FACTS THIS WEEK:
EARLY VANCOUVER NUMBERS - BEST IN 4 YEARS
CHINESE BUYERS WILL KEEP COMING IF WE DON'T BORE THEM TO DEATH
TROUBLED CITIES SHOW REAL ESTATE RESILIENCE
VANCOUVER LAND LISTINGS REVEAL TOWERING PRICES
PROPERTY TAX RULING MAY AID B.C. RETAIL TENANTS
DON'T SWEAT THE DOWNTURN IN US HOUSING SALES
INTEREST RATE PREDICTIONS WITH A GRAIN OF SALT
I N T E R N A T I O N A L: Chinese Buyers Will Keep Coming If We Don't Bore Them To Death
There is always a lot of debate about the extent of real estate buyers from China in Vancouver and what effect they are having on housing prices. We believe there are a lot of Chinese buyers and accept the fact that they have helped drive housing prices higher, particularly in better neighbourhoods. We don't believe there is any doubt about that.
We also believe Chinese buyers will keep investing in Vancouver - if we don't bore them to death with a lack of entertainment and social activities.
As anyone who has been to Hong Kong, Shanghai or Beijing can attest, Vancouver simply does not rank on the same whirl of events, of simply things to experience. A day just walking around in any of these cities would dazzle even the most jaded Vancouver hipster.
Granted, Vancouver is much smaller, but a number of Chinese residents here say they find it dullsville in B.C.'s biggest city.
A poll released last month by Insights West asked 2,100 Chinese and South Asian residents of Metro Vancouver to rate what they like and don't like about the region. Most were relative newcomers to the city.
On the downside, 64% said the quality and availability of entertainment is worse than in their home country and 68% said the social life in Vancouver is also below par. The job environment was also found wanting.
The poll found that those aged between 35 and 54 are most likely to say employment opportunities are better in China than they are here (34%) than those in the 18-to-34 (45%) and 55-and-over (45%) age groups.
Major Point: On the upside, respondents rated some factors related to quality of life higher than in China - including the weather (81%), political freedom (77%), the health care system (68%) and housing (75%). (It is somewhat surprising that nearly a quarter thought that political freedom was better in communist China than here in Vancouver!!) Major Point: Chinese immigrants are not alone in dissing on Vancouver's social scene. Visitors to TripAdvisor, the big online travel site, have remarked that the city is boring, has too many panhandlers and homeless on the streets and "a town this expensive lacks anything depicting the old fashion panache of money, glitz, and world class reflection." Interestingly, Vancouver has too many regulations and too few great venues to make it a world-class fun place.
Troubled Cities Show Real Estate Resilience
We always have to wonder when we read the latest wide-eyed warning that the Vancouver housing "bubble" is about to burst. Often, the reports cite the relatively low incomes compared to the high house prices. The most recent was by Vancouver architect and planner Andy Yan who noted this month that the average BA graduate in Vancouver earns $41,981 - the lowest among all major Canadian cities. He added that, even with low interest rates, a generation is being priced out of the Vancouver housing market.
What such pundits don't take into account is the resiliency of global house prices - and buyers - and how Vancouver incomes-to-house prices are not nearly as out of whack as most people would think. Also, there is a lot to be said for Vancouver's beauty, stability, safety and general quality of life which can more than make up for the income gap.
In Vancouver, the average downtown condominium sells for $750 per square foot, one bedroom apartments rent for an average of $1,100 and the 5 year mortgage interest rate is around 3.0% in a city with an average income north of $60,000.
As a comparison we look this week at three cities where housing prices would seem truly out of sync with incomes, but where people still own and buy homes. (All dollar figures are in US dollars.)
Tehran, Iran: The Iranian capital is ruled within an Islamic Republic that restricts gender equality and religious and political freedoms. Until recently, an adulterer could be stoned to death. Now they are simply executed. In Tehran, the average annual net household income is $6,100 and the average mortgage interest rate is 22%. Yet the typical condominium in Tehran's central core sells for $330 per square foot and the average rent for a one-bedroom apartment is $710 per month.
Kiev, Ukraine: is in the midst of a political and military crisis and the economy was teetering even before the Russians came knocking. The average net annual household income is $6,840 and the mortgage interest rate is 19%. But a typical condo apartment in Kiev costs $256 per square foot and the average one bedroom apartment rents for $701 per month and three bedrooms go for $1,371 per month, not that much less than in Metro Vancouver's pleasant suburbs.
