Real Estate Chronicle

# posted by Luigi Frascati @ Saturday, May 28, 2005 1 comments

Tuesday, May 24, 2005

Real Estate: an Industry in Evolution

As a real estate Agent I have witnessed personally over the years a continuous change in the industry. Changes have stemmed out of improved technologies, different consumers and an overhaul of our entire lifestyle, especially here on the West Coast and particularly in the Lower Mainland. People's expectations are different today, both in terms of the services sought and products demanded. Expectations are so different today, that in fact they have impacted even the engineering and architectural aspects of real estate.

Not too long ago the Strategic Issues Subcommittee (SIS) of the American National Realtors Association was asked to identify the top trends influencing changes in the industry and give a futuristic outlook of what the real estate landscape will look like a few years to come, both in the United States as well as in Canada. Their findings are extremely interesting, both from a professional viewpoint as well as from a social sciences perspective. Ultimately real estate is a "people's business" and the following major factors speak volume about how we are all going to think and act. Here they are.

Changing consumers values and behaviours.

The concept of family is changing. Family has been the pivotal knot throughout all human civilizations throughout the centuries, but this pivotal knot will be entirely different. No more Dad, Mom and two kids. An ever greater number of people will be living alone or as a couple at most. The general trend throughout Western societies is not to have children and this trend will be more remarked in times to come. 'Home Sweet Home' will change too. Our children will be living mostly outside and will not require large homes or, for that matter, large apartments. The one-bedroom and den will be the standard fare a few years from today. On the other hand, tomorrow's consumer will be increasingly technically competent, will want to have access to all sort of information - products, financing, services - and will be 'decision-independent' , meaning they will be more than capable of making their own decision as to what real estate product to buy. The times of the streotyped old, pushy, hard-selling real estate agent trying to shove a house down consumers' throats are soon to be over (they already are, as a matter of fact).

Diverse approach to the home transaction.

The financial impact of buying real estate will continue to be the primary consideration. Consumers will increasingly look at their home purchase as just another facet of their overall financial picture, pretty much the way they look today at stock and bond investments. Price, in fact, will supersede emotion. No more purchases dictated by the impromptu feeling of the moment. Tomorrow's buyer will be cold and calculated, and will buy only if it makes financial sense to do so. He/she will hardly fall in love with the product they buy, even if for their own use. As such, the people of tomorrow will have no time for household chores: carpet cleaning, window cleaning, gutter cleaning will all be carried out by specialized companies or strata management companies as in the case of apartments.

The Realtor and the rise of the machine.

Consumers, both buyers and sellers, will have their own access to data from a variety of sources, but mostly from the Internet. As they will be technically skilled and computer proficient, the Realtor will no longer be seen as the primary source of real estate information. Instead the Realtor will function as an interpreter of information, both relating to products as well as the workings of real estate, especially financing. Realtors, moreover, will be required to be very skilled at negotiating. In essence they will function pretty much like ambassadors. It will not be only a matter of writing and presenting offers: they will be required to explain the rationale behind the offers they write. They will also be required to explain why offers have not been accepted and to provide solutions.

Entry of large-scale financial institutions.

This will probably be the largest single change in the industry. Banks will no longer be only lenders. They will become suppliers of real estate as well. With their large working capital, branch networks and back-end technology solutions they will at one time step into the industry and build, finance and sell their own real estate products with and through their own Realtors. They will do it on a catalogue basis, so to speak. Just as you can walk into a Sears today and order a vacuum cleaner on catalogue, you will be able to walk into a bank tomorrow and order a house on catalogue, perhaps a house not yet built. Pull out your own credit-card size computerized ID, and in the same branch you can view the schematics, order the interior decor, sign the offer, get the financing all set up, order the appraisal, request the lawyer, sign the warranties and I'll bet by the time you are finished about an hour later they will give a bottle of champagne before you walk out too ! I can imagine already how the conversation will go: " Just speak up, kiddo - tell us what you want. We provide a one-hundred percent service and guaranteed solution to all your real estate needs, from foundations to door keys. We open up an account and you are on your way ".

