Facts By Email #27 – Questions, Questions

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IN THIS WEEK’S FACTS BY EMAIL:

• SPECIAL BREXIT AND HIGH END BUBBLE HOTLINE ON WEDNESDAY AFTER FIVE
• QUESTIONS, QUESTIONS
• WHAT SHOULD CANADA DO TO STOP FOREIGN INVESTMENT? TAX OF 15% ON PURCHASE!
• CANADA CRASH RADIO SHOW
• HIGH END STALLING IN NEW YORK/HONGKONG AND ELSEWHERE
• LANDLORD REPORT
• THE RISE OF THE RENTAL CLASS
• BUYING A VIRTUAL APARTMENT BUILDING
  THE PROBLEM WITH FIXED-TERM LEASES
  GETTING SMART ON STUDENT HOUSING
• BC ENDS SELF REGULATION IN REAL ESTATE
  22,000 AGENTS, 500 COMPLAINTS, 9 HEARINGS
• HOUSE PRICE BUYS MT. BALDY SKI RESORT
• SURREY MOVES TO END LAND USE CONTRACTS
• FRASER VALLEY TOWNHOMES POISED FOR PRICE SPIKE
• NO BUBBLE, EXPERTS CONCLUDE

Questions, Questions

Lots of questions on Brexit piece. In fact too many to feature here. This is why we will do a special Hotline on Wednesday night. But here are a few:

Q: Are you talking about British REITS or North American REITS?

A: We do not recommend you buy ANY real estate in Britain for at least a few months and definitely NOT REITS. They – as other funds – will be seriously hurt.

Q: The BC government brought in new regulations for the Real Estate Council. Will this help? A thousand complaints last year.

A: First, the government announcement spoke of the Council being totally industry regulated and did not ‘succeed’ in 10 years. Actually, I was a director of the council in the eighties! In place much longer than 10 years.

Second, the government has appointed 3 non-industry members every year to that council for at least that long.

Third, dual agency in this environment can be dangerous and I agree with the separation of duties.

Fourth, take a look at the story below … details, details.

Q: I like your explanation of where and what to buy and why? Should have subscribed sooner.

A: Blush! Thanks.

Q: What can we do to stop the boom and likely – bubble?

A:  I think the government should urgently study the foreign speculation question. It isn’t the bad egg realtors –  it is a flood of super-rich money (some of which wants to hide) which seems to be increasing. What to do? Review the 15% tax on foreign buyer purchases at the point they buy – like in Hong Kong and implement it now. Since October of 2013, Hong Kong, which is a hub of international capitalism, has required foreign investors and companies to pay the special 15 per cent tax on top of regular document and transfer taxes (called “stamp” duties). It stopped that money flow and halted Hong Kong property price rise. Add to that an exit tax if sold below 5 years. Currently, that flood will continue – even accelerate (from Europe), since it has been created by questionable low interest rates and the dangerous game that our CB plays with our Canadian dollar.

Q: Michael Campbell had a radio show where the speakers saw a big collapse in Vancouver based on stopping Chinese money flow? In your opinion, could that happen?

A: Anything can happen, but 1. This was not on the Michael Campbell Moneytalks show. It FOLLOWED the Michael Campbell show – more like an infomercial hour. Briefly: The crux – as I understand it – was, that the speaker felt that the Chinese Yuan’s value was tied to the US dollar. Since the US dollar rose spectacularly, so did the yuan, creating a high value currency and making Canadian Real Estate very cheap (45% premium – cheap).

Further, last summer the Chinese government lowered the value of the yuan and a 3 trillion-dollar stock market debacle ensued. (We reported to you last summer.) The speaker felt that the Chinese government is seeing a slowing economy and wants to reduce the value of its currency … which would result in a different Yuan-Canadian dollar relationship – the money would flow back to China and our dollar would collapse.

Our view is, BECAUSE of the debacle the devaluation of the yuan will NOT be a sudden move. We agree that the Chinese government will use every opportunity to take its currency lower (it did it last weekend – when all concentrated on the Brexit issue), but it would not be a surprise move. We also agree that the government will clamp down on the flood of money leaving. But the money that is here – will NOT flow back. It ran away to stay … unlike the 1998 return of capital to Hong Kong. More on Hotline.

Q: In my view Britain will survive. Look at the announcement that they will bring the lowest corporate tax rates in Europe – which will attract companies to relocate there.

