Monthly Archives: February 2010

“This is not about a real estate bubble. Let’s just admit that were all pissed off because people are landing in Vancouver and buying up our land. I say wake up to the global revolution! It’s happening right here and now.”

Regular readers of these pages know that we have a bearish opinion regarding the future direction of the Vancouver RE market. We also archive any eloquent accounts arguing for alternate outcomes. The most popular alternate argument, by far, is that of overwhelming and ongoing demand, especially foreign demand, for Vancouver RE. We’ve posted other versions of this argument previously. Here’s another one. -vreaa

Alan at greaterfool 6 Feb 2010 11:15 am writes -

“Possibly a voice of reason in all this madness of collapsing real estate prices…. First, it’s good to see so many naysayers and dire warnings of imminent RE crashes, especially in Vancouver. It’s a good sign that there’s no bubble. Most importantly, it would be great to see someone write about what’s really happening and why so many people are bothered about being priced out of the market. This phenomenon is in it’s most basic form, part of global re-organization of peoples and their ability to walk with their money to any country they wish to live. Vancouver when I was growing up in the 60’s to 80’s was still a small town. The only people that moved here in any great numbers to speak of, were Torontonians and a number of Brits and some of our dear friends from the Atlantic coast to work in our once flourishing lumber industry and other remnants of our past economy. Vancouver had it’s real estate cycles then as we do now but those cycles were locally driven. Today, we see people from not only China and India in great numbers, but new people from the former Soviet Union, eastern block countries, middle eastern populations and believe it or not, US citizens running from the US-Bush led debacle of the last ten years. Money has been streaming into Vancouver and it’s not being driven by our local economy. The RE market, while it appears to defy gravity, is being driven by money being moved from one country to another, namely Canada and Vancouver in particular. This has not just happened overnight, its been happening since 2000 in a significant manner. That’s why no one can understand who is buying at these prices, and why the average Vancouverite cannot afford the high prices. Plain and simple, Vancouverites are being displaced by those that have the wherewithall to pack up their families and move to Canada. All this whining is about the global competition we have when it comes to buying an affordable home in our own home town. This is not about a real estate bubble gone to the stratosphere, let’s just admit that were all pissed off because people are landing in Vancouver and buying up our land and because our wages are not going up to make these homes affordable, we’ve now taken on the role of being whiners and naysayers, when really we should all be just moving out to the far distant corners of land afffordabilty. This is what none of you want to admit is happening. Instead it’s about a housing bubble about to burst. I say wake up to the global revolution! It’s happening right here and now.”

“We could sell and walk away with 400K. But where do we live? With two small boys and two government jobs, we want to stay in BC.”

This from trapped at 6 Feb 2010 1:15 am - “My husband and I have worked hard to pay off our mortgage. We could sell and walk away with 400K. But where do we live? With two small boys and two government jobs, we want to stay in BC. Rent is significantly more than our mortgage. How long until housing prices in Vancouver come down to realistic prices? We can absorb interest rate and tax increases in our current situation. Is it better to stay put with minimal debt, or sell and watch our profits go in to rent?”

“Rein Us In” – Canada’s top bankers are pushing the government to clamp down on the mortgage market to cool off the rise in home prices.

From The Globe and Mail 6 Feb 2010 12:00 am -

Canada’s top bankers are pushing the government to clamp down on the mortgage market to cool off the rise in home prices. … The heads of the country’s six largest banks have privately told policy makers that they fear the wide-ranging economic fallout of a U.S. style binge-and-collapse in housing. … The chief executives of the Big Six made their point last November, when they met with Bank of Canada Governor Mark Carney. The country’s top commercial bankers, who between them control more than three-quarters of the country’s $940-billion mortgage market, said then that they wanted the government to look at far-reaching options, such as raising the minimum down payment to as much as 10 per cent and shortening the maximum amortization period to 30 years. … Mr. Carney didn’t disagree, according to people familiar with the November talks. … However, the real key is convincing Finance Minister Jim Flaherty.

Much of the population’s net worth is tied up in their houses, and the concern is that if tighter rules caused home prices to fall, consumers would rein in their spending.

“Some people talk about 10 per cent down payments, and we would have serious concerns with that,” said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals.

“I have friends in Alberta and Ontario. $200,000 is considered a lot of debt there. Here, $500,000 is nothing.”

This from metalhead at RE Talks 4 Feb 2010 8:23 am -

“I have friends in Alberta and Ontario. $200,000 is considered a lot of debt there. Here, 1/2 a million is nothing. My brother in law recently bought a new place in Surrey. He had $350K to put down. He paid $800K and has already spent $100K+ on it. No big deal by BC standards. Our mutual friends in Alberta wonder if he is insane. He’s told them it will probably be worth $1.1M to $1.2M in a year. I just smile and say of course it will.