A world of change is awaiting on us all. Everything will be different: vehicles, clothing, informatica ... why not real estate. Doesn't all this make you feel old already ? You are not alone.

Luigi Frascati

# posted by Luigi Frascati @ Tuesday, May 24, 2005 0 comments

Sunday, May 15, 2005

Five Reasons for Tenants to buy instead of renting - An Economic Perspective

If you are presently a Tenant anywhere in North America, before you plan to remain a Tenant you should read this post. There are several good reasons for ownership to prevail over tenancy and the real estate profession is littered with extremely clever pointers as to why Tenants should buy - and buy now. But quite aside from all the hype characteristic of real estate sales, there are five solid economic reasons for Tenants to purchase instead of renting.

Here they are:

CAPITAL APPRECIATION

Real estate appreciates over time. This is due to a variety of factors, the most important of which is that bare land does not depreciate. The economic rationale behind this is that bare land cannot depreciate because free, available land diminishes as population increases. You may not notice this immediately if you live right in the middle of the Sahara desert, but in urban environments everywhere there is no question that land is scarce and, in turn, pricey. What depreciates in real estate is the structure, such as the walls, plumbing and electrical circuitry. This is normal functional depreciation due to the constant use - and subsequent wear and tear of the place. But functional depreciation almost never offsets land appreciation, with the end result that even if you mistreat your property you still end up building up equity.

Capital appreciation applies just as well to single-family detached houses as to condominium units. The 'land' of a condominium unit is the strata lot, so that if you so happen to live - say - on the twenty-fourth floor of a highrise tower in downtown, your condo unit still sits on a strata lot. And on the twenty-fourth floor your strata lot does appreciate while the structure of your condo is subject to functional depreciation.

RENT MATCHES INFLATION

Inflation, as it is widely known, is defined as the loss of purchasing power of money. Inflation is due to a variety of economic factors and political choices but no matter what our governments do - or fail to do - at any given time, it all boils down to increased borrowing and increased monetary supply and availability which, in turn, decreases the purchasing power of money. In layman's terminology what this means is that it will cost tomorrow, for the sake of an example, ten cents more to buy a certain good in the economic basket than it does today. You still end up buying the same good, but you pay more for it.

These days inflation is not a problem in North America - at least not the way it used to be. But every year our currencies still lose value, albeit minimally: two percent in the United States and almost three percent in Canada on the respective currencies as of last year's count. Rent typically increase at the rate of inflation, so that a tenant in Vancouver that was paying - say - CAD $1,000 per month in 2004 can expect to pay CAD $1,030 approximately in 2005. Rent paid is, in essence, the cost of just another service this time offered by a Landlord , and once the rent money is into the Landlord's pockets it can never be recovered.

MORTGAGES CAPITAL AND INTEREST PAYMENTS

Naturally when you go buy a house and contract out a mortgage with a lender, you will have to pay interest because you are using someone else's money. But every time you make your monthly mortgage payment you also pay back some of this money. This builds up your equity which then grows over time. Equity growth is typically more evident in the United States where mortgages are amortized in a straight line over the term of the loan. In Canada lenders are more complicated and apply a process known in the business as compound interest, i.e. interest on the interest. Still at about halfway through over a typical 25-year amortization span, in Canada too principal repayment takes over interest payment, so that equity growth builds up faster.

CAPITAL GAINS

Capital gains are not to be confused with capital appreciation, although they are a consequence of it. Simply put, there is a realized capital gain when the amount of money you sell your property for minus the price you paid for it is positive. The real estate market may fluctuate, but it is a matter of fact that house prices increase over time. Economic capital gains are adjusted for inflation and expressed in Dollar/Year. For instance, here in Vancouver a single-family detached home that sold in 1975 for CAD $57,000 in 1975 Dollars may very well sell today for CAD $525,000 in 2005 Dollars.

