Real Estate

The “Real Price” of Vancouver, Toronto & Calgary Single Family Dwellings

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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.

…related: 

TSX Energy, Real Estate, Financial Services, Gold and the Bank of Canada Commodities Indexes

 

Real Estate Market Update

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…

a1a48b783d9b9baacbd9bd1a7de067a0 LCalgary 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.

10 Must-Know High-Yield CDN Real Estate Stocks

(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.

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5 things we look for in real estate

craigburrows1. 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?

Canada

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.

United States

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

Real Interest Rates….

Interest Rate Spread Between BoC Bank Rate Less the Posted

5yr Fixed Mortgage and CPI, Real Bank Rate & TSX RE Index

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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.

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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

 

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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).

Back to the Chart Book Index

CDN Real Estate: Another Step Down

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The Canadian Real Estate
PLUNGE-O-METER

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The Plunge-O-Meter tracks the dollar and percentage losses from the peak and projects when prices might findsupport. On the price chart in the spring of 2005 there was a 4-6 month plateau period while buyers and sellers twitched like a herd. When the credit spreads narrowed and the yield curve began its journey towards inversion, the commodity stampede began.
 
Ottawa data are Combined Residential (not SFD) and Montreal data are Median (not Average) *The Price Support target represents prices at March 2005; the start of a 40 month period of ardent speculation in all commodities; then a full blown crash into the pit of gloom (March 2009); and then another 39 month rocket ship to the moon but then the crowd suddenly thinned out in April 2012. The revival of spirits erupted in 2013 as globalmoney went short cash and long real estate on an inflation bet. See Whale Watching.

Plunge-O-Nomics

In case you have forgotten the depth and velocity of the previous market reversal when Canadian real estate prices plunged in 2007-2008 (chart); householder equity vanished as follows:

  • ’07-’08 Average Vancouver SFD lost $122,900, or 15.9% in 8 months (2%/mo drop)
  • ’07-’08 Average Calgary SFD lost $92,499, or 18.3% in 18 months (1%/mo drop)
  • ’07-’08 Average Edmonton SFD lost $78,719, or 18.5% in 21 months (0.9%/mo drop)
  • ’07-’08 Average Toronto SFD lost $63,867, or 13% in 13 months (1%/mo drop)
  • ’07-’08 Average Ottawa Residence lost $25,664, or 8.6% in 6 months (1.4%/mo drop)
  • ’07-’08 Median Montreal SFD lost $6,000, down 2.6% in 6 months (0.4%/mo drop)

Another Observation: oil spikes and real estate (TSX Chart)

  • 2008 Vancouver down 16% in 8 mos
  • 2008 Calgary down 14% in 8 mos
  • 2008 Toronto down 14% in 9 mos
  • 2008 TSX RE down 51% in 10 mos
  • 2011 Vancouver down 2% in 6 mos
  • 2011 Calgary down 10% in 8 mos
  • 2011 Toronto down 7% in 3 mos
  • 2011 TSX RE down 6% in 4 mos

The Tech Bubble Blowout…

…occurred in March of 2000 and since then we have had serial bubbles globally (Financial Assets, Commodities & Real Estate). Prior to 2000, Japan and the USSR blew out in the late 1980’s and the Asian crisis occurred in the late 1990’s. More recently Argentina defaulted in 2001-02 and now European taxpayers are on the hook for public and private mal-investment. Commodities peaked July 2008 and the U.S. 7-10 year Treasury Bond prices peaked in May 2013.

Real estate has boomed and plunged in select markets with awesome volatility since the early 2000’s atop a huge edifice of debt that is only being propped up by the willingness of fewer and fewer buyers who think that prices will never collapse despite recent history being full of examples of the opposite (California, Florida, Detroit, Japan, Dubai, Greece, Ireland, Spain, etal). 

Rising prices allow both the private and public sectors to over-leverage and with it comes speculative fervor that leads to prices rising further. But when prices decline then market sentiment changes and real estate becomes a slow moving asset class as debt revulsion sets in and fundamental illiquidity leads to asset re-pricing. At that point there is only one viable solution and that is for debt to be transformed into equity, and that occurs either by the debt being repaid slowly, or written off quickly.

In the sell-off phase, governments (who do not issue their own non-convertible currency eg: Greece, Spain and Italy, ie: members of the Eurozone) and corporations and individuals who defer repayment with more leverage (bailouts, bond issuance, secondary financing) are simply delaying the date of foreclosure, increasing the amount of potential asset destruction or lengthening the time and amount of repayment with valuable income streams that could have been used for productive investment (Canadians are producing more weapony and less infrastructure). Increasing debt leverage only works when prices are rising.

With respect to housing, there are much better mortgage models to follow than CMHC’s tax payer “insurance”. See the Danish Mortgage Finance Model where the combined loss ratio for all Danish mortgage credit institutions (MCIs) has never exceeded 1% in any one year – a number most other countries can only dream of.

A change in taxation policy is also needed. The way that government collects tax is highly inequitable. For an elegant solution see the APT (Automatic Payment Transaction) which would eliminate the tax complex. Gone would be personal, corporate, property, estate, capital gain, income, sales, excise and all manner of taxes or levies disguised as fees as well as the elimination of tax returns, deductions and special interest exemptions.

Implementation of this simple idea in Canada would allow Canadians to create an original, authentic social organization that would eventually be copied by all other nations. Let’s apply the power of the internet to build better housing, financing and taxation institutions. Canadians, write your Member of Parliament.