What will the October numbers reveal...?

Will they be scary for the bears??

We really cannot go up much higher in price without jeopardizing the 'bubble bursting graph'.

Real estate has definitely cooled from the heat of summer, but is still being bid, supported mainly by incredibly low rates.

Five year variable rates are as low as 2.25% at ING!

No wonder some folks are saying..price be damned...the carrying costs are low....so I am buying!

As long as rates stay low, they are fine. Once rates rise they will be skewered and we will all be picking up the tab, either through CHMC bail-outs or our savings will be inflated away or home owners in trouble will get tax relief or other help.

Once again this potential crisis-in-the-making could be stopped right NOW. Raise the minimum deposits and severely restrict the CHMC are two first steps.

Heck put a Federal RE sales tax in place taking 1% from buyers and 2% from sellers, so when the banks start crying about foreclosures or the CHMC needs a capital infusion, the government has a 'sinking fund' to pay out of, not just throw the bill at everyone else. That extra 3% will help cool the market, then when RE strats to fall down, take it off.

Owning a home is not a decision to take lightly. A deposit must be saved, a potential rise in interest rates must be budgeted for, repairs and assessments (eg a special post Olympic assessment??) must be expected.

It is too easy to make an offer and sign on the dotted line and then wail when it doesn't work out.

If you have any doubts about that..take a look at the US. Despite the soaring stock-market, in the third quarter (which just ended) there were over 900,000 foreclosures in the US, the highest number on record...ever.

Who is the gate-keeper? The Commission-based Realtors and mortgage brokers who could be telling the buyers what they can afford and should not over-extend themselves? I am sure some are and some aren't.

Bank of Canada Governor Mark Carney made some weak noises about the housing market being frothy and people taking on too much debt at these low rates.

If he believes that he should walk across Ottawa to Stephen Harper's office and tell him we have the potential for another bubble, which will be supported, eventually, by the money of the prudent.

Happy Halloween!

Commercial Real Estate

Vancouver has some of the lowest CAP rates (% returns) on commercial real estate in North America.

Hot cities like New York and Hong Kong and London have teeny weeny cap rates and now Vancouver.

The reason is clear, we have a lot of money chasing very little product.

As we all know a lot of people come to Vancouver with money, they retire from out East, they come from overseas and a lot of people here are making big chunks of money. After a few years of almost no interest in the bank, many finally make the leap into commercial real estate to try and juice their returns. They like to keep it local, so they can keep an eye on it.

Some of our retail rentals (like Robson Street) are amongst the highest per sq foot in North America.

The logic is that while it may just be 5-6% return now, the market is tight and so rents will go up and in a few years you may have CAP rates of 8% or more.

Downtown rental buildings have had particularly low CAPs. Some selling with minuscule 4-5% rates.

The problem with such low rates for commercial rates...be it office, retail or residential.. is how easily the CAP rate can disappear altogether.

A renovation or an elevator which needs replacing OR A tenant who leaves or goes bankrupt (and the tenant-inducement needed to bring another one in) and your total returns for the year are gone.

Also any on-going weakness and the rents will NOT be going up, and in fact may go down to keep struggling tenants.

Looks like the total sales of commercial property have fallen dramatically all across Canada. Though Vancouver was saved somewhat by the big ticket purchase of Bentall V by a German Pension agency. This seems like an expensive buy to me, especially in this environment. They must have a lot of faith in Vancouver:

http://tinyurl.com/yz2fzzs

This is absolute Lunacy...

I really cannot get over the fact that Harper's Government is almost doubling the CHMC's ability to lend in just over a year.

What are thinking? What happened to the fiscal Conservatism?

Think about it..if you are a bank lending officer and sitting across from you is someone who has, with great difficulty, saved 15-20% down-payment but is subject to the vagaries of the job market or someone who can only scrape together 5-10% but has a government-issued CHMC guarantee behind them...which would you lend the most money to?

I know the concept of the CHMC is laudable. Help low earners get on the property ladder. It was the same rationale used by Fannie Mae and Freddie Mac and the HUD in the US.

In fact what happened was a catastrophe. A lot of these folks were too extended to get into their purchases, had very little 'skin' in the game and with the smallest drop they lost their equity and stopped payments.

Lower income earners are also, unfortunately, the most likely to get hurt first in a recession.

'The federal government has quietly given Canada Mortgage and Housing Corp. more financial muscle, raising concerns the multibillion-dollar agency is expanding at an unprecedented pace with little oversight.

