Saturday, May 28, 2005


Real Estate: what if the Boom turns out to be a Bubble ?

NOW that even David Dodge, the Governor of the Bank of Canada, is talking about "froth" in real estate markets, how concerned should people be - not just about the value of their own homes, but about the entire country? After all, we just had a big stock market bust and it barely dented the economy. Outside of brokers, speculators, and a few unlucky sellers, would a real estate crash really matter to the country as a whole? In a word, yes. To understand why, we must first look at how pervasive the effects of real estate are throughout the economy.
Start with the so-called wealth effect. If people tend to spend more when their net worth increases, they'll spend less when it decreases. Economists use this rule of thumb: a $1 change in household wealth leads to a roughly 5-cent change in consumer spending. By that measure, a 10 percent decline in real estate prices would knock about half a percent off the gross domestic product. Even more significant for the economy, though, would be a collapse in home equity lending. The industry has been booming as housing prices have soared. But if prices stop rising, new borrowing against home equity will drop, and may disappear. This is important, because home equity lending in Canada amounted to more than $20 billion last year - or nearly 4 percent of the economy. If all that borrowing - which freed up cash that was spent on new furniture, appliances, vacations, cars and the like - simply vanished, the effect could be large enough all by itself to send the economy into recession.
But that's not all. The housing sector has even broader effects on the economy, by some estimates accounting for 25 percent of all activity. A decline in property values would most likely lead to declines in other industries, like construction, brokerage, banking and insurance. And these are important for future growth. Construction, for example, amounts to 7 percent to 8 percent of the economy, according to the Economic Council of Canada. Then there's banking. Because of the leverage associated with real estate, a fall in values would affect banks and other lenders. It would probably lead to tightened credit standards, less lending and higher interest rates. If lenders begin to suffer steep losses, there is always the danger of financial contagion, in which problems at one institution ripple out to others it does business with.
And there is yet a new wild card factor for the economy. In 2004, variable-rate mortgages made up a third of new mortgages. No one knows what the effect of the widespread use of V.R.M.'s would be in a down market. A climb in interest rates, of course, would put downward pressure on real estate prices, but V.R.M. borrowers would feel the pinch rapidly. If those borrowers started to default, lenders would be hurt. Adding it all up, it's easy to see how a drop in real estate prices would spell trouble for the economy. To put that in perspective, the Bank of Canada has conducted a detailed study in 2004 that assessed the potential economic impact of a property slump. Reviewing the experience in the United States and 13 other industrialized countries, the Central Bank found that a real estate bust is far more dangerous to the economy than a stock market bust. The Bank of Canada has calculated that a housing-price decline less than half as large as a decline in stock prices typically causes twice as big a drag on the economy and that its effects last twice as long as those of a stock market crash. Moreover, while a large decline in housing prices might come as a shock to many Canadians, especially these days, the Bank of Canada has found that busts happen every 15 years, on average, thereby giving credo to the popular belief that real estate is a cyclic, periodic industry.
So if a housing bubble is a bigger risk to the economy than a stock market bubble, what can be done to prevent it from bursting? The most attractive way for policy makers to cool the housing market is to put pressure on lenders to tighten their credit standards. Some small steps in this direction have already been taken: Regulators have issued new guidelines on home equity lending, and new rules on first-mortgage loans are expected to follow soon. A more drastic way, of course, is to raise interest rates progressively, both short and long term. And steps in this direction have been taken as well.
Regardless of the monetary policy applied, the situation calls for persistent and continuous monitoring. Real estate in Canada is far too important for central policy makers to ignore.
Luigi Frascati

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

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:

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.

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.

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 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.

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

As Featured On Ezine Articles Platinum Author

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.

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

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

As Featured On Ezine Articles Platinum Author

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

As Featured On Ezine Articles Platinum Author


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.
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 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




