Tag Archives: Fundamentals

BC Budget: Taxpayer Debt To Support The Construction Industry – “Every young person out there today understands the challenges of getting into the housing market.”

“Every young person out there today understands the challenges of getting into the housing market. As parents and grandparents, we worry about the struggles our children and grandchildren have trying to save for their first home.
Even with the relief we provide to first-time buyers from the Property Transfer Tax, it is still difficult for many British Columbians to save up enough to make a down payment and still have money left over to cover all their other costs.
That is why, as part of this budget, we are introducing the B.C. First-Time New Home Buyers’ Bonus. It is a temporary, refundable income tax credit for first-time buyers who purchase newly‑built homes effective today until March 31, 2013.
They will receive a cheque for up to $10,000. Just think of the difference that’s going to make.”

[Yeah, it’ll almost definitely result in the prices of New Homes purchased by FTBs rising by an effective $10K, resulting in absolutely no net-savings to the purchasers, who will continue to purchase at the very limit of their monthly-payment ‘affordability’ level. -ed.]
“It complements the measures we announced last week — which included raising the threshold for the existing HST rebate to $850,000, and making a similar grant available for new secondary homes outside the Greater Vancouver and Capital regional districts. Over 90 per cent of all new homes in the province are below this threshold.
Together, these measures serve the dual purpose of giving consumers a break, while supporting the new-home construction sector.”

BC Finance Minister Kevin Falcon, Budget Speech, 21 Feb 2012

This in a budget that will come in with a spending deficit of about $1 Billion.
Taxpayers are spending borrowed money to support the construction sector.
And note the glib assumption that “every young person” needs to “get into the housing market”.
Next up, assistance for toddlers interested in buying their first condo.
– vreaa

Find the ‘fact sheet’ regarding this bonus here:
2012 First Time Home Buyer’s Fact Sheet
[And see the end of the sheet for the hilarious example that some government wag came up with: a home for $150K! Unfortunately the home has to be in BC, Canada. – ed.]

Vancouver – “Where my friends/mom/society/tourists think I live; Where I actually live.”

– found on Facebook by Makaya, forwarded to VREAA 20 Feb 2012.
[Thanks. -ed.]

Extirpated Biologist – “In conservation biology, when a species can no longer survive in its home territory, it is referred to as “extirpated”.

From the ‘Introduce Yourself To The Forum’ thread at RE Talks, a post by ‘extirpated’, 22 Mar 2011 7:55pm

1) Age / Location / Occupation
“38, born and raised in Richmond BC (to Polish immigrants) forced out of my home province by rising real estate prices and the desire to live in my own house. Conservation biologist – turned – artist”

2) What real estate do you own?
“2 houses, which are not in BC”

3) What’s your view on the market going forward? Buyer or seller? Which parts of the market?
“I don’t think I’ll ever be able to afford to live in BC again” 😥

4) Anything else?
“In conservation biology, when a species can no longer survive in its home territory, it is referred to as “extirpated”.

“A guy I know bought a place and was bragging that his mortgage is only a little bit higher than his rent would be. He gave me the whole lecture about how I am throwing money on rent. It took only a month until he started complaining about other expenses.”

“A guy I know bought a place and was bragging that his mortgage is only a little bit higher than his rent would be in a similar place. He gave me the whole lecture about how I am throwing money on rent etc. It took only a month until he started complaining about the high condo fees (which he did not account for), taxes (which he did not account for), higher insurance cost (which he did not account for) and a possible “assessment” (not even in his dreams when he was doing his “calculations”).
He has a variable rate mortgage and is paying just over 2% interest, that’s how his mortgage payments came relatively close to rental cost. Every 0.5% increase would add another $200+ to his cost.
Most home “owners” I talk to ignore any variables beyond mortgage when they are doing their calculations.
Another cost that is almost never accounted for – closing costs.”

– a splice of two posts by ‘bubbly’ at VREAA 20 Dec 2011 11:55am and 11:58am

‘The Economist’ – Rental Income Shows Canadian Home Prices Are 71% Overvalued

‘The bursting of the global housing bubble is only halfway through’.
Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.
To assess the risks of a further slump, we track two measures of valuation. The first is the price-to-income ratio, a gauge of affordability. The second is the price-to-rent ratio, which is a bit like the price-to-earnings ratio used to value companies. Just as the value of a share should reflect future profits that a company is expected to earn, house prices should reflect the expected benefits from home ownership: namely the rents earned by property investors (or those saved by owner-occupiers). If both of these measures are well above their long-term average, which we have calculated since 1975 for most countries, this could signal that property is overvalued.
Based on Incomes, home prices are 29% overvalued in Canada.
Based on Rents, home prices are 71% overvalued in Canada
[The most overvalued by this measure of any of the global markets studied. -ed.]
Canada has an even higher household-debt burden in relation to income than America did at the peak of its bubble.
– excerpted from ‘House of horrors, part 2’, The Economist, 26 Nov 2011. Image from the Huffington Post, Canada, where the story was headlined as: ‘Canada’s Housing Market More Overvalued Than U.S. At Its Peak, The Economist Says’.

