The Burrard Street Blog

The Vancouver Sun ran an interesting editorial today in which Bob Ransford discussed lower mainland housing prices. One very interesting argument he made was that Vancouver’s core is immune to world events that would generally crash real estate markets. The idea behind this is that Vancouver and British Columbia ”[are] a haven for people fleeing such doom and gloom, and that our real estate market therefore benefits from the uncertainty, instability and economic downturns elsewhere. People like to park their money in a safe, stable, beautiful place like British Columbia.”

We need to admit that Vancouver is a global city whose appeal spreads from the UK to South America to Asia. Wealthy individuals around the globe see real estate in our city as not only a neccessary luxury but a safe investment. When a businessman or celebrity can have bragging rights and an excellent return from their Vancouver penthouse who would say no? I feel safe in saying that the luxury condo market will only go up, but what about the rest of the province?

In the Lower Mainland markets there seems to be certain price ratios between certain areas that remain a constant. For instance A condo in Burnaby will be xx% of a condo Downtown, while a condo in the Westend will be xx% of one of Coal Harbour etc. The problem with this is that the demand forces are entirely different for all these areas. Luxury penthouses are hitting record highs of 20 and 30 million and bringing up the prices of 2 bedrooms in the same building. Now my question is, why does the owner of a 60 year old 2 bedroom in a 3 story walkup in the westend think his apartment is now more valuable because brand new luxury condos are increasing in price? Just something to think about. 

And yes I understand supply and demand and how the markets work, I’m just trying to look at things from a fresh perspective. At the end of the day it falls on the consumers. When you’re looking to find an affordable place downtown remember to negotiate and play hardball. The value of a property is what someone is willing to pay for it. For those renting, its not your responsibility to cover someone’s mortgage payment because they paid too much for a property that is poorly designed or in an unappealing location. I would say based on the number of vacancies in the Spectrum buildings I think this is starting to occur. 

If you are looking for an investment it is very important to prevent yourself from getting attached to any one property. There is a great story in Donald Trump’s first book, The Art of The Deal where he talks about a heritage mansion he purchased. I believe it was owned by the government and they had it for sale for 20 million. Donald describes the place as absolutely gorgeous, important Italian marble, beautiful grounds, the works. He also knows he doesn’t have to own it and won’t spend more than he has to. If I remember right (my copy of the book is lent out) his first offer was around 10-15 million.  There were many interested buyers and his initial offer was refused. Eventually those buyer’s either backed out or their financing fell through, so he made another offer, lower than the first. Again it was refused, and again the potential buyers fell through. Continuring to make lower and lower offers each time he eventually purchased the mansion for 5 million dollars, not bad eh?

 If you want to check out the full Vancouver Sun article that inspired this entry you can find it here:

http://www.canada.com/vancouversun/news/westcoasthomes/story.html?id=b0412dc8-0639-4bf9-96b5-5c47265cc2ca

Have an outstanding day,

Dan.

My business coach forwarded this video to me and I had to share it with everyone.

This clip got me thinking about how our minds work. We direct our subconscious in one direction and it does whatever it must to keep us on track. When deep down we want to sit on the couch and be lazy, or fail financially out subconscious will come up with any number of logical reasons for us to follow that route. Perhaps your parents always tought you money was the root of all evil, your subconscious will come up with 100 reasons why you shouldn’t invest or start your own company. JUST DO IT

The CBC aired an excellent program on condominium pre buy units. The main message was condo buyers have little legal rights and should be very careful about buying anything pre construction as it is all subject to change.

 To summarize the advice given at the end of the program:

• Take a measuring tape to the model suite and compare the measurements with the floor plans
• Look into the developer’s record
• Visit a completed building by the same developer and ask residence if they are happy
• Hire your own real estate agent and lawyer
• Show the contract to your lawyer, sometimes it can be improved

You can watch the full program online here:

http://www.cbc.ca/marketplace/2008/01/09/condo_crunch/

Yesterday the CMHC (The Canadian Mortgage & Housing Corporation) announced that 2007 saw 229,600 housing starts, the second highest in 2 decades. “Growth in 2007 housing starts was driven by low mortgage rates, solid employment, income growth and a high level of consumer confidence,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “Even with the weakness in residential construction in December, new home starts are estimated at 229,600 units in 2007, surpassing 2006 levels.” 

December housing starts were down significantly compared with November. While some took this as a market indicator the CMHC had another explaination. Bob Dugan pointed out the exceptionally cold December in Toronto as a significant cause of the decline and pointed out the large number or condominium pre sales indicate a lot of activity to come.

In some circumstances it is now possible to purchase a property with no down payment (infact in some circumstances you can get cash back, effectively borrowing over 100% of the properties value). Although this is heavily advertised by many banks and mortgage professionals it is not always advisable and may be a poor financial decision. While there are circumstances when you’re best decision is to buy a property with zero down, if the market shifts you can find yourself with negative equity. Here I’ll review the pros and cons of the Zero Down mortgage.

