IN THIS WEEK’S FACTS BY EMAIL:
- OZZIE TALKS AT FRASER VALLEY BUILDING AWARDS: “THE TRUMP EFFECT”
- QUESTIONS, QUESTIONS
- INTEREST RATES ARE SOARING
- SNAPSHOT ON EDMONTON AND CALGARY
- WEST SIDE OF VANCOUVER FOR $1 MILLION LESS?
- WAITING FOR VALLEY VENDORS TO PULL THE TRIGGER
- 1,800 METRO HOMES FREE OF FOREIGN BUYER TAX
- DIVING INTO THE PRESALE CONDO MARKET
- B.C. IMMIGRATION WAVE IS BUILDING – AMERICANS LOOK NORTH
Talk, Talk, Talk
Ozzie talks at the fine FRASER VALLEY BUILDING AWARDS FUNCTION on the 17th: “The Trump effect on real estate”. He also has the privilege to be acting as a judge on this years’ Building Awards. If you are in Langley on the 17th at Cascades Casino, purchase a ticket at http://businessexaminer.ca/events
Ozzie is in Phoenix next week walking a new apartment complex.
Wow! An avalanche of comments! It amazes me to see how many Canadians are engaged in debating the politics of our neighbours. THANK YOU for sharing and just remember (to those that are waving an accusing finger) my job as your servant is to try and predict outcome of events that may impact our investment strategies. I did that. Trump won. The results are still unclear, but I gave you an outline of possibilities as I see them. Now it is your job to make the big decisions.
Q: When is Petronas voting on whether to go ahead with their billion dollar LNG Plant? December?
A: Multibillion! I believe the target date is April 2017.
Q: Should I lock in my mortgage rate now?
A: If you have a credit score of over 700 and just have your home property and you watch it … play the game. They likely will stay low. If you do not and have multiple properties, lock in now! It isn’t the rate you should worry about, it is whether the money will be given to you at all at renewal time! I rather have safety and certainty in my real estate investment portfolio and pay a prepayment penalty if necessary – rather than being faced with the fact that the new mortgage rules throw me under the bus! Look below.
Interest Rates Are Rising Everywhere!
The US 30-year rate hit 3.94% this week, up from 2.52% last week and the highest since January. On the Hotline we debated last week the rise of rates by the TD bank. (It took its prime rate from 2.7 per cent to 2.85 per cent for variable rate mortgage customers.) I told you last week that other banks would follow. They did but now they raised the fixed rates!
Now, RBC is raising its rates for amortizations of 25 years or under, effective Nov. 17. The changes affect new customers with fixed rate loans for terms of three, four and five years. The fixed rate for three years rises from 2.69 per cent to 2.79 per cent, four years goes from 2.59 per cent to 2.89 per cent and five-year rises from 2.94 per cent to 3.04 per cent – up 30 points (thin edge of the wedge). Royal Bank said the changes are for special discounted rates and do not affect the posted rates. (Which no one – except the Government uses as they are 2% higher than the discounted rates!)
Major Point: We predicted in September that the BOC changes would have an impact on banks and represented an “Early Christmas present”. They started giving themselves that present well ahead of Christmas.
Canada’s housing market could soon be suffering from a new condition, one that a TD Bank economist is calling “Trumpflation.” But “Trumpflation” wouldn’t mean rising house prices — it would mean higher mortgage rates, leading to worse times for the housing market. U.S. stock markets soared in the days after Donald Trump’s electoral victory, betting that his administration will be good for business.
But the bond markets made a different bet — that Trump’s plans for massive infrastructure spending and tax cuts will cause inflation to rise. Inflation is bad for bond markets, so the bond market tanked last week, wiping out $1 trillion of investors’ money.
The wipeout was such a jolt to the markets that some analysts on Monday were predicting the end of a 30-year-long bond market bull run.
This “Trumpflation” phenomenon that’s brutalizing the bond markets could also hit Canada’s housing markets, because some mortgages in Canada are linked to U.S. bond yields, and because changes in Canadian bond yields tend to follow trends in the U.S. See above!
And indeed Canadian bonds are under pressure. Yields rose to an 11-month high (meaning prices fell to an 11-month low) on Monday. Just six weeks ago, Canadian bonds hit their lowest yields (highest prices) ever, Reuters reported.