On a cursory count, CAD $57,000 in 1975 are equivalent to approximately CAD $80,000 in 2005, so that your economic capital gains from the time you bought the house in 1975 to the time you sell it in 2005 are the difference between CAD $525,000 and CAD $80,000 expressed in 2005 Dollars, or a whopping $445,000. You can easily determine from this example how much real estate has appreciated over time in my hometown, with the appreciation already adjusted for inflation.

PRIVACY AND CONTROL

In a Tenancy Agreement you are entitled to privacy typically for the period you pay rent for, subject to the Landlord's rights. These rights include the Landlord's right to inspect the tenanted premises on reasonable notice, the Landlord's right to sell the tenanted premises, the Landlord's right to repair and ameliorate and so forth. In essence, just because you pay rent that does not make you the owner. The rent simply guarantees your exclusive use of the premises for a certain period of time, again subject to the Landlord's rights.

Likewise, in most cases you as the Tenant have no control over items such as remodeling, repainting and redecorating. It is true that in most jurisdictions Landlords have a duty to rent premises reasonably fit for human habitation, but then it is also true that many Landlords do not go one inch over and above the minimum threshold required by law. But from an economist point of view, if you spend money you should be entitled to reap the rewards - something you entirely miss out in a tenancy situation.

Too many tenants and renters think that owning a property is a farfetched goal. Yet, now more than ever it is the best time for them to take the plunge and buy real estate. Mortgage rates are still historically low and the buying process is easier than ever.

Are you missing out, if you rent? You bet.

Luigi Frascati

# posted by Luigi Frascati @ Sunday, May 15, 2005 0 comments

Friday, May 13, 2005

Let me help you save CAD $36,090 !

This year the Bank of Canada has raised interest rates once and then lowered them once for a total of a 20 basis points reduction or 0.20 percent. Is the central bank going to raise interest rates again or is it going to lower them? This is an important question, since prospective Buyers may be waiting for additional rate cuts. But then, does it make sense to wait? The answer is: it depends.

Let's first take a look at the historical charts. For the sake of our calculations, let's consider a 5-year term mortgage rate, which is the benchmark mortgage most consumers will take on at the time of purchase.

CHARTERED BANK ADMINISTERED INTEREST RATES

June 1990 ................. 14.25
June 1991 ................. 11.25
June 1992 ................. 9.63
June 1993 ................. 8.95
June 1994 ................. 10.75
June 1995 ................. 8.63
June 1996 ................. 8.50
June 1997 ................. 7.00
June 1998 ................. 6.95
June 1999 ................. 7.70
June 2000 ................. 8.45
June 2001 ................. 7.75
June 2002 ................. 7.25
June 2003 ................. 5.80
June 2004 ................. 6.70
April 2005 ................. 6.05

Notes: all rates above are expressed with semi-annual compounding and refer to 5-year closed mortgages.

The general rule of thumb is that if you can afford to make the monthly payment today, then you should go ahead, lock in and buy a home. Especially these days that mortgage rates are low from a historic perspective - for example from the early 1990's when double-digit mortgage rates were commonplace. Buyers who are uncertain about rates should consider locking in for three to five years. This will offer them peace of mind, so they do not have to worry about the ups and downs. This added security, however, comes at an extra cost. A study conducted by Canada Mortgage Housing Corporation (CMHC) has shown that in the 1980's and 1990's borrowers would have saved money by choosing a one-year term mortgage and renewing every year, rather than locking into a 5-year term.

