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The chart above shows the “real price” of Vancouver, Toronto & Calgary SFDs when looked at from the point of view of the BoC Canadian Commodity Index (CCI) and Borrowing Costs (5yr Mortgage) which are the main input costs apart from operating expenses and tax.
In September 2014 the CCI (solid pink line) continued dropping after a failed breakout above the previous major high set in April 2011. The cost of stuff is still keeping the “real” price of SFDs (solid city lines) well below the Spring 2012 highs, but the gap is closing.
The other major cost input, the retail 5 year fixed mortgage rate (aqua dotted line) remained at the April 2014 record low of 4.79% or 35 bps below the previous 5.14% low of July 2013.
Neighborhood banks are advertising sub 3% five year fixed mortgages. Hello Japan. The fire sale mortgage rates are allowing the real cost of housing (city dotted lines) to continue floating up to new monthly and historical highs.
Calgary set to break MLS records… Report highlights income gap between generations… Low rates likely to be the norm says BoC deputy… US existing home sales fall but market is good…
Calgary set for record breaking September
A report from the Calgary Real Estate Board suggests that September could break records for MLS sales. The board says that sales are up 11.6 per cent on the same time last year, with 1,500 sales to 21st September and the pace continues. That could mean that this month will beat the record set in 2005 when 2,197 MLS sales were recorded. Last year came close with 1,919. New and active listings are both higher than last year, while realtors say prices are at a record for September. The luxury market in Calgary is buoyant and there has been a resurgence of single-family home sales after two months of year-over-year decline. Read the full story.
Report highlights generational income gap
Twenty-somethings are the first generation to be financially worse off than their parents. New figures from the Conference Board show that over the last thirty years the gap in incomes between older and younger workers has widened; in the 80’s it was 47 per cent, now it’s 64 per cent. The report shows that in many workplaces older workers are being paid more than younger colleagues for doing the same job and while there is often a premium paid for experience it is not always a factor in the wage differential. For the housing market it highlights a big problem of course; younger first-timers struggling to afford a home and older down-sizers affected by stagnation further down the ladder. While an overheated market may be a current factor, the income gap is a longer term concern for the market. Read the full story.
Low rates still needed says BoC deputy
There are signs that the interest rates may stay low for some time to come. Senior deputy governor of the Bank of Canada, Carolyn Wilkins says that output growth may stay lower than it was before the financial crisis and there may therefore need to be continued stimulus for the economy over a longer period. That would include lower interest rates; not the 1 per cent we have seen over the last four years, but more in the 3 to 4 per cent range rather than the 4.5 per cent of the mid 2000’s. Read the full story.
US existing homes fall back
Investors are scaling back their involvement in the US property market but this is unlikely to mean a return to dark days for the market. Figures from the National Association of Realtors show that August saw declines in existing home sales of 1.8 per cent, however this followed four months of increases and the level of sales is still the second highest of the year so far. The level of investors’ involvement was at its lowest for 5 years with expectation of interest rate rises during 2015. Outside of the investment world the US housing market is still showing positive signs with a steady rate of first-time buyers and buyers sentiment increasing. Read the full story.
(1) Northern Property Real Estate Investment Trust (TSE:NPR.UN.CA) — 5.5% YIELD
Northern Property Real Estate Investment Trust is an unincorporated open-ended real estate investment trust that manages and owns a portfolio of residential and commercial income producing properties. NorSerCo’s operates execusuite hotel properties and real estate-related services. The Trust’s residential properties are comprised of three components: apartments, townhomes and single family rental units; execusuite apartment rental units; and seniors’ properties. The Trust’s commercial properties are comprised of office, industrial and retail properties in areas where it has residential operations. As of Dec 31 2010, Co. owned 8,419 residential units and 903,352 sq. ft. of commercial space.
1. Job Growth – we look for trends in job creation, type of employment, and unemployment trends
2. Population Growth – we look for trends in growth, demographics, and forecasts that mitigate growth
3. Economic Growth – we look at what is driving the economy, is it diversified and economic trends
4. Healthy Real Estate Fundamentals – are we too late or early? Is the market stable with positive growth trends? Is the market affordable?
5. Business Friendly Government – understanding municipal and provincial / state attitudes towards development (taxation, levies, growth plans)
What Real Estate Markets do we like and what particular sectors in that market?
Calgary – arguably not only the best market in Canada but in the world to invest. According to the June 2013 IPD Global Cities Report puts Calgary as the leader in overall performance as to real estate returns in the world for the last 2 years.
