Vancouver Real Estate – How I learned to stop worrying and Love the Bubble.

Don’t believe the Hype. (the Bubble-Hype that is)

Short Version

• Vancouver Real Estate – in particular detached home prices can, and likely will, rise further.
• As more single family home lots are assembled and redeveloped into multi-family product so dwindles the supply of detached homes in Vancouver.  Less Supply = higher prices still.  Alternative paths to increased density continue to flourish as well.
• In 1991 Vancouver became the most expensive City in Canada in which to purchase a detached home.  Since 1991 the gap has steadily widened.
• If you are going to live out your life in Vancouver and wish to own a home, then do not sit on the sidelines waiting for a crash that is supposedly coming…as you might have done since 1991 when values began to deviate from the norm.
• Low interest rates are in fact not allowing Canadians to qualify for larger mortgages that they did 5 or 6 years ago at notably higher rates.  Government Regulation has seen to that.
• Low interest rates could be here for some time to come.

Think about the irony demonstrated in the next two stats cited in a 2012 CAAMP presentation;

• 83% of CDN’s are comfortable with the amount of Equity in their own homes.
• 77% of CDN’s believe that low rates mean many CDN’s own homes who should not.

Canadians individually believe they personally are OK, but are worried about their neighbours…and vice versa.

How very prudent and very Canadian of us.

Long Version

We often see both social and economic commentary, think-tank studies, statistics, & opinions, (lots of opinions) making the argument that the cost of home ownership in Canada, in particular Vancouver, is both ‘unaffordable‘ and ‘unsustainable‘.

Of course it all depends upon ones definitions of unaffordable and unsustainable.

Prices are due to correct, even the IMF says so...

Vancouver pricing corrections are historically short-lived and are rarely of tremendous significance to most of us.  The statistical fact is that 98% of homeowners carry on making payments and pull through to the next round of appreciation.

The events around a major correction, the nearest example being 2008/2009, typically reduce prospective purchasers power (via decreased employment) as well as hampering most potential buyers psychologically (as humans tend to illogically ‘buy-high‘ and ‘sell-low‘) often demonstrating a greater fear of buying into a dropping market than of buying via multiple-bid into a fast-rising market.

One key trigger of a large drop in Vancouver Real Estate values would be a large drop in employment and/or incomes.  Assuming there is some unforeseen fundamental shift downward in unemployment, then yes there will be an increase of supply on the market and with that increased competition for a small pool of buyers (remember most buyers are out of the market now as they too presumably lost jobs) with corresponding  low sales volumes – similar to what occurred in Jan – March of 2009.

In hindsight re 2009, one must also consider the impact on sales activity that record setting snow fall in January 2009 had on a City that seizes up with more than a 1cm dusting.  Economic crises or not, January 2009 was doomed to inactivity by weather alone.  Also prolific into the Spring of 2009 was a ‘world is ending‘ psychology that had many buyers sitting on the fence waiting for deeper drops.  Then, before those fence sitters knew it, prices were on the way back upward and the window of opportunity had closed.

Employment drives values,

‘Unsustainability’

  Current Arrears rates in Canada for CMHC insured mortgages, arguable the ‘riskiest’ of the bunch has dropped steadily from a recent peak of 0.45% to 0.31%, approaching historic lows.  It should be noted that in 1992, and in 1997, the arrears rate peaked at .65%.  More than double todays level. (still a very low number)  All the while home prices trended in an upward arc.

It would seem that CDN’s are in fact having less trouble with regard to making their mortgage payments than in previous years, despite carrying larger average mortgage balances…which are in line with rising incomes.

Based on a 99.69% rate of compliance with mortgage repayment by CDN homeowners it seems reasonable to suggest that things are perhaps more stable than might otherwise be suggested.

What if interest rates double?  Interest rates rising or falling has little to no day-to-day effect on the 47% of Vancouver homeowners currently mortgage free.  As for the balance of homeowners this concern was addressed in detail in a previous post and the impact is nowhere near as dramatic as one might expect.  It should also be considered that over 80% of new mortgages written in 2013 were 5yr fixed under 3%.  A spike in rates does not impact many homeowners until 2018.

