Friday, October 28, 2005
Ben Bernanke: the new Era of the Feds.
It is the economic news of the week that President Bush has appointed Ben Bernanke, B.Econ, Ph.D. as the new Chairman-designate of the Federal Reserve System. Mr. Bernanke - if approved by the Senate Banking Committee - will take over the powerful post from Alan Greenspan early next year. It is almost certain, albeit not guaranteed, that Mr. Bernanke will pass the Senate test. Once that happens, a new chapter will open up on how the Federal Reserve will steer the greatest economy on the planet and, by reflection, the economies of the leading industrialized nations. The purpose of this post is to explore what we can expect in the new Era of the Feds.
To those of us who make it a point to be updated on economic matters, Ben Bernanke is perhaps most famous for his paper entitled 'Monetary Policy and Asset Price Volatility' written in February, 2000, where Prof. Bernanke explores the implications of asset price volatility for the management of monetary policy. Bernanke is also famous for his comments on deflation (as opposed to inflation), a destabilizing period of falling prices, made in his two and a half years as a Fed Governor. Bernanke is best known for raising the novel concern that the U.S. economy could be devastated by the type of deflation that has crippled Japan for many years. In a November 2002 address to the National Economics Club in Washington, DC, Bernanke raised the issue and outlined a series of tools at the Fed's disposal for "making sure 'it' doesn't happen here" as he subtitled his speech. The “Bernanke Option”, as it was described, would be used in the event that short-term interest rates fell to near zero and the Central Bank needed other ways to stimulate the economy.
In practicality, Bernanke appears to be the apt successor of the legendary Greenspan. But there are some subtle differences of opinion between the outgoing and the (hopefully) incoming Chairman that may dictate some differences in the Feds' approach to the handling of economic affairs, most notably monetary policy. Bernanke is a Monetarist - but not as much as Greenspan. Bernanke favors an explicit inflation "target," while Greenspan has pursued a more flexible policy with no stated target. Bernanke is a theorist whereas Greenspan (like Paul Volcker, his predecessor) is a practical man. But perhaps more important of them all is the fact that Bernanke is a firm believer in free trade, much more than Greenspan.
Taken altogether, these differences may signal some changes of policies. As they relate to Canada and real estate, here are the most important:
- Free Trade : NAFTA has not always been welcomed in the United States and has at times caused political attrition and differences with Canada. Under Bernanke's tenure it is reasonable to expect a relaxation of the sometimes protectionist and isolationist approach of the United States in favor of a more integrated North American trade and exchange between the two neighbors. My American readers and friends will forgive me if I theorize that, in ultimate analysis, it is in the best political interest of the American colossus to have a prosperous, economically stable neighbor to the North so that American attention and energies can be devoted to more pressing deeds, such as the completion of the ever-ending military occupation of Iraq, the never solved political question of Taiwan with China, the threatening anti-americanism trumpeted by the new leading elite in Iran, the economic antagonism created by the bulgeoning economic expansion of China and the ever-ending rivalry for economic primacy so much coveted by many leaders of the new Europe.
- Interest Rates : Bernanke favors an inflation-targeting approach. More specifically, he has made statements arguing in favor of a 2 percent inflation target in two years. If he intends to follow through, we can expect a tightening of the Feds control over money supply as well as short-term interest on treasury bills, with the end result of a more valued American Dollar and higher interest rates. This will result in an influx of foreign capitals into the United States and a strenghtening of the greenback, with a commensurate softening of American exports. A move this, that may not be entirely welcomed by the Bush Administration which, since 2003, has 'punished' the detractors of the American intervention in Iraq by letting the Dollar devaluate to impede imports- something this that Germany and France and, to a certain extent, Canada have still to digest.
