Agriculture the next real estate play

Everyone has been hearing and reading about the rising costs of food around the world. This storey is in part a decline in food production, increased global demand from developing countries like China and India, the US government pushing forward on corn based ethanol production and finally market speculators pushing up the prices. That being said several commodity, real estate and other experts are looking forward on a 10 year boom in commodity prices.

If we look at it from a real estate perspective, farmland is the obvious place to be. Assuming a 10 year boom in the commodity market plays out, real estate values of farmland will skyrocket. I base this primarily on the limited supply of farmland and adding another billion people to the world population by 2020. In addition to this, farmland around the world is decreasing due to development and loss of ground water .

The Spring 2008 Farmland Values Report released by Farm Credit Canada says the following:

"The average value of Canadian farmland increased 7.7 per cent during the last six months of 2007, Canada's highest increase since 2002. This is higher than the 3.6 per cent increase in the first six months of 2007.

Most provinces continue to see growth in farmland values, with British Columbia experiencing a huge 14.5 per cent increase. Overall increases are consistent with an upward trend in land values since January 2000.

With the largest increase in B.C. at 14.5 per cent, Alberta shows the second largest increase at 10.3 per cent. Saskatchewan follows closely behind with an average 7.8 per cent increase and Manitoba is experiencing a similar per cent increase of 7.3 per cent.

Quebec shows an increase of 3.6 per cent, while Ontario's farmland values increased slightly at 1.2 per cent during the last six months of 2007.

Atlantic Canada land values varied, with Nova Scotia showing a 3.1 per cent increase, while Prince Edward Island and New Brunswick indicating decreases of 1.4 per cent and 3.3 per cent, respectively. Newfoundland and Labrador land values remained the same in the second half of 2007. "

Final thought: For all those times you wish you would have jumped into the market early and made your fortune, now is the time to investigate the future follow the money and make your play.

Calgary is leading the real estate decline

This article talks about Calgary leading the pack of the four most active provinces in resale housing activity.

"A report released Tuesday by the Canadian Real Estate Association says MLS sales in the province were down 30.5 per cent compared with the first quarter of 2007, new listings increased by 36.2 per cent, total dollar volume of all transactions dropped by 26.7 per cent but the average sale price increased by 5.4 per cent to $361,544."

REM: The question is, how long will this "balanced market" and "modest price gains" last? My call is that we will pass by the "balanced market" on our destination to a buyers market.

The duration the market will hold a balance I believe is directly linked to the number of people/quasi-investors who have been holding on to hit the top of the market before selling.

There still seems to be a fair number of people I talk to who believe the market will continue on a 5% -10% gain over the next couple of years (at least in Vancouver BC). The problem with timing the top of the market is that you don't see the top until it has already passed by.

I will leave you with this Wall Street truism as a final thought: Bulls Make Money, Bears Make Money, Pigs Get Slaughtered.

Banks Reluctant To Pass On Rate Cuts

There are signs the Bank of Canada and the U.S. Federal Reserve are running out of room to deliver further interest rate relief to their economies.

Commercial banks in Canada are showing an increasing reluctance to pass on the central bank's rate cuts, and further Fed cuts are expected to run into opposition from members who are starting to fear inflation more than recession.

REM: Real estate may be leveling off to a more "balanced market" however the balance of 2008 will tell the real storey. We could even begin to see a shift in some Canadian markets in the next couple months since the spring is typically the most active months of the cycle. There are a few items I think will impact the real estate market in the not so distant future: recession fears, the impact of the banks holding back on mortgage rate cuts, fears of global inflation impacting Canada and highly leveraged first-time buyers .

Looking for a Vacation Home Amigo?

I just got back from a well deserved vacation in Mexico. While I am back to my day-to-day routine my mind is still in Puerto Vallarta. The weather was excellent, the ocean was warm and the locals are great people. Although, just getting away from the rainy cold weather of the west coast would make anyplace with a temperature above 15 degrees seem like paradise.

What interested me most about Puerto Vallarta was the real estate investment possibilities. You can get into this market for as little as $80k US for a 2 bdrm - 2 bath condo however I'm sure "you get what you pay for" applies. There are several options for condos not on the beach but within waking distance priced in the $140 to $200K range. Beach condos will cost you an easy $500,000 to $1,000,000 plus. There are also options for buying a house for those interested.