Beirut, Lebanon: Beirut was bombed nearly to the Stone Age and the city is torn by ongoing political and sectarian violence. The average net household income is $1,017 per month (about $12,000 annually) and the average mortgage rate is 6%. Yet the price of a typical condo apartment in downtown Beirut is $535 per square foot and the average rent for a one-bedroom apartment is $875 per month.
We could go on, but the message is simple: in most of the world, even the worst places in the world, incomes don't relate to housing prices. People are resilient and will always find ways to live and to buy homes.
Major Point: Vancouver has never been an affordable city for housing and likely never will be. But it remains, we believe, one of the best places in the world to live and many more immigrants will continue to discover that every year - and to buy and rent homes here. Those who can't afford Vancouver can follow the Skytrain and Canada Line to very nice areas where house prices are close to what they are in Tehran, Kiev or Beirut.
Don't Sweat The Downturn In US Housing Sales
We are hearing about the downturn in U.S. housing sales recently but we don't see it as a big concern. The American housing market has seen a remarkable recovery from the 2007-2008 bust and, even, with the recent slowdown, there are a lot of positive signals.
In August, sales were at an annual pace of 4.5 million homes sales this year, down 6% from August of last year, RealtyTrac reports. But the median price of U.S. residential properties sold in August -including both distressed and non-distressed sales - was $195,000, up 3% from the previous month, and up 15% from a year earlier. And most of the action was at the high end of the market.
For instance, the share of sales in the $500,000-to-$1 million price range increased 18% from a year ago while the share of sales in the over-$1 million price range increased 38% from August 2013. Overall the share of sales above $500,000 increased 23% from a year earlier. Sales of homes priced below $200,000 were down 9% from August of last year, but we believe this simply reflects that there are less foreclosed properties for sale.
In fact, short sales and distressed sales (properties in some stage of foreclosure or bank-owned when sold) accounted for 13.5% of all U.S. residential property sales in August, down from 14.3% in August 2013.
Major Point: An average price of $195,000 and an expected 4.5 million sales this year points to a fairly robust U.S. housing market, which we believe will continue to get stronger.
C A N A D A: The (Early) Numbers - Vancouver
The average price is higher than the record $834,400 achieved in May 2011 and up by 10% over September 2011. Sales are not only up by 17% over 2013 but 23% higher than 2011. New homes are much higher, but that is likely that they are built in more expensive areas. New condos are 7% cheaper than they were in 2011. Overall an excellent month and we can say for the first time that we are now reaching - ore beginning to reach some new highs. Realtors report strong activity throughout the market area from the Okanagan to the Sunshine Coast. Still, the increase in price is only felt in the single family home area. Condos are lagging throughout the Lower Mainland.
Questions, Questions, Comments
Comment: Top Realtor Greg Andrews writes: "Just to let you know the city is booking new buildings permits for March 2015 at this point so 'that ship has sailed' so to speak."
A: I guess, with the new rules there was a race to get in before January. It also shows the healthy and strong belief in the future by Vancouver builders.
Q: I just thought I would send you this after watching live coverage of CNBC Squawk Box Asia and other Television footage of possible confrontations with Police and Governments in Hong Kong, if Citizens feel they will not be heard and their "demands" are not met, for an elected CEO, without control from Bejing. The possible consequences of a possible "Tianamen Square" type situation, would mean a massive flight of senior executives from there back here to Canada, many who have Canadian Passports, and or lots of funds to become "permanent residents" here, and most of those, unlike here in Canada, are "Cash rich" the impact on Housing and the possible impact on the much less fortunate "Canadians" who have little or no housing could then become explosive, most "wage slaves" here, earning below CAD 75,000. - here could have social consequences ... more ... so I just thought, that an "exodus" scenario could have a major impact on B.C.'s economy, I hope this does not happen, and things return back to "normal" there in Hong Kong, but ...
A: Interesting question, since we have had in our history exactly that ... thousands of Hong Kong Chinese fleeing to Vancouver between 1994 - 1996 when the fear was that the Hong Kong repatriation in 1998 would result in terrible strife there. When the Chinese government did a good job by creating its '2 China policy', most went back. The result was that between 1994 and1996 our prices rose substantially but collapsed to the same extent of the rise by 1997/1998. Even Concord Pacific condos dropped an average of 15% - having risen by more than that in the previous 3 years. The average price had risen to $345,000 in 1995 but by 1998 it was back down to $278,000 - a 17% decline overall.