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 3: Priced Out Forever? Vancouver Renters and Basement Suites

In other times, and other places, renting was and is the norm. But during the kind of runaway real estate boom that Vancouver has experienced, just about everybody who can buy, eventually does.  The cheap loans and social forces are irresistible. Ownership rates rise to record highs. The renter pool becomes more highly concentrated with vagabonds and the indigent. Renters become an underclass, targets of derision and subjects of pity. As with all things human and economic, however, once this process has moved as far as it can in one direction, the only way forward is for it to come back. There may well come a time when the renters rise up out of their basement suites; a time when renting comes to be seen as prudent, as sensible, as responsible, as trendy, as wise. -vreaa

Part 3: Priced Out Forever? Vancouver Renters and Basement Suites

Reality and fantasy
In the latter half of the 1980s I was a student at the University of British Columbia, augmenting my student loans by working part time as a bartender in one of the student bars. Behind the bar was also a food preparation area, where workers on the food side of the operation assembled light appetizers for the patrons. When business was slow, the bartenders and the food prep staff would chat, and over time we all got to know one another. One evening Mike, one of the food prep guys, told me that he and his mother had just bought a house on the East Side, traditionally the working class area of Vancouver. The house was close to the two-bedroom apartment I shared on East Broadway near Fraser, so when Mike described the house — two-storey, wood frame, peaked roof, about eighty years old — I could picture it exactly. I might even have seen the actual house with the For Sale sign on my walks through the neighbourhood.
…..Mike was a full-time employee, not a student earning a few extra dollars like most of us working in the bar, which meant that his path through life was set at a different tangent than ours. He probably made eight or nine bucks an hour, which wasn’t bad given that the minimum wage at the time was $3.65 an hour. The house he’d just purchased needed work, but Mike had some of the skills required to do it himself, and could learn more as he went. I remember the price he and his mother paid: $90,000. The rent for the two-bedroom apartment I shared — ironically, or portentously, above a realtor’s office in a building owned by the realtor — was $400 a month, utilities included. The view of the mountains from the high landing at the back of the building was stunning.


My old digs on East Broadway

Twenty-two or twenty-three years later, in 2010, the anecdote I’ve just related would be pure fantasy. Someone doing the job Mike was doing might still be making only eight or nine bucks an hour. Minimum wage in BC has stagnated at $8.00 an hour since 2001 — a period of almost ten years without an increase, which also happens to coincide with the real estate boom. During that same time period, the price for a two-storey, wood frame “character house” on the East Side, even if it’s falling into ruin, has inflated to at least $600,000, and closer to $800,000, or more, if it’s in good shape or renovated. If someone working for minimum wage were magically able to bank every cent they earned toward buying that house, and assuming there was no mortgage interest, they’d need to work 100,000 hours, or 50 years, to pay for it.
…..If Mike and his mother held on to their house they will have done well. And perhaps Mike went on to a career in one of the construction trades, in which case he may have done very well for himself.
…..In the previous episode I shared some of the experiences and emotions associated with being a homeowner during the first few years of Vancouver’s real estate boom — a real estate lottery winner. Well, what about all those people who didn’t, or couldn’t, buy a ticket?
The basement dwellers
For a sampling of Vancouver renters, I don’t have to look any farther than the people beneath the floorboards I’m standing on. When my wife and I buy our house in the fall of 2003, we inherit tenants — a single mother and her teenaged son. So we become small-time landlords without really worrying too much about what being a landlord might entail. We want the rental income to help with the mortgage, and we’ve bought a house with everything, including tenants, already in place. The rent charged by the previous owners is $560 a month, plus 40% of the utilities, and we leave it unchanged for the year and a half that mother and son continue to live in our suite. They are quiet and always pay the rent on time. On Sundays, when they return from Mass, the sound of the mother singing Catholic hymns, inexpertly accompanied by a small electronic keyboard, drifts upstairs. Not unpleasant. In hindsight, I realize we must have been a lot louder for them. At the time, the floor between the two units has no soundproofing. And I tend to be a bit loud.
…..The suite is 750 square feet, has two bedrooms, and isn’t really a basement, it’s ground level, or “garden level” as they’re called on Craigslist or in the classifieds, even if your house is surrounded by a smoldering junkyard. The city calls rental units in houses “secondary suites,” and generally turns a blind eye to the fact that the vast majority of them are put in without permits, which means they’re illegal. Ours falls into that vast majority.
…..When it isn’t raining, sunlight pours through the large, south-facing living room and master bedroom windows. It’s a decent, livable space, or potentially is. On the downside, the ceiling height is less than seven feet, heating ducts and a central supporting beam drop even lower in a couple of locations, the layout is terrible, the kitchen and bathroom are a garish mishmash of pink, white, and harvest gold appliances and fixtures, obviously salvaged from elsewhere, or like the rickety 1940s kitchen cupboards, moved piecemeal from upstairs.
…..These are details that somehow didn’t really register during our initial, somewhat anxiety filled walk-though prior to putting in an offer.
…..I learn from our neighbour that two brothers owned the house in succession in the 1980s, and these brothers put in the suite themselves. This is the classic East Vancouver way, because working class homeowners usually have limited amounts of disposable income, and often balk at the prices charged by professional contractors. But they’re willing to roll up their sleeves and do things themselves, and perhaps not be too fussy about the results.
…..In the suite, these do-it-yourself aspects are everywhere. One end of the kitchen cupboards is supported by bare 2x4s running from beneath the cupboards to the floor. Although quite the eyesore, I know better than to disturb these. The outer wall of the shared laundry room tilts at a bizarre angle. The furnace and hot water tank are in a makeshift utility room with flimsy walls made of that dark, ugly, 1970s fake wood paneling. In the bedrooms, lurid red and black carpet is stitched together in places like a mask worn by some horror movie killer. One entire half of the suite is served by a single heating register, so it’s always cold. The electrical panel is a Medusa’s head of snaking wires, making me shudder and mentally cross my fingers every time I see it. Frankenstein plumbing connects the laundry sink. And perhaps most strangely, the bathroom, which requires a step up — in the words of one contractor we’ll later hire, “a bathroom for dwarfs” — has walls entirely covered with full-length mirrors. This final detail I can’t fathom. Like a funhouse at the midway, or a brothel bathroom specially equipped for fetishists.


