Friday, December 30, 2005


Tinkering with Cognition

'Collective intelligence' for real estate professionals.


Any time I step into a lawyer’s office, I feel guilty.

I do not know whether it has anything at all to do with my profession, or if it is the series of books that lawyers are so fond to prominently display behind them. Those old, conspicuous textbooks with ominous titles written in gold Gothic characters on yellowish or greenish hardbound covers, barely readable, much less understandable. I noticed that no matter if the law office is located in Canada or in the United States, those textbooks look exactly alike. I still have to see a single lawyer actually reading one of them, however, so my personal theory is that those books are hollow inside and used to conceal who knows whatever arcane secret items or, perhaps, just unsavory culinary recipes. In real estate too we are fast approaching the time when our shelves are going to be filled with all sorts of books. Yellow, red and blue, with manuals covering all sorts of topics from Ethics in Real Estate to How to Write a Contract And Not Go To Jail. I have been tinkering with the idea of writing a manual myself – just a small pocketbook entitled “Top 10 Successful Strategies To Defuse Sellers Armed With Pitchforks”, which I figure would be an instant hit with many of us.

With the ever-advancing technology of our times fields of expertise that are crowd-oriented, such as the legal and real estate professions, are poised to experience dramatic changes in the forthcoming years. As it relates specifically to real estate, to be sure, technology has had already a great impact but innovation is not over yet and it is not confined merely to the use of sophisticated hardware. There is on the horizon a new conceptualization of professionalism, an absolutely novel way to harness individual resources for the common good of all. It is called ‘collective intelligence’, a techno-jargon concept that will revolutionize the way we – the professionals – think, act and interact among ourselves as well as with the communities we serve. Collective intelligence tinkers with the way cognition and information processing are structured and relayed to consumers, especially when they involve knowledge, expertise and learning. It also delves into methods of gathering and sharing information and resources that bind different groups, or associations, or disciplines. Real estate is, of course, intertwined with banking, law, economics, marketing and urban sciences and collective intelligence links and bind together different networks or resources to coordinate a more efficient and comprehensive response to ever- sophisticated demands.

Real estate professionals are called more and more to field questions that go over and beyond the mere act of selling. In fact, it can be said that selling in real estate already represents the last stage when the professional is finally compensated. But before that there is an array of issues that must be confronted and answered, ranging from understanding regional economics such as local job environments and trades to proficiency in specific areas such as cultural orientation and demographic diversity to acquaintance with well-defined facets of disciplines the likes of architectural styles, land-assembly and development, and contract law. This radicalization of the real estate business to come is in response to the evolution of choices of market participants. Although singular consumers do not have more power over market events than before, they certainly have improved their chances of getting what they want because they have a greater variety of choices. We are, in essence, entering an era where the professional learns and stores information gathered from a group or organization and is ready to deliver it to a consumer, or another group or organization, on demand for the purpose of enhancing choices through expertise.

Sharing information is of paramount importance in real estate, since there is not a ‘national’ market per se. Real estate is made of a compilation of local economies, each abiding to a set or sets of local inputs and variables. What is happening in Toronto does not directly affect what is happening in Vancouver. And yet, there is a common thread shared in the needs of individual expression of market participants, no matter where they are located. The Realtor, as an integral part of his function and purpose, is going to be required to contribute to the building of a consensus decision-making process that involves meeting everyone’s needs and which is intended to promote and enhance the decision-making process of each individual consumer, whether a person, a group of persons or an organization.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Thursday, December 29, 2005


Breaking The Real Estate Bubble Myth

Real Estate forecast for 2006. A must-read post – definitely better than Nostradamus ...
Bubble? What bubble?

At the root of the Real Estate Bubble Myth is the fact that interest rates are on the rise and the inexplicable truth is that, all of a sudden, everybody is so worried and concerned about it. Interest rates have been steadily on the rise both in the United States and, by reflection, in Canada since mid-2004, so I will leave to psychiatrists and psychologists the arduous task of explaining the newest, interest-rates phobia. I will, however, delve into the reasons as to why interest rates have been on the rise for these past 18 months.

Interest rates are the most important mechanism of Monetary Policy used by Central Banks to expand or reduce the available pool of capital at any given time. Central Banks use this mechanism to control the level of aggregate demand for goods and services, a primary cause of economic fluctuations. By reducing the money stock the cost to the banks for using the available capital is raised and passed on to consumers with a mark-up factor. This, in turn, discourages consumer spending on goods and services and, conversely, stimulates consumer saving. The effects are widespread and reverberate throughout the economic basket including, of course, real estate. What, however, pays to bear in mind is that it is not so much the amount of the increase that is important but, rather, the time given for the economy to adjust. The effect of a one percent interest rate hike in one month is going to be very different – and much more dramatic – than the effect of a one percent rate hike in six months, and this is a fact very well known to both the Federal Reserve System and the Bank of Canada.

So much so, in fact, that David Dodge, the Governor of the Bank of Canada, as well as Alan Greenspan, the outgoing Chairman of the Federal Reserve Bank and Ben Bernanke, the nominee for the Chairman position are all proponents of gradual interest rates increases. Prof. Bernanke in particular, in fact, has gone even as far as postulating an inflation-targeting approach designed to keep inflation in check at 2 percent over two years. All number-crunchers out there, therefore, consider this: the posted annualized U.S. rate of inflation calculated monthly for November, 2005 using the Consumer Price Index published by the Bureau of Labor Statistics is 3.46 percent, so all the Feds are talking about is a –1.46 percent inflation-targeting reduction programme over two years. That amount should be easy enough for everyone to absorb and it certainly does not look nearly as ominous as the doomsayers are all too fond of depicting.

Contrary to the belief of many ‘bubbleologists’ and the uneducated guesses of ill-informed consumers, a rise in interest rates is actually a welcome variable for the economy and, moreover, it is specifically the tool needed to keep a bubble from bursting. An economic bubble as it is widely known – or perhaps it isn’t – occurs when speculation causes prices to increase, thus producing more speculation and subsequent price increases. The bubble bursts when prices of goods are so absurdly high that consumers either refuse or cannot afford to purchase, thus sending demand tumbling down. As real estate markets in North America have seen more than a fair share of speculation in recent times, it follows that a cooling-off trend through higher interest rates will have the beneficial effect of consolidating market wealth achieved thus far. The bubble would be likely to burst if no pressure were applied on speculation, thus increasing prices even further and causing demand to lower and finally collapse. Allowing the economy to get an even footing through a slowdown of capital appreciation and, at the same time, allowing real wages to catch up is exactly the tonic needed for a healthy foundation. Higher interest rates, moreover, promote domestic saving and attract foreign capitals thus reinforcing both the Greenback and the Loonie, another beneficial factor in finance albeit not in trade.

