question, "Who is buying?". The market is still searching for the bottom, jobs have lost their security as business and credit get caught in the aftermath of the burst bubble, and governments are spending the country out of recession but in doing so building inflation. At this rate, we will not be able to afford what we could yesterday. Thus with low interest rates now, buyers who could not afford yesterday but can today are entering the market.

There is a fundamental difference between true and market value. The true value of any product should be what endusers are willing to pay. Not investors and definitely not businessmen. The market value however, is marked on what the greater fool will pay. In other words, greed has been priced in.

Just remember. You cannot oversell something without someone overbuying. The motivation to build is fueled by the motivation to sell which is fueled by the motivation to buy.

In my case, I could be over-analysing.

Real Estate Construction/Development Risks

When everything seems like an unsafe bet nowadays, I would still turn to real estate as a hedge against inflation. It is what it is, no more, no less. If you want an investment above inflation, then you need to get into development projects which usually involve rezoning and a higher level of risk.

There are two basic risks involved in a construction or development project – construction and market risk.

Construction risk mainly involves cost of construction and pace which directly translate into profit margin. Or you can look at it as two basic criteria – On time and on budget. The construction itself depends on efficiency and good management.

To better understand market risk, we look at the time for a project from drawing of plans, city approval, land clearing, construction and sales which range from 3 to 5 years. A regular cycle is only about 7 years which means each project will take up almost a whole cycle. It is therefore very important to time your project such that you can catch the peak of the bull cycle.

Take for example, if you are working on a project in the midst of the current global economic crisis, then like so many projects have, you will be facing the dilemma of either completing the project even though sales will be difficult and pricing will be compromised, or halt the project construction but continue to pay loan interests. In either case, you will be in a slow and painful ride.

Welcome to the real world, greed is just a price to pay.