BALAUSTER TO DEN Posted by Hello


LIVING ROOM Posted by Hello


DINING ROOM Posted by Hello


FAMILY ROOM Posted by Hello


MASTER BEDROOM Posted by Hello




NANNY's BATH (FULL) Posted by Hello





Thursday, May 05, 2005


Strata Developments: the Use of Common Property

I have received an e-mail from a person who owns an apartment unit in the same building complex where I own one, in Vancouver B.C. . This particular person, who wishes to remain anonymous, is inquiring about the use of common property in strata developments. More specifically, she is asking whether common area designated as Limited Common Area (LCP) 'runs with the land' , i.e. whether subsequent owners will have the exclusive right of use as well. Since I am a four-year Council Member and this year's President of Strata Council, as well as a real estate Agent, this property owner has posed this question to me. I thought I'd write a post to investigate the use of common areas in general lines, which I am confident readers who are strata owners in British Columbia will find useful.
In a strata development the use of common property is often a cause of disputes among strata lot owners. Parking stalls, storage areas, rooftop decks and landscaped areas around individual strata lots have generated the most difficulty. Since the common property is available for use by all strata lot owners, an owner who wants exclusive use of a part of the common property must be able to point to some authority that gives the owner the right to use the area in question. Additionally, if an owner has a right to use some area of common property, it is important to know whether that right can pass to a subsequent purchaser, i.e. 'runs with the land' as stated by my fellow property owner above, or to a tenant if the owner leases the strata lot.
The first step in determining how common property can be used is to find out whether the particular common property has been designated as LCP. Common property that is designated as LCP for a particular strata lot assures the owner of that strata lot that he or she is entitled to use that common property on an exclusive basis. The LCP designation also assures subsequent owners or tenants that they too will have the right to use that particular piece of common property on an exclusive basis. The LCP designation can, however, be removed a 3/4 vote of the owners in a General Meeting.
If the particular property is not designated as LCP, it remains common property. While common property remains available for use by all owners, other arrangements may have been made which allow an owner to exclusively use the relevant portion of the common property. If the property is not LCP, the second step in determining how the property can be used is to find out whether the strata corporation has granted an owner permission to exclusively use the particular common property or whether the property was leased by the developer. A short-term, exclusive-use agreement between the strata corporation and an individual property owner is limited to a maximum period of one year. Although the Strata Council can renew the agreement, it can also choose not to renew or to renew at different terms and conditions. Naturally, if an owner is using a piece of common property under the terms of an exclusive-use agreement, the owner has a less certain arrangement than if the property was designated as LCP.
Since the short-term exclusive-use agreement is granted to an owner personally and is not attached to the strata lot, the right to use the piece of common property does not automatically transfer to a purchaser or tenant when the owner sells the strata lot or leases it. It is up to the purchaser or tenant to negotiate a new exclusive-use agreement with the Strata Council. When selling or leasing strata lots, owners who hold an agreement to exclusively use common property, and their agents, should be careful not to promise the purchaser or tenant the use of that property.
Even though particular common property is not designated as LCP or is not subject to an exclusive-use agreement, an owner may still be entitled to use that piece of common property as a result of the lease of the property by the developer. As a means of controlling the use of common property, the developer may have leased common property and then assigned or subleased a portion of it to a first purchaser. In this case it is necessary to look at the terms of the lease between the developer and the strata corporation and the terms of the assignment or sublease from the developer to the first purchaser, and any further transfer of rights from the first purchaser to a subsequent purchaser and so on, to discover if a current owner has the right to use that portion of common property or to transfer the right to a purchaser or tenant. Such was the arrangement made by the developer respecting exclusive use of parking areas in the building where the aforesaid property owner and myself own our respective strata units.
Whenever there are areas such as parking stalls involved in a strata sale, the safest thing to do is to check the registered strata plan and the resolutions dealing with common property at the Land Title Office to identify what kind of legal interest in the parking stall the seller can pass to the purchaser.
I would like to thank this person for taking the time to write to me. If any other reader wishes me to address a particular topic, just send me an e-mail and I will be glad to respond publicly on this blog.
Luigi Frascati

Tuesday, May 03, 2005


Homeowner Protection Act: if you build it, you are exempt.

I have had a very interesting conversation last week with a builder client of mine, which has spurred this post of interest to those readers who are involved into construction in British Columbia.
Not every new home in British Columbia must be built by a licensed builder or have third party warranty insurance. Under the Homeowner Protection Act, owner-builders are not required to be licensed or obtain home warranty insurance. Owner-builders are defined as people who build a single detached dwelling for their own personal use no more than once in any eighteen (18) month period. All persons ordinarily residing in the same dwelling who are also registered on title are deemed to be the same owner-builder. Thus the owner-builder cannot build a second dwelling in the same eighteen-month period and claim that, for instance, the wife built it - as this client of mine seemed to be suggesting. Only one owner-builder exemption is allowed per household in the aforesaid time period.
An owner-builder must comply with the ten (10) year statutory protection provisions of the Homeowner Protection Act. Owner-builders who sell their homes within ten years of building could face legal action and personal liability to subsequent purchasers. They must ensure the home is built with good quality material and constructed with ordinary (not special) competence, skill and care. To meet the legislative criteria, owner-builders must build or directly manage the construction of the new home. All others involved in performing a manager or builder function must be licensed residential builders, otherwise the home is not considered to be owner-built. Hence the brother of my client who is not on title and will not live in the dwelling does not qualify for the exemption and must be licensed as well.
Owner-builders who sell their home within ten years of occupancy are required to provide the purchaser with a copy of the Owner-Builder Declaration and Disclosure notice indicating that the home is not built by a licensed builder and that it does not have a third party warranty. The statutory protection provisions of the Homeowner Protection Act protect original and subsequent purchasers of owner-built homes. Any action commenced by a buyer under this section of the legislation must be commenced within ten years of occupancy.
I am sure my client, who has the URL of this blog, will not be especially enthused in reading this post but, as the saying goes, prevention is better than sorry.
Luigi Frascati

