Financial Jungle

I’m working in the lending industry and some appraiser are now getting more conservative in their appraisal value. It creates friction with clients but surely is safer for everybody, even for them. Vancouver’s market is the closest to what’s happening in the USA. The sub-prime lender crisis (http://www.thefinancialblogger.com/?p=37) in the USA might lead to some market drop in BC as well…
FB

Hi FB,

Thanks for your comment.

I hope we won’t mimic what’s happening in the US. My parents, relatives and good friends all have houses in Vancouver, so deep down, I don’t want to see a market crash. What I like is for the market to take a break and plateau for a while. It’s very tired after a 5 or 6 years sprint. I think the appraisers are doing the right thing.

FJ

Hey FJ,
I hope that too! ’cause if not, I’ll lose a lot of business Seriously, BC might just reach a plateau since their economy is very strong and they can always count on Alberta to help them out. I would suggest your relatives to turn their mortgages into HELOC in order to benefit from the actual value of their residence.
FB

Hey FJ
I dont think the Vancouver real estate market will crash…prices might flatten or grow at a much slower pace than before but i dont see a crash in the cards, expecially since the local economy continues to grow, create jobs and workers continue to be in demand.

Hi FB and WS,

I tend to agree with you that prices will plateau for the reasons you listed, even though I don’t have the crystal ball.

I do wonder what the raising interest rate will do to our housing market. When I bought my home in late 2003, rate was 4.55%. Now it’s 5.25%. That’s a 15% increase in monthly mortgage interests which doesn’t contribute to the bottomline. Everything else being equal, raising mortgage rate creates financial hardship for homeowners. In other words, housing costs rise even if prices plateau.

I fully expect to see a crash in the real estate market, though it may not happen until after the olympics.

Talking to a realtor last week, and he said that places are staying on the market for longer periods of time. One place was trying to be sold for 1.5 months, which was unheard of last year.

then there’s the huge amount of new construction going on in downtown. I’ve heard that some of the construction companies have paid for condos to house the workers they had to bring in. When the construction craze comes back to normal I figure many of those construction workers will leave, opening up even more condos.

At current prices the only people that can afford a new property are people that are selling another property to pay for it. If there are no new homeowners but lots of new homes eventually there will be a correction.

Lastly, looking at other cities that have held the olympics. Salt lake city saw a huge decline in property values after their winter olympics, and Sydney has seen a significant drop despite a good economy. I don’t think Vancouver is in such a unique position that it will be able to not repeat what happened in those places.

Great insights, HalOtis.

I wasn’t aware of construction companies housing their workers. That makes a lot of sense, as I see construction workers flooding the streets around where we live. You may be right about a harsh correction lurking.

[…] are aware that I’m increasingly leery of Vancouver’s housing prospect. I still remember those cheap mortgage rates at 4.55% back in […]

I do not think the U.S. credit crunch will significantly affect the Canadian market. I have found an interesting article on US and Canadian real estate markets in The Globe and Mail. It reads: U.S. sneezes, Canada stays healthy, examining why the real estate market north of the border remains immune from what’s ailing U.S.
Blake Hutcheson, president of CB Richard Ellis Ltd. says that “in those areas where Canada is one small part of increasingly interdependent North American business activity, such as capital markets, we are already being hit with the fallout. The U.S. credit crunch is expected to make money to refinance existing projects or fund new ones either unavailable or more expensive” He added that “In the past, it might have taken up to six months to affect us. This time we started to feel the impact in about two minutes.”
And one more thing: eight out of ten (84%) Canadian baby boomers, aged 41-61, state they are not hesitant to consider a real estate purchase despite U.S. housing market volatility, according to a new online survey.

Hi FB:

Great commentary.

I am in an “enviable” positon having homes in both Vancouver and Calgary. I believe that basic economic fundamental ultimately rule in the end although I yet to meet someone with the clairvoyance to predict the peaks and troughs to housing or any other investment.

I believe that the GVRD real estate market will not crash precipetously due to: low interest rates, limited land availability and the burgeoning economy of China(the rich which seek the safe harbour of Canada’s liberal social structure).

However, I see that Vancouver’s housing market will slow down because of affordability. It is this reason that Calgary has slowed down dramatically.

I would caution that the Vancouver Condo market seems quite bubbly with per square footage costs exceeding that of houses combined with a glut of new condos coming into market in the next 18 months.

Ben - Yup, I’m envy of your position. The market sure is rewarding early birds lucratively.

Personally, I didn’t miss out too much of the Vancouver boom. My fear is that most GVRD real estate advocates are no longer defending aggressive price appreciation over the next 3-5 years, but instead, they’re defending the current price point from ebbing. Nonetheless, the easy money has been made. Being a wealth allocator, I wouldn’t want to roll the dice in this environment when there’s little upsde potential. I basically adopted the approach that there’s no hurry to rush into the lofty market.

>>”I believe that the GVRD real estate market will not crash precipetously due to: low interest rates, limited land availability and the burgeoning economy of China(the rich which seek the safe harbour of Canada’s liberal social structure).”

The prevailing 5-year rate is now 6%, but the rent yield on my unit is only 4.7%. The “earning” yield is even lower. To me, this is reminiscent of the tech bubble era - investing in a money losing business (negative P/E ratio) while praying the price appreciation bail me out.

As shocking as it may be, I’m netting an extra $9,000+/year due to the spread between interest+expense and rent. In other words, I’m building equity by being a renter. Something is wrong with this picture. If the market is such a good deal, then owning should be cheaper than renting. I’m not that old, but I still remember those days.

The limited land availability is already priced into rents. Homes are priced by speculation, while rents are priced by fundamentals. Over the long haul, home prices can’t race too far ahead of rents.

The Financial Jungle is almost there, but I believe that you have sugar-coated the truth but refusing to believe the a imminent financial collapse is upon the Vancouver Real Estate Market, and everyone with a mortgage greater than 50% in today’s market should sell, wait two years, and by the same home back at half price. Visit www.CAPtainCanadaCrusades.ca, and learn the truth. USA has collapsed financially, and Canada CANNOT escape the same fate with only 10% of the population of our biggest and closest trading partner in the world. In fact, the old adage is true: “If America catches a cold, Canada will catch pneumonia”
The CAPtain