The Burrard Street Blog

If you live in Greater Vancouver I don’t need to describe the rapid increases in housing prices seen over the past 5 years. All that one really needs to know is that:

1. Homeowners not planning to sell in the near future have seen the property taxes follow the increase in their property’s value without seeing any relative gains.
2. First time buyers making anything less than 6 figures are being pushed further and further away from Downtown Vancouver, The North Shore and Vancouver, often those making even 150,000+ a year aren’t able to afford to live in central areas once they factor in car payments and family expenses.
3. Vancouver’s younger generations are desperate to get into the market although many have lost hope they will ever be able to afford to live where they grew up.

Now of course there have been a lot of benefits derived from the housing boom. Increased jobs, more money flowing into the city, a lot of prosperity for intelligent investors and those in the real estate industry, and an increased net-worth of all homeowners.

Like it or hate it, the price of real estate in Vancouver is not going to fall significantly and I do not take issue with that fact. Vancouver is a gorgeous, relatively safe city situated to continue as a major international trade centre due to its proximity to the Pacific Rim. As a long time Vancouver resident what I do take issue with is the large proportion of unoccupied condos and properties held as investments by non residents. RBC’s affordability index ranks Vancouver as the #1 least affordable place to live in Canada. RBC’s index is based on 2 values, people’s mortgage payments and their incomes. The higher the mortgage payment relative to income the less affordable an area is. Pretty simple stuff.

Vancouver is so ridiculously unaffordable for a many reasons. The main reasons I will point out are:

1. Vancouver is not a business hub in the same way Toronto is. We don’t have many corporate head offices or a large financial centre. This means there are not as many high paying jobs here. People look at New York and say “Well Vancouver could see those prices one day New York has” but this simply isn’t the case. New York sees an incredible amount of fund managers and investment bankers making 7 figures, we just don’t have that in Vancouver.
2. Speculation. As happens far too often in markets around the world speculation is running rampant in the Vancouver real estate market. Huge marketing teams push condo development presales and buyers hope to flip them for a quick buck. This means the market prices don’t reflect true resident demand for housing. Speculation drives market prices up beyond what resident’s incomes support.
3. Foreign buyers play a role in market prices as well and their transactions are completely unrelated to incomes within the city. This isn’t as large of segment as people want to believe (it is far too easy to take out ones frustration on a vaguely defined outside group) but still plays a significant role in driving up affordability.

The other issue I feel is worth of discussion is intentionally unoccupied properties. By unoccupied I am referring to properties bought but not rented or owner occupied. The reason this really upsets me is that it drives up rents and hurts those who already can’t afford to buy. There is a huge amount of new condos being built in this city, many bought by investors yet rents are rising and occupancy rates are below 1%. Try finding an apartment for rent on craigslist, I’m told it is chaos as a place will be listed and taken in the same day. My opinion is that intentionally unoccupied properties play a huge role in maintaining high rents despite an increase in the amount of available housing.

In Part 2 of this article I will discuss at least one out of left field idea for evening things out and making Vancouver a little more affordable for its citizens.

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.

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