There is little evidence of rate hikes for clients in variable rate mortgages any time soon either.  Clear statements have been made by the Bank of Canada regularly, such as “All we’re really doing is being honest that at this stage, we think that interest rates will stay where they are for quite some time,”

If interest rates spike there will be a wave of foreclosure deals…

The Canadian foreclosure system is heavily biased in favour of keeping people in their homes, long after they stop making payments on them in fact.  A lender can take 18-24 months to effectively remove people from a home once they cease making payments.  It is not uncommon for a sale date on a foreclosure to be over two years beyond the date of the first missed mortgage payment.  Once a Judge approves said sale the lender is then obligated to track down the original homeowner and pay them out the remaining equity as well.

It is a very socialized process.  One that should make us proud to be Canadian to a great extent.

What this means is that with an overwhelming majority of Canadians in very low rate fixed mortgages, (80% in >3% 5yr fixed from 2013) a rate-spike would not start to impact many homeowners until 2018.  Allow for a few months of payments made before slipping behind, then add in another 2 years for the entire foreclosure process to get to the point of the property being sold and we are talking about sitting on the sidelines for 6+ years, or until 2020, all the while paying rent and living in a world of inflation rates outpacing savings rates.

This is not a realistic plan.  Nor has it been over the past 30 years.

‘Unaffordability’

Critics of Real Estate ownership often cite the average detached Vancouver house price and average income.  i.e. ‘Today the (BC) median income is $68,970, and the average (Vancouver Detached) house costs $922,600.’ ‘13.4 times annual income’.  As if somehow these metrics are co-dependent.  This is a misleading correlation.

Lets instead look at apples to apples;

i.e. Average income and Average mortgage size.

• The BC median income of $68,970.00 and average BC mortgage balance of $288,750.00 presents a less hype inducing ratio of 4.18 times income.

• The Port Moody (my neck of the woods) median income of $93,015.00 and average Port Moody mortgage balance of $295,427.00 presents an even less hype inducing ratio of 3.17 times income.

It seems reasonable, if less ‘exciting’, to focus on a ratio of monies earned to monies owed. It paints of picture of impossibility, has done for years.  Here is the reality check.  It is not about income and house-price, it is ALL about income and mortgage-size.

Whether a home rises to 14:1 or falls to 1:1 is somewhat irrelevant in the short term, what matters is whether income covers expenses and is home ownership a long term plan?  If yes, then it is likely one will weather a boom and a bust… or three.

A home is just that, a place to make a life.  For some it is a forced savings plan, for others a dream realised of owning their piece of the world.   There is value beyond just dollars in owning a home, and without viewing ones residence as a singular retirement savings vehicle there are many degrees of safety and stability as well.

Are there several Vancouverites with mortgages of 500K or more?  Yes, and those folks have household incomes proportionately larger (in excess of 100K).  Typically they are dual income households with a basement suite supplementing payments.  in many cases these are highly employable people with multiple revenue streams, salary, investments, rental income, who also have family support to call on if need be.

Again, looking at real numbers, the average BC mortgage balance requires a payment of approx ~$1,350.00 per month, or $16,200.00 per year.  This is approx 24% of the gross annual median income being used to debt service the average mortgage balance.

Fear inducing headlines about ‘unaffordability’ and ‘unsustainability’ touting the end of the Real Estate world have been around as long as my wife and I have owned Real Estate.  Values cannot get any higher!  Rates can’t get any lower! – we have heard these refrains since our first detached home purchase @ 160K in 1995 when rates were at an ‘unsustainable’ low of 8.75%.  The vendor of that home had purchased for 40K in 1985, clearly we were suckers buying into an overheated market.  And yet the value never dipped below 160K ever again.

Today our current home is more ‘unaffordable’, and our current mortgage rate more ‘unsustainable’ than ever.  Yet we sleep soundly.

The Future

Vancouver has grown increasingly more expensive all my life.