- Real Estate Prices : specifically as it relates to my field of practice, the Fed may influence the real estate market both in terms of resale prices and new construction inventory by altering the equilibrium between demand an supply. More specifically, higher active and passive interest rates - if enforced by Bernanke - may have the double negative impact of shifting available capital towards high-yield savings and, at the same time, increasing mortgage rates, with the end result of curtailing demand and undercutting prices. Bernanke, therefore, will have to walk the fine line of balancing his inflation-targeting approach with the reality of the industry. Greenspan was a master of the 'let it be' philosophy, faithful to the axiom of 'there is no cure when no cure is needed'. Ultimately, it must be realized that inflation - like death - is an unavoidable fact of life.
Prof. Bernanke is 51 years old and was born on Dec. 13, 1953, in Augusta, Ga. He holds a B.A. in Economics, 1975, from Harvard University; and a Ph.D. in Economics (summa cum laude), 1979, from the Massachusetts Institute of Technology. He is married to his wife Anna and has two children.
Real Estate Chronicle
Wednesday, October 19, 2005
The Economic Impact of Home Sales: a Canadian Study.
A new study by Clayton Research Associates finds that the purchase and sale of homes through the MLS system generates an average of CAD $19,800 per transaction in additional consumer spending. Clayton Research is a firm of urban and real estate economists providing strategic information, analysis and advice to private and public sector clients across Canada. The firm specializes in real estate market analysis, land use planning issues, consumer spending and borrowing research, and building products demand. The study, which was commissioned by the Canadian Real Estate Association (CREA) found that the $19,800 increase generated by each single real estate deal includes:
- fees paid to professionals such as realtors, lawyers, appraisers and surveyors;
- taxes and fees, including registration fees, paid to governments;
- purchase of new appliances, furnishings as well as renovations.
During the span of time scrutinized by Clayton, which ran through the period between January, 2000 through November, 2002 an average of 381,800 homes changed hands annually.
The study found that when Canadians move, they typically purchase new appliances or furnishings as well as renovate. As a result, resale housing transactions generate CAD $7.5 billion per year in additional consumer spending and help create more than 101,600 jobs attributable to moving. This is, unquestionably, a significant contribution to the Canadian economy. More specifically, consumers spend their money as follows (all figures are in CAD):
- $ 490 for moving costs.
- $ 1,315 in general household purchases.
- $ 3,385 in new furniture and appliances.
- $ 3,550 in renovations.
- $ 9,485 in professional services.
Clayton Research Associates maintains a website at http://www.clayton-research.com .
Real Estate Chronicle.
Sunday, October 16, 2005
A brief History of Real Estate: the Fee Simple Ownership.
Arthur Wellesley (1769-1852), Duke of Wellington, is reputed to have been the one to exclaim 'All good things come from England, but cavalry is not one of them' while facing Napoleon's French Army at Waterloo on June 18, 1815. Wellesley had learnt his military trade in India applying his study of the art of war and had became a master of the reverse-slope tactic - keeping his forces screened from artillery fire behind the brow of a hill. At Waterloo, however, Wellesley's Armies were outwitted by Napoleon. The French Emperor had imitated Wellesley's tactics by positioning 200 heavy artillery guns behind a ridge at La Haye Sainte. When the Hussars and Dragoons cavalrymen led by Lord Uxbridge attacked in the famous Charge of the Scots Greys, Napoleon commanded the guns on the topline of the ridge and one of the epic artillery bombardments in history began. It was at this very moment, at the height of the Charge and while his 3,000 cavalrymen were being slaughtered by the rapid artillery fire of Napoleon's heavy guns, that the phlegmatic English General is reputed to have exclaimed his now famous remark, directed at Lord Uxbridge who had apparently ordered the Charge without Wellesley knowing it. The day was saved by Gebhard von Blucher (1742-1819), Field Marshal of Prussia, who led the assault of the Kaiser's Prussian Cavalry against the French right wing, thus causing the entire French line to collapse.