If consumers do not lock in and interest rates increase, say, by 50 basis points, what will be the additional cost? Let's say you are about to buy a CAD $550,000 house with a $150,000 downpayment, and that you are considering taking up a CAD $400,000 mortgage for a 5-year term and amortized over twenty-five years. For a 5-year term at the current posted rate of 6.05 percent, the monthly mortgage payment will be $2,571.13, inclusive of interest and principal re-payment. If you wait for a year and rates increase by 50 basis points to 6.55 percent, the monthly payment will be $2,691.43. That's a difference of $120.30 per month which amounts to a yearly increase of $1,443.60 in your cash outlays or a whopping $36,090 for the life of a mortgage over a 25-year amortization period. This is a saving you can hardly afford to miss out.

Luigi Frascati

# posted by Luigi Frascati @ Friday, May 13, 2005 0 comments

Wednesday, May 11, 2005

E-Transactions: are we ready ?

It seems more and more that technology and the Internet are going to be the future of real estate sales. In Canada one-third of the people are online. This means approximately ten million Canadians, give or take a few. It is projected that by the end of the decade this number will reach one-half of the population, if not more. Pressure is already mounting, in fact, for real estate transactions to take place entirely online.

To be sure, buying and selling a home remains a complex process, with clients needing someone to guide them through the transaction and protect their negotiating positions as well as to provide knowledge of neighbourhoods, future development plans, taxes, zoning, transportation, schools and community services. But more and more baby boomers increasingly like the convenience afforded by online browsing, and today's children are going to become tomorrow's real estate consumers. There is no doubt in the minds of industry analysts, that e-transactions will become common practice in just a few years.

But exactly what is an e-transaction? It is an electronic sale that includes all the contracts and ancillary documents, and it is done entirely online. Everyone, including sellers, agents, buyers, mortgage lenders, notaries and lawyers will complete their part of the transaction online. The banking industry, for example, has adopted already the online approach with mortgage applications being received by individual branches and the final approval coming from 'downtown' . And it is becoming more and more common practice for appraisers to prepare their reports online, without the customary tour of the property being bought and sold.

Electronic signatures are key to e-transactions and here in British Columbia the Government has paved the way by passing the Electronic Transaction Act. Under section 11(1) the legislation states:" If there is a requirement under law for the signature of a person, that requirement is satisfied by an electronic signature". The legislation is taylored to encourage, wherever practical, the acceptance in law of the use of electronic records in circumstances where non-electronic records are used. This includes Contracts of Purchase and Sale with electronic signatures.

Luigi Frascati

# posted by Luigi Frascati @ Wednesday, May 11, 2005 0 comments

Monday, May 09, 2005

Gray Power: Marketing to Canada's aging Population.

Ever since the first baby of the post-Second World War generation arrived in the world, the ‘boomers’ have influenced every aspect of society and have pretty much had and done things their own way. Even now, as the leading edge of the generation has passed 55 years of age, nothing has changed, as affluent boomers are raising the bar on how and where they plan to live in their retirement years. According to a report of the Urban Futures Institute the aging Canadian population will consistently dominate real estate markets just about everywhere in the country.

Unlike previous generations who were more likely to move into smaller homes, eliminate mortgages and cash in their equity as retirement approached, the Freedom 55 generation, as it is sometimes called, is more likely to upgrade to more expensive properties, while assuming new mortgages. In 1999, 59% of Canadian homeowners between 45 and 54 years of age and 35% of those between 55 and 64 years of age held mortgages. In 2001, according to Statistics Canada information, those figures had risen to 61.6% and 39.1% respectively. In 2003 the ratio was 64.2%and 35.1%.

More expensive but not bigger properties, though not in all cases. There is a trend identified by the Institute for the boomers to make their way out of the suburbs and back into the city. And what do they want to find in the city? Fitness Centres, fine restaurants, dancing and ... yes, lots of people. The leading characteristic of the Freedom 55 generation is, according to the Institute, that they hate to be left alone. They are also going to be the happiest and heathiest generation of their age group in a long time, with a highly remarked hypocritical spirit. And who is going to be at the center of their hypocritical attention? The Federal Government (politicians beware ....), with women being the most vociferous.