Further from 2009 - 2011 there was huge speculation from (Mainland) China here that distorted some of our prices in West Van and the Westside. Finally investors come from all over the world to 'park' their money here now! The effect is one of having created 2 Vancouvers - the high priced areas and everywhere else! The number of Hong Kong Chinese with a Canadian passport is estimated to be between 150,000 and 200,000 and yes ... should they all come here it would have a big impact. However, I doubt it will happen. People that like to make money and have a lot of action in their lives (in Hong Kong) will always want to be in Hong Kong (see the next piece).
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Vancouver Land Listings Reveal Towering Prices
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Last week two new real estate listings in Vancouver underscored how expensive residential land has become and where multi-family prices are clearly heading.
The first is a full block for sale in on West Boulevard between West 47th and West 48th in tony Kerrisdale. It is currently made up of older low-rise rental apartments but it has an FSR of 2.5 and the land covers 31,332 square feet, or about 0.7 acres. The asking price, according to HQ Commercial real estate, is $28 million, or about $30 million an acre.
Then Vancouver Coastal Health issued a request for proposals (RFP), for land it owns near C ambie Street and West 59 Avenue in Vancouver. (Cushman & Wakefield are handling the RFP with a deadline of Oct. 28.) Right now the site has two extended care medical facilities. The properties for sale are in two parcels: one just under 6 acres and one of 22 acres. The current planning calls for an increase in density to 2.8 FSR, which translates to 3.29 million square feet of potential development, most of which will likely be high-rise condominiums. Coastal Health expects to sell the smaller lot, six acres, for somewhere between $100 million and $120 million, or more than $17 million per acre.
Major Point: These are not pie-in-the-sky listings. The top five sales of residential land in Metro Vancouver so far this year, which includes the 2.2-acre site of the new Vancouver House residential tower that sold for $32.4 million, and the $83.5 million paid for a one-acre site on Alberni Street in Vancouver's West End, were worth more than all the industrial real estate sold in all of British Columbia this year.
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Property Tax Ruling May Aid BC Retail Tenants
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B.C. retail tenants have long complained about high property taxes and they have a beef. Commercial property taxes in Vancouver are 4.2 times higher than residential taxes and, since property taxes are based on air rights, retail tenants can be paying taxes for the potential floor-space-ratio of a site, though they are often renting in a one-storey retail strip. (!)
But some relief may be coming after a landmark decision last Thursday by the Property Assessment Appeal Board against BC Assessments. The case was on behalf of Amacon, a major real estate developer, and focused on nine lots that the company owns on Seymour Street in downtown Vancouver. The lots are worth about $3 million each, and right now house a mix of old low-rise retail buildings and parking lots, though they are zoned for high-density residential.
In the ruling, the Appeal Board agreed with an argument put forward by Paul Sullivan, a Vancouver appraiser and chairman of the B.C. Chapter of the Canadian Property Tax Association, that the land should be taxed based on the existing commercial property on the site and on the lower residential rate on its potential use. The tax savings, according to Sullivan, are in the tens of thousands of dollars. BC Assessment may appeal the ruling, but right now this could offer a break for many B.C. retailers who, not the property owners, pay the property taxes on their premises.
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Interest Rate Predictions With A Grain Of Salt
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hile we have had spectacular success forecasting market trends and individual cities to buy, we have less than a stellar track record of predicting mortgage interest rates. We believe they should be much higher than they are today, but, like us, most of the major banks have been just as bad at predicting where rates are headed.
So take the following forecasts with a grain of salt.
The TD Bank last week came out with a forecast that the Bank of Canada will raise its long-standing 1% overnight rate.
"Firming price pressures and strengthening labour markets are consistent with a gradual path to normalizing interest rates," TD Bank's quarterly economic forecast, released Thursday, states. "We see the Bank of Canada beginning to raise its overnight rate in mid-2015."
TD Bank predicts the short-term rate will hit 2% by the end of 2016. The bank believes even a slight increase will put a limit on household spending, as debt-to-income levels are still around 165%. So, even the most pessimistic of forecasts are for an overnight rate of 2% and not for two years, which would make the typical variable rate in the 3% to 4.5% range, still about the lowest in our lifetimes.
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Best Mortgage News
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THE CONTINUING DEBATE: GO OPEN OR CLOSED?
By Dustan Woodhouse (604.351.1253)
Is your mortgage balance currently in an Open interest only mortgage product at 3.5% or higher?
Is the rationale that it can be paid out without penalty?
Perhaps it is all about having the minimum monthly payment?
If so, here are some mathematics for consideration:
Take: $100,000.00 at 3.50% (interest only)
Monthly interest expense $289.56 per month.
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