A: I agree it will and I said so last week. However, I am not sure whether the low corporate tax environment is for British companies only (so they don’t leave?). If the new tax environment were to attract European companies, the revenge from the EU would be enormous. When Ireland borrowed money from Germany a few years ago and then offered German companies a better tax environment (with German money), Germany did not renew its financing. This time there would be a sharp reaction. Also it very much will depend on where and what British corporations will export and whether the trade agreements will still work.

Q: Britain has our former central Banker. He will steer the ship through. Your thoughts?

A: That depends on your point of view. Under his direction the pound will drop below $1.10 – following the Canadian model. Whether that will be a good thing remains to be seen.

Why are we discussing this? Money WILL be fleeing Britain and some of that WILL come here. BIG money will NOT come here – we are too small a currency to move the very big money fast. BIG money will flow into the US dollar and the YEN … safety and big markets.

So, if you want to invest in the US real estate – (likely – no guarantees) – the US dollar will rise – the Canadian dollar can reverse downwards.

• Crazy world 1: The outcome? Helicopter money, print more … hard assets will continue to soar (until they won’t). Money always pushes things to the point of irrationality. Yep! In the meantime, that irrational money printing will continue the boom, buy real estate!
• Crazy world 2: If you were short the stock market before Brexit you were wrong … if you were long the stock market before Brexit you were wrong too. Aren’t you glad you are in real estate.

• International •

There Is A Chorus – Of Warning

The chorus of warning voices is accelerating and there are some cracks appearing at the upper end of the market. “The return of realism,” is how Dan Conn, chief executive of Christie’s International Real Estate, described the high-end market that stretches (in his report) from San Francisco to Singapore. Average luxury home prices in Miami Beach, Florida, plunged 13.7 percent to $5.7 million, according to Christie. For Boston-area Brahmins fell 11.8 percent to $3.2 million. San Francisco tech gurus saw the average luxury sales price dip 4.7 percent to $4.4 million, while the Washington, D.C. area slid 4.2 percent to $2 million. Another headline reads: “Manhattan:  Oversupply and stalling sales means good deals are available, with one seller offering to throw in a free Lamborghini.” The story goes on to say that “Properties are sitting on the market longer, banks are adjusting their approach to construction lending, land prices are cooling, and many industry experts are beginning to question the health of the high end of the market and the impact it may or may not have on the remainder of the market”. Particularly at the high end, $5 million and up which shows the biggest weakness. A last week CNBC report talks of high end condos sitting 169 days on the markets. Blogger Zero-Hedge reports: “Another China Crack: Ultra-Luxury Hong Kong Real Estate Being Dumped for Cash”

Says the report: “Not surprisingly, newly minted mainland tycoons transferred some of their winnings from coal mines and real estate projects to Hong Kong’s soaring real estate market, believing that prices of luxury condos do, in fact, grow to the sky. But, alas, it turns out they don’t. Hong Kong authorities have had to impose drastic administrative controls and taxes to cool down the rampaging real estate sector, and the comrades in Beijing are now also desperately scrambling to dampen the volcanic credit bubble on the mainland. Hong Kong has, since October of 2012, required foreign investors and companies to pay a special 15 per cent tax on top of regular document and transfer taxes (called “stamp” duties). Suddenly, the tycoons need cash and the bid has disappeared from the nosebleed section of the Hong Kong real estate market.

Zero Hedge concludes about the HONGKONG and CHINA real estate market by saying: “…Chuck Prince famously said in 2007, just before the first US mega-bubble burst, “as long as the music is playing, you’ve got to get up and dance.” In China, the music just ended!

And then there is the Billion Dollar Fund Manager betting against Canadian Real Estate.

Marc Cohodes is a Wall Street legend. The New York Times once called him “the highest-profile short-seller on Wall Street” and he is now betting against the Canadian housing market.

Cohodes: “The Country is using housing as an economic generator, and it’s going to be an economic killer…housing is shelter, and right now it’s being used for speculative purposes”. With the average Toronto home appreciating $550 per day, buyers have been piling in faster than people can sell their homes, and Cohodes thinks this is “not an organic situation, and it’s dangerous.” Further: “…we have a bustling sub-prime lending industry that exists with almost zero regulations … in Canada.”

Major Point: A basic tenet of real estate speculation is: “High upside, high downside!” You dear reader buying cash flow real-estate are not affected. But also note the report below: “NO BUBBLE, EXPERTS CONCLUDE”

• Canada •

Landlord Report

Rise of the rental class: A demographic pincer movement is squeezing Canada’s rental market as a growing body of young people who cannot afford to buy a home and an increasing number of older people who don’t want to.