The Urban Futures Institute prognosticates that in about twenty-five years one in three Canadians will be over the age of 65. As by then they will have become empty-nesters, they will trade down their 3,500 square-foot homes in the suburbs for high-class downtown condo living, thus driving prices upwards especially in the most expensive category. More and more the adult lifestyle component will be the major force impacting how condominium complexes will be conceived and built. It will impact developers, architects and contractors alike. And since the boomers are - and will continue to be tech savvy - high speed Internet, fiberoptics circuitry, satellite connections and electronic wizardry will be must-have accessories.

The Urban Futures Institute report concludes that it is going to be both a lifestyle and financial choice — closer to downtown means closer to established shopping, restaurants and entertainment and boomers are of the mind the location will offer more liquidity in the long-term.

Luigi Frascati

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Real Estate Chronicle

# posted by Luigi Frascati @ Monday, May 09, 2005 0 comments

Saturday, May 07, 2005

The Beautiful Homes of British Columbia - Part One

Throughout my eighteen years of professional experience as a real estate Agent I have come across several beautiful properties. Some of them, however, have particularly inspired my imagination, and I thought I'd write a post - complete with photos - to share with my readers. I am not professing that here in the Lower Mainland there are the most beautiful homes in the world. I am very well acquainted with cities like Seattle and San Francisco where one can find homes that are extraordinary in terms of beauty and quality of construction. But then, they are also very expensive. In the Lower Mainland, instead, beautiful homes are still an affordable commodity, although it has not escaped anyone's attention that prices have skyrocketed in recent years.

For the benefit of those readers who are not acquainted with the Vancouver Metropolitan Area, the term Lower Mainland refers to the lower Southwest section of the Province where Vancouver is situated. The Lower Mainland is comprised of several cities, townships and municipalities and it is home to approximately 1.8 million people. Although certainly not up to par with the size standards of other metropolitan areas, nevertheless the Lower Mainland is Western Canada's largest urban conglomerate as well as this country's gateway to the Pacific Rim. It is also one-half hour away from the border with the United States, our neighbour to the South, and a two-hour drive from Seattle, Washington. It is also approximately a two-and-a-half hour drive from Whistler, where the Winter Olympics will be held in 2010.

B U R N A B Y

I am going to open up this first part of a series of posts with a home that I have listed and sold a few years ago in Burnaby. For the sake of privacy I am not going to reveal the address of this very fine property. The City of Burnaby with its 200,000 inhabitants is the third largest demographic centre in British Columbia after the City of Vancouver and the City of Victoria respectively. Burnaby features high density residential areas, major commercial town centres, rapid transit, high technology research and business parks, comprehensive industrial estates and major post-secondary institutions. For further information Burnaby maintains a very interesting website at http://www.city.burnaby.bc.ca which I invite readers who want to know more to visit.

This particular property was five years old when I listed and sold it in mid-2001. It is an Elegant Contemporary both on the outside as well as on the inside, sited on a perfectly rectangular lot bordering a golf course. The house was designed by Ralph Nader Anderson and, like all the projects of this acclaimed Canadian architect, space and tonalities are of utmost importance. Entirely framed in two-by-six, it features an outer polyurethene membrane that makes this house completely waterproof. It encases 5-BDRMS, 3-BATH (full) on a two-and-one-half split level floor layout measuring an overall 4,850 square feet covered, functional living room/dining room ensemble and a covered rear patio. Ceiling is 9' on the main floor, 8' on the upper floor and 8' at lower level. The house opens up with an 18' foyer on dark pine hardwood floor. Heating is by baseboard hot water. Nanny separate accomodation is included at lower level. Two monumental gas fireplaces are located on the main and lower levels.

Here are the photos. It was offered for sale for CAD $649,000 and it sold for $625,000 in 2001. Although not presently on the market, today it would probably fetch anywhere between CAD $850,000 and CAD $875,000.

Hope you house hunters out there like these photos. Have fun.

Luigi Frascati