So, what is the prognostication for 2006? Real estate consumers need to look no further than at the prices large developers are asking – and collecting - today for new construction slated for completion by the end of 2006 and beyond. Prices for residential condos in the planning stage or just under construction sold ‘on paper’ today are about 10 percent higher than prices of equivalent existing resale units, which goes a long way to point out where big players think the real estate market is heading. The basis of this buoyance is that consumer confidence is stronger than ever. Just before the Holidays, in fact, the Feds reported that the Index of U.S. Consumer Confidence has risen to 103.8 from 98.3 in November, the second highest level since August, 2005 when the Index reached 105.5, a reflection of lower energy prices and an improved job market environment. Moreover, preliminary estimates already show an 8.7 percent rise in Holidays spending in the United States and a 7.6 percent rise in Canada over the same period last year. There is no valid reason to believe, under the circumstances, that consumer confidence applies to everything but real estate and that an economic bubble would affect only real estate markets and nothing else. Furthermore, Real Estate Boards across Canada and the United States report that inventory levels are ‘seasonally normal’ – an indication that the anticipated glut of housing due to the inability of homeowners to meet mortgage payments has failed to materialize thus far. In fact, those who worry that adjustable-rate mortgages are a potential financial time-bomb ready to explode should be informed that while there has been a surge of new adjustable-rate mortgages over the past twelve months, especially in the United States, they account overall for less than 10 percent of the total existing inventory of mortgages held by banks. Furthermore, many adjustable-rate mortgages have allowed consumers to fix rates up to 10 years, and it is only borrowers of sub-prime mortgages that face monthly-payment adjustments after three years – which therefore means that the problem, if there is a problem, will come due in 2008, not in 2006. Interest rates increases have absolutely no impact whatsoever on the vast majority of mortgagors who have locked in already.

In conclusion, therefore, it certainly appears that the Real Estate Bubble theory belongs more to Greek mythology than the reality of our times. There is in progress right now a reduction of real capital values, which will continue for some time as the direct consequence of the markets taking a breather. This trend is expected to settle real estate markets to new, more commensurate pricing levels before appreciation will surge upwards once again. Where the difference will be seen more likely than not is in the annualized rate of appreciation: gone are the times of twenty percent capital appreciation increases from year to year. As interest rates are steadily, gradually increasing, expectations in economic circles range from a conservative 5 percent to an optimistic 10 percent housing appreciation in value by this time next year. But there is no question that real estate markets still have a way to go to make up for years of decline. Those who theorize the collapse of the housing market by comparing it to the stock market are fundamentally incorrect. At its core the housing market, like the stock market, is all about supply and demand. However, the difference is that investors base their decisions to buy into stocks on future potential whereas investors base their decisions to buy into housing on inherent value. Moreover, externalities as varied as immigration, internal migration trends, marriage trends and cultural precepts as well as generation gaps affect real estate markets whereas they are totally missing in stock markets. As such, real estate markets just do not ‘crash’ like stock markets. There is not going to be in real estate the infamous Black Monday – October 19, 1987 – when the Dow Jones collapsed 22 percent in value in one day. When people buy into stocks there is no guarantee whatsoever that the companies they are buying into will be still in business five, ten, fifteen years down the road. Real estate markets, conversely, are far, far safer.

In the absence, therefore, of external negative influences the likes of wars, terrorist attacks or devastating virulent pandemics – which, on the other hand, would affect the entire economy – and until such time as consumers exhibit confidence and purchasing power the way they have been doing thus far, there is no reason to fear bubbles of any kind anywhere in real estate. Hence, do not expect to hear a popping sound any time soon

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Tuesday, December 27, 2005


Young and Single

No ladies, this post is not about me! It is about the younger generations purchasing real estate. I am, however, in the process of drafting another Article - this time about me - which will be published here first and that will be aptly entitled …’Obsolete and Disposable’…


I have had the great fortune of selling a loft right before the Holiday Season to a new and young Client of mine, who goes by the first name of Michael. Michael, who must have told me ten thousand times to call him Mike, has taken me for a tour of all miniaturized condos and lofts available in Downtown Vancouver. In fact, I must confess that this was one instance where it was the Client that showed properties to the Realtor and not the other way around as it is customary in the business. Such was the case because the Realtor (myself) viewed investments – to put it the way Mike did – as “just not cool enough”. I must say, before I go on and not to give the wrong impression to anyone, that Mike is an accredited computer animator in his early twenties and that he has a gross annual income hovering to on or about CAD $100,000. He ultimately ended up purchasing his loft for about CAD $400,000.

Michael is the typical example of what we refer to in the business as the ‘Digital Generation’. Kids of the Digital Generation grew up in the suburbs with computers at home and in the classroom, shopping malls down the block and swimming pools in the backyard. Now they are young adults, aged 18 to 26, eager to move out of the parental nest but not willing to give up everything they had as kids. These young buyers are smart: they know it costs the same, if not less, to buy as it does to rent. But their taste is remarkably different. They do not hold the traditional axioms of real estate – view, location and space – in very high esteem. In fact, the opposite is true. I was shocked (terrified might be a better word) when Mike took me into this apartment on the fourth floor of a medium-height concrete building in a questionable area of the Downtown, with the balcony and the bedroom window opening up ... right on to the main railroad tracks of the Canadian National Railway. “Cool!” exclaimed Mike “You get to see the train every day”. Yes, every hour too.

But then and again, this is typical of the Digital Generation: they speak a different real estate jargon. Rich in cash and spendable income, with no problems at all qualifying at the bank for a loan, these young professionals of the Twenty-first Century are filling up the downtown cores of large metropolitan centers throughout North America. Or, in the alternative, they lean towards the purchase of heritage homes and bungalows built in the 1950’s that they can retrofit to their taste, and in neighborhoods where they have friends. They almost invariably choose locations with tennis courts, parks and theaters at a walking distance away. They adore having restaurants and cafes just outside their front door and markets nearby that cater to their working lifestyle.

Space is generally not a problem, in light of the requirements of their almost totally non-existent furniture. Mike’s biggest hurdle was to find a living room large enough to accommodate his top-of-the-line computer hardware, a must that he uses for work at home, together with his top-of-the-line … pinball machine, a must that he uses for ‘transcendental meditation’. Bed, living and dining room sets and loveseats and chairs, not to mention wall pictures and frames had no bearing whatsoever on his decision to purchase – all household items of past eras and age and definitely ‘not cool’.

Developers are particularly eager to target the Digital Generation. With retail prices for Downtown condos in Vancouver past the CAD $450 per square foot benchmark, it is becoming a balance of trading off space for affordability. A survey conducted by Ipson-Reid has shown that a whopping 61 percent of young buyers rate home ownership as very important and that a further 47 percent say they are likely to buy within two years. Pretty much the same proportions, however, rate square footage at the bottom of the ladder of interest. It is also an issue of culture, customs and mentality. In the past, people had first to wait and get married and then bought together. Not anymore with the Digital Generation: they are buying on their own. As not all of them, of course, can sport a CAD $100,000 income like Mike’s, new developments come with smaller units making them accessible to singles with only one income sufficient enough to pay for the mortgage.

The alternative very much sought after by these new buyers is to live in refurbished warehouse spaces the likes of lofts. Lofts are none other than stratatized light industrial space rezoned for residential use. In fact, in many instances rezoning has not been undertaken at all: it is just the highest and best use that has switched from light industrial to residential – a consequence of the price levitation of recent times. Modeled on the New York style lofts, they typically consist of a main floor and a mezzanine accessible through an internal iron stairway, all surrounded by brick walls. Very rustic in appearance, they do not feature fireplaces, closet space and even ceiling clearance is skewed with a characteristic 14 to 18-foot clearance on main and a 7-foot clearance at mezzanine level, taken from the overall floor-to-ceiling height of the strata unit. Modern, stainless steel appliances are the only notable residential touch.

And, finally, these youngsters do not cherish their privacy as much as ‘old-timers’ do, as reported by the same survey. Just less than 50 percent, in fact, rate privacy, quiet and silence as not very important factors in the scale of their preferences. This was certainly evident in Mike, who is also a drummer in his spare time. And, moreover, they like to congregate. Friendship is important, and not merely for showing off: these kids value each others’ opinions and thrive to build bonds sealed through sharing common visions, pre-concepts, experiences and lifestyle. Mike, in fact, had no trouble at all meeting this young girl at Possession Date, who also owns a loft in the same building. A pretty girl wearing a chemisette a little too tight, either because it was the wrong size or because it had shrunk in the washing machine, it revealed a portion of this otherwise conspicuous tattoo strategically positioned – I might add – beginning at the same level of the last two lower vertebrae going downwards. She was sporting also this earring which, by whatever law of physics or other vicissitude of life, had somehow detached from the ear lobe and gotten pinned right on her left nostril.