Wellesley's famous remark has been retouched several times throughout the years, depending on one's point of view. The British dropped the second part - the reference to the ill-fated cavalry charge - thus creating the popular short version 'All good things come from England' - period. When about a century later Britain had the unwise idea of attacking the Ottoman Empire and the British and French Armies were fighting the Turks side-by-side in WWI, General Mustapha Kemal - the English-speaking Commander of the Turkish Garrison and victorious defender of Gallipoli - paraphrased the English dictum after 289 days of siege by turning it, somewhat deprecatingly, into: "No good things ever come from England". And Mahatma Gandhi throughout his teachings of non-violent conflicts resolutions makes reference to the fact that "All good things come from India".
Alas, no matter what your point of view is, I shall submit to readers of my Blog that "at least two good things come from England" : Fee Simple Ownership and Organized Real Estate.
English real estate law (or 'Estate Law' as it was known back then) was imported, through colonization, into the earlier forms of law in the U.S.A., Canada, Australia and New Zealand. Many of these states, or their territories, have since modified this historical law, to varying degrees. A study of the old feudal land system of England provides us with an invaluable glimpse of legal history regulating the most valuable asset of them all: land. In medieval times, land was the sole form of wealth and it depended primarily on possession. You had it, you owned it. You wanted it, you fought for it. You found it, you kept it. There were no courts or police force ready to recognize or enforce "legal rights" as we know them today. All this changed with the Norman conquest of England in 1066. William decreed that he owned all of the land in England by right of conquest. Not one acre of England was to be exempted from this massive expropriation. This sudden vacuum of privately-held land was promptly filled by a variety of huge land grants given by the new King to either his Norman officers or to those of the English who were ready to recognize him as king. The device used by the King to control and administer his land was that of tenure. Tenure was the key component of the feudal system. The King struck a bargain with a Lord for a large chunk of land. The Lords that held their tenure directly from the King were called Tenants-in-chief. It was this group of persons who formed the basis of English aristocracy and began, by the process of subletting the King's land, the implementation of the feudal system.
Tenures were of a variety of duration known as "estates" and the Fee Simple Estate was the most extensive and allowed the Tenant to sell or to convey by will or be transferred to the Tenant's heir if he died. In modern law, almost all land is held in fee simple and this is as close as one can get to absolute ownership in common law. It was in this context that the British began their dominion over the seas and their explorations which led to the modern nations of Australia, Canada, New Zealand and the United States of America. The concept of developing an informal association of local real estate agents originated in the United States in the 1880s, and by the turn of the century about 15 Real Estate Boards had been established. The National Association of REALTORS® (NAR) was formed in the U.S. in 1908 with 19 boards and one state association. Organized real estate in Canada is almost as old as the country itself. The very first Real Estate Board was set up in 1888 in the growing community of Vancouver. Back then, a commercial lot on Hornby Street near the Hotel Vancouver sold for $600. The Vancouver Board - as it was known then - was active until the start of the First World War, when operations were suspended. It resumed in 1919, and has been operating ever since.
The distinction of the oldest, continuous running Board belongs to Winnipeg, Manitoba. It started in 1903, and the Winnipeg Real Estate Board was the first in Canada to celebrate its 100th anniversary. The Toronto Board was incorporated in 1920, followed by boards in Ottawa, Hamilton, Regina and Victoria in 1921. More than half of the existing Real Estate Boards in Canada were created after 1955, in part because of the evolution of the “Photo Co-Op System” that was introduced in 1951. That was the forerunner of today’s MLS®, introduced in 1962. The Co-op System not only created a need for an organization to establish rules and promote co-operation among agents, but also to provide funds to operate a real estate board. That’s when technology first changed the real estate industry.
Real Estate Chronicle.
Thursday, October 13, 2005
Fundamentals of Contract Law.
No matter where you live in North America, you must have seen some humoristic vignettes depicting a not-so-trustworthy Realtor intent at selling a house to some innocent-looking couple. My favorite vignette, which still makes me chuckle today, goes back to a few years ago when I was practicing real estate at United Realty. It involved a Real Estate Agent of Pompeii Realty, briefcase in hand, in the process of selling a house to an ancient Roman couple sometimes around 100 BC . The house is overlooking Mt. Vesuvius. There is a black, threatening, ominous plume of smoke coming out of the top of the volcano, and the Roman couple looks somewhat startled when the Real Estate Agent - big smile on his face - delivers the punchline: " Plus, with a view like this what could possibly go wrong" !