Higher mortgage rates would put downward pressure on Canadian home sales and house prices at a time when the market is already facing some significant headwinds.
Major Point: Winners and losers? The first time Canadian home buyer is the loser. Higher rates, higher premiums and less ability to qualify. Winner? Royal LePage CEO Phil Soper, has been arguing for some time that a Trump win could push Americans to move to Canada or at least purchase property here. That could push Canadian home prices up, especially given the recent strength of the U.S. dollar against the loonie gives Americans strong buying power in Canada. (Our recommendation of buying Whistler, Squamish, and Pemberton stands.)
West Side Of Vancouver For $1 Million Less
Say it was six months ago and someone listed a detached house on the West Side of Vancouver, say Kitsilano or Kerrisdale, for $1 million less than the average price in the neighbourhood. They would have had to beat a crowd of potential buyers off the doorstep. Well, that is what is on the block today after a series of government body blows crushed Canada’s hottest housing market within a matter of months.
But even with a million-dollar discount, buyers aren’t biting.
In October, the average price of a detached house on Vancouver’s west side was $3.18 million dollars. That is high, sure, but it is $700,000 less than in September and $1 million less than in May of this year, when the B.C. government banned resale assignments.
As we reported here every month, Westside detached sales have been plunging ever since. From August, when the 15% foreign buyer tax was introduced to October 31, less than 200 detached houses have sold across all of the west side, a pace of 56 per month, down 70% from the first quarter when a typical month would see 225 sales.
All high-end markets have been affected. The average house price on the East Side of Vancouver is down $250,000 from May and similar price reductions are seen in North and West Vancouver. Richmond’s average detached October house price is dramatically lower than the one achieved in April.
Major Point: Our advice to well-heeled investors: scour the higher-end neighbourhoods and be ready to make a low ball offer. We suspect there are lot of detached house owners, including speculators and foreign buyers, who are seeking an exit out of expensive mortgages right now. No rush on your part, since there will not be a sales recovery until after the New Year, perhaps early spring.
Waiting For Valley Vendors To Pull The Trigger
The plunge in detached housing sales in the Fraser Valley has not been reflected yet in prices, but when the first nervous vendors pull the trigger with a discount we expect a wholesale drop in detached house prices.
This is because, psychologically, the Fraser Valley was not ready for the shocking 30% rise in house prices seen this year. Also, the effect of foreign buyer tax was more pronounced that most people thought: it was somewhat disguised because many foreign buyers were assembling detached lots, especially in South Surrey, not just buying single houses.
In March, before resale assignment sales were banned and the foreign buyer tax came in, 1,553 detached houses sold in the Fraser Valley, the highest on record, and bidding wars drove average prices to $920,201.
In October, just 513 detached houses sold in the Fraser Valley and the average price was $923,812, up only fractionally from nine months ago. So far, the 984 vendors of detached houses are sticking with their listing price but we don’t think they can hold. A lot of sellers are hoping for a sales recovery, but with the sales-to-listing ratio slipping deep into buyers’ territory that seems unlikely.
Major Point: Look for detached houses in South Surrey-White Rock, were foreign buyers were most active. The average detached house price in September, at $1.5 million, was slightly lower than in March when sales hit 249 units. Detached sales are now at 64 per month with 529 active listings. Single family? This is a buyer’s market. However, as we noted last month the condo market has strengthened substantially in the Valley!
Diving Into The Pre-sale Condo Market In Metro Vancouver
When we start getting calls from top new condominium marketers telling us how great the pre-sale condo market is, we know something could be going wrong. When the market is truly hot, these guys and gals are much too busy.
So, when we got a missive from Mac Marketing Solutions trumpeting the sellouts of some top concrete condo projects, we took a deep dive into the statistics.
We found that there is a very small inventory of new and unsold concrete and wood-frame condominiums on the Metro Vancouver market, but developers are stalling new projects as they try to figure out where prices and sales are heading.
You must remember that in the last year multi-family developers have been paying inflated prices for development sites, sometimes $300 to $400 per buildable square foot in Vancouver. This means such developer must sell the final condo units for $800 per square foot or more to make any profit after construction, finishing, marketing, commissions, taxes and other soft costs.