With vacation rental fees in the $100 to $200 USD per night for a 2 bdrm - 2 bath condo close to amenities but not on the beach, purchasing one with a positive cash flow should be attainable.

The limited market research I did while on vacation indicated that the real estate market in Puerto Vallarta has been experiencing a 5 year boom with some signs of a turn. Such as the number of listings increasing over the previous year and speculation that the US credit problems will somewhat weaken the real estate market in Mexico.

There are a few things we can take from this; first, every boom runs out of steam and is followed by a pullback at some point.

Next, this market is also predominantly driven by US buyers. Now that the consensus amongst most experts is that the US is in a recession, discretionary spending on a vacation home should decline.

In addition, real estate markets in some US states like Florida and California are a buyers market increasing the competition for vacation properties in general.

Finally, the US sub prime impact. I don't think that this alone will have a major impact on the real estate market in Mexico for the following reasons:
* most sub prime loans were made to people whom could not afford their first home.
* others who got caught up by the easy money availability invested locally.
That being said, the current tightening of credit availability will have some impact on the vacation home market the question is just how much.

The vacation home market in general has been strong for the past several years in most areas and some markets will continue to remain strong in the future due to demand from retiring baby boomers with cash to burn. However not all these markets will play out the same.

If you have been considering purchasing a vacation home now is the time to start researching and paying attention to the local real estate market you are interested in.

B.C. sales figures rank dead last among provinces

Retail sales in B.C. placed dead last among the provinces in January in an underwhelming performance one economist suggests may be a blip.

B.C. was the only province in Canada to see a sales decline in January as month-over-month sales shrank by 0.2 per cent, Statistics Canada said yesterday.

Nationally, retail sales rose by 1.5 per cent, buoyed by Canadians' hunger for cars, clothes, building supplies and furniture.

Business Council of B.C. economist Jock Finlayson said B.C.'s sales figures are a bit puzzling given the province's strength in other economic areas such as the labour market.

"We have had quite strong retail sales until this report, so I wouldn't jump to a conclusion based on one month," Finlayson said.

"It could very well be a blip rather than a sign of any fundamental slowdown of retail sales."

REM: This may be a blip however I have one associate who works for a large furnitue distributor and he claims shipments to individual stores are down when compared to the same period over the last few years.

Market Numbers

Click on the image for a larger view.

REM: The numbers are up across the board. Any predictions for the market for the remainder of the year?

Greater Fool: The Troubled Future of Real Estate

He writes that a reckoning is imminent because we've been as greedy as Americans, who are enduring their worst real estate deflation since the 1930s. He takes issue with claims that our banks are prudent, arguing that zero-down mortgages and 40-year amortizations are useful only to speculators and people who can't really afford to be in the game.


He also cites recent reports that personal debt levels in Canada are at record highs and savings rates at record lows, leaving many short on options should hard times hit.


"An anti-real estate mood has swept America. Within months it will be here," he declares. He claims that suburban trophy houses in some areas of the GTA are lingering on the market and falling in value. He says the collapse will be widespread and long-lasting, in part because boomers will flood the market with houses to finance their retirements – especially since so few employees outside the public sector have much in the way of pension prospects.


His scenario gets scarier, if you fear that manufacturing jobs are in danger due to the strong Canadian dollar and the likelihood the U.S. will slip into recession. The logic is that it won't take many deeply indebted, freshly unemployed people to trigger a wave of desperation selling. That, in turn, would drag down property values for entire neighbourhoods, leaving many people with mortgages worth substantially more than their homes.


It's that situation that caused an estimated 1 million Americans to walk away from their homes last year, with predictions that twice that number will follow in 2008.
Frightened enough yet?


Well, unless you're already struggling to carry a huge mortgage with a long amortization on a large house on some car-dependent patch of suburbia, you can almost certainly relax. But you might want to include a read of Greater Fool as part of that relaxation – no matter what your circumstances are.


Wise investors diversify their portfolios, but by some estimates, most Canadian households have more than 80 per cent of their wealth tied up in real estate. And Turner is correct to point out that many, if not most, people are deluded by real estate mythology. Many believe it's always better to own than rent. Many think prices always rise. Many see real estate as a foolproof route to financial freedom, even though history has shown that at times real estate can be a great destroyer of wealth.