It is my opinion that the gap between average BC income and the price of a detached home in Vancouver will continue to widen.  the very limited supply of land, the lack of detached housing starts, and the ever increasing demand as migration and immigration continue will almost certainly ensure this.

Water to the West, Mountains to the North, a Border to the South, combined with Farmland and more Mountains to the East.  Throw in trees, Frogs, Birds, steep slopes and other development-limiting issues and well – we only have a finite amount of space left to spread out on.  With tens of thousands more people arriving every year wanting a place to live.

Will my children ever own a detached home in Vancouver?  Perhaps not.  Would they want to?  Perhaps not.  Will they have a shot at owning in outlying areas such as the tri-cities and the Fraser Valley?  Entirely feasible for the foreseeable future.

All of this data and more helps keep us personally invested in Vancouver Real Estate beyond just our own home.

Thanks for your time.

Have an Excellent Day!

@dustanwoodhouse 

The financial news this morning was dominated by the December employment reports for Canada and the US.

In Canada we saw one of the worst months for job creation in the last two decades as Canada lost 45,900 jobs (see chart above), which is stunning considering the expectation was for a gain of 14,000.  This pushed the Canadian unemployment rate from 6.9% up to 7.2%, and pushed the Canadian dollar to 4-year lows.

Job growth is arguably the most important requirement for gains in real estate prices.  In BC, we may be in luck in that the province actually created 13,000 net new jobs.  However, Ontario saw 39,300 net job losses, a staggering total compared to the population of the province.  Also, we have to remember that the Toronto housing market has continued to defy fundamentals and has grown while the Vancouver housing market has been relatively flat for a while now.  It would be hard not to believe that the risks of real-estate speculation in Toronto has reached new heights since the job situation is clearly worse than anyone had anticipated.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

Deflation Shock Coming? Or QE Euphoria?

Taki Tsaklanos over at GoldSilverWorlds has reprinted a series of charts fromIncrementum Lichtenstein that show a reversal in several big trends. Here are a couple of them, followed by some other supporting material.

First, US banks have not only failed to return to their pre-2008 pace of lending, but the loan growth rate is now falling back towards zero. In other words, the trillions of dollars pumped into the banking system by the Fed in recent years don’t seem to have worked:

Along the same lines, after the 2008 crash growth in the money supply spiked in the US and recovered modestly in Europe. But both trends are now declining:

To see what this means for the weakest links in the global finance chain, here’s a chart from Mike Shedlock showing how pretty much all the new credit being created in Spain is by the government, while private sector activity continues to contract.

In November, Spain’s youth unemployment rate exceeded that of Greece:

“Spain saw its youth unemployment rate rise to a staggering 57.7% in November as the country registered the worse youth jobless rate in the eurozone area.

Eurostat, the statistical information arm of the European Union, also revealed the youth unemployment rate across the eurozone remained steady at 24.2% for the second consecutive month – meaning there were 3.5 million unemployed under-25s across the region.

“There is a real danger that these young people will get trapped in the ranks of the long-term unemployed,” James Howat, a European economist at Capital Economics, told IBTimes UK.

What does all this mean? Maybe that 2014 will be a year in which Europe leads the global economy back into recession, people start focusing on how deflation makes life even harder for debtors, and pressure builds for the European Central Bank to board the QE train. The Fed, meanwhile, will find it hard to justify more tapering with big parts of Europe on the brink of explosion (an inevitable result of 50+% youth unemployment) and will be forced to reverse course sooner rather than later.

So the question becomes one of interpretation. Do equity and other financial markets freak out over incipient deflation or soar in anticipation of global, unending debt monetization? Or one then the other?

However it plays out, fundamentals will likely take a back seat to perception and manipulation, which is, for a while longer, the way of the world.

About DollarCollapse.com

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

Yesterday, with the wind chill, a stinging -16 degrees Fahrenheit terrorized Baltimore’s morning commuters.

At least those who bothered to leave the house, anyway.

As for me, I layered up, gave my Prius a few minutes to warm up, and ventured downtown, where the common sight of intersection panhandlers was unsurprisingly absent.

