experts: real estate column Thursday, April 03, 2008

Understand Your Objectives as an Investor

Real estate markets are primarily local in nature. Thus, if one looks at measurable statistics, mixes in some historical performance - one should be able to come up with a fairly accurate forecast. Factors like affordability, interest rates, inward migration, demand and supply determine, or are likely to affect, market values. The intangible - locally - is of course confidence ... but even that is measurable to some extent. The problem right now is that we are not in a normal real estate market.

By Ozzie Jurock

Forecasting is never easy ... particularly when it is about the future. Ok, old joke. But, in a normal real estate market however, forecasting - following some time-honoured principles - should be quite simple.

Real estate markets are primarily local in nature. Thus, if one looks at measurable statistics, mixes in some historical performance - one should be able to come up with a fairly accurate forecast. Factors like affordability, interest rates, inward migration, demand and supply determine, or are likely to affect, market values. The intangible - locally - is of course confidence ... but even that is measurable to some extent.

The current problem is that we are not in a normal real estate market.

I have held the multi-year position that we live in the most unreported inflation of all times. Nothing that you and I buy only goes up the 'core' 2% ... nothing. In fact, anything of real value is soaring (oil, gold, food, etc.).

Additionally, it looks like the central banks - in order to stave off panic - are now further flooding - 'liquifying' the system with 'created' cash ...

Oscar Wilde said "Anyone who lives within their means suffers from a lack of imagination" ... and our governments sure do not suffer from that lack right now. Worldwide we are creating cash out of thin air for the last 10 years and are accelerating the 'creation' right now. That cash is competing with the cash that you and I earn and is driving everything of real value higher. Add to this the debacle of the US 'sub prime' market and the worldwide 'credit crunch' - there is no doubt that we are in for an extended period of serious financial adjustments.

These adjustments will affect home buyers (much tougher to get that 'self-employed' mortgage), hungry flippers (much more dangerous, outcome much less predictable) as well as commercial investors (money will be more expensive). Overall, financial institutions will be less flexible and you have to pledge your first born to qualify for the slightest 'off-centre' deal. They will also keep interest rates higher to give you and me the privilege to pay off their mistakes.

Which leads us to forecast even more inflation and with it, much higher real estate prices ahead eventually ... but first we must solve our problems.

We have been there before ... Stock market crashes, Asian crisis, Mexican crisis, currency crisis, Savings and Loans crisis ... and we worked them out. But each time we had to 'go thru the valley of readjusting' before we went on our next leg up. Each time it was a little more difficult. It will not be any different this time. In our view, we will muddle thru, but thru the valley we must go ... and this valley is a morass with a steep cliff to climb at the end.

So what should we do? We have said it before ... just as valid today:

  • First of all understand your personal objectives, make a plan and write it down. This is important. Decide if you are a flipper, a shark or a long-term investor. It will force you to think. Buying downtown, you are really not buying for cash flow ... you are looking for capital gain ... you are a flipper. Can you carry the negative cash flow, if you can't flip it for a few years? If you look to be an investor for cash flow, go to areas - good solid areas - where rent to price ratios make sense and a tenant buys you the property - literally over time. And if you are a shark ... don't buy a US tax lien course, go sit in court here a few days and see how things work in Canada. Once you clarify your personal objectives, buy what you like.
  • We like most of BC ... but here are areas (which we have mentioned before) we like first:
  • We like all of Vancouver, but particularly Dunbar - between 10th Ave and West 34th - proximity to UBC and still somewhat affordable.
  • Main and Broadway, proximity to the South Shore of False Creek, Canada Line and Skytrain links ... condo prices still make sense.
  • North Vancouver's Lower Lonsdale is transforming into 'Yaletown North' minus the high prices. The $250 million Pier Project will add tremendous value.
  • We like Richmond's Steveston (Granville Island meets West Vancouver). Great ambiance and still affordable.
  • If you are into big homes, Port Moody's Heritage Mountain and Coquitlam's Westwood Plateau still have 4,000 sq foot newer homes for under $800,000 and Pt. Moody's Newport Village has great mountain view condos. Port Moody has a fine marina, great walkways, mountain and valley vistas and is relatively close (along the Barnet Highway). If you haven't been there for while ... take a drive to Belcarra from Vancouver ... it is gorgeous.
  • New Westminster has some excellent new condo buildings with great water views at $200 per sq. ft. less than downtown. The Quays have a great market and fine waterfront vistas. We also hear of a number of near new condos hitting the market, when pre-sale buyers that wanted to flip, could not, and had to close. Now they are competing with the new product.
  • Surrey, especially the Whalley area. Surrey is where people are moving to. It will become the largest municipality in all of Lower Mainland. North Surrey may be a good research pick for (slightly oversupplied) townhouses.
  • Then there is Maple Ridge's Albion Development area, Langley's Willowbrook neighbourhoods, and Fort Langley's Yorkson Village, all will - together with Mission - benefit from the twinning of the Pt. Mann Bridge - the new bridge replacing the Albion ferry - and the new connector roads. (See also the article on Downtown Langley on page 15 of this issue.)
  • Further afield there is Chilliwack (Sardis's Garrison Crossing or older homes downtown) and Hope (still asleep) for the cash flow seeking investor.
  • Kamloops has great cash flow (low cost condominium apartments and a healthy rental market makes it hard to get hurt). The mining town of Logan Lake maybe worth a look for those searching cashflow.
  • On the Island, Nanaimo and nearby Cedar, Black Creek, Deep Bay and Saratoga Beach in the Comox Valley may be good bets.
  • Mining centres like Smithers and Williams Lake, have seen solid new employment and sharply lower vacancy rates. Price to rent ratios make sense there.
  • Some of the ski resorts make sense. There is an $11 million expansion at Cranbrook Airport for international jets ... particularly when you buy in the older parts of town of ski resorts like Kimberley, Rossland and Revelstoke. Kimberley still has one-bedroom condos priced at $75,000 and Fernie, Revelstoke and Rossland are good bets for the blue-eyed sheiks from Alberta.
  • Silver Star, Mt. Baldy near Osoyoos, Mt. Washington remain a standing ski resort recommendation ... for personal use condos.
  • Anything in a 2-hour radius from the major centres of Vancouver, Calgary and Edmonton remains a buy for great capital gain potential ... if not cash flow.
  • Baby boomers are getting older and are heading to retirement towns, like Vernon. We also like Salmon Arm and the whole Shuswap for retirement. The Sunshine Coast with Gibsons (you can commute there) and Powell River are worth a look.
  • Whistler: Whistler prices are set to move up after a three-year lull.

