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Friday, November 12, 2010

Into the fire...

One of the rationalizations you often hear about the big collapses in real estate values in the United States is that those markets that are collapsing don't compare to Vancouver.

Vancouver, the R/E defenders chip, is a world class city. Therefore you need to observe how bad the 'real estate correction' is in those types of American cities.

Invariably New York City is one of those cities held up as an example.

Until recently, NYC had weathered the downtown moderately well. But it appears that the tide is starting to turn.

This is the Apthorp, a 1908 heritage building located on New York's upper West Side.

The Apthorp is a luxury building, elegantly detailed with elaborate wrought ironwork, a massive courtyard hosting a pair of fountains, marble benches, statuary and greenery.

The courtyard's facades are rusticated limestone and the first and second stories have arched windows and each angled corner has an entrance to apartments.

The complex was undergoing a massive luxury condominium conversion when the real estate market crashed. Struggling since then, the complex is finally succumbing to the new R/E economic reality.

According to this story in the New York Post, New York condos values are crashing headlined by developments like the Apthorp.

The Post is reporting that a one-bedroom penthouse in the historic building, originally offered at more than $2 million, was sold for an amazing bargain-basement price of around $200,000.

The building, plagued with strict state regulations regarding rental-to-condominium conversations, has been battling a number of related problems.

Conflicts with rent-stabilized tenants worried about losing their deals as well as declining services, including problems with elevators and electricity. New buyers have also said they couldn't get renovation plans approved.

The issues have culminated with a one-bedroom penthouse, "unrenovated but livable", selling for a mere $228,900 - down more than 88% from the asking price of $2,025,765.

The 763 square-foot home had been on the market for 13 months, according to real-estate-data site StreetEasy.com.

The real estate downtown has lead to similar deals in the Gilded Age-era building.

A 405 square-foot penthouse sold for just $123,717 in July - down 86% from an asking price of $895,000.

And a 964 square-foot penthouse also closed in July for $417,177 - down 84% from an asking price of $2,559,420.

If you can get a 90% collapse in condo prices in Manhattan, is a 70% collapse in our bubble all that far fetched?

North of the Border

Meanwhile CNN has come out with a story titled "Canada's coming housing bust".

CNN notes that the greatest issue looming for our nation is our housing market which "has, despite a brief blip, continued to drive higher through the world's economic snow bank due to easy credit, low interest rates and encouraging government tax breaks."

The article troupes through all the arguments put forth by "believers in the Canadian miracle (who) say the country's housing market is not likely to have much of a correction at all, and certainly not the sort of housing swoon seen in the United States or Europe."

But CNN zero's in on the fact that our housing market is showing signs of strain and as housing prices level off after a decade of scaling ever-greater heights, the article focuses on the looming problem.

  • Canadians easily obtained mortgages with only 5% down and payments running out 35 years. More than 65% of Canadian mortgages are fixed for five years (and now face more stringent renewal terms and likely higher interest payments). But variable rate mortgages offered in Canada were at least as creative as those doled out in the US, with banks allowing terms as short as six months. Unlike in the US, people who default on mortgages in Canada don't just lose their houses, they risk other assets as well.

    Lower housing prices could hit Canadians fairly hard. Housing accounts for more than 20% of Canada's GDP, and its employment gains have been fueled by continued spending in the construction industry, which is one of Canada's largest and fastest growing employment sectors. In October, while the number of workers in Canada's massive service sector declined by 33,000, construction added 21,000 jobs.

    Canadians easily obtained mortgages with only 5% down and payments running out 35 years. More than 65% of Canadian mortgages are fixed for five years (and now face more stringent renewal terms and likely higher interest payments). But variable rate mortgages offered in Canada were at least as creative as those doled out in the US, with banks allowing terms as short as six months. Unlike in the US, people who default on mortgages in Canada don't just lose their houses, they risk other assets as well.

    A fast or unexpected rise in interest rates (Canada was the first G7 country to begin moving them higher following the recession) could leave Canadians with little cushion. Last year the IMF noted that, by some measures, Canadians were paying a larger percentage of their income for housing than Americans did prior to the housing bust.

And, of course, in our little hamlet here in the Village on the Edge of the Rainforest recent date shows that the average homeowner with a two-story home spends 70% of their household income on mortgage servicing.

And now we are half way through the sixth consecutive month of the worst real estate sales totals in the last 10 years - despite the fact interest rates remain among the lowest in our nation's history.

It brings to mind something Paul Krugman wrote in the New York Times back in August 2005. He was talking about a possible looming collapse in real estate prices and said:

  • "[The end of the U.S. housing bubble] won’t come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started."

Krugman wrote this a full year before the concept of a Real Estate collapse was even on the radar screen of the average American.

In November of 2010 his words ring eerily true here. Indeed, the process here may have already started. And it seems everyone, except us, can see it.

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Email: village_whisperer@live.ca

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4 comments:

  1. To Krugman's point of rising inventory being the first indicator:

    http://vancouvercondo.info/forum/topic/november-data

    Vancouver has averaged about 3100 new listings every November for the past 10 years.

    For November 2010, the number of new listings has been about 165/day, which would be almost 5000 for the month!!!

    To be fair, I will note that sales are also higher than average in November 2010: average has been about 125/day (which would end up as 3750 for the month - well above 3083 for 2009).

    So, I suspect that both listings and sales should slow down in the second half of the month, or else November 2010 will be a record for both stats.

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  2. Unfortunately I took this blog off my bookmarks. The story is the same, just a different day. I don't really like reading the same thing over and over again - especially when the predictions have been wrong for a long time. Good luck with it however!

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  3. I think your statement:

    "..that the average homeowner with a two-story home spends 70% of their household income on mortgage servicing."

    isn't accurate. I think that's a theoretical number if the average wage earner bought the average house. Of course many bought well before the price spike. Source?

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  4. A
    "isn't accurate. I think that's a theoretical number if the average wage earner bought the average house. Of course many bought well before the price spike. Source? "

    many had bought before the bubble but the point is that from 2007 to 2010, it takes 70% of income to enter the market. Prices are dictated by people entering the market.

    vancouversun

    CBC

    " A typical house eats up just more than 40 per cent of income. In Vancouver, it's more like 73 per cent. ".....this just shouts bubble...

    ReplyDelete