It must have been love at first sight, because the girl was with us for almost one hour helping exploring the newly bought loft and giving Mike suggestions and advices as to where he should position the pinball machine. As I was just about to leave, on my way to the door Mike took me on the side and exclaimed half-jokingly (and, then, also half-seriously): “Luigi, no wonder you never got married – you are just not cool enough”.

Ouch! That hurts …

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Monday, December 26, 2005


Second Home

A fascinating trend from an economic perspective is the growing popularity among consumers to purchase a second home. Whether it is being used as a vacation cottage, it is rented out or is merely an alternative to one’s primary address, the purchase of a second home is typically viewed as a Status Good. Additionally, this trend runs exactly opposite to the Theory of Marginal Utility and it thus makes the discipline of Real Estate the great exception to the general rule.

In every society, from the Marxist to the Capitalist, there is a fairly sizeable minority class which always has a surplus of cash from income or an ability to borrow sufficient for its expenditure to have stimulative effects on the general economy. Whereas in past historical times this minority class consisted mainly of the royalty and the aristocracy, it now comprises something like 25% to 30% of the population of a developed country. Because the education system in advanced countries is as egalitarian and selective as it has ever been in history, and because the skill requirements of a modern advanced economy are higher than ever before, this minority class tends to be clearly divided from the remainder of the population in terms of intelligence, educational attainments and cultural tastes.

With extra spendable resources at its disposal and a fairly higher degree of education, knowledge and experience, it comes to a point where this minority class focuses its energies and resources to the acquisition, holding, perusing, renting and reselling of consumer items which are out of reach of the remainder of the population at large. As such, these items have a distinctive connotation denoting a higher status within society – if none other than in the minds of the beholders, and are called Status Goods. A second or subsequent home is possibly the crown jewel of all consumer goods and the quintessential status symbol.

More specifically, a Status Good is a purchasable item which becomes fashionable enough to have an effect on consumer spending, sufficient to produce a significant boost to the general economy of a nation, or a region, or a culture. The main motivation driving its purchase and use is that of denoting high status in society. Because of its desirability the price of a Status Good is able to carry a high profit margin and thus new providers enter the scene quite quickly with competitively high prices. This explains the recent development of resorts areas throughout the world. Here in British Columbia, for example, Whistler is already a world renown ski resort and site of the 2010 Winter Olympics. The real estate development of Whistler and Blackcomb Mountain in this past decade has seen land prices multiply exponentially from an average of CAD $75,000 in 1995 for a standard residential lot to CAD $750,000 in 2005. Anyone who owns an interest in land in Whistler these days definitely fits the foregoing definition of Status consumer.

As stated before, the purchase of a second or subsequent home runs exactly opposite to the Theory of Marginal Utility. “Marginalism” is the economic line of thought that postulates the notion that what is most important for decision-making and to determine economic value is the marginal or last unit of consumption or production. For example, one automobile is very useful for getting around. An additional automobile might be useful in case the first is being repaired, or for spare parts, but it is not as useful as the first. A third automobile has even less utility than the first two. Given the price of cars, one would not expect many people to own three cars because the benefit they receive on the third car would be unlikely to exceed the price. In essence, “marginal utility” is the additional benefit that a consumer derives on an additional unit of a commodity output. Such additional output is said to have economic value if the additional benefit exceeds the price of the output. The concept grew out of attempts by 19th-century economists to explain the fundamental economic reality of price.

As it relates to real estate, therefore, the usefulness of a second or subsequent home should diminish and, in accordance to the Theory, so should its price, so that second or subsequent homes should not possess economic value and, thus, demand for them should be minimal to none. Clearly, this is not the case in that real estate is not viewed as a disposable commodity but, rather, it is perceived as an appreciation-generating vehicle - a real capital asset.. As proven empirically, second homes as Status Goods are a vital component of consumerism, in that they stimulate demand and production and, thus, economic growth.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Saturday, December 24, 2005


Price, Value and Worth

The importance of intelligent pricing in real estate is underscored by the relation between Value and Worth. Excess inventories combined with the everyday low-pricing mindset that exists in most sectors of the economy including, of course, real estate has created buyers who are more price-sensitive than ever before. In this environment sellers typically can no longer justify the notion that the properties they are about to sell are a value-added inventory item. Unless sellers can prove, in terms of dollars and cents, the economic value of their properties, buyers have no choice but to view sellers’ products as just another commodity.

In order to motivate buyers, sellers must apply leverage on the perceived value of the interest in land they are offering. In Economics the ratio of the perceived value of a capital asset vis-a-vis its intrinsic risk of acquisition is termed ‘worth’. Clearly the lower the risk, the higher the worth. It follows, therefore, that the perceived value – or simply ‘value’ - of a real capital asset is the total monetary worth obtained by reducing exposure to risk and liability. Put in elementary terms, ‘value’ is the total net benefit a buyer expects to receive from a purchase, measured in currency. The measure of the ‘value in exchange’ of the real estate transaction is the sales price.

In an economically efficient market, defined as a market where there are large numbers of rational, profit-maximizers actively-competing participants, with each trying to predict future market values of individual investments and where important current information is almost freely available to all participants, competition leads to a situation where, at any point in time, actual sales prices will be a good estimate of value. It follows, therefore, that sales prices of transactions past are the best measure of value of transactions to come.

Real Estate, however, is possibly the quintessential economically inefficient market because different participants may have varying amounts, degree and quality of information. This offers an advantage to sellers and helps explain the reason why properties offered for sale are typically overpriced. Furthermore, the uniqueness of each property compounds such inefficiency even further. A problem, therefore, arises as it relates to the determination of value, and the solution is in function of the real capital asset taken into consideration. There are three primary approaches used in valuing interests in land:

[ ] the Cost Approach, which generally works well for estimating the value of new buildings, involves estimating the cost to build an identical property taking into account land prices, labor, construction materials and developers profit;

[ ] the Comparative Sales Approach involves estimating the value of a property by comparing it to similar properties recently sold. The problem with this approach is that all properties are unique and adjustments must be made to account for differences in the properties being compared;

[ ] the Income Approach involves estimating the value of a property by calculating the present value of future income. The formula for market value equals annual net operating income (NOI) divided by a market capitalization rate that must be estimated and is determined by market factors.

As it relates to non-revenue producing residential assets, which account for the vast majority of transaction in the real estate market, the equilibrium between value and worth is obtained by setting a price based upon the sales price of recent transactions using the Comparative Sales Approach with due adjustments for correction, because this best defines how much a certain real inventory product is worth to a buyer relative to similar (but not equal) inventory products already consumed (sold).

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Friday, December 23, 2005


Bad News For The Boys

Hey boys, stop watching the hockey game: I have got news for you. In fact I have got a good news and a bad news. The good news is that you are still classified as the family breadwinners. The bad news is that you don’t get to eat any bread no more. And there is a really, really bad news boys – but I am going to tell you last, because I am packing up …

A recent study conducted by Canada Housing Mortgage Corporation indicates that women across Canada have now more purchasing power than ever. Canadian women, although not paid quite at par as their male counterparts, nevertheless make more money than ever before and are closing the income-gender gap very fast. They also show more remarked entrepreneurial skills and are more likely than men to sign an offer to purchase, especially one involving residential real estate. They also make more responsible property owners and are three times less likely to be foreclosed upon than men. Overall, Canadian women represent an increasingly powerful key market group and are a major force in the Canadian housing market.

