Monthly Archives: April 2012

Dennis Gartman – “The rising price of Vancouver real estate cannot continue. It won’t. How do we short it?”

Thanks to reader ‘D’ for sending us this snippet from Dennis Gartman’s latest letter to clients (30 Apr 2012, pg 7):


We agree with Gartman. Large price drops in Vancouver RE are all but inevitable. We have no suggestions regarding short positions, other than standing clear. We do suggest that locals with leveraged exposure to RE diligently consider their options.
- vreaa

Guest Post – An ‘Ex-Vancouverite In Asia Considering A Return’ Lays Out ‘Why Vancouver Real Estate Prices Might be Justifiable’

The View from Asia: Why Vancouver Real Estate Prices Might be Justifiable
[A guest post kindly submitted by ‘an ex-Vancouverite in Asia considering a return’ (handle ‘BLM’), 27 Apr 2012.]

Like many of you, I too have been in shock and denial at the astronomical rise of Vancouver’s property prices. How could the city I grew up in, without the jobs to keep me there in the first place, support such exuberant real estate prices?

After nearly a decade living in Asia, I am now contemplating a return to Vancouver because there really is no better place to live – economics aside. I hope to share with you a new perspective as a prospective buyer of Vancouver real estate and to provide insight into the thinking of several investors I’ve conversed with here in Asia.

It all started back. Such a long, long time back.

The year was 2001, when the US Fed rate began the year near its historical average at 6%. By December it fell to 1.75% – the lowest in over 40 years. Alan Greenspan was steering the slowing US economy away from a recession following the bursting of the dot-com bubble and the 9/11 terrorist attacks. With rates that low for the next three years, the scene was set for hard asset prices to rise.

The rates did go back up very briefly to the 5% level in 2006 to 2007 but quickly returned to a historical low of 0.25% after the financial crisis of 2008. The rate today continues to stand at 0.25% and is expected to until well into 2014.

Simplistically speaking, this is why real estate prices in select cities around the world have become out of reach for many locals – not just in Vancouver.

Why are Vancouver property prices more adversely affected?

One could argue Vancouver is Canada’s most international city in terms of ‘main street’ capital flows (i.e. money earned in Asia but spent in Vancouver). Being on the Pacific Rim and acting as Canada’s strategic link to Asia Pacific means its economy will take on characteristics unique from other Canadian cities. Canadian economists only have hard Canadian economic data to work with which is why it has been so difficult to forecast and explain Vancouver’s economy (and indeed real estate prices)!

What about Toronto? Don’t they have large ethnic groups and immigration inflows?

The difference is in the foreign economies they link to and the quality of the capital flows. There are far fewer direct flights from Asia to Toronto than there are in Vancouver. This means, on a whole, Asians who immigrate to Toronto are less likely to maintain regular links to Asia and therefore fewer capital flows.

Why Asian ‘main street’ capital flows matter?

Asian economies are booming. For countries that aren’t, like Japan, they have huge aggregate amounts of savings that if deployed in numbers to any one country (think Australia), it would have a very meaningful impact on asset prices. What makes Asia’s economies matter to Vancouver, other than the ‘main street’ capital flows mentioned earlier, is perhaps their close reliance to the US economy and ultimately the US Fed rate. To simply put it, Asia’s booming economies, fueled indirectly by cheap US borrowing costs, is expediting a new wave of middle class savings and a new breadth of real millionaires and billionaires in the region (fact: there are more billionaires in China than in the US). This glut of savings, together with low savings interest rates coupled with low borrowing costs, in places like Hong Kong and Singapore have pushed domestic property prices up to become some of the world’s most expensive.

Why don’t they just buy more property at home rather than abroad?

For the wealthy in China, where there are limited avenues for investments other than stocks and property, many have begun to move some of their wealth offshore. It is also partly driven by the lack of trust in their own government and legal system. It doesn’t hurt that there are still living memories of the revolutions that began in the 40s which led to personal possessions being confiscated. Additionally, the Chinese government has been implementing policies to rein in domestic property prices making it harder for the middle class and the wealthy to invest in multiple properties even if they are financially capable in doing so.

Other regions such as Hong Kong and Singapore have also seen their governments implement policies making real estate investments less attractive for speculators and investors.