What we like: concrete tower apartment buildings, inner city development in residential, retail and commercial.
Edmonton – Alberta continues to add over 100,000 new people a year driven by the energy sector and Edmonton as the capital and the “blue collar” side of the energy will continue to grow.
What we like: apartment buildings, medical, light industrial, and raw land development.
Texas – Texas leads the nation in job growth, low unemployment, affordable, projected to double in size by 2040 (over 50 million people), low taxes, pro-business government, energy, etc.
What we like: we love the Texas Triangle (Houston, San Antonio, Dallas). We like raw land for residential and retail.
Arizona – real estate trends around the Greater Phoenix area show growth trends of 30% over the next 3 years that are still well below the peak of 2008. Phoenix is in the Top 10 of fastest growing cities in the US, Top 5 in Job Growth, and #1 in real estate recovery.
What we like: we like apartment buildings in and around the Phoenix area
Craig Burows is the President of TriView Capital, an Exempt Market Dealer specializing in private equity offerings
Interest Rate Spread Between BoC Bank Rate Less the Posted
5yr Fixed Mortgage and CPI, Real Bank Rate & TSX RE Index
The chart above shows that in Augusst 2014 the spread between the Canadian Bank Rate (1.25%) and the posted residential 5 year fixed mortgage (4.79%) remained at its narrowest (3.54%) since the Aug-Sept 2008 spread of 3.6% which did not augur well that fateful autumn.
The continuing zoom in CPI (now 2.1%) is pushing the real Bank Rate deeper into a negative return. The trend is egging on the search for yield while promoting excessive margin debt as preferred lenders tout their lowest rates sweeping risk perceptions under the rug and governors finger wag the consumer class to spend more without increasing leverage.
The top 10% of earners need little incentive to chase capital gains, and the big national Canadian banks don’t need much in the way of a vigorish on high ratio tax payer insured loans; they can unload the narrow spread “conventional” paper to the securitized derivative markets, (CMBs, REITs) to avoid the risk of holding to term when comparative rates could be higher; or the collateral value lower.
A mortgage interest rate “sale” gets new customers and their deposits, accounts, investments and insurance business AND 80%+ customer retention into the subsequent term renewals on a slam dunk bet that rates will be higher off of current fire sale lows (my branch advertises sub 3% for a 5 year fixed). If there was a 30 year cycle of mortgage rates, it’s broken now with the current leg extending into 33 years.
When the spread between the BoC Bank Rate and the 5 year retail mortgage rate widened from April 2007 to Dec 2008, the TSX Real Estate Index rolled over and plunged into the March 2009 pit of gloom.
My case study of what a Vancouver investor is facing when contemplating the purchase of an average condo for the purpose of rental revenue demonstrates that although interest rates may be low, the capital cost according to my case study is 25% too high. If borrowing costs rise even fractionally the incentive to hold is irrational.
“Real Interest Rates” (BoC Bank Rate & 30yr Bond Rate less
CPI) and TSX Real Estate Index
Real Rates of return fall with the rise in CPI or the drop in nominal yields.
The chart above shows that in August 2014 real interest rates as defined by the nominal rate less CPI took a rest from plunging with the CPI ticking back down to 2.1%. It was 2.5% in Jan-2012 and 2.3% in April 2012 which was the peak in averageVancouver SFD prices.
The CPI inflation stoked by a weak CAD/USD is increasing the cost of stuff we import which is showing up in the CAD Canadian Commodities Index that is recently returning back down to trend. The cost of stuff is still dampening real investment returns by increasing the holding cost of the asset. But cash buyers of the TSX real estate index have only been targeting the 2007 peak and the current spike is hitting a late season ceiling.
The Real Prices Chart shows the “real” price of real estate (Vancouver, Calgary, Toronto average SFD prices) held in check below the 2012 highs despite the aggressive bidding up of nominal prices and the fire sale peddling of credit.
CPI is now 170 beeps off the April 2013 low and at 2.1% qualifies as over reaching the Bank of Canada’s target-i-ness.
The renewed erosion of yield may produce a hike in the Bank of Canada rate and mortgage rates sooner rather than later although BoC head Mr Poloz says there is no rush to raise the Bank Rate; he sees “…too many economic risks, including low inflation, sputtering exports, a shaky housing market and a raft of global uncertainties from Ukraine to China” (Globe & Mail April 16, 2014).
Ah shucks, maybe he is just talking global central bankerese about employing negative interest rates to combat hoarding (CBC News June 5, 2014).
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