For the second time since the beginning of 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding. The increase moves the cap to $600-billion, up from $450-billion and nearly double the $350-billion limit in place at the end of 2007.' Globe and Mail October 21st.

What does this all mean? It means when, and if the second round of the recession comes in 2010, there will be nothing left to fight it with. The Provincial and Federal Governments are already tapped out and the Federals will be dealing with CHMC losses and Baby-boomer costs. There will nothing left to stimulate with.

We will be forced to live within our means.

The governments here have made many decisions, some good and some bad, but this is one of the worst.

To 'Help' people to get into housing when the economy is so uncertain, when the prices are near or at their peaks, when interest rates at so low and could conceivably double in the next few years, is....IMVHO ECONOMIC LUNACY and purely political!!

The Perfect Storm

They are showing the Perfect Storm on TV.

Are we setting up for the Perfect Storm in Canada?

Maybe.

Exhibit one...exploding deficits like this one:

http://ca.news.yahoo.com/s/capress/091022/national/ont_economy


Exhibit two...completely oblivious to the foolish errors that took place south of the border, we are marching to exactly the same drum:

'The federal government has quietly given Canada Mortgage and Housing Corp. more financial muscle, raising concerns the multibillion-dollar agency is expanding at an unprecedented pace with little oversight.

For the second time since the beginning of 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding. The increase moves the cap to $600-billion, up from $450-billion and nearly double the $350-billion limit in place at the end of 2007.' Globe and Mail October 21st.


Insanity: doing the same thing over and over again and expecting different results. Albert Einstein


Wave one. The crisis hits. Governments and policy makers did nothing to prevent the onset, but now throw everything at it, everything they have.

We go deep into deficit.

The crisis is averted, for now.

Asset bubbles reignite..RE here, Gold and Oil worldwide.

Wave two hits. They have nothing to fight the fire with. How can a Provincial Government which has a $25 Billion deficit pay for it's regular programs, never mind expand??

We hit the Perfect Storm.

Is this scenario likely? Maybe. Not many economists are even mentioning it as a possibility. Yet it is very possible. All governments are facing increasing expenditure and declining revenue...and add to that the baby-boomer entitlement programs and it is hard for me to see how this can end well.

Nuttin' much to say

We are seeing some normal fall cooling in the temperature and the housing market. The numbers are still pretty strong, and far from a buyer's market, though if you check craigslist, you will see some 'deals' being offered.

I think Klepto has been too busy to parse the numbers and I haven't got much to say. Lets see what October brings.

If the commodity market continues strong and assets like the stock-market and $CAD stay strong and interest rates remain low-the market will continue buoyant and the bubble bursting graph I posted below will fail.

However if any of these change directions then we will see renewed weakening.

Nothing more to say. Lets wait and see what the end-of-October numbers have in store for us.

Have a Great Thanksgiving

Not much to say. Still bullish, but slightly less frenetic action in the market. We will have to wait for all assets to correct to see significant softening, since they all seem connected at present..gold, $CAD, stocks, RE, oil and commodities.

BTW here is the bubble graph I have posted before and Larry Yatter's graph of Vancouver average prices. As you can see it looks like make or break time!

Late Breaking News on the Athlete's Village

Pulled off CTV news.

Final cost to tax-payers depends on how strong the property market is. Best case from Robertson = break even.

Worst case $1 billion in the hole.

As they said on CTV, politicians should not dabble in business.

More importantly who advised the previous council (only Susanne Anton is left in the boat from that administration) ? Which law firm, which accountants and financial advisers??

Should they not be held liable?

Does anyone have the time to ferret through City info and find out who these advisers were?

Meanwhile the RCMP have been questioning the friends of Olympics opponents. Be careful who you share that extra-hot skimmed late with :

http://tinyurl.com/ydgsz4w

And yes anon (from the last comments) I did see what happened to Canwest. The ire of the public prevented at least one tax-payer bail-out, though I do feel sorry for the employees:


CanWest union decries bankruptcy protection

2009-10-06 16:01 ET - News Release

Mr. Peter Murdoch reports

CANWEST EMPLOYEES DESERVE BETTER

After CanWest Global Communications Corp. filed for Companies' Creditors Arrangement Act (CCAA) protection for some of its operations, Peter Murdoch, vice-president of media for the Communications, Energy and Paperworkers Union of Canada (CEP), said in reaction, "Media workers at Canwest stations should not be forced to pay the price with their pension and severance payments for financial problems that are of the company's own making."

