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Discussion Starter · #1 ·
Yale economist sees Vancouver 'bubble'

By NIALL MCGEE
Globe and Mail

Tuesday, April 26, 2005 Page B17

Yale economics professor Robert Shiller is known for making the right call at the right time. His prescient book Irrational Exuberance was published weeks before the tech market crashed in March, 2000. The second edition of that book sounds a warning call on the North American real estate market.

"This is the biggest national bubble that the U.S. has seen in over a century," Prof. Shiller told Jim O'Connell on Report on Business Television. He says a violent correction is imminent. "When people are flocking into the housing market buying more and more houses, it's not a sustainable situation."

The bubble is building in "glamour cities and glamour vacation areas" in the United States and Canada. Ominously, Prof. Shiller says that "Vancouver is the most bubbly city in the world." He says that city has a history of volatile housing prices but he doesn't see the same level of bubbliness in the rest of the country's housing market.

However, Prof. Shiller can't say when the North American real estate bubble will burst. He says it tends to be a "psychological phenomenon" and "any bubble is a tug of war between the enthusiasts and the doubters."

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Thoughts? I know housing prices in Vancouver are rediculous. There has to be a market correction. Hopefully it won't be that bad. If anything though, it will be a great time to buy a condo. I wonder if this 'bubble' would happen in Toronto as well?
 

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I've heard this prediction from other sources as well. Not specific to Vancouver, but some see the bubble bursting soon.

Let's hope things cool off gradually, rather than a big sudden crash like the tech sector.
 

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Agreed but what I don't understand is if most units in a condo or subdivision are pre-sold then what's the problem? It's not like developers are building on spec hoping someone will buy them. They are pre-sold for the most part.

I don't get that. I'm sure there's some deep economic reason for it but I missed that class.
 

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If everyone believes everything that is written in this book, then the market will indeed crash, since demand dictates direction of prices.:)
 

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416 - part of the problem is that people are buying more then they can afford due to very low interest rates. Rates go up by a few points and poof - a lot of people will be in a very bad position financially.
 

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I agree with vitc - the local economy, although it is very strong at the moment, doesn't provide salaries as high as other cities with sky-high real estate prices - so people must be leveraged to the hilt.
 

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Discussion Starter · #7 · (Edited)
Thanks. That explains things.

But why haven't salaries caught up to housing prices as in other high priced cities?

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Interestingly, a day before, this article:

Dreaded 'flip' absent in Canada's housing market
'No speculative bubble'

Garry Marr
Financial Post

April 25, 2005

It's the dirtiest four-letter word in real estate and few will utter it.

Flip: Talk to most people in the industry and they'll tell you it's not happening. Their fear is very simple, the flip is usually the final phase in the real estate cycle before the bubble bursts.

It means the market is out of control.

That's what happened in Toronto's red-hot condominium market in the 1980s. Prices were shooting up so fast people bought condos and sold them within weeks. It was easy to make money.

You bought a condo from a builder and before the highrise was even completed you sold the unit to someone else and made a tidy profit in the tens of thousands of dollars by doing nothing but putting up a paltry down payment of $5,000 to $10,000.

Investors could pull off the move because overall real estate price increases were running well into the double digits and it was not uncommon for a condo to jump 50% in price before it was even built.

"That was before the developers got smart," says Jamie Johnston, with Re/Max Condo Plus. These days, some builders make investors put down 25% to 35% of the purchase price.

The other big obstacle to flipping is changes to the condo rules that make it difficult to transfer ownership of a unit until the condo has been officially registered.

But the No. 1 issue in today's market for someone looking to make a quick buck in real estate is prices are not rising fast enough, once transaction costs are considered.

"There really isn't much speculation in this market. We don't have the speculative bubble," said Adrienne Warren, an economist with the Bank of Nova Scotia. "The market has been more about how much your carrying costs are. It's a market that is attracting first-time buyers [not speculators]."

Recent data from the Canadian Real Estate Association shows prices continue to climb, but mostly at moderate levels. March set a new all-time high for the average price of a home sold at $259,736 but that's still only up 8.6% from a year ago. That is a nice increase but hardly justifies the risk of speculative investing.

Furthermore, economists such as Ms. Warren are predicting price increases will slow the rest of this year making the opportunity for a quick turnaround less likely.

Peter Norman, an economist with Clayton Research in Toronto, figures the total transaction costs on any deal are in the 8% range once you factor in the 5% commission real estate agents get, plus legal costs and land transfer taxes.