More specifically, Canada Housing Mortgage Corporation details the following trait characteristics of ladies buyers:

[ ] Single women are now twice as likely to buy a home as men and they have an expensive taste too. Women are the largest condo buyers by dollar volume in downtown sections of large metropolitan centers, typically Toronto and Vancouver. They love luxury condominiums and, in any event, women will stretch their purchasing capacity to the limit. They believe that, when it comes to real estate, more expensive is a better investment in the long run.

[ ] Women are buying at a faster rate than the general population and are more likely to hold on their capital assets than men. Moreover, Canada Housing Mortgage Corporation reports that young ladies, whether married or not, believe in long term investments, thus proving outmoded the previous finding that the typical Canadian household changes home every seven years.

[ ] In total, all women (single, married, divorced and widowed) control a whopping eighty-five percent of all residential purchase decisions. This includes not only decision making as it relates to cosmetics such as the style of a home, colors and location, but it involves such factors as ‘important’ financial decisions the likes of type and length of financing, amounts of down-payment and terms of contract of purchase and sale – previously the almost exclusive domain of men.

[ ] Canadian women are twice as likely as men to have a credit rating from good to excellent and will go the extra length to keep it that way. For this reason, women are beginning to replace men as the ‘preferred customers’ of bankers and mortgage brokers alike.

And there is also a fifth trait characteristic of ladies purchasers, a real bad news, boys – but I am going to tell you last because I am packing up …

At the roots of this substantial change in the real estate landscape is the fact that in the period from 1994 to 2004 the number of males earning more than CAD $75,000 gross per year has increased twenty-five percent, but the number of women earning more than CAD $75,000 has increased sixty-two percent over the same period. This is the main reason why, according to the report, women want to get the best possible investment. They want to build up equity rather than paying rent and a landlord’s mortgage – a concept that men seem to begin to underestimate.

But wait to hear the real bad news, boys – I will tell you in a second, because I am pretty much finished packing up …

Furthermore, men are increasingly losing score in a field that has been their own exclusive domain for ages. As Home Depot (Canada) knows very well, fully fifty percent of purchases made there are from women. Canadian women appear to be more and more skilled at such typical ‘manly’ tasks as sheet-rocking, plastering, fixing plumbing and electrical and even window-framing. Overall, they are no longer intimidated by repairs and maintenance.

There it is. I am finished packing, now. Before I go to the airport to catch my flight, here is the fifth news, boys:

[ ] There are 32,764 single women in Canada who own more than two properties, thirty-eight percent of which are … lawyers.

That’s it. I’m moving to South America. Hasta la vista, baby

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Thursday, December 22, 2005



There is a special and direct economic relationship in real estate between Time and Value: as land becomes scarcer and appreciates, the improvements on the land are subject to obsolescence and depreciate. Obsolescence is an economic variable used by governments, economists, appraisers and Realtors that reflects the fact that the building sited on a piece of land ages with time, just like me. And, unlike wine, a building that ages with time does not get any better, again just like me. No wonder that I am in real estate – but I digress.

There are two types of depreciation when it comes to real capital assets: physical and functional. And both physical and functional depreciation can be categorized as either curable or incurable.

[ ] Physical Depreciation

Physical depreciation represents the accumulated loss in market value caused by physical wear and tear since the date the building was completed. Physical curable depreciation refers to damage which can be corrected economically, and it includes such items as poor decorative conditions, broken fittings, outdated or worn out carpeting, faded or old paint, appliances not in a proper working order as well as aging roofs. On the other hand physical incurable depreciation includes wear and tear of structural members and foundations where repair or replacement is likely to involve significant cost. These two kinds of depreciation are treated differently. The dollar amount of the deduction required for physical curable depreciation is generally based on the required cost of carrying out the repairs. Conversely, the allowance for physical incurable depreciation is more difficult to estimate, with the principal cause of such difficulty lying in the determination of the remaining life of the building.

There is no precise way to estimate the cost of correcting physical incurable depreciation. Generally speaking the cost of this kind of corrections is so great that in terms of economics the structure should either be left in its present state or totally rebuilt. Governments tend to estimate the economic life of buildings in terms of straight-line depreciation, but this is so merely because it makes the estimate of capital gains and losses, as well as their recapture, a little easier to determine from an accounting point of view. Appraisers and experienced Realtors, on the other hand, will tend to make an educated guess more often than not as to the value of the physical incurable depreciation based upon visual observation while economists will base it upon knowledge of regional comparable market data.

[ ] Functional Depreciation

This type of depreciation describes the loss of value caused by outmoded or inadequate design. Here too it is necessary to distinguish between curable and incurable functional depreciation. Functional curable depreciation includes items such as the cost of replacing old-fashioned fittings, installing an additional bathroom or otherwise making alterations to the existing plan by, for example, creating new doorways and blocking old ones, or by following market trends such as enhancing the visual appearance of rooms with open layouts and light-play. Again, the amount by which market value is reduced is in direct function of the cost involved in carrying out the necessary updates.

And, like before, the amount by which market value is reduced because of functional incurable depreciation is entirely a matter of judgment and cannot be determined with an arithmetical calculation. There are, of course, limits to what can be done to cure functional depreciation. For example, if an architectural style has gone out of fashion, nothing can be done and a higher factor of deduction will be applied. The opposite is true, of course, of plans that never go out of style. For instance, residential ranchers are always high on the list of demand and very much sought after by elderly and younger couples alike but for opposing reasons: a lack of stairways for the first and easy maintenance for the latter.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Tuesday, December 20, 2005


The New American Urbanism

American readers are going to be thrilled by this: somebody out there is trying to build a new America – without Americans, that is. And, to be more specific, it is the European Union (EU), Putin’s New Russia and Capitalist China the ones that are trying to do it. They all call this trend the ‘New American Urbanism’.

The New American Urbanism is what city planners, architects, civil engineers, developers, realtors, appraisers and bankers throughout the United States refer to as simply ‘Urbanism’. It is the way so familiar to us all in which cities, towns and communities have been conceived, planned and built. There is nothing new about it, since Urbanism in the United States and to a lesser extent Canada is a phenomenon that dates all the way back to the Seventies. It is just the very practical way North American cities are structured: a mix of shopping, residential and light industrial districts effectively connected by a system of boulevards, roads, streets and alleys. Residential neighborhoods are comprised of mixed-use housing clustered with schools, sports centers, wide sidewalks and essentially with everything at close range from home.

Business is carried out in the city centre areas or in downtowns, with the typical characteristic skyline of concrete high-rise and low-rise buildings. One would not think that all this would cause such an uproar. But it has. There are three specific reasons for the rest of the world to all of sudden rediscover America and to put it (again) under the microscope: time, money and economy of scale. The EU, Russia and China all face the common dilemma of having to relocate millions and millions of people on relatively short notice and share the common denominator of minimizing social cost and maximizing affordability.

With the collapse of European borders and the fast-approaching disappearance of singular national identities, the urban trend throughout Europe nowadays is to create centers where jobs are being relocated and redeveloped. Cities and towns must follow the people who, in turn, follow economic prosperity wherever they may find it. As such, it is imperative that a social and living thread be created quickly and swiftly anywhere there is a need for it. Call it the logistics of capitalism, but the EU cannot possibly achieve its coveted objective of creating a free market zone of 600 million or so people, double the one in North America, if this area cannot be properly connected, effectively serviced and economically integrated.

