So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!

So yesterday the Vancouver Sun shamelessly published more sensationalism by making the Vancouver real estate market sound a lot worse than it really is. There are a few highlights I would like to point out from the stats released and they are as follows:

The benchmark price of a home in Vancouver, excluding Surrey, fell by 2.1% from May of 2008 to July of 2008. So in a three month period of time, the market has dipped by 2.1% in the first pull-back that has occurred in prices in around 8 years.

In Surrey, over roughly the same time frame, prices fell 6%. When you consider the average home was over $500,000 this means that someone (every home owner – allegedly) has lost $30,000 in the last few months in real estate.

Is this true?

Short answer: Yes.

It’s right there in the math. The benchmark price of homes has fallen. The real estate market has taken a backwards step, and my opinion is a steadfast, “So What?”

This is what markets do: they fluctuate. You should expect it to happen. In fact, a 10% swing up and down is not only uncommon, it is NORMAL! What we have seen over the last 8 years has not been “normal” with prices steadily increasing by percentages in double digits… 12%… 18%…. 23%… or MORE in some markets. Are people’s wages and income rising this fast? Absolutely not. So why should this type of price increase be sustainable? It simply isn’t.

Now, for those that had the gumption to read beyond the sensationalist headlines, you would see that the actual opinions of the experts is more upbeat than the headline suggests. In fact, Cameron Muir, Chief Economist for the B.C. Real Estate Association, said he does not believe that a housing bubble existed and has now burst. “Typically, at the end of a market cycle you will see home prices remain flat, or even come off a few percentage points a year, until the next cycle begins,” said Muir in an interview.

Note that he said “a few percentage points a year” and not “a few percentage points.” Yes, the market could down trend for the next few years. It is possible, and likely long overdue. People can say, “it’s different this time,” or, “but the olympics are coming,” or, “but this is the best city in the world for x y and z reasons,” and this is the self same rhetoric that people hear before ever major price decline.

So, what is my opinion? Is this the end of the market? Should you NOT get into real estate?

I think that a slight down trend, or a long levelling off period is long overdue. Prices have gotten away from earnings and wages, and as a broker that sees how people qualify for mortgages, almost ALL of them we do are 40 year mortgages, and we do them because without them, the people don’t qualify for the home. When the average family cannot afford the average home, something is out of whack, and one thing about nature and markets is that when something is out of whack, it will eventually be brought back INTO whack.

Does this mean a market meltdown? I don’t believe so. I believe that over the next year or two, there will be a lot of inventory on the market as speculators and “flippers” have to sell their projects or “spec homes” to get out of under the mortgages. I suspect this will extend the already existing “Buyer’s Market” for quite some time with properties staying on the market longer, fewer “multiple offer” situations, and create lots of great buying opportunities for shrewd buyers looking to buy and hold: the only universally successful real estate investment strategy, in my opinion.

I still think that real estate is a good investment. Even if the market repeated the fall of 1981-1985, those people that stayed the course always came out ahead. There has been virtually no 5 year period where someone has bought real estate and lost money except in specific isolated markets with unique market forces at work. Real estate as a whole in Vancouver has been a very lucrative investment for a very long time, and given the attractiveness of the geography, the great employment and jobs, the tourism, and all the things that make a city great, I do not see real estate ever falling off the map as a viable investment.

So what do you do? I still suggest the same thing now as I did before: buy as much house as your wallet can afford, live there for five years, take a fixed 5 year mortgage (or longer) to ensure payment stability, and start paying down the mortgage. Worst case scenario is that you make no money after five years and stay in the home for another five. By that time, no matter what market we are looking at, you will have made money. What is the alternative? Renting? Long term that isn’t a great plan either with no appreciation potential despite the lower risk that renters face of market forces.

So there is my plan: business as usual. Buy a home in a desirable area, close to amenities, close to schools or schopping or other attractiveness, and it will always have value. Try to make a buck on a quick flip and you will be the author of your own misery unless you are very very shrewd and able to move and flip faster than the market currently seems to allow.

Happy hunting!