Author: Stan S.

Bubbles — like the current Vancouver housing bubble — are nothing new. Contrary to the views of some, markets are not efficient and are frequently irrational. Few understood this better than John Kenneth Galbraith. Over twenty years ago in, A Short History of Financial Euphoria, he gave an excellent summary of how they occur. And as the following section presciently concludes, “There will be occasion to see the operation of this rule frequently repeated.” Chapter 1 – The Speculative Episode That the free-enterprise economy is given to recurrent episodes of speculation will be agreed. These–great events and small, involving bank notes, securities, real estate, art and other assets or objects–are, over the years and centuries, part of history. What have not been sufficiently analyzed are the features common to these episodes, the things that signal their certain return and have thus the considerable practical value of aiding understanding and prediction. Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns, leading on as it does to wonder at the increase in values and wealth, to the rush to participate that drives up prices, and to the eventual crash and its sullen and painful aftermath. There is protection only in a clear perception of the characteristics common to these flights into what must conservatively be described as mass insanity. Only then is the investor warned and saved. There are, however, few matters on which such a warning is less welcomed. In the short run, it will be said to be an attack, motivated by either deficient understanding or uncontrolled envy, on the wonderful process of enrichment. More durably, it will be thought to demonstrate a lack of faith in the inherent wisdom of the market itself. The more obvious features of the speculative episode are manifestly clear to anyone open to understanding. Some artifact or some development, seemingly new and desirable–tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan–captures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. Securities, land, objets d’art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum. This process, once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall. For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what–although it will always be much debated–triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.

Just Sold: 101-1168 Richards Street Last Sale: March 2015 – $975,000 Assessed: $952,000 Asking: $1,399,999 Sold: $1,500,000 Sold in 5 days for 54% more than previous sale 14 months earlier. There were some renovations, but nothing major. Here are the before and after pictures: 101-1168 Richards – Before 101-1168 Richards – After Just Sold: 1501-428 Beach Crescent Last Sale: December 2012 – $1,950,000 Assessed: $2,270,000 Asking: $3,080,000 Sold: $3,280,000 Selling price 68% higher than previous sale 3 years and 5 months ago, 44% higher than assessed value. Sold in 2 days, no pictures provided in listing. Why bother? Just Sold: 2003-918 Cooperage Way Assessed: $893,000 Asking: $1,399,000 Sold: $1,350,000 This one actually went for less than asking, but still 51% higher than assessed value. Sold in 13 days.

One of the more disturbing criticisms of the housing affordability discussion is coming from some pretty obnoxious baby boomers. They are telling younger Canadians to “stop whining” and accusing them of “entitlement”. Talk about irony! The typical boomer was raised in a home where mom stayed home and dad worked an 8-hour day. Back then, the average Canadian family could afford a comfortable middle-class life in a single-family home with only one income and little household debt (less than 30% of GDP). Today families are weighed down by record-high household debt which is approaching 100% of GDP. When it came time for university, boomers graduated without the need for large student loans. Their parent’s generation picked-up the tab thanks to a top tax rate of 80%. Now, university students are being asked to finance their own education, so boomers can enjoy the lowest tax rates since the Great Depression. The situation is especially bad in BC, where the 2013 BMO Student Survey found students here graduating with almost $35,000 in student debt. When the boomers started working, they enjoyed good starting wages and generous retirement benefits — thanks to strong labour unions. As they moved up the income ladder and as some of them took over positions in government, they gave themselves huge tax cuts, greatly weakened the strength of labour unions, and put in place plenty of other perks that they disproportionately benefited from — like income splitting and TFSAs . In a report from earlier this year, the parliamentary budget officer concluded that TFSAs overwhelmingly benefit older, wealthier Canadians. Did I mention the TFSA was first proposed by one of Canada’s most prolific millennial-mocking boomers, Garth Turner? As the baby boomers stock holdings grew, corporate income tax rates fell. Since the 1980s, the Canadian corporate income tax rate has been cut in half. This has done wonders for after-tax profits, and been yet another windfall for the boomers. Ask any millennial if they expect to get the same generous government retirement benefits that older boomers now enjoy. The age for OAS is already going up. Sorry, you young entitled whiners, but there’s a good chance you’ll be working many years more than the boomers had to. When it comes to housing, boomers were able to buy a single-family home on one income. Then they got to enjoy decades of falling mortgage rates, giving them a nice bonus every time they renewed their mortgage. The outlook for millennials is much less rosy. As hard as it is now to buy a place, it’s likely to get much worse when they renew as interest rates have nowhere to go but up. One of the regional perks enjoyed by boomers has been the Agricultural Land Reserve. In the mid-1970s, after many of them bought cheap land for their homes, restrictions were put in place on future development. As a result, the ALR helped ensure that the homes of baby boomers would appreciate handsomely. We got ours, tough luck future generations! Now stop whining! And one of the most outrageous examples of boomer entitlement comes courtesy of the BC Liberals. For homeowners over the age of 55 — most of whom are equity rich — the BC government will now give you a super-low 1 per cent loan. The only requirement is that you don’t pay your property taxes. Meanwhile, the whiners get to pay over 5 per cent on their student loans. I don’t think there’s been a generation in history that’s had it as easy economically as the baby boomers. They’ve enjoyed economic tailwinds their entire life. Now that millennials are rightfully complaining that their prospects are much worse than baby boomers enjoyed, some of those boomers now have the audacity to call millennials entitled?