Likewise, it has been over a decade that Russia is in the process of abating the old Stalinist organization of a modern, self-sufficient European Russia on one side surrounded by a cluster of backwards Asian republics and Putin – the former KGB boss - has now become for domestic political reasons the chief architect of the new Russian social integration. Consequently, the republic is now in the process of developing far away areas the likes of northern Siberia and the East Urals, and will shortly be facing the huge problem of having to accommodate, house, connect and integrate millions and millions of domestic migrants and workers.

China suffers of an ailment called ‘one side development’: its coastal areas, home to thirty-five percent of China’s 1.3 billion people are expanding at the rate of 10 percent per year and have been doing so for the past decade, while the remaining sixty-five percent of the population living in the hinterland is housed in communities where running water is thought of as the ultimate luxury. Chinese leadership is very much aware of the economic rift that exists between the affluent, modern and westernized city dwellers on one side and the poor, uneducated and hopeless inhabitants of the countryside, as well as the tension, envy and huge social unrest that this situation – if not resolved quickly – will inevitably lead to.

Hence, America. Using standardized models of development it has occurred to urban planners throughout the globe to think (possibly at the same time) that it takes Americans four years to fully build, connect, develop, service and integrate from scratch a standardized community for 30,000 people. This would include building roads, viaducts, railway, shopping centers, living dwellings, parks, sidewalks, streets, lighting, school and sports facilities, utility installations such as electricity, telephone lines, cables, sewers, water mains, a small airport as well as plant trees everywhere. Furthermore, the typical housing construction time in the United States, counted from digging a hole in the ground to giving the keys to the owner, is five and a half months. Using the same standardized models but applied to different construction and development methods, it would take seven years for Western Europeans to accomplish the same objective, with the average housing construction time running to about one year. The Russians would take almost ten years to do the same, with a typical housing construction time of one year and data is unavailable for the Chinese – but it is common belief that it would take them longer than the Russians to build this model town in the countryside.

Moreover, what foreigners especially cherish of North American cities, towns and neighborhoods is the economy of scale: the more you build, the less expensive it gets. And, naturally, the fact that environmental concerns are of paramount importance, particularly in Canada. So much so, in fact, that Europeans have banded together none other than in Stockholm to draft, well ... The Charter of Stockholm, in fact, where the Council for European Urbanism has adopted officially as its mission the objective of maintaining and preserving the well being and integration of the present and future generations by building cities, towns and villages speedily and with mixed-use with architectural lines, construction techniques, planning and management modeled upon American cities.

Seems that somebody is eating back a lot of criticism these days ...

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Monday, December 19, 2005


Speculation v. Investment

What most people loosely refer to as ‘real estate flipping’ these days is no flipping at all – it is reselling for a profit. This is so because most market participants finalize the transaction before reselling their newly acquired interest in land for a mark-up. The implication is that they actually use their own money to complete - a classic real estate investment. The true fine art of ‘flipping’ houses or other real assets, on the other hand, consists in reselling an interest prior to closing. A Buyer of a subjects-free contract of purchase and sale will find another Buyer for the same interest ready, willing and able to purchase prior to the first Buyer completing the deal. The implication is that the first Buyer merely puts the deposit out of his own funds - a classic real estate speculation.

True real estate flipping, albeit not an illegal practice per se, will get you in trouble more often than not and notwithstanding anything Donald Trump will have to say on the subject. In fact, it’s gotten him in trouble as well. It is also a practice not favorably looked upon by many Boards and professional associations within organized real estate. At the centre of it all is the definition of market value with its element of proper exposure to market conditions. Imagine a purchaser that convinces a seller to accept an offer of, say, $300,000 for a single family detached house with completion in three months and a $15,000 deposit. Then, about half a way through the purchaser finds a second buyer willing to pay $350,000 for the same interest and to complete on the same day as the first contract. Come completion date the original purchaser will close on the second contract first. As it takes at least one day for documents to be couriered to the respective conveyancers and about a month (in British Columbia) for the transfer of ownership to be recorded and the new title registered at the Land Title Office, this little trick will allow the original Buyer to walk away with a neat $50,000 in his pockets, without having used his own money practically at all. As market value is, by definition, the price that a real property is reasonably expected to fetch after adequate time and exposure to market conditions, a real question arises as to whether or not the Seller in this example has received full market value for his property.

Flipping potentially encompasses an element of negligent misrepresentation, at the very least, all the more so if someone with special skills and knowledge – such as a Realtor – is involved. But even if no real estate professional is involved, the Courts have long since ruled that under certain circumstances mere silence or half truths may have the same effect as misrepresentation and are, thus, actionable at law. In some cases such misrepresentations may be even qualified as fraudulent. As no reasonable Seller will, if given a choice, sell his property for $300,000 as opposed to $350,000 lawyers have been quick at crying out loud foul play when contacted by disgruntled sellers. But beyond the legality and morality of flipping practices, there is a real economic question as to whether flipping merely contributes to the speculative inflationary ravages that ultimately reveal themselves detrimental for the entire economy, especially when they involve large ticket items such as real capital assets. This is not the case when it comes to investing or, for that matter, reselling for profit, which is looked upon as a regular part of doing business in any market. Which, then, opens up again the ages old debate going on in the economic community as it relates to the impact of speculation vis-à-vis investment.

The role of speculators in a free market economy is to absorb risk and add very little liquidity to the market place. In fact, more often than not, speculators will reduce market liquidity by inflating prices – the principal effect of speculation – and by moving their newly made riches out of a particular market for use elsewhere. This would be the case in our previous example if the first purchaser, upon completing the first transaction decided to abandon real estate and invest his capital, including the $50,000 profit, into the stock market. Moreover the effect of price increases, particularly in the short run, is to reduce the pool of buyers thus hampering demand and reducing prices even further – the classic economic bubble. Investors, on the other hand, play an entirely different role. In theoretical Economics the term ‘investment’ refers to the purchase and holding of capital goods, which are not instantaneously consumed - i.e. sold for profit – but, rather, used at a later date. Therefore a purchaser that buys a fixer-up, remodels and sells it later on for a mark-up is an investor, not a speculator. The same is true for a buyer of a property under foreclosure.

Risk management when it comes to investment is also well defined. More particularly, investment is in direct function of the underlying relation between personal income or capital appreciation, depending upon the nature of the subject property being bought and sold, and interest rates. An increase in personal income, just like an increase in capital appreciation will encourage investment to a higher degree which, in turn, will spur demand causing a proximate levitation of prices and subsequent economic expansion. Conversely, higher interest rates will discourage investment by heightening the cost of financing resulting in a lower demand and, thus, depressing prices and causing an economic constrain. Even if an investor decides to use his own funds exclusively, the measure of risk will be given by the equation between the underlying opportunity cost of investing versus the lending of those same funds for an interest profit, a process known as maximization of use of capital resources.
It all ultimately boils down to the business plan embraced by the singular market participant. If the objective is to make a ‘quick buck’ through flipping and short term speculation, the measured risk of the acquisition is considerably higher and, in ultimate analysis, no better option than the leveraged capital appreciation through investment holding.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Sunday, December 18, 2005


Total Destruction

Although most real estate transactions complete without a glitch, there are at times extreme circumstances that render finalization of a contract problematic, to say the least. One such instance is the frustration of a contract.