The laundry room
…..So, yeah, the suite is a dump. Which is why, although we could probably squeeze $800 or $900 a month, we keep the rent low. It’s the right thing to do. And gouging can on occasion come back to haunt the gougers.
…..Romance enters the life of our single mother. She meets a man and after a few months of being wooed, gives notice and moves in with him. He owns his place, so our mother, assuming things work out, has left behind the life of the renter.
Saving for a downpayment — frustration, expense, and exhaustion
Our next tenants are a couple, Amir and Sarah, who also stay for about a year and a half. We work hard to paint the entire suite before they move in, and get the living room carpet steam-cleaned, but there’s no redeeming the main traffic area, which stubbornly remains grey. Amir is pretty straightforward about the place and their motivations. He tells us that the suite “isn’t great,” but they’re willing to accept it in exchange for a lower rent because they’re saving for a downpayment on a place of their own. Amir is a bit of a negotiator. He doesn’t like the arrangement that involves paying a percentage of the utilities. He wants a fixed monthly amount that they can budget around. By this point, we have a pretty good idea of what the utilities cost over the course of a year, and after some thought propose a rent of $600 a month, everything included. It’s only later we realize Amir and Sarah run electric space heaters throughout the winter to make up for the deficit of heat. But I don’t begrudge them. The suite is cold. My only worry is fire.
…..Amir and Sarah are also quiet and always pay the rent on time. The only problem that arises is when the son of the woman across the street, someone who doesn’t even live in the neighbourhood, tells Amir not to park in front of his mother’s house. His mother is housebound and doesn’t own a car. Some homeowners, or relatives of homeowners, seem to view tenants of basement suites as second-class citizens who must always defer in matters such as parking. The city’s bylaw is pretty clear. Non-residents are prohibited from parking for more than three hours in front of any property, but residents are allowed to park “on their own street.”
…..From time to time, Amir and I talk about Vancouver real estate, and politics. He comes from a country where repression of personal freedom is standard practice. About a year after Amir and Sarah move in, in early 2006, they begin the search for a house. Their timing is somewhat unfortunate. The average price of a house in Greater Vancouver, driven by voracious demand, has just increased $100,000 in the past three months, to around $700,000.
…..Amir and Sarah get themselves a buyer’s realtor. Amir tells me that they like the neighbourhood, the location works well for both of them, and they are interested in a new, heritage-style house that is being built, and nearing completion, on the next block. Amir asks me what I think the list price might be. At least $600,000, I answer. A few days later Amir tells me that their realtor confirmed the asking price is going to be in the mid 600s. So the dream of buying in the neighbourhood is quickly extinguished.
…..What follows for Amir and Sarah is six months of frustration, expense, and exhaustion. Almost daily after work they spend two to three hours touring properties, prices and bidding wars forcing their search farther and farther east. Amir tells me that he’s unwilling to pay $40,000 over asking price — an amount by which they were recently outbid — for “an apartment.” I don’t blame him. And they don’t even really want a condo, they want a house. Amir tells me they’re spending a ton of money on gas to make these daily runs to the suburbs and back, and food, because they’re now eating dinner in restaurants along the way. And each additional month they continue to live in our suite is another $600 that could be going toward paying down a mortgage.
…..In June they finally manage to purchase a house — in Coquitlam, a suburb ten miles farther east than they wanted to be. Their first order of business is to spend more money and quickly make some modifications to the lower level of the house so they can use it as a rental suite.
…..And so ends the first era of our rental suite. August 2006. We’ve decided to leave the suite vacant for a while, so we can make some improvements. Amir and Sarah have been gone for only a couple of hours when I put on my work clothes, a dust mask, and a pair of heavy work gloves. I go into the suite and rip out the skanky wall-to-wall carpeting in the living room. I confirm that a soft spot I felt underfoot while painting is a rotten patch in the subfloor. Several of the vinyl floor tiles lift away easily, and beneath them the floorboards, and chunks of the underlying 2×4 sleepers, break apart and disintegrate in my fingers. Rot. Although dry now, there has obviously been significant moisture. I investigate further, and find that I can easily peel away the cheap vinyl baseboard, the underlying glue compromised by dampness. The wall behind the baseboard is speckled with black mold. The house inspector’s caution about his elevated moisture reading comes back to me. I don’t know it at the time, but this is Day 1 of what will be three years of an often difficult, often painful, and always expensive renovation of the suite and various aspects of the house in general. Three years before we will again see tenants, or a single penny of rental revenue. Had I known what lay ahead, I would have left that carpet exactly where it was. And perhaps suggested to my wife that we put a For Sale sign in front of the house.
Four generations under one roof
Around the time that our rental suite becomes vacant I’m at a garage sale up the block from our place. I get chatting with the owners, Joe and Grazia, a retired couple who tell me they’ve lived in their house since the mid-1960s. The subject turns to real estate and the recent increase in the number of people living in their house. Joe and Grazia, and Grazia’s mother, have been joined by the couple’s son, his wife, and their young daughter. Six people. Four generations under one roof. And like our house, it’s a modestly sized roof. Their house is probably 1750 square feet, top and bottom. And like us, they have only a small, single-car garage.