Limited investment options in China and extremely low interest rates in places like Hong Kong and Singapore are forcing capital to go offshore and back into the West.

Why are they choosing Vancouver?

So why are investors looking to Vancouver? To answer that, let’s put ourselves in the shoes of an investor in Asia looking to diversify their assets in real estate abroad in a politically and economically sound country.

Closer to home, you have Hong Kong and Singapore but prices there have become some of the world’s most expensive. Further abroad, you have time zone friendly Sydney and Melbourne but their prices too, along with their currency, have risen to what some call ‘frothy’ levels as a result of Chinese trade and Japanese capital. Then there is London, with its property priced in the expensive Sterling and New York with its tough immigration laws. These have been some of the more popular destinations for Asian capital to invest in which brings us to Vancouver.

Vancouver has no major policies to limit real estate investment . It’s currency is cheap relative to the Sterling and the Australian dollar. The Canadian dollar is also expected to appreciate which provides either a limited hedge to falling property prices or a bonus return on investment. Access to the city is easy with numerous airlines flying direct from a variety of Asian cities. The list goes on and on.

How did they acquiring their wealth?

No one can clearly answer that but if we just think of the thousands and thousands of companies in Asia (especially China) that have gone public in stock exchanges at home and around the world, it is not hard to imagine the number of affluent individuals in Asia.

Others have surely made their money in property along with the region’s economic rise. In Hong Kong, for example, the equivalent of a 400sqft 1 bedroom apartment in a similar district to Coal Harbour now goes for about CAD $1.2mn – thanks in part to Chinese money inflating the city’s property prices.

For some families who immigrate to Canada from Asia, it makes all the sense in the world to diversify their assets into Canada with the view of settling there. Some might even buy a few condos, lowly leveraged, to generate CAD income for their living expenses as a bubble popping in Vancouver is perceived to be no more likely than in Asia.

Brown barbaloots

Vancouver is not an exception where locals have been pushed out of the city core. This is a phenomenon that has been repeated many times throughout history. Today, in many cities across Asia, where there is a lack of a social safety net, high property prices are leading to street protests and influencing election outcomes.

Unfortunately, the wealth gap across the world has been widening for many reasons. Vancouver is not alone in that young couples are finding it hard to develop a career, start a family or to purchase their first home. In fact, let’s not forget these problems are more magnified in China, the source of hot Asian money, than anywhere else in the world.

Unless

Unless there is global economic calamity or unforseen restrictive policies towards immigration/real estate as an investment, prices are likely to tread higher, retreat slightly, or stabilize in the long term regardless of the ‘expected’ interest rate moves.

It is hard to see a scenario where Vancouver prices will ‘crash’ with supportive interest rates and rising Asian economies. What makes Vancouver unique is that the majority of home owners are not overly leveraged (from my own anecdotal observation). Certainly the newly landed buyers and existing homeowners of SFHs do not appear to be. Yes, there were a few who took out 40 year mortgages and those who put down a 5% down payment but those days are long gone and prices have risen since then.

More importantly, the majority of the most vulnerable seems to be first time buyers who typically bought into the $250k-$400k range over the last 10 years in the lower mainland. Should there be a decline of 25% percent, a clear crash, even a $400k property would still be worth $300k. With interest rates this low, principals are being paid down rather quickly.

Foreclosures will be the first sign of real trouble, not price declines.

Covered bonds

The final thing I wish to touch on, as a keen observer of the bond markets, is Canada’s mortgage market in relation to covered bonds being issued by Canadian banks. Canadian banks are keen to expand their mortgage businesses in pursuit of profitability. However, this tenacity differs from that of the US sub prime crisis. Canadian banks have been active issuers of covered bonds, which unlike the toxic CDOs that US banks issued before 2008, are guaranteed by the banks’ balance sheets. With Canadian banks being some of the world’s strongest, many of the covered bonds they issue (which consists of mortgage loans) are rated AAA – the same credit worthiness as US treasuries, which are considered to be the world’s safest investments. Institutional investors are keen to buy as much Canadian covered bonds as possible given the lack of AAA bonds in the world and because of the expected currency appreciation of the Canadian dollar.