What is it exactly that you do when you sign a 'contract' . The term 'contract' means a promise or a set of promises made by one person to another, which the Courts will enforce. A contract can contain a number of promises or 'terms' to be performed by either party. The person who makes the promise is called the 'promissor' and the person who can enforce that promise is called the 'promissee' . If the contract contains several mutual promises, each party will be both a promissor and a promissee. Contracts of Purchase and Sale of land and interests in land usually have lots of mutual promises. Contracts are a crucial part of every business transaction, but not nearly as much as in Real Estate. For instance, some contracts are made verbally while others are made by simply exchanging letters or even e-mails. This is not the case in Real Estate, where it is a requirement at Law that contracts be written down in usually lengthy legal forms to avoid uncertainty, ambiguity and to be binding .
A contract has seven essential elements:
- Legal Intent.
- Legal Object.
- Genuine Consent.
Each of these elements must be present for a contract to be binding and enforceable. Let's examine them individually.
An offer is the promise made by one party to another. Save and except in Real Estate where the offer must be in writing, an offer can be made in any form. In all circumstances, however, an offer must be made in clear an unambigous terms. If more than one interpretation can be given to an offer, neither interpretation will be followed by the Courts. There are 'unilateral' and 'bilateral' offers. Offers to purchase real property are bilateral, i.e. containing the exchange of mutual promises.
An offer is not made forever. Offers can either be finalized, when all mutual promises are fulfilled. Or they can expire, if not timely accepted. Or they can be released, if one of the parties does not - or cannot - deliver on the promise. Offers can also be revoked after acceptance, unless a term of the offer stipulates that revocation is not allowed.- as it is now the case in British Columbia for offers involving land. A 'counter-offer' is simply an offer from the offeree back to the offeror. The legal effect of a counter-offer is to terminate the original offer and substitute the offer of the offeree. What this means in practicality is that if the counter-offer is not accepted, the offeree cannot try to accept the first offer unless it is tendered again by the offeror. This is a point often times neglected in Real Estate, which has caused several tears to be spilled.
The acceptance, like the offer, must be given in clear terms. It must be a positive act. For instance, an offer cannot state "If I don't hear from you, I will assume you have accepted". Doing nothing will never be considered legal acceptance. The rule at Law is that where an offer is required by statute to be in writing, then also the acceptance must be in writing in order for the offer to become a contract binding on both parties. Such is the case in Real Estate. An acceptance has no effect until it is communicated to the offeror. Communication can be made by 'instantaneous means' as in the case of telephone or teletype or fax communications, or e-mail or hand-delivery and by 'non-instantaneous means' such as postal mail. The Law gives the responsibility to the offeror to specify how he wants the offer to be accepted. If the offeror chooses a method like slow mail, then he assumes the risks involved in that type of service (such as misdelivery).
For an offer and acceptance to form a contract there must be consideration or the contract must be signed under seal. Consideration is defined as 'some right, benefit or profit accruing to the promissor or some forebearance, detriment, loss or otherwise responsibility suffered by the promissee' . What this means is that the party trying to enforce the contract must have 'paid' something in exchange for the promise of the other party. Consideration must be of real value, but it does not have to be money. For example, a mutual exchange of promises is consideration per se.
For a person to be bound to a contract, he must seriously intend to create legal obligations. For example, inviting a guest for dinner would normally not be considered a contract intended to create legal obligations. The Law presumes that there is legal intention in a contract involving total strangers. On the other hand, if the contract is between family members the Law presumes that there is no intention to be so bound (non arm-length transaction). However, this presumption can be reversed if there is evidence to show otherwise.