Turner is also correct to point out that economists employed by large real estate firms, banks and mortgage insurers tend to be quoted uncritically in Canadian media.

But try to find a respected Canadian economist who buys into Turner's pessimism. People at the University of Toronto's economics department, the Ivey School of Business at the University of Western Ontario and University of British Columbia's Centre for Urban Economics and Real Estate couldn't find one for us.


While most seem to think a gradual softening is likely after 10 years of constant price increases, a U.S.-style meltdown doesn't appear to be on anyone's radar.


"I think you will have a very tough time finding any economists who agree with Turner on this," says Tsur Somerville of UBC.



Read the entire article


REM: This book has been recently released. If you have read it, and would like to write a review on this book I will consider posting it on this site. All other comments and feedback are appreciated.

Central banks apply a costly Band-Aid

Harvey Enchin
The Vancouver Sun
Friday, March 14, 2008

World markets, including Japan's, rebounded Tuesday after an infusion of money from major central banks.

If there were any doubt that the world is in the throes of a financial crisis, moves by central banks in Europe, Canada and the United States this week confirmed our worst fears.
While their methods seem arcane -- establishing a "term securities lending facility," for instance -- their goal is painfully obvious: To avert a run on the banks and the failure of major financial institutions.

Such a calamitous outcome seems unthinkable sitting comfortably in Canada where the economy west of Thunder Bay still sizzles and the housing market crash south of the border has yet to depress local real estate prices.

But the key to what makes a capitalist economy work is also its greatest weakness -- leverage. Every time a financial institution initiates a transaction, it posts collateral to make good on a trade, explains Levente Mady, fixed-income strategist for MF Global, one of the largest financial intermediaries in the world.

When the housing bubble burst in the U.S., the alphabet soup of acronyms that represent derivatives of mortgage loans and other financial instruments were undermined and financial institutions no longer could be assured that the collateral offered to back a transaction was worth the value ascribed to it. In short, financial institutions didn't trust each other. And a financial institution unable to lend or borrow is toast.

To grease the gears of commerce, central banks do something mysterious; they inject liquidity into the system. It's a meaningless phrase to those outside the inner circle of economists, policy wonks, financial analysts, bankers, brokers and others who actually find this stuff interesting, but the latest move by the U.S. Federal Reserve illustrates how it is accomplished.

The Fed has given senior dealers -- the 20 banks and investment houses that deal directly with it -- an offer they can't refuse. In exchange for their illiquid debt, including mortgage-related securities, the Fed will lend them government-guaranteed securities, such as treasury bonds, which those financial institutions can then lend to other firms for cash. This follows similar earlier schemes, such as the Temporary Auction Facility that allowed banks to use mortgage-backed securities and other dubious structured investments as collateral at 85 per cent of their face value even though they are virtually worthless. The Fed began with a $30-billion program in December, raised it to $90 billion in January, bumped it up to $100 billion in February and doubled it to $200 billion on Tuesday.

This is in addition to the commitment by the European Central Bank, which has been engaged in this sort of activity for several months, to add about $45 billion to the several hundred billion previously pledged. For its part, the Bank of Canada has ponied up $4 billion in two tranches of $2 billion each but it imposes stiffer quality requirements than the American plans.

"If the Federal Reserve and other central banks weren't providing this liquidity there would be a number of very large players in big, big trouble," Mady says. Indeed, it was widely reported that the credit facility was timed to bail out Bear Stearns, a brokerage firm struggling with higher borrowing costs and mortgage-related losses that was deemed too large to be allowed to fail.
Mady blames the central banks for creating the now rapidly-deflating liquidity bubble in the first place, dating back to 2002 when interest rates were lowered to one per cent, or perhaps even earlier during the irrationally exuberant run-up in technology stocks.

The question that needs to be asked is whether some of the biggest global financial institutions are still solvent. If not, they will need to swap their dubious debt for securities backed by governments indefinitely. That's the bottom line of this costly program to shore up the balance sheets of financial institutions. Their bad bets will be covered by taxpayers.

It's difficult to fathom how these cosy arrangements between central bankers and their clients serve the public interest. Shouldn't financial institutions that make the wrong choices face more serious consequences than accounting writedowns?