In generalities, frustration is a legal doctrine which provides that where the existence of a specific thing is necessary for the performance of a contract the duty to perform is discharged if the thing, for reasons beyond anyone’s control, is no longer in existence at the time of performance. After a contract has been made, but before it has been performed, it will be frustrated if events outside the control of the parties destroy the subject matter or change it in such a way that it becomes fundamentally different from that originally contemplated. For example, in Real Estate frustration would occur where a house was destroyed by fire or lightning after a contract of purchase and sale was entered into and prior to its completion. Unless the contract provides otherwise, such event will relieve the parties of their future obligations.

In practicality, the determinant factors of frustration are on the one hand the terms and construction of the contract read in the context of the then existing circumstances, and on the other hand the events which have occurred. In fact, to be more specific, special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. Frustration is not called into play merely by hardship, inconvenience or material loss. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing altogether from that contracted for. Obviously, frustration cannot be self-induced and the disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as it concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.

Typically, real estate contracts for the purchase and sale of residential interests in land provide that the risk of loss or damage to the subject property, or to the fixtures, equipment and personal property included in the sale, by fire or other cause,is assumed by Seller until the time of closing. However, contracts relating to the purchase and sale of industrial or commercial real property sometimes include optional provisions for the Seller, without any obligation on the Seller’s part to do so, to repair or replace damaged property entirely at his own discretion. In such instance, the Seller must notify the Buyer within a prescribed period of time of his intentions to replace or repair or to do otherwise. Should the Seller elect to go forward with the replacement or repairs, Seller must notify Buyer of the timeframe in which he will carry out the restoration work and the closing will be adjourned for this purpose and without cost or penalty to either Seller or Buyer.

If, conversely, the Seller does not elect to make the repairs or replacement, or if he elects to make the repairs or replacement but fails to complete the same before the adjourned completion date, a Buyer of an industrial or commercial interest is under the obligation to advise the Seller of his intention to either: i) declaring the contract of purchase and sale cancelled in which event the deposit or down-payment paid by Buyer shall be refunded to Buyer and neither party shall have any further obligation or liability to the other; or (ii) completing the purchase without reduction in the purchase price. In this instance, if Seller's insurance covers the loss or damage, Seller shall turn over to Buyer at the closing the net proceeds actually collected by Seller under the provisions of any insurance policies, to the extent that they are attributable to the loss or damage to any property included in the sale. In the eventuality that the Seller has not yet received such proceeds, Seller shall irrevocably assign to the benefit of the Buyer any future collection of any such insurance proceeds.

Clearly, frustration does not follow the general path of negotiating, performing and closing contracts of purchase and sale. Exceptional care must be taken by the parties – and their Agents - to make sure that any amended terms be carried out swiftly and fully for everyone’s best interest.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Friday, December 16, 2005


Real Estate Syndicates.

Contrary to the belief of some, a real estate syndicate has nothing at all to do with Don Corleone. Take it from me – or my name is not Luigi.

The real estate investment market is becoming more and more complex and, as a result, the traditional boundaries between different investment activities are changing. If someone is interested in buying or selling an interest in land, he generally seeks help from a real estate expert. If someone wants to buy or sell a common stock, he seeks the services of a securities expert. During the past decade there has been a growth of new forms of investment vehicles, the most common of which are known as ‘syndicates’. Syndicates are used in conjunction with many types of assets including real estate, R & D, purchase and management of hotels and motels, oil and gas exploration, livestock and agricultural development to name a few. Specifically as it refers to real estate syndicates, in its simplest definition this term is applied to any form of organization which allows two or more investors to participate in the ownership of an interest in real estate.

In the syndicate, the real estate asset is divided into two or more ‘investment units’ which are acquired by the individual investors. It is important to realize that the investment unit refers to the particular asset that is acquired by the investors, and not the underlying real property itself. The precise nature of the investment unit will depend on the form of the syndicate. In essence, investment units represent a fractionalized ownership of one or more interests in real property rather than direct ownership of an entire interest. While real estate syndicates are formed for a variety of reasons, the typical reason is to create a tax shelter. At the base of the syndicate is the relationship among investors. In all real estate syndicates there is some form of contract specifying the relationship intercurring between the individual investors and the underlying interest in real property.

Despite the multitude of forms, the structure of a real estate syndicate is invariably based upon one of the following six legal relationships: co-ownership, divided ownership, corporation, trust, general partnership and limited partnership. In addition, there are three central participants, or sets of participants, as follows:

[ ] the syndicator or promoter who creates the syndicate in the first place;

[ ] the syndicate manager who manages the syndication and who, often times, is the promoter as well;

[ ] the investors who purchase the investment units.

Moreover, a number of other experts are used that are unrelated to the syndication, such as managers, appraisers, builders, leasing agents and mortgage lenders. In some cases the syndicator may buy the property before creating the syndicate organization. In other cases, the syndicate investment units may be marketed before the real property is acquired.

The allocation of profits and expenses is typical of the real estate industry. For instance, there are ‘front-end’ fees to cover initial expenses for the formation of the syndicate such as:

[ ] mark-up profit on lands sold to the syndicate by the syndicator, if he advanced the initial capital to purchase real estate.

[ ] Real estate commissions on sales to the syndicate by the syndicator.

[ ] Percentage of the initial funds raised by the syndicator.

[ ] Fees for services rendered.

[ ] Fees for guarantees, such as cash-flow guarantees or construction guarantees.

As to the return and liquidity, each investor is entitled to the proportionate share of all leases, rents, resale of the syndicate interests in land and, of course, each investor will have to consider different tax shelter possibilities offered by the six different legal organizations of syndicates. Last but not least, liquidity is an essential factor from an investors perspective, in that investors may want to transfer investment units or portion thereof to someone else at a later date.

There are at times situations wherein a direct ownership in land is neither beneficial nor convenient, and an indirect ownership by way of investment units may be more appropriate. Likewise, as it is the case more and more with large hotel consortiums, original capitalization is done by selling ‘interest shares’ – the equivalent of investment units – to private investors, with the balance of the initial funding obtained by institutional lenders and secured by the real property. Nowadays syndicators have gone as far as raising money in the stock market by selling futures stocks of edifications to come, typically large high-rise and residential towers that cluster the downtown core of practically every metropolis in North America.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Wednesday, December 14, 2005


January 1, 2006: Changes in the Applicability of Strata Rental Restriction By-laws.

The Strata Property Act provides that developers and Buyers who purchased from developers are exempt from a Rental Restriction By-law under certain circumstances if a Rental Disclosure Statement was filed by the developer with the Superintendent of Real Estate. Under a valid Rental Disclosure Statement developers and first Buyers are able to rent their strata lots even though a Strata Corporation has passed a Rental Restriction By-law. A change, however, is going to take place effective January 1, 2006 in that as of this date only first purchasers from a developer are exempt from a Rental Restriction By-law. More specifically, s. 17.15 of the Strata Property Regulations reades as follows:

“Despite section 143 (2) of the Act, but subject to section 143 (1) of the Act, if a strata lot is conveyed by the first purchaser of the strata lot, and the strata lot was designated as a rental strata lot on a rental disclosure statement in the prescribed form under section 31 of the Condominium Act and all the requirements of section 31 of the Condominium Act were met, a bylaw that prohibits or limits rentals does not apply to that strata lot until the earlier of:

(a) the date the rental period expires, as disclosed in the statement;

(b) January 1, 2006.”

The effect of s.17.15 which has been in place since January, 2000 is limited only to those circumstances where a Strata Corporation has passed a Rental Restriction By-law, and Buyers who have not purchased directly from the developer (second Buyers on) have been exempted from the By-law. As of January 1, 2006 developers and first Buyers continue to be exempt from a Rental Restriction By-law if a valid Rental Disclosure Statement has been filed with the Superintendent of Real Estate. Many people in real estate and the media have somehow incorrectly interpreted that this legislative change to the Strata Property Act will prevent all landlords of strata properties from renting their units. While it is true that some strata owners will no longer be able to rent, January 1, 2006 is not ‘The End’ for rentals of investment strata properties in British Columbia.