Benefits
-If you have a good income but have not saved any money it allows you to purchase a property without waiting. This is very appealing in a rising market, especially for recent graduates.
-You can keep your savings for new furniture, rennovations or other moving costs.

Downside
-You will pay significant insurance premiums (this covers the bank in the event you can’t make your payments) for the privilege of having a Zero Down mortgage.
-If your property doesn’t increase in value over the term of your mortgage you may have trouble refinancing when your mortgage comes due.
-These products are marketed hard because there is money to be made lending money, the more lent the more made. This is part of a scary societal trend of over borrowing. Before taking on any debt you must really consider your ability to make payments and what other areas of your lifestyle may suffer if you stretch your income too much.

Even in some advertising they show the client as broke! When used responsibly the no money down mortgage is a great tool, unfortunately irresponsible lenders tend to market it towards those who should not be using the product.

In conclusion the Zero Down mortgage is an excellent option to have available when used properly. Under the right circumstances this mortgage allows you to buy property immediately without waiting years to save a down payment. In a fast rising market this could be a major benefit. Imagine having waited 2 years from 2004 to 2006 to save a down payment to avoid insurance premiums only to have the property you want increase in value 40%?

If you’re considering this option send me an email and we can discuss your circumstances and decide what is your best solution.

There is a lot of confusion over the “Credit Crunch” or “Mortgage Crisis”which is apparently sweeping the globe. I’ll do my best to simplify and summarize the US problem and explain why it won’t ever happen in Canada.

2007 saw the United States facing crashing real estate markets and a record high number of home foreclosures. Many families have lost their homes and many more have lost equity they had built up in their homes. This has been referred to as the “sub-prime crisis.”

The first thing we need to clear up is the meaning of the term “sub-prime.” Sub prime lending refers to the practice of granting mortgages to less than ideal candidates, usually those with poor credit or past bankruptcies. These clients pay a higher rate and usually upfront fees for the privilege of borrowing money. The term “prime rate” is the interest rate charged by banks to their most creditworthy customers; “sub prime” is not related to this term and does not meaning customers getting a lower rate than the “prime rate.”

Now, lets move on to the cause of the mortgage crisis south of the border. While this is not intended to be a social commentary I couldn’t explain the problem without first discussing the obvious. The United States is a country of over-indulgence. Marketers push food, clothes, cars and homes on people that they don’t need and creditors make it easy for the customer to give into their craving and just spend without recourse. The average consumer spends more than they make. I’m a mortgage planner not a financial advisor, but this seems like bad financial planning to me.

Ok, so I’m getting sidetracked here. Well what happened in the US is that the housing market was booming and so lenders decided to grant people mortgages they couldn’t really afford. The way mortgage qualification works is that your monthly mortgage payment can’t be more than xx% (usually 32-35) of your pre-tax income; this is to ensure you’ll be able to afford to eat and get to work while making your mortgage payments. Some lenders down south started pushing what are know as “graduated payment mortgages” on people and this is where the problem started.

Graduated payment mortgages, or GPMs were originally created to help low income families secure housing and were usually run through the government. While in a normal mortgage your payment is the same in year 25 as year 1, in a GPM your payment gradually increases (as it is assumed your income will as well). The low initial payments let those with a low income qualify for a mortgage they otherwise wouldn’t be able to afford. This can be great for lower income families trying to get back on their feet. The problem with GPMs is that your initial small payments usually don’t cover the interest accrued on your mortgage, so the amount you owe actually increases each month.

When the US housing market starting to boom in the early 2000s many private lenders started pushing GPMs with teaser rates (very low rates of one or two percent interest for a short period of time). These mortgages weren’t aimed at struggling families, instead they were used by the middle class. John and Jane would get a GPM to buy the biggest possible house they could, then use the money they saved from their teaser rate to buy a new BMW and send the kids to private school. Because the markets were hot the banks and the borrowers assumed their house would keep going up in value and wasn’t concerned that their mortgage was actually increasing in value.

So what happened? Well the markets started to turn. Now John has a $425,000 mortgage on a house he paid $415,000 for that is now worth $325,000. Because he took only a 3 year term for the teaser rates his mortgage comes due before the market has time to pick itself up and no one will refinance his house (remember he owes $425,000 and his collateral is now only worth $325,000). John can’t refinance, the bank takes his house and is force to foreclose. Soon enough this happens 3 times on the same street and property prices tumble, everyone knows the story from this point.

WHY THIS WON’T HAPPEN IN CANADA
This simple answer is that the banking system is Canada is one of the best in the world, and the sub prime market in Canada is minuscule compared with the United States. GPMs are almost never offered here, and Canadian consumers are much smarter about their credit and spending. I was recently speaking with an executive at a major lender with operations in both the United States and Canada who commented on how amazed he was at the low rates of foreclosure in Canada and especially BC. Canadians have enormous pride in home ownership and paying their bills on time.

If you’re knowledgeable on the subject feel free to add to this article. I’m not an economist or an expert on the subject.

For more on the US housing mark and foreclosures this article offers some excellent commentary and links to other sites:
http://wallstreetexaminer.com/blogs/ducalion/?p=127