We can blame many factors for Vancouver’s high real estate prices but ultimately, through the invisible hand of the markets, it is only a result of the low US Fed rate.

My considerations as a prospective buyer with foreign assets

My wife and I have decided to return to Vancouver with our young family at some point in the future. The hope is to give them the same experience we had growing up – Canucks, PNE, Stanley Park, Granville Island, street hockey, camping, fishing, etc. This view is increasingly shared by ex-Vancouverites all over the world. Even some of the immigrants from Hong Kong of the 90′s who have since left Vancouver seem to have budding fantasies of returning once they have children.

We’re squarely middle class with decent savings and significant equity in our home in Hong Kong. Property prices here have appreciated with the same velocity as Vancouver. In our minds, we have several decisions to make. When to move and whether to move all or some of our assets back.

If we decide to move back this summer, we have the option of renting out our home here and refinancing it (mortgage rates at 1.5%-2% in Hong Kong currently) so that we have a substantial amount along with our savings to shop for a condo or townhouse. Or we could sell all of our assets here and look for a SFH completely paid off (or with minimal leverage).

However, if we decide to delay our move, we could consider hedging, for better or worse, by buying into a pre-sale condo. Our savings needs to be invested and the stock market does not offer the same sense of security for our future plans. So if we are to make an investment, it might as well offer some hedge for our future aspirations.

As a prospective buyer with foreign assets, I have two variables to consider: FX and real estate prices. This makes me see things very differently compared to a local buyer. Property prices may stay high but if the Canadian dollar falls by 10% against the Hong Kong dollar (in effect the US dollar), it makes it very attractive for me to take action.

I will be in Vancouver for vacation this summer and no doubt visiting some open houses. We shall see where the Canadian dollar stands and what the state of the real estate market is at the time. Stay tuned as I will report back in due course.
——-

Editor’s comments:

Many thanks to ‘an ex-Vancouverite in Asia considering a return’ (handle ‘BLM’) for submitting this carefully considered piece. We welcome all stories of the effects that the Vancouver RE market is having on citizens, and BLM generously shares with us his own considerations as he looks to buy property in Vancouver. He weighs information at his disposal, concludes that the market will remain strong into the future and, despite price levels that he’s found “shocking”, and price rises that he judges to be “astronomical”, he is planning to buy. This is all very important information to students of the Vancouver RE markets: If enough people continue to see what BLM sees, and act on their conclusions by buying, will the Vancouver RE market simply power upwards, relentlessly, forever?

BLM offered this piece for the sake of discussion, and he welcomes your thoughts on his opinions and circumstances; he also invited comments from vreaa, so here are a few thoughts and questions on some of the specific points he raises:

1. “I am now contemplating a return to Vancouver because there really is no better place to live…”
– The vast majority of us here know that Vancouver is a fine city. Welcome back.
When you say “there really is no better place to live”, is that based largely on a direct comparison with HK? Are there other places you’ve considered living?

2. We’d agree with the conclusion that easy money has caused the global RE price inflation, and that the Fed’s profligate ways were a central cause.

3. Are “capital flows” really that dependent on direct jet flights?

4. When comparing us with Australia, the Aussie dollar is not really that much stronger than ours, is it? And their real estate is similarly “frothy” compared to Vancouver, not moreso. In fact, aren’t we now ‘ahead’ of them in that regard, in some recent survey? (There are so many surveys, one can’t keep up). So it’s not that more expensive RE makes Australia less attractive to buyers outside the country. One difference of significance is that Australia has moved to limit off-shore ownership of RE.

5. More billionaires in China than in the US? I don’t believe that’s true. Wikipedia says 412 in the US vs 115 in China (2011). So, yes, there are rich people in China, a lot, but let’s not get too far ahead of ourselves (or underestimate the staying power of the US).

6. We have little doubt that, in the long run, China will become a stable and firmly established economic power. It’s already large, that’s for sure. Currently, however, we read much about China’s own (deflating) RE bubble, and about the shaky foundations of their GDP numbers; we hear credible commentators predicting a period of much slower real growth for China. Such a period of contraction would be expected to effect capital flows out of China, but by how much? Massive? Negligible?