Even when all the foregoing essential elements exist, a contract can still be void, voidable or illegal. A void contract is one which is deemed at Law never to have existed. A voidable contract is slightly different: it exists until it is repudiated by one of the parties. An illegal contract is one which is made for an illegal purpose, and which is therefore always void. Examples of voidable contracts are the ones made when one of the parties is an infant, i.e. a minor or under the majority age. In this case the contract can be voided by the infant. Likewise, when one of the parties is legally insane, the contract is voidable. A special case is a contract stipulated when one of the parties is a limited company or corporation. Three questions must be first answered before the contract can be enforceable: 1) whether the corporation does in fact exist and 2) whether it has the capacity to enter into the contract and 3) whether the person signing on behalf of the corporation is, in fact, the authorized signatory.
Quite aside from blatantly illegal contracts such as, for examples, contracts to commit a crime or tort until recently here in British Columbia certain other types of contracts where considered illegal. For example, until the mid-80's contracts involving the sale of land made on a Sunday were deemed to be a contravention of s.4 of the Lord's Day Act(now repealed) and, thus, illegal and void. Since then, the Supreme Court of Canada has ruled that the application of s.4 - in fact the entire Lord's Day Act - is unconstitutional in that it infringes on the freedom of conscience and religion guaranteed by the Canadian Charter of Rights and Freedom.
If one of the parties makes a misrepresentation or if the contract contains an inherent mistake, the contract may still not be binding. A misrepresentation is, by definition, a statement which is false and which must have induced one of the parties to enter into the contract. A misrepresentation can be innocent, negligent or fraudulent and different remedies are available to the party suffering damages because of the nature of the misrepresentation. If the representation is innocent, the party can sue for rescission of the contract. In the case of negligent or fraudulent misrepresentation, the affected party can sue for damages as well. Although misrepresentation requires a statement to be made, in Real Estate silence too can result in some form of misrepresentation. Disclosure of latent defects is one such example: failure to disclose latent defects on the part of the Seller will not, by itself, affect the consent of the parties but will have similar consequences as misrepresentation.
In the case of inherent mistake, true consent of the parties does not exist. The logic behind this notion is that the parties were negotiating for a subject matter other than the one stipulated in the contract. A specific type of mistake is sometimes referred to as 'non est factum' , Latin for 'this is not my deed' . This occurs when a person executes one form of document thinking the document is something else. Duress and undue influence both affect the genuine consent element of a contract. Duress occurs when a person is forced to enter into the contract against his will. As a result, the Courts will find the contract voidable at his option. Undue influence, on the other hand, is more subtle. Like duress it results in one party losing his free will to contract out. However it occurs more frequently when a person is in a superior or dominant position in relation to another and uses this influential position to induce the other to enter into the contract. Again, if undue influence is found, the contract is voidable at the option of the innocent party.
Real Estate Chronicle
Monday, October 10, 2005
What it's really worth: a look at the British Columbia Assessment Evaluation Process.
- BCA sends property Assessment Notices each January based on BCA's estimate of market value of the property as of the previous July 1st . On the other hand, the value a Realtor places on the property is current as of today's date, thus resulting in a more up-to-date estimate.
- BCA maintains a database of 1.6 million properties. When a new property is created through zoning, re-zoning or construction, or the classification of an existing property changes (as in the case of industrial warehouses turned into residential lofts), a BCA appraiser visits the site and takes into account lot or strata lot size, structure, cost of construction, replacement value, selling data and other factors. To update values, BCA appraisers do not visit properties annually. Instead, they use a mass appraisal system. Values are calculated by evaluating prices for homes sold in each neighborhood around July 1st and then by applying the data to get an average price. BCA, furthermore, uses a broad range of variables that add up to sixteen screens of data for each property.
A Realtor, conversely, scrutinizes the most recent comparable data for homes sold in a neighborhood, or apartments sold in a certain complex. Realtors also examine the exterior and interior of properties in detail, noting alterations and major renovations such as a new kitchen or bathroom that affect the value of a home. They also take into account view lines and architectural styles. In the eventuality that every home and every lot on the street are essentially the same, both BCA's and Realtors' evaluations will be similar. Differences will be more likely to occur in neighborhoods where every lot on every street is different, every home's architecture is unique and every view is distinct.