On the radio, a press release issued by PJM Interconnection was recited. The morning reporter asked those in the listening area to conserve electricity, as a power outage in this kind of weather could result in deadly consequences. Especially for the elderly.

Of course, I doubt many folks even heard the announcement. And of those who did, few would actually heed the warning.

I’m not particularly worried though. I’ve done enough research on this stuff to know that it would take an enormous amount of pressure from consumers to put enough strain on the grid to knock it down. And the truth is, even if it does get dicey, the gatekeepers will simply lower the voltage in order to keep things humming.

Still, basic conservation efforts — like turning off the lights in unoccupied rooms or running the dishwasher during non-peak hours — probably aren’t going to break anyone.  In fact, if done regularly, they can actually save you a few bucks.

But I’m not writing you today to talk about common sense measures to save money. Instead, I want to talk to you about how a growing trend of more extreme temperatures is exposing us not only to the elements, but to new opportunities to make a lot of money as well.

Long-Term Crisis = Long-Term Profits

Over the past few years, we’ve had the opportunity to make a lot of money in sectors that have been impacted by extreme weather events.

Capitalizing on high oil prices following destructive hurricanes has been especially fruitful. But with this cold weather comes another, more long-term opportunity.

You see, temperatures fluctuate all the time. And with those fluctuations come fluctuations in price. This is great for trading, but if you’re looking for a more stable play on extreme temperatures that’ll take you over the long haul, there’s a better place to look.

Check this out…

While we’ve packed up the party hats, guzzled the last of the champagne, and already started ignoring our New Year’s resolutions here in the U.S., China’s New Year is about to begin — and it’s poised to be a huge one for investors.

It will be the year China turns its economy around and delivers investors the double-digit gains they were so used to when China started adopting free-market principals 30 years ago.

Welcome to the year of the horse…

In China, the spirit of the horse is not only a symbol of travel and improvement, but also of a sign of speedy success. It also represents the Chinese people’s ethos to improve themselves at all costs.

And they have already gotten an early jump in the improving-themselves department…

Famed investor Jim Rogers is calling it “the most important economic event of the next 10 to 20 years.”

Here’s what happened in Beijing while we were watching the ball drop in Time’s Square…

In November, Chinese leaders gathered for a historic meeting called the “Third Plenum” to unveil a set of sweeping economic reforms in order to jump-start their lagging economy. Many skeptics — myself included — figured these would be ceremonial “reforms” that would make for a good press conference but wouldn’t really have any teeth.

Instead, President Xi Jinping rolled out a rather drastic series of changes that focus on China’s bloated, incompetent state-owned enterprises, demographic nightmares, and draconian social policy.

What does it mean for investors?

Let’s have a look-see…

Kill the Monopolies

First thing on the docket is to shake up the bloated state-owned businesses that muck up the works, cultivate cronyism, and are generally just bad at business…

Historically, China’s state businesses have taxed the nation’s resources and boxed out private sector business — much to the detriment of the average investor. So as part of the 2014 reforms, China is actually allowing private sector cooperation to inject some free-market savvy into the state monopolies.

That is a big, big deal…

From the Financial Times: 

The government will allow state companies to introduce employee stock ownership plans, a way of encouraging managers to target profits. Bringing more private investors on board will also increase the portion of state companies in the hands of performance-minded shareholders, a disciplining force.

Even more important are the reforms that will change their operating environment. Shifts to market-based pricing for energy inputs and interest rates are, over time, undermining the advantages that state companies have over their private rivals.

In order to further embrace free-market ideals, the Chinese also announced they would loosen the harsh price controls that have dampened private investment in their energy and agriculture industries.

Welcome changes, to say the least…

The endgame here is to transition China’s economy from one of investment and exports to one that is a free-market and consumer-driven. But purely economic reforms won’t be enough to transition China into the consumer-driven behemoth they wish to be.