7. Yes, the perception that the loonie will rise may make Canada more attractive, and the fact that it has been strong compared with the USD has made Vancouver RE gains seem even larger from outside of Canada.
But is this to remain the case? Couldn’t the loonie just as easily see 80c-85c US again before it sees $1.15c? If RE prices drop, and the loonie drops (the scenario we see as most likely),  how would foreign holders of Canadian RE respond? Buy more at ‘discount’ prices? Or worry that a Vancouver RE bubble has begun to deflate and hurry to sell? We’ll find out in the coming ‘grand experiment’.

8. “With interest rates this low, principals are being paid down rather quickly.”
– On aggregate, surprisingly not; it is stunning to consider, but total equity in Canadian homes has been falling despite increasing home values.

9. “With Canadian banks being some of the world’s strongest..”
– It’s a nice thought, and we know it’s gospel in some circles, but is this true? Or do they look strong because they haven’t been tested yet?

10. “What makes Vancouver unique is that the majority of home owners are not overly leveraged (from my own anecdotal observation).”
- Not being overly leveraged doesn’t mean that an owner is not overly dependent on RE price strength.
Of the owners you know, what percentage of their net-worth would you estimate they have tied up in Vancouver RE? How dependent are they on rising or at the very least stable RE prices, for their financial futures? How will they respond to price drops of 10%? 15%? 20%?

11. We particularly appreciated the section where BLM shared his own considerations as a prospective buyer.

12. “We’re squarely middle class with decent savings and significant equity in our home in Hong Kong.”
- Great; you’re in a similar position to many Vancouver owners. Well, apart from the savings bit, that is… Most Vancouver owners are over-invested in RE, especially when age, net-worth, and retirement plans are taken into account. So, it sounds like you’re actually better off than most “squarely middle class” Vancouver owners with young families.

13. “…we have the option of renting out our home (in HK) and refinancing it (mortgage rates at 1.5%-2% in Hong Kong currently) so that we have a substantial amount along with our savings to shop for a condo or townhouse.”
- In which case you’d have no savings and own a property in Vancouver and a property in HK; with low leverage. What would you estimate your maximum downside risk would be in that scenario?

14. “…we could consider hedging, for better or worse, by buying into a pre-sale condo. Our savings needs to be invested and the stock market does not offer the same sense of security for our future plans.”
– We personally consider Vancouver pre-sale condos one of the worst investments imaginable at present. But, yes, the stock market is likely to be volatile through the next year or two (with significant downside risk). Why do your savings ‘need to be invested’ in one or the other?

15. “Property prices may stay high but if the Canadian dollar falls by 10% against the Hong Kong dollar (in effect the US dollar), it makes it very attractive for me to take action.”
– Are you sure that would lead you to act? Imagine a global deflationary wave, in which Vancouver property prices started falling, fell 15%, and the loonie dropped 10%. Are you sure you’d be looking to buy at that point? Would you be having any other thoughts in that scenario?

‘An ex-Vancouverite in Asia considering a return’ (BLM), many thanks for your thoughts and your story. Thanks, too, for your promise to keep us updated; please report back, we’ll be interested to hear how things play out for you, and we’ll headline your updates. All the best with all of your endeavours.

- vreaa

Flaherty – “For some time now I’ve had concerns about the role that CMHC now plays. Historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that. I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada.”

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.” [Finance Minister Jim Flaherty]

In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.
“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”
The finance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.
The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.
By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.
But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”


Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.
As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”


- from ‘CMHC could be pulled out of mortgage insurance business, Flaherty says’, Garry Marr, Financial Post 27 Apr 2012 [hat-tip allen]

If it ain’t broke, don’t fix it.
Ergo, I think we can very fairly say that these announcements of change are an admission that something is ‘broke’, or is going to be. Just as many of us have opined for some time. The problem has been that the CMHC has mispriced risk and created a form of moral hazard, fuelling speculation with the same “cheap money” that Flaherty here blames on the bankers.
Interesting to note Flaherty playing hot-potato with Carney: “Cheap money is his problem!”; “..no, his!”; “..no, HIS!”; etc.
We’re not sure what he means when he says: “The key in housing from my point of view is to get the best information on housing.” Translation, anyone? Does he mean we shouldn’t consider things deemed extraneous to the market?
- vreaa

“Fast forward 5 years later, HE STILL HAS INTEREST ONLY mortgage at variable 2.00% rate, he can barely keep up with payments, he has 5 credit cards all maxed out, and 6 month ago he asked me to lend him some money.”