There are such opportunities all across this province. But remember, today you can buy anything you want. But make sure you want what you own. These are crazy times.

When we look at the past ... enormous booms were followed by equally enormous reversals - but even if today we somehow manage a 'soft landing', it behooves us ... as smart investors ... to be professional about our goals and our investments.

Like - insisting that the real estate debt is serviced substantially by the rental income and that the cost - i.e. the mortgage actually gets paid off - eventually. Building equity with tenant's money is a principle that should never be overlooked by investors! Interest only - doesn't hack it. Our ideal mortgage term for an investor remains 17 years. Maximum payback for minimum monthly payment increase.

Vancouver had a spectacular year in 2007. The average home sold in Vancouver clocked in at $811,000. (The average new home sold at $1,100,000) the average condo sold for $407,200 up some 15% over last year. (Even the average used condo came in at $376,000.) Unit sales were 12% higher in December 2007 and listings ... ? Listings were 8% lower than December 2006 at 8,286! Low inventory, strong sales predict a strong spring ahead.

2007 was a very strong year indeed.

The first half of 2008 looks good, but there are landmines. Our prices are VERY high, our affordability is zero. We hear from many sources that the pre-sale condo market has slowed to a crawl, that condo inventory is building, that there are more people looking and making lower offers.

In 2008 we expect:

1. In Alberta, Saskatchewan and after a strong spring - BC ... more selection, selection, selection. All listing inventories will rise. Particularly condo inventories.

2. No Bidding Wars. A change to buyer's market without competitive bidding.

3. Offers will be welcome. Offers over asking price will not be prevalent unless listings are underpriced. Sellers will not be insulted by a lower offer.

4. Realtors will have more time ... and will spend it with you. Today buyers can take their time, look at several homes and think about their decision.

5. There will be fewer investors. It is estimated that one half of all condo purchases in the last 3 years were to investors. These non-owner occupied buyers caused the market to inflate and affordability to decline. In Edmonton we estimate some 1,800 properties - owned by investors - stand vacant. There will be deals in those.

6. People will use more to buy deals and find them. Particularly in the "assignment" sector.

7. Financing will be tougher, particularly in the self-employed sector and the commercial market.

8. Developers and builders will (have already) slowed down their development plans for 2008. This will result in lower housing starts making the headlines.

9. There will be a barrage of bad news about the 'market'. Not just in the US. Prices are reversing in New Zealand, in England, in Australia and in the US. But not in all areas. Real estate is local ... so you will always find a great local deal. The best deals are made in poor markets ... not at the top. Don't worry about it ... you are not buying the market you are schussing out your fine deal.

Major Point

Canada is not the US. But we are very closely tied economically. As the situation worsens ... stagflation, inflation or recession words will be bandied about ... resulting in all consumers - yep - even us in Canada to start pulling back. As we do ... we may well bring about what we fear.

BC still has a way to go - we have huge capital investment, large foreign investment, low, low unemployment, very low vacancy rates. However, we would not be surprised to see a reversal sometime this year, but remain convinced that 10 years from now we will see prices higher yet.

Published in the Calgary Herald, Saturday, March 15, 2007

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