…..Apparently Joe and Grazia’s son and his wife had been sharing a house in the suburbs that they co-owned with the wife’s brother, but the brother had wanted to sell because with the huge run-up in prices, and the favourable interest rates, he and his wife now had enough equity and additional financing that they could afford a place of their own. The finances of Joe and Grazia’s son and his wife still aren’t sufficient to do the same, so they’re moving in with the parents/in-laws while saving for a downpayment.
…..At this point, it’s been over two years since The Province’s hysterical headline about house prices going up by $222 a day. Except for a brief respite in the second half of 2004, the rate of increase hasn’t let up, and it won’t until the global financial implosion of 2008 — and then for only a year before rebounding at a similar rate. $222 a day is $80,000 a year. So Joe and Grazia’s son and his wife will have to save $80,000 each year just to keep up with the rate of increase. Each year, they’ll need to add that much additional money to their downpayment nest egg just to keep a mortgage at the same amount it would have been if they had bought the year before. The only people in Vancouver who can sock away $80,000 a year are the best paid C-level executives, financial elites who hail from elsewhere, or high-ranking gangsters or marijuana grow operators. At the beginning of 2010, I’m not sure exactly how long it’s been since Joe and Grazia’s household increased in size, but I notice that its youngest member is significantly taller than when I first saw her at the garage sale.
It was all kids
One day I’m chatting with Grazia, out sweeping her walkway, and she tells me that years ago the street was “All kids. All kids running up and down every day.” The mature trees were recently planted saplings, and the sidewalks hadn’t yet been installed. She points to a large Vancouver Special nearby. “That house there, they had twelve kids.” Well, the neighbourhood certainly isn’t all kids now. There are a few around, but not many. Now it’s retired people like Joe and Grazia, Italians, and Portuguese, and Chinese who bought into the neighbourhood thirty and forty years ago, a few widows, or newcomers like us, professional couples without children, or with teenagers or adult children who’ve already left home. There are exceptions, but generally speaking the economics of the neighbourhood no longer support families just starting out — and definitely not large, working class families. The same thing is happening in all the old central neighbourhoods of Vancouver — in Strathcona, in Mount Pleasant, in Fairview, in Kitsilano. I wonder what it feels like for Grazia’s son to be priced out of the neighbourhood he was brought to as a baby, and in which he spent his entire childhood, and teenage years, like the trees, growing up. To perhaps be thought of by some as a second-class citizen in the neighbourhood with which his personal history is intimately connected.
Getting crushed
So I don’t have to look far to find people whose dreams and aspirations have been seriously curtailed by Vancouver’s real estate boom. It’s not much fun being on the outside looking in. And then there are the marginalized inhabitants of the Downtown Eastside, and Vancouver’s homeless, whose dreams and aspirations aren’t just being curtailed, in many cases they’re being crushed.
…..During the mayoral campaign of 2002, Jennifer Clarke, the candidate for the Right, vows to retake the Downtown Eastside — which she inaccurately describes as an American-style “ghetto” — “one block at a time.” The image her rhetoric conjures is of a phalanx of developers and well-heeled West Siders, gentrifying stormtroopers, marching on the country’s poorest urban neighbourhood. The block-by-block rallying cry backfires. Instead of galvanizing voters it repels a lot of them, and is quite possibly the phrase that loses her the election. Left-leaning Larry Campbell, with his more nuanced approach to the Downtown Eastside’s undeniably severe social problems, wins the election in a landslide. But Campbell doesn’t last long. After a fractious three years marked by in-fighting and warring cliques within his own party, he pulls the plug on his tenure as mayor, announcing he won’t run again. A little over seven years after Campbell’s victory, to my eyes anyway, it’s Clarke’s vision that seems to be progressively winning out — one towering condo block at a time — even if Clarke herself didn’t win.
…..Along with the adjacent Gastown and Chinatown, the Downtown Eastside, with its hundred-year-old brick buildings, is the oldest part of Vancouver, and was once the hub of the city, but is now home to a large population of urban poor. It’s a political battleground for just about everybody, and reams have been and are being written about it, so I won’t go into great detail here (although I may in a future episode). The only point I want to make is that in the two years my wife and I lived in a brick loft on the border between Gastown and the Downtown Eastside, and in the six years since, an increasing number of large mid-rise and high-rise condo buildings have been getting built on the periphery of the area. These buildings I imagine as giants looming over the neighbourhood, or as those massive slab walls in 1960s cartoons or action movies, slowing moving inward, threatening to crush the trapped hero. Downtown Eastside residents and poverty activists are doing what they can to resist, but when I see what’s happening, quite literally, on the ground, I feel there’s a certain inevitability about the outcome.
Are people really priced out forever?
Among Vancouver residents, only a recently awoken Rip Van Winkle could fail to understand that we’ve been experiencing the mother of all real estate and construction booms for the last decade — really, on and off since Expo 86, almost 25 years ago, the world’s fair that achieved its purpose of providing a giant, live-action, promotional brochure for the city. Expo 86 actually started out with something less than a world’s fair designation, but that little detail was brushed under the carpet by boosters at the time, and now seems largely forgotten. Living in the city, it’s possible to become oblivious to the growth and development, because it’s everywhere and it’s gone on for so long. Rapid change has become the norm, although for many of us it’s a disorienting and even upsetting norm. For many years, whenever my father visits Vancouver from Victoria, he always remarks on the number of construction cranes, and the number of expensive automobiles. The obvious money. (Or, perhaps, the less obvious debt.) These things leap out at him, and he’s coming from Victoria, the provincial capital, an affluent city of over 300,000 just across the water on Vancouver Island, with a pretty significant real estate boom of its own — not exactly a poor cousin.