Real Estate Chronicle
Friday, October 07, 2005
Goods and Services Tax (GST) on Property under Construction: the New Residential Rental Property Rebate.
- an unoccupied new residential complex and intend to resell or lease or lease to persons who are acquiring the complex in the course of a business; or
- an interest in the complex while the complex is under construction or substantial renovation;or
- a commercial real property to be converted into a residential complex
then you may be eligible for a GST residential rental property rebate if the complex qualifies for the rebate. In all cases the rebate applies to real property that is or will be used as residential real property for the first time. In fact, to be more specific
a qualifying residence includes:
- a residential unit that the person possesses under an agreement of purchase and sale; or
- a residential unit in a residential complex that the person leases or sublets; or
- a detached house, semi-detached house, rowhouse unit, condominium unit, mobile home, floating home or apartment; or
- a suite or room in a hotel, a motel, an inn, a boarding house or a lodging house, or in a residence for students, seniors, individuals with a disability.
In addition, in order to qualify for the rebate all the following conditions must be met:
- The unit is a self-contained residence.
- The person holds the unit to: a) make an exempt lease or sub-lease of the unit; or b) make an exempt sale of the unit and an exempt lease of the land; or c) occupy the unit as a primary place of residence as long as another unit situated in the same complex is leased to another person on an exempt basis.
- The first use of the unit will be - or can reasonably be expected to be: a) the primary place of residence of the person or a lessor who will occupy the unit continuously for one year; or b) the primary place of residence of the person or lessor who will occupy the unit continuously for less than one year if, after that shorter period, the unit is sold to someone who will occupy the unit as a primary residence; or c) if ninety percent or more of the residential units of a residential complex that contains ten or more residential units qualify for the rebate. In this instance, all residential units in the complex are considered qualifying residential units.
Are you eligible to claim the rebate? You may be if:
- you buy a taxable residential complex or an interest in the complex from a builder and you lease units in the complex;
- you are a builder who constructs or substantially renovates a residential complex, makes an addition to a multiple unit residential complex, or converts a commercial real property into a residential property and you lease units in the complex;
- you are a builder who constructs or substantially renovates a residential complex, makes an addition to a multiple unit residential complex, or converts a commercial real property into residential property; and you sell the building or part of it, and you lease the land;
- you lease land to a person who will affix a residential unit to the land;
- you lease sites in a residential trailer park.
Finally, there are four different types of rebate applications.
I would like to thank these two readers for posing me these questions and trust the above post will be satisfactory. Additional information can be gather from the Canada Customs and Revenue Agency's website at www.ccra-adrc.gc.ca. . I also would like to invite all readers to submit questions online using the 'comments' section of this Blog. This way all requests will be publicized as well. You do not need to leave your e-mail address if you do not want to. As always, all questions will be answered.
I wish you a Happy Thanksgiving and, to all my American friends, a Happy Columbus Day.
Tuesday, October 04, 2005
Suspicious Real Estate Transactions.
Real Estate Chronicle
Saturday, October 01, 2005
Stats ... Stats ... Stats ....
- 74% - yard signs
- 74% - Internet advertising
- 53% - newspaper advertising
- 51% - open houses
- 40% - home book/magazine
- 37% - builders
- 26% - television advertising
Furthermore, 90% of Buyers consult a Realtor to search for a home, 77% of them actually use a Realtor to buy, 12% buy directly from a builder without the assistance of an Agent and only 9% buy directly from a Seller. In fact, if you are or intend to be a direct Seller (FSBO), beware: the typical FSBO home sold for $163,800 compared to $189,000 for agent-assisted home sales.
And finally, between 1980 and 2000 the number of households headed by unmarried women has increased by about 10 million. NAR maintains a comprehensive website at your fingertips by clicking :
Real Estate Chronicle