Assuming the worst, that governments are paying the equivalent of hard dollars for paper worth pennies or less, the result could be a significant drain on governments' financial resources, forcing some into deficit (or increasing deficits of countries that already have them). That could mean higher taxes, reduced spending on social programs or both. The central bank swaps of good money for bad could also stoke inflation.

Meanwhile, U.S. consumers, who account for roughly 72 per cent of the American economy, are getting whacked. Many have descended into negative equity territory as house prices have dropped and credit lines were pulled. Barring some sort of intervention to relieve homeowners of their mortgage obligations, as many as two million foreclosures are expected this year alone.
Clearly, the liquidity injection is a Band-Aid that fails to address the problems underlying the global financial system's distress. The virus that has brought the world's strongest economy to its knees has to run its course.

Canada is not immune from the malaise. The manufacturing sector is already reeling and there's little reason for optimism with the Canadian dollar at or over par. Exports make up about 40 per cent of the Canadian economy and 80 per cent of our exports are destined for the U.S.

And, of course, the credit crisis has infected the stock market. Investors can try to second-guess the peaks and valleys of a volatile bear market but it's a mug's game for most of us.

The best defence, suggests MF Global's Mady, is to play defence. Looking back a couple of years from now, a government of Canada bond that secures principal and yields 2.75 per cent annually might seem like a good deal.
henchin@png.canwest.com
© The Vancouver Sun 2008

Household spending up

Statistics Canada; Vancouver Sun

Published: Tuesday, March 11, 2008

Household spending in 2006 continued to show the effects of the strong resource economy in the West. Spending growth in Alberta surpassed all other provinces by a wide margin, and B.C.'s increase managed to beat the national average.

REM: Times were good. I wonder how the pocket book is feeling now after all that frivolous spending in 2006? Financial hangover?

Income Security and Stability During Retirement in Canada

Statistics Canada

March 10, 2008
Past research has shown that the Canadian pension system is relatively effective in helping seniors to stay out of poverty. However, the extent to which the pension system enables individuals and families to maintain living standards achieved during their working years after retirement (income security) is less well understood.

To help fill this knowledge gap, we employ 20-year longitudinal data to track individuals as they move from age 55 through their retirement years. We use various measures of an individual's family income to study four main issues: change in income levels through retirement; the role that various income sources play in this change; variation in replacement rates through time and between poorer and richer
individuals; and, finally, the degree of long-term stability in individual incomes.

For workers with average incomes, family income falls after age 60, declines until age 68, and then stabilizes at approximately 80% of the income level they had at age 55. In contrast, low income individuals (those in the bottom income quintile) experience little change in income as they move from age 55 through the retirement years, largely because of the income maintenance effects of the public pension system. They experience high levels of individual income instability in their late 50s and early 60s, but income instability falls dramatically after retirement. Individuals in the top quintile experience substantially larger income declines in retirement so that income inequality within a cohort declines as the cohort ages.

More recent groups of retirees are experiencing higher income levels than earlier cohorts, largely because of higher private pensions. Replacement rates have changed little among cohorts, however. Whether recent gains in income levels will persist in future cohorts is unknown since pension coverage has been falling among younger workers.

Metro Vancouver Housing Starts Spiked

By Derrick Penner
Vancouver Sun

Monday, March 10, 2008

VANCOUVER -- Metro Vancouver housing starts in February spiked almost 100-per-cent higher than the same month in 2008 thanks to a flurry of condominium projects in Vancouver and some main suburbs.

Builders started work on 2,446 housing units, according to Canada Mortgage and Housing Corp.'s February report, some 96 per cent more than the 949 units begun in February 2007.

And in a continuation of the affordability trend, multi-family starts outnumbered single-family-home starts by a ratio of almost eight to one.

"With apartments and townhomes being relatively less expensive than single detached housess, the demand for multiple-family homes will remain high in 2008," Richard Sam, a Canada Mortgage and Housing market analyst said in a news release.

Multiple-family starts totaled 2,174 units in February, compared with 949 in the same month of 2007. Single-family-home starts of 272 were nine-per-cent lower than the 299 started in February 2007.

For the first two months of 2008, the 3,778 housing starts are 47-per-cent higher than the 2,575 units that Canada Mortgage and housing recorded in 2007.
© Vancouver Sun

REM: Add to this 1,085 condos listed for sale on Craigslist and another 5,278 on MLS for a total of 8,809 condos on the market in Metro Vancouver.