…..I think the most pertinent question at the moment is this: Are we in a boom, or a bubble? Your answer to that question probably defines you as a real estate bull or a real estate bear. And the current gap in sentiment between the two is rather wide. It sometimes spoils family dinners.
…..To my mind, a boom is a period of intense growth, activity, and price escalation, with people falling over themselves to get a piece of the action, but it doesn’t necessarily entail a subsequent collapse, or bust. Booms are perhaps periods when rates of growth are warranted by underlying conditions or fundamentals (I’m not saying those necessarily exist in Vancouver). When the underlying conditions or fundamentals alter, the boom levels out, but it doesn’t collapse because the initial and ongoing reasons for the boom were legitimate. Think of New York City in the late 19th and early 20th centuries.
…..Bubbles on the other hand, by their very nature, containing the ingredients for their collapse. They may look exactly like booms, with all the same frenzied activity, but ultimately they aren’t warranted by underlying conditions or fundamentals. Perhaps they start as booms, but for a host of reasons mutate into something wildly inappropriate. I’m not even an armchair economist, but from just a casual perusal of charts of stocks and real estate values, the most likely outcome of a bubble is that values return — collapse rapidly — to more or less where they were before the bubble, or where they would have been had a more natural rate of growth obtained during the period in question. They do so because there is no underlying support for the level that values achieve during the bubble. At some point, everybody suddenly realizes that the emperor has no clothes. What precipitates this mass realization is perhaps a little mysterious. Like the signal telegraphed through a flock of roosting birds causing them all to take flight simultaneously. On the West Side of Vancouver, perhaps the emperor is any of the small, dilapidated, eighty-year-old houses on thirty-three-foot lots currently listed for 1.2 or 1.3 million dollars. Or the same sorts of houses on the East Side listed for $800,000.
…..If there is a bubble in Vancouver, when it pops the average house price could collapse, or perhaps slowly deflate, from its current level of $950,000 to something around $550,000 or $600,000, assuming a return to a support point implied by a more natural rate of growth. That’s a decrease of about 35% or 40%. An average house price of $600,000 is still very expensive, but townhouses, condos, the discount for living on the East Side, or the even greater discount for living in the suburbs, would all be subject to the same general decrease in price, to a greater or lesser extent. The result would be that large numbers of people who are currently priced out of the particular form of housing to which they aspire would be priced back in. No longer would young couples lusting for home ownership in Kitsilano have to make do with a neighbourhood like Grandview. And renters in the burbs could once again legitimately dream of a condo in the city. There are plenty of people sitting on the sidelines, gathering cash, hoping this is exactly what happens. I work with two of them.
…..I should mention that feeling oneself to be priced out also requires that you’re someone who wants to buy in. And there are various reasons why people may prefer to rent and not buy real estate at all. A footloose life style with the freedom to pick up and leave on short notice. The wish to avoid the never-ending expense and responsibility of home ownership. A dislike of strata council politics and the problem personalities who often seem to dominate. Or exorbitant condo fees. The conviction that your money can be better invested elsewhere. Or maybe you’re not paying rent at all. You’re an adult child living at home.
Froogle calls a definite maybe
I don’t know what the hell’s going to happen. I hear interesting arguments on both sides. One thing that’s often absent from the arguments, however, is a time horizon. Maybe the bulls and bears will both be right. In the short to medium term, I wouldn’t be surprised by a fairly epic collapse of real estate prices in Vancouver, or a long grind downward over a decade. Goodbye paper equity. But what about in twenty or thirty years? Isn’t it possible that as power centers shift in the world, that as China perhaps surpasses the United States as the world’s economic behemoth, and other Asian countries continue to increase in economic clout, Vancouver, because of its geographic location and immigration patterns, might be hugely affected to the upside — that it could become an increasingly important player as the 21st century progresses? Manhattan was once an island covered with trees. Expo 86 and the 2010 Olympics notwithstanding, Vancouver is not yet a major player, as much as some locals fervently wish it were. But will that always be the case?
…..I don’t think any of us really knows whether Vancouver is experiencing a boom, a bubble, or a boom become a bubble. Having a strong opinion, and knowing, are not the same thing. If it’s a boom become a bubble, maybe values will only shrink to a support level warranted by an underlying legitimate boom, and who knows what that might be. But not as much of a collapse as an all-out bubble bursting. We will all find out at some point, maybe fairly soon, maybe not until a number of years down the road, where values really belong, and the answer could be surprising — for the real estate bulls, the real estate bears, or maybe both.
Next episode
Part 4: “Raise or Raze”
I walk around my neighbourhood taking inventory: renovation, renovation, that house raised and a new foundation poured, that one with a second storey added, and there, a house demolished — razed with a “z” — and a new house built in its place.