Under the old Condominium Act if a Strata Corporation passed a By-law prohibiting rentals or restricting the number of strata lots that could be rented, the developer could continue to rent the number of strata lots shown on the Rental Disclosure Statement. A first Buyer could also rent for the period of time that the developer intended to rent. It was unclear, in the Condominium Act, whether subsequent or second Buyers could also rely on the Rental Disclosure Statement. Transitional relief for this clarification brought forth in the new Strata Property Act which was legislated in 2000 provided that second purchasers had a reprieve from a Rental Restriction By-law until January 1, 2006. Therefore also a second purchaser could rent a strata lot for the period of time the developer intended to rent according to the Rental Disclosure Statement, or until January 1, 2006.

On January 1, 2006 if your Strata Corporation has a Rental Restriction By-law in effect, the practical applications of this change are as follows:

1. if the rental prohibition By-law was passed within one year prior to January 1, 2006 the By-law will not apply to any strata lot until one year after the date it was passed. This may very well extend the time beyond January 1, 2006 and the strata lot owner, in this case, will not be in contravention of the By-law – but only until the one-year anniversary;

2. if the tenant occupying the strata lot is the same tenant that was in the strata lot the date that the Rental Restriction By-law came into effect, the tenant gets to stay beyond January 1, 2006 and the strata lot owner is not in contravention of the By-law;

3. when the tenant that occupied the strata lot at the time the By-law was passed moves out, the Rental Restriction By-law will not apply to that individual strata lot until one year after that tenant has moved out of the strata lot.

The same rule apply as of January 1, 2006 to by-laws limiting the number of units that can be rented out. For further information or clarifications feel free to e-mail me or post your questions on this blog.

Luigi Frascati

Real Estate Chronicle

Sunday, December 11, 2005


Rainscreen Technology

Vancouver, BC is the largest city in the province of British Columbia and the third largest city in Canada. It is surrounded by water on three sides and is nestled alongside the Coast Mountain Range. In addition to a spectacular natural scenery and a bustling metropolitan core as well as boasting one of the mildest climates in Canada, Vancouver records one of the heaviest rainfalls in the world. Typical rainfall patterns average 169 mm in November and December and 135 mm in February and March. In Vancouver anything can happen to you, but dying of thirst is not one such thing. Vancouver, furthermore, holds one other record – although this one is very seldom publicized on tourism websites: it is the leaky condo capital of Canada.

To be fair to my hometown, Vancouver is not by any means the only place in the world to have experienced this kind of problem. Toronto and Winnipeg have suffered of the same calamity, and so have Chicago and London, England. The problem here, however, is that a lot has been said and very little done to correct building envelopes imperfections common to so many high-rises, until the aggregate estimated cost of repairs to leaky condos has exceeded CAD $1 billion. Engineering, now, has come to the rescue changing things finally for the better with a new advance in building envelope construction and repairs. It is called Rainscreen Technology.

Most of the high-rise towers have been built using face-sealed outer wall assemblies. Developers refer to ‘cladding’ as the material or component of the wall assembly that forms the outer surface of the wall which is, thus, exposed to the full force of the environment. Face-sealed outer wall assemblies have invariably relied on a strategy for rain penetration control based on the elimination of holes through the cladding. As face-sealed walls are designed and engineered to deal with exterior moisture, in the form of rain, by sealing the exterior of the wall and preventing water from penetrating past the face of the cladding, if water does penetrate past the cladding it cannot readily drain out of the wall and remains, therefore, stagnant within the assembly. Here, water can damage moisture sensitive material and components. It is, therefore, essential to insure that no water penetrates the outer cladding.

The water management strategy created by face-sealed outer wall assemblies can work in certain conditions where the wall is in a protected location and receives little exposure to wetting. However, as we have so disgracefully learned first-hand here in Greater Vancouver, in most situations face-sealed walls do not perform well. This is so because it is extremely difficult to fully seal the exterior cladding and ensure that no water will enter. The increased exposure experienced by high-rise buildings further limits performance expectations for this type of wall.

In contrast, rainscreen walls manage water in a different fashion. The exterior cladding is still intended to deflect most of the water that contacts the wall. However, a cavity is provided behind the cladding. If water does penetrate the cladding it reaches the cavity and cannot move further into the wall assembly. Instead water in the cavity will drain down on the inside face of the cladding or on the waterproof membrane at the other side of the cavity, and it will be deflected out of the assembly at a cross-cavity flashing. In practice the cavity acts as a capillary break to remove the capability of water to stagnate inside walls. The end and most important result of all this is that with rainscreen walls it is not essential that the outer cladding be completely sealed. Imperfections are acceptable, and this will surely make a lot of developers happy – and a great many condo owners even happier.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Friday, December 09, 2005


The Evolution of Real Estate Market Value

As a real estate professional, I sometimes wonder how many opinions of values are out there when it comes to real properties. It certainly seems that the dollar value of an interest in land and its definition changes according to whom you ask – talk about subjectivism. There is a value to the owner, a value to the buyer, a market value, a realtor’s market evaluation, a development realized value, a property appraisal, a lender’s value, an assessed value, an estate value, an expropriation value, an insurable value, a taxation value, a latent value, an investment value, an economic value, a residual value, an actual value one can think off the top of the mind, enough to be tempted to take all these numerical values and go play the lottery.

In real estate, of course, no value is more important than market value - and no other factor is of a more ephemeral nature. This is so because real estate is an imperfect market. Although commonly and somewhat misleadingly referred to or otherwise thought of as one market, real estate consists of several, smaller markets each one of which is constantly subjected to and shaped in accordance to external influences and in direct function of economic variables. Externalities the likes of demographic variations, income fluctuations, trends and social preferences, technological progress and government policies – all have a bearing on the desirability of a certain real product and all are proximate factors affecting demand and, conversely, supply at any given time. As such, the numerical determination of market value is also shifting over time to follow the impact of externalities.

Market value, therefore, varies according to the interpretation of variables. Here are a few definitions:

[ ] The highest price estimated in terms of money which a property will bring if exposed for sale in the open market allowing a reasonable time to find a buyer who purchases with knowledge of all the uses to which it is adapted and for which it is capable of being used.

American Institute of Real Estate Appraisers

[ ] The amount that would have been paid for the interest in land if, at the time of its expropriation, it had been sold in an open market by a willing seller to a willing buyer.

Canadian Federal Expropriation Act

[ ] The highest price in terms of money that a property will fetch in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and assuming that price is not affected by undue stimulus.

Urban Land Economics Institute

The differences in these definitions reflect different assumptions concerning the conditions and circumstances under which the sales transaction will occur. They also introduce an element of subjective opinion. More specifically, they require a definition of ‘fair’, the degree of ‘knowledge’ that is required of market participants, what’s ‘prudent’ in a real estate market and how ‘undue stimulus’ affect price. Opinions relating to the meanings of these words within the context of a transaction are difficult to support with market data. However, these difficulties can be somewhat avoided by recognizing that a sales price represents ‘value in exchange’, but that there are also other kinds of value which do not necessarily reflect price. The study of how human and social biases affect economic decisions and how such decisions, once taken, affect market prices, returns and allocation of resources are the subject of a very specialized branch of Economics known as Behavioral Economics. There are three main themes in Behavioral Economics:

[ ] Heuristic – from the Greek ‘eureka’ which means “I find”, heuristic is the art and science of discovery and invention. As applied to Behavioral Economics in real estate, heuristic lays out the tenet that people often make decisions based on approximate rules of thumb, not strictly rational analyses. This is due to how people are affected by biases, especially cognitive biases, that is distortions in the way reality is perceived.