“A friend of mine, a small business owner who reports annual income of about $20K (not true income) from his business received a $550K INTEREST ONLY MORTGAGE in 2007 and bought a house in Westwood Plateau Coquitlam. Fast forward 5 years later, HE STILL HAS INTEREST ONLY mortgage at variable 2.00% rate, he can barely keep up with payments, he has 5 credit cards all maxed out, and 6 month ago he asked me to lend him some money.
Next time someone tells you there is no SUBPRIME in Canada, PLZ punch them in the teeth for being ignorant or lying straight to you face.”

- SunBlaster at VCI, 21 Apr 2012 9:29pm

“There were two houses on his street built last year and have been sitting for sale for about 6 months. The one without the wok kitchen just sold.”

“Just chatted with a co-worker over a cup of coffee. He lives in a not-so-distant suburb of Vancouver and he said that there were two houses on his street built last year and have been sitting for sale for about 6 months. Both priced over a mil, slightly different in size, but equal by $/sf, curb appearance etc. The catch is that one has a wok kitchen, while the other doesn’t.
One of the houses was sold last week. The one without the wok kitchen.”

- Patsan at vancouvercondo.info 27 Apr 2012 11:16am

“I can’t imagine people buying such a thing without speculating on the price.”

“I frequent North Vancouver, especially the mid-Lonsdale area around 13th st to see my significant other. There’s been quite a few large scale developments in the area, and more planned down the road. Last year I dropped by “The Vista,” a two building high rise project just off 13th and Lonsdale. I saw a 4th floor 2 bedroom apartment, barely 1000sqft, that was asking 600K. At the time I thought that was crazy. Today the SO and I dropped by The Kimpton to have a look around. I was blown away. The “luxury” building is 5 floors, and the asking price for a 2 bedroom was 710K! Unbelievable. Of course, everything that could sparkle in that ~1000sqft condo did, and the sellers said “concrete” about 15 times during our 10 minutes there, but there was a suspicious inconsistency in the “luxury” presented. The kitchen and bathroom were all fine (complete with a bow-tie on the toilet!), but for some reason there was a sliding door to the master bedroom, but not to the 2nd bedroom. There was a sliding door to the bathroom for the 2nd bedroom, but a regular door for the bathroom in the master bedroom. And instead of an actual fireplace, there was some weird graphical device that showed something that looked like a really bad CG fire. Anyways, it seems builders in a very non-posh neighbourhood of North Vancouver think they can sell people a 1000sqft concrete box just barely off the ground for $710,000. You’d think it was a 2000sqft penthouse in Downtown/West Vancouver. Oh, they said they only had a couple units left. I guess they can get away with it, although I can’t imagine people buying such a thing without speculating on the price.”
- from ‘R’, via e-mail to VREAA, 26 Apr 2012

Get Girls With Your Car; Keep Them In Your Condo


- from The Georgia Straight, 27 Apr 2012
Many thanks for the link to the image to Ray, who also adds:
“Here is a fun ad from the Georgia Straight today that insults our ability to keep a woman unless we buy one of their houses. Is it the top when they have to play into our primal urges in order to sell their homes?”

And the target buyer is…?
With a name like ‘Meccanica’, and this line of advertising, you’ll be able to smell the testosterone in the common areas.
(Where is condohype when we really, really need him? For those of you who are relatively new to the Vancouver RE blogosphere, ‘condohype’ was a site that offered incisive, insightful and often hysterically funny critiques of condo project promotions. Foreclosed 2009. Archives still online.)
Yeah, guys, if you can’t supply a cave or a nest, you aren’t going to get girls, and all sorts of other things aren’t going to happen to you either.
‘Real Men Buy Real Estate’ ™
- vreaa

Reminiscent of:

woes of wenting

[For the record, this our version of the cover of the book “I Married An Artist”, by Billy Button. Great stuff. -ed.]