Central banks buy time for commercial lenders

Globe and Mail - Update December 18, 2007

Following up on their united pledge of last week to make more money available for terms that extended into the new year, the European Central Bank, the Bank of England and the Bank of Canada flooded short-term credit markets with accessible cash. The U.S. Federal Reserve made its own injections on Monday.

The flood of cash has greased the wheels in many short-term credit markets, ensuring that commercial banks have enough money on hand to tie up loose ends before the New Year and fund Christmas shoppers' annual needs for liquidity.

While much of the intervention had been foreshadowed by the joint announcement last week, the ECB took markets by surprise by going well beyond its initial intentions. It infused about $500-billion (U.S.) into money markets – the largest injection yet for that central bank, and one that was quickly gobbled up by some 390 financial institutions.

The Bank of Canada infused $2-billion (Canadian) into short-term markets, more than the $1-billion it announced as a minimum last week.
When the five European and North American central banks made their announcement last week, many analysts were skeptical that liquidity injections into short-term money markets would do anything substantial to ease the credit squeeze that threatens to undermine economic growth.

But since then, economists have lowered their expectations, and aren't looking to the central banks to solve the credit issues. Rather, they say the central banks' role at this point is simply to make sure money markets are liquid enough to remain functioning while commercial banks sort out their exposure to U.S. subprime loans.

Essentially, the central banks have bought commercial banks some time to figure out their losses, said Stewart Hall, market strategist at HSBC (Canada.).

“Large banks are now awash with cash. The issue is not whether they have enough cash, it is whether they are inclined to lend,” the Bank of England's governor, Mervyn King, said yesterday.

At the core of their unwillingness to lend is fear about losses connected to failing subprime loans.

Analysts believe the exposure will amount to at least $300-billion (U.S.) on the balance sheets of commercial banks, and only about $80-billion of that has been officially acknowledged.

Interbank lending is priced high because lenders don't know where the rest of the losses are hidden, Mr. Luxton said.

REM: Do you really think this is the solution? The word on the street is that this is not a liquidity problem but a solvency problem. Do you agree or disagree?

Dodge says credit conditions could get worse

"These difficulties are expected to persist for a longer period of time than previously thought," he said, adding that the weakness in the U.S. has increased the risk that exports will decline further.

"All of these factors considered the bank judges there's been a shift to the downside in the balance of risks ... ," he said.

Dodge said the bank expects weaker economic growth in the fourth quarter of this year and the first half of 2008.

REM: Except in BC where it is the land of milk and honey.

However, the Canadian economy is still operating above its non-inflationary capacity, said Dodge, who is retiring as governor at the end of January.
"Given the strength of domestic demand and weak productivity growth there continue to be upside risks to the bank's inflation projections," he said "However, ... other developments ... suggest the downside risks to the inflation projections ... have increased."

REM: It would be nice if he could pick a side.

Dodge's semi-annual testimony to the Senate banking trade and commerce committee came as the central bank released a report saying that the Canadian economy - including the business sector - was in good shape to weather the global financial turmoil resulting from the U.S. housing market meltdown and the fall in the greenback against most currencies, including the loonie.

"There will be some impact on the Canadian economy directly through credit spreads and availability, and indirectly through the effects on the U.S. economy," it said bank said in a Finance System Risk Assessment in its latest Financial System Review.
"The effects on the Canadian financial system, however, should be mitigated by the strong balance sheets of financial and non-financial corporations built up through years of strong growth and substantial profits."

Yet, it also warned that there is a "low" risk that the U.S. and global financial and economic situation could deteriorate more than expected.

REM: I think they are down-playing this “low” risk. There has been much talk about certain rescission and the credit conditions deteriorating well into 2008 over the past couple months in the US. There are also those that disagree with this. The one thing I have learned is that when the sheep believe in a boom or bust the psychology and not the fundamentals behind it seem to prevail.

If that occurred, the greater-than-expected slowing in the economy of the U.S., and possibly globally, together with a rise in the loonie would "increase stress on Canadian businesses, households and financial institutions.

"This might threaten the viability of some firms," it warned.

Meanwhile, in a separate report appearing in the Financial System Review, the central bank said heavily indebted households are becoming more vulnerable to financial or economic shocks, including a rise in interest rates.