RSVP for tickets to David Eby’s Emergency Town Hall on Housing Issues here: https://ebyemergencyhousingtownhall.eventbrite.ca What: Emergency housing affordability meeting Who: Everyone who believes there is a problem in Metro Vancouver’s real estate market When: Wednesday March 16, 2016 at 7 p.m. Where: St. James Community Square, 3214 W. 10th Ave, Vancouver Join MLA David Eby and local experts for an Emergency Housing Town Hall This meeting is to discuss the causes of, and solutions to, an out-of-control real estate market in the Lower Mainland that has little or no connection to average household income. Issues of international speculation in our housing market, shadow flipping, real estate agent accountability, and other concerns will be addressed. Bring your stories, questions and concerns. The media, along with MLAs from both sides of the legislature, both BC Liberal and BC NDP, will be invited. This is a meeting to hear stories, demand answers, and send a message to the Premier and the government to start to value the people of Metro Vancouver who make the communities we call home possible. Wednesday March 16 from 7-9pm at St James Community Square. Doors at 6:30pm.

Here we go again… Mercer recently came out with their 2016 Quality of Life Survey. As usual, the media misused the survey to brag about how Vancouver is the bestest of the best. What they failed to point out is what the survey is actually trying to determine. When executives are temporarily relocated to another city, they frequently will receive a hardship allowance. For example, when an executive in a city like Vancouver is assigned to Jakarta, Indonesia, Mercer recommends a 25% hardship allowance. In calculating their index, Mercer considers these ten categories: Political and social environment (political stability, crime, law enforcement, etc.). Economic environment (currency exchange regulations, banking services). Socio-cultural environment (media availability and censorship, limitations on personal freedom). Medical and health considerations (medical supplies and services, infectious diseases, sewage, waste disposal, air pollution, etc.). Schools and education (standards and availability of international schools). Public services and transportation (electricity, water, public transportation, traffic congestion, etc.). Recreation (restaurants, theatres, cinemas, sports and leisure, etc.). Consumer goods (availability of food/daily consumption items, cars, etc.). Housing (rental housing, household appliances, furniture, maintenance services). Natural environment (climate, record of natural disasters). Because these executives will continue to earn their base salary plus any hardship allowance, and will be housed by their company, local incomes and housing prices are not even considered. The idea that incomes and house prices have no bearing on quality of life is absurd. Any true measure of livability would need to consider both of these factors. This would be especially true for young families who are just starting out. So, in light of the deficiencies of livability surveys that only consider temporarily relocating corporate executives, I’ve adjusted Mercer’s numbers to take into account incomes and house prices. For example, if Mercer thinks City A is 5% better than City B, but pay is 5% higher in City B, they would tie in my adjusted index. The same would be true if housing in City A is 5% higher than City B. I’ve taken the latest available data from Mercer (for English-speaking cities), and adjusted the index to account for incomes and house prices. Here are the results. Vancouver is without question a great place to live for visiting executives, home-owning retirees and the super-wealthy. But for young families just starting out — not so much.

When our first ‘before’ picture was taken, in 2002, the Remand Centre round the corner from the Main Street courthouse was just closing. Designed by Richard Henriquez in the late 1970s and completed in 1983, the building was taken out of commission as it became unnecessary to hold enough prisoners on remand to warrant the cost of running the building. In 2008 the bottom floors were converted to the Community Court, but the upper floors and their massive concrete pods remained unused. A $21m makeover later, designed by Henriquez Partners, the building is now a 96 unit low cost and non-market housing project managed for B C Housing by the Bloom Group. Before images: 2002 and 2012; After images 2015.