Financial details

From 2004 onward, all mortgage and LOC balances are as of 31 December of the year in question.
Asking Price: $355,000
Sale Price: $355,000
Down payment: $88,750 (25%, ergo, no CMHC insurance, representing thousands of dollars of additional cost)
Mortgage (at purchase, Sep 2003): $266,250
Terms: 3 year fixed at 4.00%, 18 year amortization, bi-weekly payments
2003 Property Assessment (estimate of market value on July 1, 2002): $260,600
2004 Property Assessment (estimate of market value on July 1, 2003): $330,500
Equity based on assessment: $64,250
Mortgage principal: $247,330
Terms: 3 year fixed at 4.00%, 18 year amortization, bi-weekly payments
2005 Property Assessment (estimate of market value on July 1, 2004): $420,000
Equity based on assessment: $172,670
Mortgage principal: $201,829
Terms: 3 year fixed at 4.00%, 18 year amortization, bi-weekly payments
2006 Property Assessment (estimate of market value on July 1, 2005): $461,000
Equity based on assessment: $259,171
Mortgage principal: $191,884
Terms: 5 year variable at Prime minus .75%, 25 year amortization, bi-weekly payments
HELOC balance: $4,291
HELOC interest rate: variable, at Prime.
2007 Property Assessment (estimate of market value on July 1, 2006): $570,000
Equity based on assessment: $373,825

“I know a couple who bought a house for $3 million plus. Put about $800k down from their previous house which was mostly paid off, but that’s still a huge freaking whack of new debt.”

People who have apparently taken profits, but then simply used them to leverage up, are now in positions that are even more vulnerable to price drops. In the following example, a 25% pull-back in prices will wipe out 100% of the owners’ $800K equity. -vreaa

This from betamax at RE Talks 4 Feb 2010 12:10 am -

“I know a couple who bought a house for $3 million plus. Put about $800k down from their previous house which was mostly paid off, but that’s still a huge freaking whack of new debt. They thought they’d only be able to get a mortgage for $1 million based on earnings and were thrilled when the bank let them go into hock for more than twice that.”

“Got Rich Off Vancouver Real Estate” stories – “I knew a guy who basically was dumb as a doorknob, ended up buying a house that was on a half acre, for next to nothing, and sold it for about $600,000 more than he paid.”

Here’s the flip side of the last post, but it illustrates the same point. When it’s so easy to make a fortune flipping houses, why do anything else? -vreaa

At RE Talks (2 Feb 7:27 pm), a poster tellingly called FuturePorscheOwner asked if anybody knew any “Got Rich Off Vancouver Real Estate” stories -

FuturePorscheOwner 2 Feb 2010 7:27 pm“I knew a guy who basically was dumb as a doorknob, ended up buying a house that was a half acre, for next to nothing, and sold it for about $600,000 more than he paid. The guy sold a couple of years ago, [and] bought the fancy toys that come along with having half a million in the bank.”

unicas 2 feb 2010 11:33 pm – “As accountant, I have met many people who became multi millionaires through real estate investment, too many. None of those people are the analytical types who talk about fundamentals, rates, charts. Most are not what you would call savvy business people. Let me give one recent example.  I know a couple, in their mid 40s, since 1997. They became my clients in 2003. Between 1997 and 2006, they bought and sold 3 times, each time they became $200K richer. In 2006, they built a 4,000 sqft house near a golf court in North Van for around $900k. In 2007, they came to my office and told me they were interested in buying two properties near Taylor way. The properties were next to each other, each over 13,000 sqft lot owned by the same owner for $1.7 mil. They said they planned to tear off the houses, build one for themselves and one to sell. They wanted to ask my opinion. I said “Look, we are almost at peak, construction costs are at all time highs, I like the idea, but timing is not good”. They went ahead anyway. Just last month, 3 years later, they came to my office again, for a different kind of consultation. They just completed building a 6,000 sqft monster house that they planned to move in. Just one problem: A broker made an offer to buy it for his client for $3 million. Their cost? $850K for the land plus $200 per sqft (building cost of $1.2 mil.), so they would pocket almost one million, with their other old house still there waiting to be tore off, another million coming. And they just sold their North Van home for 1.5 million.
While I prepare my $150 bill for half an hour of consulting, I was thinking, hell, what do I know?”

Vancouver Renter writes “Dear Mr Flaherty, Mr Harper, and Mr Carney, I feel compelled to let you know how your policies have affected me and my family.”

Asset bubbles skew and distort the playing field, and honest, taxpaying citizens justifiably feel unfairly treated. This is very, very bad for our society. We all benefit if we live under circumstances where honest efforts and hard work are fairly rewarded. The politicians holding Canada’s financial policy strings are doing absolutely nothing to limit the housing bubble that is perverting circumstances in this fashion, and which is destined to severely injure many Canadians. They know there is a problem, but would rather steer a course for re-election than genuinely improve the country’s financial outlook. History will judge them poorly.  -vreaa

This from Vancouver Renter at 3 Feb 2010 3:28 am -

“Dear Mr Flaherty, Mr Harper, and Mr Carney,

I feel compelled to let you know how your policies have affected me and my family.

First, a little bit about me. Unlike many Canadians, I’ve got some cash – not enough to be considered “rich” but enough to raise an eyebrow or two. I didn’t inherit it, win it, marry into it, or obtain it through illegal activity. It’s a result of hard work, living below my means, and most importantly taking entrepreneurial risks.