There have been some spectacular sales successes. Mac Marketing listed six concrete condo projects in Burnaby, Vancouver and Richmond that either sold out or sold more than 92% of units since launching in August (after the foreign buyer tax came in). Some, such as Bosa’s Cardero in Coal Harbour and Primrose by Transcana on the Cambie Corridor, are very high-end projects.
Yet, according to the Q3 statistics compiled by the Urban Development Institute (to be officially released next week), there are only 73 new concrete projects being sold now across Metro Vancouver, down 43% from Q3 2015. Sales in this third quarter, at 1,763, are down 21% from the same time last year and even 4% below Q3 of 2014.
However, there are only 31 new concrete condominiums that are completed and unsold, the lowest standing inventory in the last five years.
In the low-rise wood-frame inventory, just 40 projects are now marketing, down 165% from the third quarter of last year and down 55% from the first half of this year. Sales in Q3, at just over 300, are down 44% from Q3 2015 and 31% below the pace in 2014. The UDI found only 19 new and unsold wood-frame condos across Metro Vancouver in November, a six-year low.
And the inventory may stay low. In October, Metro Vancouver multiple housing starts fell to the lowest annual pace since 2011.
The construction drop is not due to the foreign buyer tax or the new mortgage restrictions: the slowdown was clearly planned before these policies came into effect. The reason is uncertainty among condo developers about whether they can achieve sales at the price point they need.
An astute observer at Colliers International, which compiles a semi-annual study of Metro development land sales, noted that land speculators, particularly foreign buyers, have made mistakes. “They come in, they buy fast and they haven’t always done the due diligence needed,” he said, suggesting that some condo sites may remain idle if the developer does not think he can get the retail price needed to cover land costs. (JREI mentioned this several times in the spring and summer: “A sign of a market topping is when the developers and builders pay too much for the land.”!!!)
Two Major Points:
First, the B.C. ban on assignment sales in Metro Vancouver does not apply to pre-sale condos. With a low standing inventory and less starts, the market is being set for a shortage of new low -and high-rise condominiums. Buying at current pre-sale prices could mean a potential lift in value before the project completes in 2017 or 2018, with the potential opportunity of cashing out early through an assignment sale.
Second point: As we pointed out in our annual forecast of 2015 and 2016 (when we were talking about Calgary and Edmonton) a drop in housing starts has historically been a harbinger of a market slowdown.
1,800 Metro Homes Free Of Foreign Buyer Tax. Why?
When the tax was introduced in August, it was only on housing sales to foreigners in the Metro Vancouver Regional District, but it excluded the treaty lands of the Tsawwassen First Nation (TFN). NOTE: We don’t know why the exception was made, but it could be meaningful.
The TFN plans a massive residential development on a 250-acre parcel it owns in South Delta, where it plans to build up to 1,800 homes, half of which will be detached houses and the rest all strata units. There is no talk of social housing or low-cost rentals.
Major Point: The B.C. property transfer tax and the federal sales tax will apply to the housing sales, but not B.C.’s 15% foreign buyer tax. Residents will pay property and school taxes to the TFN. However, the foreign buyer tax will apply to other non-reserve land owned by First Nations: the biggest example being the 90 acres at Point Grey purchased this year by a trio of First Nations (with Canada Land) that is to be developed into high-end homes. (You figure out why!)
Ace broker Robert F. McLeod, of McLeod Project Marketing Ltd. reports that the month of October had mixed results for Edmonton. The labour market saw overall employment well below levels seen this time last year. The number of people working was down by 17,800 jobs from a year earlier. However, Stats Can`s average weekly earnings increased in September by 4.2%. In fact after 3 quarters in 2016, earnings were up by 3.7% from the same time in 2015.
Alberta’s population growth rate during the second quarter was up slightly from a year earlier. Total net migration into Alberta from all sources was up from April to June 2015 by 609 persons, for a gain of 6.3%. For the third consecutive quarter, a strong increase in international migration helped offset another decline in inter-provincial net migration. However, Alberta posted inter-provincial migration losses in the second quarter of 2,165 persons compared with the same time in 2015.
Residential and non-residential building permit values fell in September by 34%.
- Residential permits declined in September by 21% from a year ago.