[ ] Framing - the way a problem or decision is presented to the decision makers will affect their action.

[ ] Market Inefficiencies – defined as outcomes in the market that are contrary to expected behavior based upon prior economic models. These would included mispricing, non-rational decisions and decision-making processes, and market anomalies from a behavioral perspective.

Herd behaviour is one important subject of scrutiny in Behavioral Economics. Herd behaviour refers to situations wherein a group of individuals react coherently without there being any co-ordination between them. Such a group is called a herd. The impact of herd behavior can have very long and sometimes devastating consequences. For instance, the fear of a real estate bubble – although economically unfounded – can have a very real impact if a large enough group of market participants believe in it in the same or similar lapse of time. In such a circumstance, demand for products would be affected clearly to the point of causing a marginal or absolute price depression. Groupthinking, like herd behavior, involves a group of people where each individual member of the group attempts to conform his or her opinions to what they believe to be the consensus of the group. In a general sense this seems to be a very rationalistic way to approach the situation. However this results in a situation in which the group ultimately agrees upon a certain collective course of action which each member might individually consider to be unwise. This happens in strata general meetings where the individual agrees to a certain conduct for the benefit of the condominium which, ultimately, turns out to be wrong. Risk aversion – defined as a participant’s willingness to accept a lower, expected payoff in exchange for a more predictable outcome – is another important facets of Applied Behavioral Economics. In real estate, this would translate for instance in a seller of a leaky condo deciding to sell at a loss to avoid confrontation and emotional strains as opposed to go through the whole process of waiting for the real property to be repaired – with the ensuing stress and ongoing litigation – so as to sell later on at a higher price. And, finally, cost of opportunity is scrutinized in Applied Behavioral Economics as the worth of a benefit forgone in a decision-making process vis-à-vis the cost of actualization of a certain decision. In simpler terms, how much is the net return obtained by, say, the act of selling an interest in land minus the cost of opportunity of not selling it.

Real estate, as we all know, is more a matter of emotions than anything else. Participants make their decisions based upon the extemporaneous factors of the moment, and understanding these decision-making processes will help realtors in bringing buyers and sellers together and lawyers in ironing out differences, when circumstances warrant, in a court of law.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Thursday, December 08, 2005


Interest Rates and the Hidden Cost of Globalization

There is more to higher interest rates than domestic consumption. Young readers may barely remember this, but only a short fifteen years ago or so the world looked much, much differently. The political landscape consisted of two powerful, monolithic assemblies of nations: us - the ‘Free World’ - and them – the ‘Communist Bloc’. The United States and Western Europe formed the bulk of the countries of the Free World while Soviet Russia, Eastern Europe and Maoist China formed the bulk of the Communist Bloc. As to the remainder of the countries which did not belong either to the Free World nor to the Communist Bloc, they were collectively referred to as the Third World – which included those nations such as Saudi Arabia who were aligned with the Free World on Mondays, Wednesdays and Fridays and with the Communist Bloc on Tuesdays, Thursdays and Saturdays. And then there was the Fourth World – also known as the No Brand World – which neither the Free World nor the Communist Bloc wanted to touch with a ten-foot pole.

Then somebody in Russia began to whisper the words glasnost and perestroika (it was Gorbachev who started first), then somebody in Germany began to yell Vereinigtes Deutschland and to make a long story short in the round of five years there was no more Iron Curtain and no more Soviet Russia. It was the remarkable end of an era of political attrition and economic division lasted more than fifty years, and the onset of a new period in the history of humanity now referred to as globalization. Globalization is unquestionably a democratic concept that puts all mankind on the same platform. In Economics we have a special sentence to describe this process of equalization: we call it ‘Democratization of Wealth’ . The distribution of wealth throughout all nations would be a flawless concept – in a perfect world, that is. But as the younger readers I was referring to before may have began to discover already, Planet Earth is not a perfect world. There is a hidden cost to globalization that is beginning to manifest itself more and more in our daily lives. Increasing interest rates which are now beginning to affect, first and foremost, the real estate market are possibly one of the best examples of it. Not because real estate is a special market per se, but because real estate involves the buy and sell of big-ticket items.

Here is the problem: there are on the world stage new economic players, which by and all in itself is not a new phenomenon. Since the early Nineteenth century, many countries have, at different times, emerged as major forces on the international economic scene. During the 1830s, productivity gains associated with the Industrial Revolution launched the United Kingdom as an economic powerhouse. Germany and the United States followed in the latter part of the Nineteenth century, by adopting the new technology of the time, as did Russia for a while before the First World War. Through the 1950s and 1960s, Japan emerged from the Second World War to become a major economic power. Then Korea took off in the 1970s, followed by other so-called "Asian tigers" during the 1980s and 1990s. Now, it is China's turn. And India is not far behind.

What differentiates China and India from these other countries is their sheer size. Together, these two countries represent close to 40 percent of the world's population. By comparison, Japan accounted for only 3 per cent of the world's population at the time of its emergence as an economic force. What is also breathtaking is the speed of China's rise to economic prominence. In 1980, the Chinese economy produced less than 3 percent of global output. By 2003 this share had risen to more than 13 per cent, roughly half that of the United States. In fact, China is now the fourth-largest exporter in the world, having surpassed Canada in 2001 and the United Kingdom and France in 2002. As for India, while its economy is also very large, equivalent to about a quarter of that of the United States, it is not yet a major global exporter. But, with advancements in communications and with a large number of well-educated workers, India is establishing itself as a significant and growing presence in the international service industry.

Not surprisingly, many perceive the growing competition from China and India as a significant threat. And some are wondering how anyone can compete against countries that have such huge pools of cheap labor and access to the latest technologies. It was a combination of demand for inexpensive products and domestic competition that has spurred companies to open subsidiaries to produce goods and services in China and India so as to take advantage of an almost inexhaustible pool of cheap human resources. A process this, that has come to be known as ‘outsourcing’. Outsourcing, from a strict economic perspective, is not an entirely negative phenomenon. Robust economic growth in Asia, which is lifting hundreds of millions of people out of poverty, is creating more demand for goods and services from the industrialized countries, thus providing a much-needed boost to global economic growth. Indeed, preliminary data for 2004 suggest that China may have vaulted into third place among the world's most important importers, behind only the United States and Germany.

This fact notwithstanding, however, the end result of a supply of outputs created in China and India destined to quench the huge demand of the preeminently American consumerism has generated large trade imbalances. The flip side of these imbalances has been a sharp rise in the net foreign liability position of the United States and a massive accumulation of foreign exchange reserves by the Asian countries. China has amassed more than US $450 billion of reserves. India too has seen a marked rise in international reserves, to roughly US $150 billion. Even more striking, as of the end of 2004, all of Asia (including Japan) had accumulated US $2.1 trillion in foreign exchange reserves. Subtracting this quantity of Dollars from the economic monetary cycles forces the U.S. Government to borrow more and the Federal Reserve System to print and lend more money with the deleterious effect of diminishing the purchasing power by weakening the strength of the currency. Think of a glass of wine where you keep on adding water. Higher international demand for American Dollars created by outsourcing, foreign savings, fixed exchange rates and a huge trade imbalance account for a large proportion of the refueling of domestic inflation and the consequent interest rate increases, the effect of which is now patently felt all over real estate markets in North America.

Luigi Frascati

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Real Estate Chronicle

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