REM: Heavily indebted household do not become vulnerable, they are vulnerable, one hiccup and the party’s over.

Full Storey Here

Increased real estate prices encourage boomers to invest

As real estate prices rise sharply across the country, more boomers seem to be focusing on property as an investment vehicle.

According to the most recent Statistics Canada Survey of Financial Security, "a significant change in the composition of assets during this six-year period was growth investments in real estate such as cottages, timeshares, rental properties and other commercial properties."

The value of real estate holdings, excluding principal residences, increased by 80.5 per cent between 1999 and 2005. This, notes the survey, was "by far the largest rate of growth of any asset type."

Realtor Brent McElheran of Royal LePage Team Realty, who specializes in the urban condo market, frequently deals with boomers purchasing investment properties and pieds-a-terre (a house or apartment that one keeps as somewhere to stay on occasional visits) in downtown Ottawa.

"Some are downsizing, but many of my clients are buying condominiums as investment properties to rent out," he says.

Other buyers buy and sell without renting, speculating the market will continue to rise, as it has done over the last decade. According to the Canadian Real Estate Association, the average selling price of a house across the country was $324,312 in the first three quarters of 2007, almost double the average $154,606 selling price of 1997.


Link

REM: Would like to know where all these boomers are investing in real estate that has cash flow - certainly not Vancouver BC.

Bullish on Canada

Are you Bullish on Canada? Michael Levy of Custom House gave his outlook on Canada in his final contribution to the World Market Update.

We start with energy because the vast reserves of oil and natural gas in the ground will some day make Canada the world's largest supplier of fossil fuels to the world.

When the method of efficiently extracting the oil reserves from the Canadian oil sands is perfected, and that could be a few years down the road, Canada will even match or surpass the likes of Saudi Arabia and become one of the richest nations on earth because of our ability to safely produce and refine energy products whose world demand continues to grow at record levels year over year.

The world will continue to need our commodities whether the aforementioned energy products, base metals, lumber, precious metals, water, power from the likes of Quebec (and B.C. once again as more hydro is produced in the decades to come), grains from the prairies, and the list goes on.

The list is endless and includes most all the base metals used in the manufacturing of just about everything from cellular phones to electronic devices to automobiles. Base metals that come from Canada.

Canada is the only country in the G-8 that does not have a budget deficit; in fact in the past 10 years where the U.S. national debt has almost doubled to over $9 trillion, Canada has actually paid off over $92 billion on our sovereign debt.

Canada is going to become the lowest taxed regime corporately in the industrialized world, with federal income tax on businesses coming down to 15% in the next five years; an invitation for industries and corporations of world to set up shop in our country.

Canada is safe geo-politically, has a stable government, and invites the world to our doorstep.

Our dollar will once again go back past the recent highs of November and could in years to come go to $1.20 or $1.30 U.S., or even higher as our economy explodes as the world demands what we produce.
Get the full story here.

REM: Agrees that Canada is well positioned to capitalize on its abundant resources. When the world does comes knocking on our door, the good fortune will spill over into the real estate market. Those areas that are close to the action (resources) will see strong gains in real estate value.

Fraser Valley Real Estate

I recently attended a seminar that covered the current trend of development land in the Fraser Valley. The following trends were covered:
*Demand for development land is high in the FV
*The market for development land is still rising.
*Development land in the FV is selling on average in the 700,000 to 1,000,000 per acre.
*Developers are building up as opposed to building out
*Many small individual sites are being purchased, assembled, rezoned and then flipped.
*Development sites are being purchased and flipped in 12 to 24 months for a 25% to 50% return.
*Difficult parcels to develop (i.e.topographically challenged and or creeks) are selling at a premium (all the prime sites are gone).
*A premium is being paid for land designated as future development sites - 10 years and beyond.
*This point I found most interesting - investors are coming in and snapping up multiple units during the project presale.

REM: This market is definitely still hot. Given the high price paid per acre, poor quality of the land, high construction and labour costs it leaves me wondering how much profit is expected, say 15% - 10% - maybe less. It all comes down to how much they can sell the finished product for, apparently the sky is still the limit. Considering the flipping land for huge profit and investors snapping up the presales it seems as though this market has its share of investors selling to investors.