- After three quarters this year, total permit values (res. & non-res.) were down 16%.
- Residential building lot inventory fell down by 7.2% to 11,716 sites in September. This was the first year-over-year decline since March 2013. Single-detached starts in Greater Edmonton decreased in October by 20.6% from a year prior to 413 units.
- So far this year, single and semi-detached starts combined were down by 28.1% from January to October 2015 to 5,140 units. For the year-to-date, row and apartment starts have declined by 57.1% from the first 10 months of 2015 to 3,198 units.
- There were 1,041 completed and unoccupied single and semi-detached dwellings in October, up from 925 units in October 2015.
- Unabsorbed new townhomes and apartments stood 810 units in October, up from 785 units in the previous month and 323 units in October 2015.
- CMHC’s average absorbed new house price for the Edmonton region decreased in September by almost 4% year-over-year to 9,512. LISTING inventory levels in October were up 8.6%
- The average residential MLS sale price in the Edmonton CMA edged lower in October by 0.6% from year-ago levels to 4,004.
- For the year-to-date, the average sale price has remained largely unchanged.
Major Point: Those of us that watch Alberta with an eye to invest when things have settled are somewhat surprised at the relative strength of the market. Anecdotally we hear of tough sales conditions … but the numbers still look very normal. Still, stand on the sidelines and wait this one out. If you want to go ahead and act now, call Robert McLeod.
Calgary Landlords Lowering Rental Rates
Whiles sales numbers are still ok, Calgary apartment landlords are cutting rents sharply to keep and attract tenants. While the official CMHC rental vacancy rate for Calgary is around 5.3%, it will likely be much higher when the government agency releases its latest numbers next month.
A study by the Calgary rental website RentFaster.ca showed that the current average asking rent is now $1,426 per month, down 33% from the recent peak in mid-2014 when the vacancy rate was 1.4%. Some tenants say they have had $375 per month knocked off the rent when it came time to renew.
“For landlords, it’s a very, very difficult time simply because the vacancy rates are very high,” said Gerry Baxter, executive director of the Calgary Residential Rental Association.
Baxter said most landlords he’s talked to have talked to tenants about lowering rent, especially when it’s time to renew a lease, in a bid to keep their properties occupied. “What I hear from many landlords is if they’ve got good tenants, you want to keep them,” he said. Baxter estimated rents in Calgary have dropped $150 to $200 a month in the lower to middle price range. “At the higher levels, it’s been even more,” he said, noting he heard from a landlord who could only get $2,100 for a property he used to rent for $3,000 per month.
Major Point: We remain bullish, long-term, on Calgary. As we have noted, major pension fund investors and REITs are rolling into the city, the price of oil is testing a price rally and consumer spending in Alberta’s biggest city is still the fourth highest in Canada. The price-per door for older Calgary apartment buildings have stalled or reversed. This winter offers a window of opportunity for landlords confident in Calgary’s future.
Rental Apartments Picked As Top Investment
Multi-suite residential properties are in high demand for investors and are expected to continue to generate strong interest for the foreseeable future, according to Morguard, which has been looking at the future of foreign investment in Canada. “Off-shore groups, with Chinese and European capital, look to the Canadian property market as a relatively secure destination for their investments,” concludes Keith Reading, director of research at Morguard.
High levels of investor interest in the apartment rental sector were evidenced by third quarter sales as groups with existing portfolios look to capitalize on the sector’s history of security, he added.
In addition to experienced investors showing interest in the sector, new groups have also begun to acquire multi-suite residential assets. “The long-term stable and secure performance of multi-suite residential units has attracted new investors to the market,” said Reading. “New investor groups see this asset class as a relatively safe investment in an uncertain economic environment.”
Major point: While risks related to the Canadian and global economy have risen lately, investors will continue to look to Canada’s real estate sector, and more specifically the multi-suite residential rental sector, to provide a buffer against the potential impacts of any further market erosion.
1. Clearbrook, 2 bedroom + 2 bath, 1001 sq feet. Price: $180,000;
2. Clearbrook, 12 storey high rise, indoor pool, 1033 sq. ft., 2 +2 bedrooms, underground parking and RV parking. Price: $179,900. Deals are on MLS – call your realtor if interested.
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