"Employees have done everything they can to sustain this company," says Mr. Murdoch. "Thousands have already lost their jobs and there has been no wage increase for years.

Though management salaries have been excessive -- $49-million to eight people from 2001 to 2008, while during that same period over 1,000 Canwest employees lost their jobs.

Those who are left are on pins and needles, including pensioners." Mr. Murdoch adds that governments, banks and media conglomerates have all ignored the warnings about the dangers of massive media convergence and unsustainable debt. "CEP will be front and centre to ensure that employees are first in line for company obligations," says Mr. Murdoch.

Mr. Murdoch also says the federal government should step up to the plate. "The federal government has been irresponsible in monitoring and policing pension plans, and where is it now to backstop this?"

"Yet another major company has filed for bankruptcy protection under Prime Minister Stephen Harper's watch," says CEP president Dave Coles. "It's time for this government to stop congratulating itself and to take action to prevent more working people from falling victim to this recession."

CEP represents more than 25,000 newspaper and broadcast employees across Canada, including workers at the National Post and Global TV who are affected by the filing announcement.

When Prudence Doesn't Pay

Who are bears? Permanent pessimists and negative souls ,who secretly pray for the collapse of civilization. Not most of the ones that I know.

In fact most are fiscally careful people...they save money, buy things on sale and won't over-pay for something because they 'just have to have it right now'.

For these folks Vancouver RE hasn't made sense for several years now. The widely accepted, often quoted ratios are...keep your mortgage to 3.5 X your total income and keep your house expenses to 40% of net income. Vancouver has been well over these numbers for a long time.

So they have patiently waited, like the counterparts in the US.

The US bears have been richly rewarded for their patience, as the housing crisis struck and foreclosures mounted. They now have their pick of properties and a low mortgage rate (assuming they still have a job!)

Here in Vancouver (in fact in all Canada) it looked like the bears were about to get their moment in the sun as well. As you can see from the graph below, sales completely collapsed last year.

The rate of collapse was unprecedented. The bounce up was also unprecedented, even faster than the preceding bubble. Enough to make a bear's head spin. No wonder the bears are downcast.



Who would have forecast an instant rebound back up to pre-crisis sales levels. It was like Vancouver hit a trampoline.

So why were so many caught off guard by this rebound. Here are some reasons:

1) Firstly there was the interest rates. The BOC dropped the rates to 0.25%. Never before had they been so low. As I posted at the time the drop in mortgage rates was like a 30% drop in prices.

2) The drop in interest rates not only made mortgages cheaper, but rates on deposits dropped encouraging those with a large down-payment to put it in property. Both 1 and 2 helped move the equation in the direction of buying versus renting.

3) Those of us who have a lived here a long time time failed to understand the allure of our city. This is particularly true for retirees, who come here with funds. The last that apartment sold in my building was to a retired dentist from out east. He also bought another apartment and a commercial property for investment. He admits the cap (returns) rates on both are minuscule compared with what he could get out east..'but I can keep an eye on them here'.

4) The drop in interest rates and Federal and Provincial crisis spending came at a time when we already had a boom from construction, both Olympic related and residential, commodities were still pretty solid eg gold and oil, and so we just bubbled some more.

Ok so that is what happened -what now?

I will give that my best shot in the next post.

Final projection for September

Projection from 30-Sept-2009 : 19 of 21 days Complete *

Listings: 5553 (-10% yoy) (+22% mom)
Sales: 3459 (+118% yoy) (+1% mom)
Sell/List: 62% (+36 pp yoy) (-13 pp mom)
MOI: 3.9 (-70% yoy) (+4% mom)
Actives: 13,572 (-35% yoy) (+4% mom)
* Rate of Increase: 44 per day

Avg Price SFH: $863,265 (+9.3% yoy) (-3.0% mom) (-6.2% from peak)
Avg Price Condo: $435,134 (+7.4% yoy) (+3.1% mom) (-3.3% from peak)
5-day Average SFH: $931,340 (+7.9% from current month)
5-day Average Condo: $430,755 (-1.0% from current month)

Median Price SFH: $704,211 (+1.2% mom)
Median price Condo: $378,029 (+1.1% mom)

* Missing data from Sept 21 and threw out erroneous data from Sept 30.

The REGBV will release the actual tally within a few days.