For evidence, look to Victoria, where the vacancy rate is near zero, more than 1,200 potential tenants lined up this spring for a chance at just 178 new rentals and the price of older, small apartment buildings have spiked 20% in the past year to around $185,000 per door.

“You can buy a life or buy a house,” is the way one Victoria 25-year-old explained why she and her partner have opted to rent rather than purchase a home. Many older citizens agree, choosing to rent rather than risk taking on a large mortgage that will still be with them into retirement. We have seen many cases where older homeowners are cashed out into the current B.C. housing market and then decided to rent rather than buy another home.

The rental vacancy rate has fallen since 2014 in nearly every Canadian market, with the exception of Alberta and Saskatchewan and that is due to the decline in oil prices, but we believe this will soon change.

Major Point: This all bodes very well for the multi-family rental market and opens opportunity for rental investors at both the low and high end of the rental spectrum.

At the low end, the wide open Airbnb sector – and similar online short-term rental programs – boosts the income of landlords, as does the growing demand for student housing (one of the things we recommended in our OUTLOOK issue). There are also more generous government incentives for developers to get into rentals.

At the higher end, demand is increasing for luxury rental units, especially for older Canadians.

Buy A Virtual Apartment Building

This month, a 50-year, low-rise Marpole apartment building in south Vancouver came to the market at $344,000 per door. It will likely sell for more in a multiple-bid situation. It is not uncommon for old apartment buildings in Metro Vancouver to sell for $240,000 per suite, and higher. We have urged landlords to sell into this spiraling and peaking market because the prices are simply too high to resist.

So where to put all the money you make and remain a landlord?

Buy a number of new condominiums at discounts from the developer and create your own modern, high-demand, high-rent virtual apartment building.

It is possible even in B.C.’s Lower Mainland, but works even better in Calgary and Toronto. In Toronto, the strategy has even spun off a real estate investment trust (Carson Central Condominium REIT) that specializes in this strategy.

There are more than 3,500 strata units underway in Vancouver, another 1,400 in Burnaby. Coquitlam has seen 700 strata starts this year and 1,700 have started in Surrey in the past two years.

In Metro Vancouver, go to Surrey Central and buy 10 presale condominiums in a new development. Believe me, the developer will offer a discount if you get in early, since their lender will be asking for proof that 60% of the units will sell. The Venue in Whalley has new condo units from less than $200,000. For diversity in the portfolio, look to the Burquitlam area of Coquitlam on the new SkyTrain line or in Burnaby’s Brentwood and Lougheed area, where a lot of new condos are being developed in mixed-use, transit-linked projects. (Concord alone has 10 towers planned for the Brentwood area.) South Surrey and Abbotsford new condo developments also offer investor opportunities.

The concept is to secure a block of units in a building at 2016 prices and then rent the condominiums out. The developer deals with all the construction costs and headaches and you benefit by creating a virtual apartment building with brand new units with escalating rents. As a bonus, if the condo prices appreciate dramatically – as they have over the past year in Metro Vancouver – you can flip your pre-sale assignment on some of the units, or sell them for a profit after the project completes to sweeten your return on investment.

The vacancy rate for rental condos is 0.7% in most of Metro Vancouver and rents are generally higher than in the conventional apartment market.

Calgary also offers potentially the best place to use this strategy. With the downturn in the economy, many Calgary condo developers are offering incentives and discounts to buyer. Meanwhile, more people are opting to rent rather than buy because of the economic uncertainty. Offer developers stink bids and you could come up smelling like a rose, with a portfolio of rentals by 2017, just as the oil price recovers and rental demand soars.

Cranson REIT shared their strategy as they locked up 30 Toronto rental condos with pre-sales. It put down less than $3.5 million with 35% deposits. (Since they bought, the prices have increased and Cranson claims they have made $1.5 million in lift in just six months.) Cranson only buys pre-sales in buildings that will complete in less than 12 months. They believe that both rents and condo values will increase, providing a steadily rising income stream.

Major Point: When buying presale condos as rentals, look closely at the floor plans. Often, the cheaper studio suites and smaller one-bedrooms are located close to garbage chutes, above the garage door entrance or close to elevators, which can make them harder to rent. One-bedrooms on higher floors are usually the best rental buy.

I will be happy to share a “how to buy a pre-sale unit” outline.

The Problem With Fixed-Term Leases

In B.C. there is a temptation for landlords to present tenants with term lease agreements rather than conventional one-year leases that roll over into month-to-month agreements. Under term-leases, the tenant either must vacate or pay the current market rent, which allows landlords to charge more than the 2.9% annual increase allowed under the Residential Tenancy Act.