Over the years, I’ve been one of those fellows who have repeatedly incorporated startup businesses and have created jobs for Canadians, with the hope that I would reap the financial rewards. Along the way it usually didn’t turn out that way, as most of my businesses failed and I lost much of my invested time and money. And believe me, there have been periods of my life where the time invested has been equivalent to 60+ unpaid hours per week. It hasn’t been easy. But I learned from my mistakes and, eventually, one of my ventures paid off and produced a bit of a windfall for me and my little family.

This brings me to the real estate situation in Vancouver, which is where I was born and have lived my entire life.

Even though I have savings, your easy money policies have allowed practically anyone to compete with me in purchasing a house for my family. If I attempt to place a reasonable offer for a house, I know there will be a dozen young kids with no savings and horrifically large pre-approved mortgages outbidding me and driving the price of these shacks in Vancouver ever higher.

But these buyers do not appreciate how long and hard one has to work, risk, and save to actually come up with the cash to buy a house at these levels. A representative example is my son’s preschool teacher who recently informed me, “I bought a place! I got a 1.75% mortgage and my bank helped me to open up a line of credit to come up with the down payment!”

At the other end of the spectrum, higher end houses are being bid up by foreign buyers. A news article appearing in the Vancouver Sun this morning provides evidence of this, with its revelation that higher-priced properties in the west side of Vancouver, Burnaby, Richmond, and the Tri Cities are experiencing the most sales. These happen to be areas in which Asian demand is high.

Now I know how it works in Canada; If you object to selling out your city to the highest (foreign) bidder you are called a “racist”. But let me say this. In the process of earning my nest egg, I paid plenty of taxes to Canada and BC all along the way: payroll taxes, corporate income taxes, personal income taxes, capital gain taxes, worker’s comp, etc that were used to build the infrastructure and fund social programs. These taxes and regulations often brought me and my businesses to their knees.

Yet, through association with several new Canadians, I know many foreigners have built their wealth without facing the same levels of taxation, legal obstacles, fair pay for workers, and environmental concerns in their home countries. And, as politically incorrect as it is to state, from what I have seen, experienced, and read, I’m convinced that much of this foreign money is dirty – generated through crime and corruption.

How can I reasonably compete with these foreign buyers? How can our children be expected to compete?

So, in spite of my successes, I am living, along with my wife and kids, in an older, very modest rental house. And I feel stuck. Renting has its benefits, but I’m also under the thumb of my landlord.

The easy money and immigration policies of the federal government and the Bank of Canada have resulted in a personal dilemma. I can’t afford a house of reasonable quality in Vancouver. So I’m left with three choices:

1. Rent indefinitely.
2. Blow my life savings on an over-priced, tear down dump.
3. Move away from all our friends and family in Vancouver so that I can provide a quality house and better standard of living for my family. And if we move away from Vancouver, it may make sense for us to move away from Canada altogether.

It simply makes no sense to me that this government is maintaining policies that reward only those with nothing to lose (new buyers with no savings) and those who make their riches in offshore businesses.

I’m convinced that, in the end, it is our younger people and children who will be paying a huge price for these short-sighted policies. Does anyone in Canada believe that our children will be enjoying a higher standard of living than our past generations? I certainly don’t.”

Update 3 Feb 2010 – As if to illustrate the points made in the preamble, here is a poster at (omg 3 Feb 2010 3:36 pm) advising Vancouver Renter to stop being a such an honest citizen. Welcome to “the new morality” -

“Hold out man, renting ain’t so bad especially when you see your landlord shelling out thousand on upkeep. Alternatively, have you looked into transferring all you assets to your wife and kids. Then you personally buy with 5% down. Usually banks want it to be a matrimonial house – ie both names on the mortgage but in this climate you should be able to get a mortgage in just your name. So if RE continue to go up your’re at least in the market. If things take a dive then you simply default and go into personal bankruptcy. Your assest are in your wife and kids names and beyond the creditors reach. This will be the new morality of the next decade.”

“It seems that the pool of ‘eligible bachelors’ looking to get married to a house is shrinking fast.”

Ownership rates are at all time highs. -vreaa

pianoexcellence at RE Talks 1 Feb 2010 12:56 pm“I have a lot of friends (close and otherwise) who have bought just recently over the last two months. They are not high income…a lot of nurses, teachers, para-professionals (law-acctg), Mid-managers…but not low income either. I am the only one I know (other than my closest friend) who decided to take the contrarian step of selling and renting.  …just based on this, it seems that the pool of “eligible bachelors” looking to get married to a house is shrinking fast. I can honestly say that I do not know anyone with a stable job who does not own at least their own condo.”

kansai_92 at RE Talks 1 Feb 2010 1:40 pm“Many of my friends are now up to their eyeballs in debt. They’re at Home Depot every weekend purchasing renovations supplies using LOC. No more vacations, no going out (not just a money thing — they’re spending all their time reno-ing). One couple was complaining that their basement tenants were causing their utils to skyrocket (utils are included in the rent). Another couple rented out their main floor and are now living in their basement. They originally planned to live upstairs, but couldn’t get the numbers to work so they had to “compromise”. Doesn’t seem like their equity paper gains have brought much joy to them. Amongst my group, I was the one of the first to own. Now I’m the only one who doesn’t own.”