"Flipping is not really an issue. You have to remember from 1986 to 1989, prices were up 33% a year in Toronto. In that environment, you can sell and cover your costs," Mr. Norman said. Nationwide, prices have climbed about 40% in the past five years.

The best example of flipping is called the "renovation flip" and it's not really the same thing. "You buy a house, fix it up and six months later sell," Mr. Norman said. But that's not really a true flip. A true flip is when you sell the property before you've even taken possession, he said.

Prish Jain, an architect who restores or renovates older homes, doesn't even like to use the word flip. "It's pejorative," he said.

He and his business partner Michael Krus will buy an older home, upgrade the wiring and plumbing, open up the space and then sell the product months later for a profit. "We make the homes suitable for modern lifestyles," he said.

Mr. Jain feels his profit is based on the expertise he and his partner bring to a project, rather than just taking advantage of rising real estate prices. "You can't buy something, sit on it for a couple of months, put it back on the market and expect to make money," Mr. Jain said. "You can't flip like that."

Ted Tsiakopoulos, a market analyst with Canada Mortgage and Housing Corp., said the evidence shows current home buyers are not speculators. Recent data indicates 63% of homebuyers in Ottawa were purchasing for the first-time while the figure was 57% in Toronto. Those people are buying to live in the home.

Even in Toronto's red-hot condo sector, the data indicates there is limited speculation. CMHC says only 20% of condominiums are being bought by investors, compared with 40% 15 years ago.

While the majority of investors may have a buy and hold philosophy, Toronto realtor Brad Lamb says more than a few of them are still "flipping homes," namely buying condominiums from floor plans and selling them immediately after taking possession.

Mr. Lamb, who says he personally owns 80 condominiums, said the flip can still be done if you get the permission of the builder. Most of the contracts signed by condo buyers include a provision not allowing them to sell the unit before the condominium corporation is registered -- something that usually happens six months after a condo opens.

"Their contracts are iron clad but for a fee they will let you out," he said.

Some people are avoiding that fee but it requires some degree of stealth. One option is to agree to sell your property to a third party in advance of taking ownership.

Either way, there is still money to be made, Mr. Lam bsaid. He gave the example of someone buying a condo three years ago for $150,000. When that condo finally gets built three years later, it's probably going to be worth about $210,000, he said.

"Let's say you put 15% down, that's $22,500. You pay brokerage fees and others costs of says $15,000. That still leave you with a profit of $45,000. That's a 100% return on your money."

It all sounds very good but is based on the assumption the value of the condo you purchase from floor plans will increase by the time the building is constructed. That didn't happen at the end of the last housing cycle.

"I had a couple," Mr. Lamb, said about condos he purchased when the market fell apart last time. "Eventually, I got my money back."
© National Post 2005
 

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I think there is a bubble because you've got interest rates going up and prices going in the same direction. That simply isn't sustainable for very long. If interest rates continue to go up, then prices will start to drop, and they will take years to stabilize.
 

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vitc said:
416 - part of the problem is that people are buying more then they can afford due to very low interest rates. Rates go up by a few points and poof - a lot of people will be in a very bad position financially.
Come on, this is not true. Anyone idiotic enough to have a variable rate morgage instead of locking in their rate does not deserve to keep their money or house.

However, anyone with any sense who did lock in their rates have little to fear -- in time it will prove to be an excellent decision.
 

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"Agreed but what I don't understand is if most units in a condo or subdivision are pre-sold then what's the problem? It's not like developers are building on spec hoping someone will buy them."

But many are buying on spec.
 

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Maybe this could calm down fears of a bubble... :D

B.C.'s economy tops provinces in 2004
Booming forest sector helped fuel strong GDP

Scott Simpson
Vancouver Sun

Thursday, April 28, 2005

British Columbia had the strongest economy among Canadian provinces in 2004, led by a booming forest industry, Statistics Canada reported on Wednesday.

B.C.'s real gross domestic product rose 3.9 per cent, its best performance since 2000, and well ahead of the national average of 2.8 per cent.

StatsCan reported that resources pushed economic growth across the West, with Alberta and Saskatchewan serving as runners-up to B.C.

Alberta got a boost from heightened activity in its oil patch to log a 3.7-per-cent improvement.

In B.C., consumer spending rose 4.1 per cent, the construction industry was working flat-out, unemployment was near historic lows, and global prices for metals and minerals provided an additional boost.

None of the numbers are considered final, and revised estimates will be published in the fall.

The B.C. figures are more than a full percentage point ahead of forecasts offered a year ago, and show the impact that an unexpectedly strong United States housing market -- and a global commodity boom -- had on this province's economy.