But we looked at three large developers – Aquilini, Cressey and Wesgroup who are building new rental projects in Metro Vancouver. Only Aquilini, which is building three rental towers next to BC Place Stadium downtown, is going with term leases, despite the potentially higher rental income.

The problem with fixed-term leases that come due all at the same time, creates the possibility that tenants, enmasse, may not renew at the higher rents, leaving landlords scrambling to fill space. This can be a gamble and, if some of the biggest rental developers are afraid of it, it is worth thinking about.

Getting Smart On Student Housing

There is a key tenant sector that landlords should be going after: student housing (as per our Outlook conference Sept. 2015 and issue). Enrollment in post-secondary education in B.C., and across Canada, is soaring and demand for student rental housing is through the roof. The student housing wait list at the University of B.C is now at 6,000, and private condo apartments near the school are charging upwards of $3,000 per month for two-bedrooms. Ditto for Simon Fraser University. One reason is a huge influx of foreign students who not only pay higher tuition, but are willing and able to pay higher rents. From 2010 to 2013, foreign student enrollment in B.C. rose from 94,000 to around 115,000. The B.C. government is trying to increase the number of international students coming to B.C. by 50% by this year.

Major Point: When considering buying a condo as a rental, target it at student housing.

• This means being close to transit, having Wi-Fi in the building and not worrying too much about parking.
• Register with university rental listings (such as SFU’s Places4Students.com) and place ads on university and campus community bulletin boards. Rent by the bedroom.
• Consider charging a premium for eight and nine month leases, rather than 12-month leases.
• Consider using a mix of student housing during the school year and then converting to Airbnb during the summer months (there are also a lot of summer students).

B.C. Ends Self Regulation In Real Estate

23,000 AGENTS, 426 COMPLAINTS, 9 HEARINGS

The move by B.C. Premier Christy Clark last Tuesday to end self-regulation in the real estate industry and move it to the Superintendent of Real Estate will likely not protect consumers much but will add a lot of paperwork for real estate agents.

Last year, for example, the Real Estate Council of BC registered 426 complaints (there were 526 but 100 came from the same individual) but they spiked to around 900 during the Council fiscal year that ended June 30. The Council reports that, since 2012, about 20% of real estate agents admitted misconduct and paid the penalty (usually a fine) but of the remainder of about 1,100 complaints, only nine went to a disciplinary hearing. This means that either the complaints were groundless, were settled privately, or the Council is lax in discipline. Who really knows?

But keep in mind the Council was regulating more than 23,100 real estate licenses across the province, 12,800 of whom are working with the Real Estate Board of Greater Vancouver. When one considers the unprecedented environment of multiple bids, fast home sales, soaring prices and the sudden influx of 2,000 new real estate licensees since 2014, it is a wonder that complaints aren’t even higher.

It will take a few weeks for the regulatory powers to be switched to government control but when it does expect things to get more difficult for all agents and very costly for the small minority who break the rules.
The government will levy a maximum $500,000 fine for misconduct by real estate companies, up from $20,000, and to a maximum of $250,000 for personal real estate agents, up from $10,000.

The new rules also include:

• The end of dual agency;
• New rules for assignments: vendors must be notified and original vendors receive any profit from an assignment flip;
• All offers on property must be retained for regulatory research;
• A new whistle blower hotline;
• Restrictions on print advertising flyers (examples being hard pitches to senior homeowners);
• Tougher standards for new licensee applications;
• The payment of proceeds from any an agent’s misconduct back to the “victim.”

House Price Buys Mt. Baldy Ski Resort

For about the average price of a Vancouver west side house – $3.4 million – Chinese-Canadian Victor Tsao, a Vancouver lawyer operating as 1063205 B.C. Ltd., has bought the Mount Baldy Ski Resort in the South Okanagan.

The resort was in receivership, owing about $4.3 million, according to Supreme Court of BC filings, at the time of sale.

Mount Baldy closed during the 2013-14 season after its American owners ran into financial difficulties. The resort opened again in January 2015 when Fred Johnston and Baldy Capital Corporation operated it while unsuccessfully trying to buy it. The resort stayed closed for the 2015-16 ski season. The new owners will open it this season.

Major Point: This marks the second sale of a B.C. ski resort in the past year. In November 2015, U.S.-based Pacific Group Resorts of Park City, Utah bought Vancouver Island’s Mount Washington Ski Resort, a going concern. That sale price has not been released.