No Such Thing As Bad Publicity? – Associated Press, Sports Illustrated, and The Guardian Preview the Olympics

Winter Olympic rings in Vancouver harbour

The story of the Vancouver RE boom and the fantasy of Olympic glory have long been attached at the hip. We thus continue to monitor Games sentiment. Three major international news publications, MSNBC (Associated press), Sports Illustrated, and The Guardian, are currently running remarkably bleak articles on Vancouver and the 2010 Games. -vreaa

From ‘Vancouver’s Olympics Head For Disaster’ by Douglas Haddow, The Guardian 31 Jan 2010 -

“Just days before the opening ceremony, Vancouver is gripped by dread. Not the typical attitude for a host city, but understandable when you consider that everything that could go wrong, is in the process of going wrong. … In the mid-2000s the games were originally slated to cost a pittance of $660m and bring in a profit of $10bn. This ludicrous projection was made before the market crash – an event that the Vancouver’s Olympic committee failed to anticipate. … Conservative estimates now speculate that the games will cost upwards of $6bn, with little chance of a return. This titanic act of fiscal malfeasance includes a security force that was originally budgeted at $175m, but has since inflated to $900m. With more than 15,000 members, it’s the largest military presence seen in western Canada since the end of the second world war, an appropriate measure only if one imagines al-Qaida are set to descend from the slopes on C2-strapped snowboards. With a police officer on every corner and military helicopters buzzing overhead, Vancouver looks more like post-war Berlin than an Olympic wonderland. … This manic mix of hype and gloom is a byproduct of the games’ utter pointlessness. … It will be the best chance yet for the Olympics to be derailed and exposed as what they are: a corrupt relic of the 20th century that does little more than gut city coffers and line the pockets of developers and investors.”

From ‘As Olympics Near, People Are Dreading Games’ by Dave Zirin, Sports Illustrated, 25 Jan 2010 -

“The International Olympic Committee has leased every sign and billboard in town to broadcast Olympic joy, but they can’t purchase people’s faces. It’s clear that the 2010 Winter Games has made the mood in the bucolic coastal city decidedly overcast. … I spoke to Charles, a bus driver, whose good cheer diminished when I asked him about the games. “I just can’t believe I wanted this a year ago,” he said. “I voted for it in the plebiscite. But now, yes. I’m disillusioned.”… A sports reporter from the Globe and Mail said to me, “The optics of cuts in city services alongside Olympic cost overruns are to put it mildly, not good.” … Bringing together a myriad of issues, Vancouver residents have put out an open call for a week of anti-game actions. … Expect a tent city, expect picket signs, expect aggressive direct actions. Tellingly, according to the latest polls, 40 percent of British Columbia residents support the aims of the protesters.”

Image: East Hastings Street

[Photo caption] ‘Welcome to Downtown Eastside. Here, life is gritty, volatile and the slightest misstep can invite brutal retaliation.’

From ‘Canada’s Olympic City Has Notorious Skid Row’, Associated Press, at msnbc 30 Jan 2010 -

Chinese RE Developer – “Prices are too high, Rent is too low. For us it makes no sense to hold property, so our strategy is to sell everything.”

Different market, same dynamic, correct conclusion. Fundamentals do matter. -vreaa

A discussion of Chinese RE at 30 Jan 2010 quotes Zhang Xin, the CEO of SOHO China, one of the best-known women in Chinese business, and one of the country’s leading property developers -

“We don’t really have a view on when it will end; [but] we do have a view that this is a bubble. Basically . . . our strategy is to sell everything we have. The real estate business should really be looking at rental yield; build a building and then lease it out with the rent giving a decent return. But, because of where China is with asset bubbles, people want to buy the assets regardless of whether they can be leased out or not. People just want to hold [property], even if it is empty. Now, if you look at the prices for the property being sold versus the rent you collect there is a real disconnect. Prices are too high, rent is too low, so if you hold property in order to get yield you are likely to get very little. For us it makes no sense to hold property, so our strategy is to sell everything. We see ourselves very much as a manufacturer. We buy land, we build, and then we sell. And the asset bubble has compelled us to be even more of a manufacturer . . . the strategy is to keep a lot of cash, to sell as fast as possible, and to turn around assets faster — even faster than before.”

Mortgage broker: “In a fragile housing market you don’t want to impose too many restraints”; Credit Counsellor: “Some people should never buy a home”

It seems the “real estate community” will say anything they can to keep the market as hot as possible, for as long as possible, regardless of the ultimate consequences for borrowers. Like the credit counsellor, we see reason for alarm. -vreaa

These from the Financial Post 22 Jan 2010 ‘Don’t Bite Off More Mortgage Than You Can Chew’ -

The real estate community is fighting against changes that would make it harder to buy a home. This month, the Canadian Association of Accredited Mortgage Professionals (CAAMP) produced a study it says shows an overwhelming percentage of Canadians are shielded from potential interest rate hikes because they opted for fixed-rate products. But that study also showed a huge portion of those consumers would be in big trouble if they had to come up with a larger down payment. Will Dunning, chief economist for CAAMP, said 65% had down payments that were worth 10% or less of the value of the home being bought. “Absolutely,” says Mr. Dunning, about whether a change would take some consumers out of the market. “In a fragile housing market you don’t want to impose too many restraints.”