They’re also going to need some serious social reforms…

Generational Suicide

When the average Joe discusses Chinese social policy, the thing that always gets mentioned first is the one child policy…

Since 1979, China has restricted the reproduction of its citizens to one child. There are exceptions to this policy, but all told, the program is estimated to have stymied somewhere around 200 million births. It has also been blamed for horrors such as forced abortions and female infanticide.

But according to Xi Jinping, the one child policy may be going the way of the dodo.

A demographic time bomb has been ticking for the Chinese for a while now. If they kept up current policy, the population of 65-plus would double by the 2030s. By 2050, there would be less than 1.5 workers for every retired person in China, according to the Brookings Institution.

Here are a couple more jaw-dropping facts about China’s desperate need to pop out some more babies. From Stratfor Global Intelligence:

• China’s working age population peaked last year, shrinking by 3.45 million(or -0.6% year-on-year), according to the National Bureau of Statistics, to 937.27 million. That represents a major demographic turning point, not just for China, but also for Asia and the world. The turning point has come three years ahead of schedule, as most demographers had put China’s peak at 2015.

• More than 13,600 primary schools closed nationwide in 2012. The ministry looked to China’s dramatically shifting demographic profile to explain the widespread closures, noting that between 2011 and 2012 the number of students in primary and secondary schools fell from nearly 150 million to 145 million. It also confirmed that between 2002 and 2012, the number of students enrolled in primary schools dropped by nearly 20 percent. The ministry’s report comes one day after an article in People’s Daily, the government newspaper, warned of China’s impending social security crisis as the number of elderly is expected to rise from 194 million in 2012 to 300 million by 2025.

• Women are bearing only 0.71 girls over their lifetime, well below the replacement figure of just over unity. In 2010, there were 51m more men than woman in the country. The sex ratio among newborns is 120 boys for every 100 girls, the highest in the world (Figure 39). At this rate, there will not be enough brides for as many as one-fifth of today’s baby boys when they get to marrying age, heightening the risk of social tensions.

Have fun building a new consumer economy on that brittle foundation…

If you really want to build a consumer economy, the one major piece is rather simple: you need people to buy things!

To combat this demographic imbalance, the Chinese have started to relax the one child policy, now allowing parents to have two children if either parent was an only child themselves. But they will need to relax this even further to avoid cataclysmic population meltdown.

Also importantly, these new people will need places to live — preferably in concentrated urban economic areas. That’s why the Chinese are accelerating Hukou (residents) reform. This will make it much easier to move from rural China to the bustling economic hubs like Hong Kong and Shanghai to drive up consumption.

Those are the changes that have Jim Rogers excited. He’s banking big on the new Chinese consumer economy…

How to Play It

As long as they rely on a shadow banking system that has somewhere in the vein of$6 trillion in off-balance-sheet loans every year,  I’m going to remain skeptical on the economy as a whole.Now, I take anything China says with a splash of soy sauce…

And the problems they are facing — like most New Year’s resolutions — will have some unpleasant side effects at the beginning…

But Chinese stocks are trading at near-record lows. For example, the iShares China Large-Cap ETF (NYSE: FXI) — is down 43% from its high in 2007. In a worldwide search for depressed stock prices, China will be a big destination for investors. A ton of cash will be flowing into China this year, no doubt about it.

That’s where Jim Rogers comes in. He’s a genius, pure and simple. The Quantum Fund he started with George Soros returned an unbelievable 4,200% over ten years between the ’70s and ’80s. And he thinks those wild returns are completely possible again… in China.

That’s how strong his belief in China really is.

And he is more bullish than ever right now. He thinks the new Chinese reformers “have the wind at their back.”

He paraphrased an ancient Chinese parable to emphasize the point: “The way you cross the stream is to feel one step at a time, one rock at a time. Eventually, you get to the other side, and start moving ahead. They are on the other side right now.”

I’ve pored over his financial disclosures and found a very attractive Chinese company that he has recently sunk a lot of money into. And better yet, it’s poised to breakoutwhether or not China’s reform take hold.

You can get immediate access to it in the Crow’s Nest portfolio by subscribing risk-free, right now.

The year of the horse is just beginning. Don’t wait until the race is over…

Godspeed,