None of the above comes as anything new to readers here.
Only wackos like Vancouver RE bears and ‘The Economist’ go on about something as passé as ‘fundamentals’.
Gravity will reassert; we will revert to the mean; perhaps overshoot. – vreaa

“I looked for a decent house for 3 years and have given up. I am not willing to spend all my money on a tear down. Just crappy value all around.”

“I too sold my company, no I did not make near $2M, I did ok in my books and I am seriously considering putting some money into other real estate investments NOT in Vancouver. I also looked for a decent house for 3 years and have given up. I am not willing to spend all my money on a tear down. Just crappy value all around. Vancouver is nice, yes, but it also rains 8 months of the year and costs an arm and leg to do it. Central California, a little in from the coast, up in the foot-hills on a few acres… now that sounds decent.
Why does everyone stay in Vancouver if it’s so damn expensive?”

Cali Calling at VREAA 22 Nov 2011 7:07pm

Repost: It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That.

[This was originally posted here almost exactly six months ago, VREAA 18 May 2011. Reposted in view of discussion regarding foreign ownership in local press, and in light of upcoming election. – vreaa]

Imagine you own a beach house in a resort area and you decide, at the end of a beautiful summer, to revive the memories of your youth by organizing a BBQ and bonfire on the beach in front of your home. You invite all your local friends, you organize the food, and you ask everybody to bring along their families, their friends, and their own booze. With plans for a whopping big bonfire, you also ask them to bring wood. Everybody complies, similarly eager for a beach bash. One of your buddies, Ken, has access to some really good firewood, so he brings a trunk-load of the stuff. The BBQ goes well, drink and chat flows, you and your buddies start to build the bonfire. Everybody is in a disinhibited party mood, and you all somewhat unwisely start constructing the bonfire a little too close to the house. A couple of people mention this but, the wind is blowing in the safe direction, it’s an arguably fair distance from the house anyway, and, besides, there is a fire extinguisher in the kitchen, right? Consensus is that the fire site is fine, and a really seriously large pile of wood accumulates.
So, the bonfire is lit, it looks glorious, and, in the fading light, everybody has a great time… marshmallows, jokes, dancing, singing. Everybody piles on the wood they’ve brought; everybody is particularly grateful to Ken, as his supply burns extremely well, it gives off a wonderful aroma, and it warms everybody very nicely.
You can see where this is going: The wind changes, the fire roars, the fire extinguisher is woefully inadequate, the house burns down, neighbouring houses catch sparks, the whole beachfront is destroyed, and everybody blames Ken.
Did I mention that Ken is from mainland China?

The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever. People told themselves all the necessary stories to reassure each other that prices could, indeed, only go up: Best Place On Earth; Running Out Of Land; Olympics; and, yes, Limitless Demand From China. Under ‘normal’ circumstances, 2008 might have marked a top, but we all know that little about Vancouver RE is ‘normal’. Prices started dropping from the summer of 2008. Perversely, shortly thereafter, the world financial system imploded and interest rates, already at low levels, dropped to essentially zero. Vancouver RE didn’t need a bail-out, but it got one anyway. Prices had only been able to drop 15% before being re-ignited, taking out prior highs, and blazing on to their current dizzy heights. Now, with Australia finally pulling back, our real estate is arguably the most overpriced in the entire world. We are the last remaining pristine and unimploded RE bubble.

The most important fuel for this market fire, by a very, very long way, was and is local speculation. Local buyers, through all of these years, have continued to mercilessly overextend themselves to purchase property at prices that they would never dream of paying if they foresaw a significant risk of price downside. This applies to primary residences as much as it does to ‘investment’ properties. If locals had not speculated, or had speculated less, prices would not have gotten so very far divorced from fundamentals. Yes, there is a direct influence of foreign buyers on the market, more so in some areas of the city. But these buyers still participate in less than 5% of all property transactions. In the part of the city most affected by this phenomenon (the high end of the westside), realtors report that 50% of sales are to this group. That means, of course, that the other 50% of sales are to locals, overbidding on properties by arguably a factor of two or three times fundamental value. Our speculative mania has attracted non-local momentum players, and, yes, there may be a need for some consideration of specific limits on their activity; but let’s be very clear that these players are only a small part of the entire phenomenon.

There is no easy way out. That is the nature of speculative manias, they harm many on the way up, and a lot more on the way down. There is no way of ‘landing’ them ‘softly’. By their nature, they run out of fuel and implode. We have built and ignited a bonfire here that was long ago completely out of control and destined to raze the whole block. It would be very unfair and disingenuous to blame the outcome on our buddy Ken, who we invited to the party, who only brought wood with our encouragement, and whose fuel we appreciated while all seemed okay.

We are very concerned, however, that our city is setting up for such a scapegoating. Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.

As we said in our end-of-2009 predictions for the coming decade: ‘A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.’ We hope that, as a society, we will be able to successfully navigate the substantial challenges of that event in a mature and wise fashion.
It is dangerous to blame a speculative mania on one small sub-sector of our community.
Vancouverites built this bonfire, and Vancouverites need to take responsibility for its consequences.
No scapegoating.

– vreaa