Surrey Moves To End Land Use Contracts

Following the lead of Richmond, Surrey is moving to terminate Land Use Contracts.

The LUC are provincial contracts that supersede local zoning. It has allowed, for example, the construction of larger houses on building lots that would be allowed under municipal bylaws.

Surrey currently has 297 LUCs still active and Surrey wants to eliminate them all well before the provincial termination in June of 2024.

In Richmond, which terminated about 4,000 LUCs last year, owners have until this November to build under the existing LUC rules.

Surrey is currently holding public hearings on the end of LUCs and it is expected they will end later this year, likely with a one-year delay before they come into effect.

Major Point: Check with the city if your property falls under a LUC. Do it now!

Fraser Valley Townhomes Poised For Price Spike

The gap between the price of a detached house and a townhouse in the Fraser Valley is now $500,000.

Based on MLS sales over the past six months in South Surrey-White Rock, it now costs $986,548 more to buy an average detached house compared to a townhouse. In Langley, the gap is $491,256, it is $496,111 in North Surrey, $332,653 in North Delta and $262,980 in Abbotsford. Altogether, the average detached house price in the Fraser Valley is $920,000, compared to $417,000 for a townhouse.

Major Point: We believe townhouse prices could rise sharply as more Fraser Valley buyers opt for townhouses over detached houses due to lower prices.

No Bubble, Experts Conclude

As the federal government prepares a national housing strategy that could be rolled out this year, there is strong evidence that government policies could be the biggest threat to the housing market.

A national mortgage industry group of 11,000 professionals maintained that no signs of a Canadian housing bubble currently exist, and that any federal changes to the current lending environment would only upend the market and turn the fear of a crash into a self-fulfilling prophecy.

Mortgage Professionals Canada chief economist Will Dunning stated that the mutterings of a bubble that has yet to materialize have repeatedly circulated through the industry for eight years now.

“Those comments have generally assumed that rapid growth in house prices (or a rising ratio of house prices versus incomes or of house prices versus rents) is sufficient evidence of a bubble. To the contrary, these supposedly strong indicators are not definitive proof. They may actually represent healthy outcomes within existing conditions,” Dunning explained.

Among the indicators that would signify a bubble in Canada’s housing sector are “excessive activity” triggered speculations, and prices radically different from those that should naturally stem from the economic fundamentals—indicators, Dunning argued, that simply do not exist yet.

“There is a risk that changes in policies of lenders or mortgage insurers that reduce access to mortgages could cause an unnecessary drop in housing demand and housing prices, and bring consequent economic damage,” Dunning said.

Best Mortgages Rates this Week:

How does Brexit impact real estate in Canada? Brexit will of course have a lasting impact on worldwide markets as Britain is now positioning themselves to leave the EU within a 2-year period. Other than the tumbling of stock markets, however, what kind of impact will it have on real estate in Canada?

“Already we have seen bond yields plummet which is not an unexpected outcome,” says Kyle Green of Mortgage Alliance (604-229-5515, Kyle@GreenMortgageTeam.ca). “Typically when you hear bad news around the world, money flocks to safety. Bonds are considered safe, and Canada as a country is also considered safe, so this pushed our yields down almost .2%. Shortly after, many lenders decreased their base 5 year fixed rate to 2.49%.”

But it isn’t just mortgage rates that may be impacted, either. “If you look at why major urban centres like Toronto and Vancouver have been so hot, a lot of this is based on some element of foreign investment,” adds Green. “If you are an international real estate investor, are you going to want to invest anywhere in the EU right now? Probably not. This should continue to propel major markets in Canada to continue their crazy price appreciation.”

Kyle points out another interesting fact, too. “With 2.49% being the new norm for 5 year rates, nearly 50% of your first years’ worth of payments go towards principal now. On a 28-year amortization, it would be almost exactly 50/50 (slightly more towards principal). Some clients are able to get 2.39% which would represent 49.4% of the first years’ payments going towards principal. Wow!”

July 4, 2016

Hot Property

1. Qualicum Beach, $320,000 -, 3-bedroom 2-bathroom rancher on large lot with RV parking.
2. Nanaimo, 1732 Trevors Road – $529,900, 3-year old 2350 sqft home with a legal 2-bedroom suite. Open concept living upstairs.
3. Nanaimo, 1843 Stewart Ave – $299,000 Located across the road from the ocean and next to the ferry terminal.  Walking distance to restaurants.

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