Sunday, May 01, 2005


OPEC: Fall of the Gods

We are all too aware of the anectode involving Isaac Newton and the falling apple, which it is said to have inspired the great scientist to later on devise and formulate his famous Law of Universal Gravitation, succintly stated in the principle that 'everything that goes up must come down'. Certainly true, this principle, for most of the world we live in - including economics as it relates to OPEC, the oil cartel. To be sure OPEC in years past more often than not seemed to be working on a principle running exactly opposit Newton's famous law and which could be enunciated with the dictum: 'everything that comes down must go up'. In response to a recent comment posted by a reader respecting falling crude oil prices vis-a-vis increased cost at the pump, I thought I'd take a brief trip into OPEC's past fortunes and explore projections into the future. Readers are cautioned that due to the nature of the subject, any consideration must necessarily carry a political weight. As we live in times of democracy everyone is of course free to agree, agree to disagree, disagree to agree and disagree to disagree as the case may be.
The Organization of Petroleum Exporting Countries (OPEC) is comprised of eleven member nations, each with its own individual agenda: Algeria (1969), Indonesia (1962), the Islamic Republic of Iran (1960), Iraq (1960), Kuwait (1960), the Socialist People’s Libyan Arab Jamahiriya (1962), Nigeria (1971), Qatar (1961), Saudi
Arabia (1960), United Arab Emirates (1967) and Venezuela (1960). These countries account for 78.3 percent of the world proven crude oil reserves by region. In the past, member states almost never showed identical or even similar interests and often found it difficult to reach consensus on strategy. Countries with relatively small oil reserves or others like Iran and Nigeria with large populations and few other resources often played the part of the "hawks" typically pushing for higher prices. Producers like Saudi Arabia and Kuwait with massive reserves and small populations feared instead that high prices would accelerate technological change and the development of new deposits, thus reducing the value of their oil in the ground. They played often times the part of the "doves" and, on a closer scrutiny, it would appear that the 'doves' are right since their fears are now in the process of being materialized.
OPEC, with headquarters in Vienna, Austria, says it has lost control of crude prices despite a pledge by its ministers to increase oil production to meet an ever increasing demand. The cartel adopted similar strategies before, notably during times of social unrest involving its own member states. This was the strategy adopted after the British blunder in Iran that led to the fall of Shah Reza Pahlavi in the mid '60's, when Saudi Arabia announced it would 'cover' Iran's oil production by exceeding its own quota and then didn't. Or during the First Gulf War, when again OPEC 'guaranteed' the West with increases in supply to balance off prices - and did so but only for a month, right to the end of the hostilities - which also lasted one month. Or, most recently, during America's second armed intervention in Iraq.
This tendency for individual producers to cheat on the cartel agreement is a long-standing feature of OPEC behavior, so that official prices have been unstable - with a few exceptions - practically all the times. But now it seems that the cartel is facing a brand new problem never before anticipated: it is fast reaching maximum production. Put differently, OPEC is no longer able to quench the world's thirst for oil, especially since this thirst is no longer the domain of the West. With its ever rapid modernization, China is poised to become a major consumer of crude - and its effects are beginning already to be felt the world over. And yet, despite the high cost of a barrel of crude, world demand shows no signs of slowing. Consumption is now believed by many analysts to be pressing up against the limits of what the world can produce. Saudi Arabia is the only country believed to have any surplus production left, and even then the Saudis are pumping close to 90 percent of capacity, according to the U.S. Department of Energy. With worldwide demand this year rising by roughly 2 million barrels per day, whatever excess capacity is out there will be gone soon, with the end result that maybe not this year, but certainly in ‘06 there won’t be any excess capacity left.
That’s little solace to energy consumers, who are watching rising crude oil prices push pump prices to record levels. And the U.S. economy is already beginning to show signs of slowing down and inflation is starting to creep up. It is out of the question that a continued rise in oil prices will eventually slow growth. Inevitably Western societies and Japan have started already to explore alternatives. Just like two American administrations have made perfectly clear that oil will not be used as a bargaining chip against the West, Western governments are already steadfastly at work to reduce their dependence on the very volatile Middle East. Initiatives are mushrooming to find new supplies of natural gas, to exctract fuel from plant material or building solar, wind or nuclear plants to make hydrogen for fuel-cell vehicles. But all this takes time to develop, and the general consensus among analysts is that things will become worse before they become better. And yet, OPEC seems to have begun to lose its grip as the single biggest source of energy - the Fall of the Gods.
OPEC maintains a rosy and somewhat philantropic website at that readers interested in this particular subject (and we all should be) are invited to view.
Luigi Frascati

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