"Forest products experienced their best performance in years," StatsCan reported. "British Columbia profited most from this growth, with improvements of more than 15 per cent for both forestry and sawmill production. Output in coal mining in British Columbia rose 15 per cent, with much of the coal destined for export."

"It was good to see B.C. leading the pack in overall output growth last year," said Jock Finlayson, executive vice president for policy with the Business Council of B.C. "We thought B.C. would be doing well in 2004, but hadn't anticipated that it was going to beat Alberta -- it's quite an accomplishment to beat Alberta on any indicator when it comes to economic performance."

Finlayson noted that B.C. also finished ahead of the Canadian average in 2003, and "virtually matched it" in 2002.

"The forecast, for what it's worth, indicates that this year we will have another year that's better than the national average as well."

Helmut Pastrick, chief economist for Credit Union Central of BC, said average GDP growth in B.C. from 1990 to 2003 was 2.5 per cent, and added that trying to calculate the 2004 number was like hitting a moving target.

"U.S. housing starts were around two million, or so, certainly more than most forecasters had expected entering 2004," Pastrick said. "There was a really big gain in wood products manufacturing, up 16 per cent -- that's primarily lumber, oriented strand board. There was more export volume in lumber, pulp. We saw metals prices higher, coal prices up.

"Housing residential construction was up about 15 per cent or so, adjusted for inflation. Business investment was up. Machinery and equipment investment was up 5.4 per cent in real, inflation-adjusted terms."

He described the strength in the housing market as "surprising -- not just in the U.S., but in B.C. as well. We are on a four-year upswing here. The numbers coming out in the last three or four months have shown amazing resilience. Of course, these low interest rates make a huge difference."

Finlayson said the U.S. softwood lumber tariff, intended by inefficient U.S. producers to drive B.C. out of the American market, has instead made it more competitive.

"It had the effect of accelerating rationalization and restructuring in the B.C. sawmill industry. The U.S. protectionists have created a bit of a monster in B.C."

Craig Campbell, a forest industry analyst with PricewaterhouseCoopers, said the B.C. Interior forest sector "got lean and mean" enough to produce record earnings despite a 20-per-cent tariff, a 20-per-cent rise in the value of the Canadian dollar that imposed a 20-per-cent penalty on earnings, railcar shortages and "a few other complications like pine beetle."

GROWTH SPURT:

B.C. led the nation in GDP growth for 2004, with booms in sectors including forestry, construction, mining and consumer spending adding to the economic groundswell.

GDP growth 2004

Nfld. & Lab. - 0.7%

N.S. 1.3%

P.E.I. 1.7%

Quebec 2.2%

Manitoba 2.3%

N.B. 2.6%

Ontario 2.6%

Canada 2.8%

Saskatchewan 3.5%

Alberta 3.7%

British Columbia 3.9%

Source: Vancouver Sun

Ran with fact box "Growth Spurt", which has been appended tothe end of the story.
 

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valantino said:
"Agreed but what I don't understand is if most units in a condo or subdivision are pre-sold then what's the problem? It's not like developers are building on spec hoping someone will buy them."

But many are buying on spec.
I agree. Speculators know the risk, so let them suffer from a downturn. However, people actually living in their own home should do fine as long as they have a traditional morgage and are able to make the monthly payments.
 

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Many more homeless people on the street

Last updated Apr 28 2005 11:12 PM PDT
CBC News

VANCOUVER – A new report says the number of homeless people in Greater Vancouver has doubled in the past three years from about 1,100 people to more than 2,100.

That's the result from a survey conducted by hundreds of volunteers who fanned out across the Lower Mainland in a one-day blitz last month.

There are also numbers within the numbers. Despite the fact that the number of shelter beds has gone up, the number of homeless people sleeping on the street has more than tripled.

"That's a phenomenonly large increase," says survey organizer Michael Goldberg of the Social Planning and Resource Council.

"Some of that, a small portion of it, is due to our better methodology, because we learned from the first count. But the overwhelming majority is that there are just more homeless people."

In the 2002 survey, 56 per cent of those surveyed had been on the street for less than six months. Now, 65 per cent had been on the street for more than six months.

When asked about their sources of income, 19 per cent said they got most of their money from welfare, while 55 per cent said they turned to crime, bottle collecting or had no income at all.

The number of employed people living on the street is also up dramatically, and now stands at 12 per cent, up from seven per cent in 2002.

The survey also shows a sharp increase in homelessness in suburbs such as Coquitlam and Langley – both up more than 200 per cent since 2002.
 
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