Here’s one of the thirteen non-market housing projects funded by BC Housing on land provided by the City of Vancouver. It’s big – 147 rooms – and managed by the Raincity Housing and Support Society. It’s named after Lorna Budzey who died in 2000, a resident of Raincity’s first shelter. The building is designed by Neale Staniszkis Doll Adams Architects and is 10 storeys high. The site was previously the home of the Drake Hotel, a small (24 room) hotel dating back to 1912, and bought by the City of Vancouver in 2007 at the same time the Province started buying SRO Hotels. The City carried out a basic renovation of the property to allow it to be used as temporary rooms for tenants whose building was being given a more significant upgrade that meant they had to move out for a while. The hotel’s neon sign, dating back to 1950, is in the Museum of Vancouver’s neon collection. Before image, 2008; after image, 2015

The MNP Tower (the accountancy tenant who were first to sign up were given the naming rights by the developer, Oxford Properties) was squeezed into a small site between the iconic Marine Building and the Guinness Tower (both also co-owned by Oxford). Initial designs were by Vancouver-based MCP, but after rejection by the Urban Design Panel a new architect, US based Kohn Pederson Fox were brought on board and they generated the gently curving dark blue-grey tower that has just been completed. The base of the building incorporates the façade of the University Club, abandoned for many years (except for movie shoots), which was designed by Thompson, Berwick & Pratt in 1929 when it was known as the Quadra Club. Before images: 2011; after images 2015  

The Averages powered up in September per Larry’s numbers. Not altogether unexpected. While not as strong as August, September this year was a lot stronger than 2012. Was this the last of the pre-approvals going through? Certainly there seemed to be a division later in the month with lower sales/list showing up. We have also had some big sales. As I documented earlier in the month, there were two $7 Million + sales in West Van alone (and a slew of $4-5 M sales). One was to a local buyer and one to a HAM from what I can ascertain. These numbers certainly baffle me. To spend $7 M on a house, requires a net worth at least twice that, and at a tax rate of even 30%, that’s over $20 Million of earnings! How many people have that sort of income? Then I remembered that some banks were paying their senior executives over $10 M every year as was Telus. MOI ends the month at over 7 for SFH and 6 for Apartments. The bubble is not restricted to residential BTW. I spoke with a  commercial realtor a few days ago and he said there is so much money in this town looking for a home, that yields on smaller, good retail and office packages have reached silly low levels. The money is local professionals looking for diversification, Eastern retired money and of course hot offshore money. “If there is a tenant turn-over, the lost rent and expenses associated with tenant inducements and costs can bring the yield down to zero for that year. They just want a low yield in a tangible asset that can keep up with inflation. Of course if there is a serious recession in our city, there will be a LOT of unhappy landlords”. He explained that is one reason for the high turn-over of tenants in particularly retail businesses. “The rents are just too high”. For example it is cheaper for a landlord to leave a unit empty until it finally rents, even to a weaker tenant , and lose the few % return while he/she waits RATHER than lower the rent much.  If you lower the rent say 10%, that could drop the value of your property significantly in this bloated market, where every dollar of return is accounted for in the price. Whence go we? The pre-approvals must be done. The market now sinks or swims on it’s own. I suspect the HPI will still come in lower for September (it will if compiled fairly by the REBGV IMHO). We should know soon if this is the case. As for the blog, I will be going fallow for a couple of weeks. I have a few matters to attend to and hope to be done near mid-month. If all goes well, I will return with commentary and the numbers at that time. May throw stuff in the comments from time to time. Have a great October.

This conversation was over heard on the GG Gondola by a friend. Not by me, but by a friend who is reliable and does not exaggerate. Lady. “I am 53 and thought I was going to retire when I was 60, but I just took out a second mortgage to help my son buy an apartment. That just buries me in debt again”. Friend: ” I am even older and thought I would be free of debt by now, but my mortgage hasn’t been paid out, and I haven’t been able to clear my credit card debt before another holiday comes along”. Male friend: ” I recently went into my bank to get an higher limit on my credit card for a month, and the   bank employee kept trying to sell me on getting a $25,000 line of credit. “Just sign here and $25,000 will be deposited into your account”.  I had to fight her off. They then discussed how the banks almost forced debt on people. “Quite the difference from a few years ago, when you had to prove you could replay them. Now they don’t care if you are nearly broke with debt. “Just get more debt to pay off the old debt.” Then another occupant of the gondola spoke up and said he worked for CIBC and that they had quotas of credit cards and personal debt to meet, and if they don’t there was pressure from Managers to get there, that’s why they kept pushing customers to get into more debt. That is were we have got to. The banks have become drug pushers. Except the drug is debt. We are supposed to hope the addict will quit using themselves. And if you can’t get your drug from the banks, there are dozens of fringe outfits willing to give you money..’If you have equity in your home’. Which just drains whatever equity you have managed to build up in your home. This can only end badly.