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Companies most levered to a decline in Vancouver housing prices


cman
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hello all.  it is absolutely clear that there is a housing bubble in vancouver that will result in tears.  so i have a few questions for the canadian's on the board:

1) which companies are making tons of money thanks to currently high prices?  home goods retailers, real estate brokerages, construction firms, furniture stores/manufacturers, local high-end restaurants/retailers?

2) which companies have balance sheet exposure to real estate prices? 

thanks!

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

 

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

 

 

I'm not suggesting that would prop their market up. I was just asking the question, b/c i don't know the answer (& don't have the time to research it this morning) and i was curious.

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

 

 

I'm not suggesting that would prop their market up. I was just asking the question, b/c i don't know the answer (& don't have the time to research it this morning) and i was curious.

I am intensely interested in others ideas here. The amt of downpayment required is typically a min of 10%. I can think of no way to profit. If you are unside down on your mortgage personal bancruptcy is the only way to escape your liability. Genwort is a private mortgage insurer and will suffer from a sustained down turn in home prices.
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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

 

 

are you sure Florida has recourse?

 

http://www.loansafe.org/forum/foreclosure-laws/4130-recourse-v-non-recourse-states.html

 

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

 

 

Full recourse, afaik. The lender comes after you for any shortfall and can put you into bankruptcy.

 

Some high LTV mortgages have to be insured by CMHC (the govt-owned Canadian Mortgage Housing Corp). This insurance protects lenders. I am not sure what happens when a homeowner defaults and CMHC pays out - can they come still come after the homeowner for the loss?

 

 

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

 

 

are you sure Florida has recourse?

 

http://www.loansafe.org/forum/foreclosure-laws/4130-recourse-v-non-recourse-states.html

 

 

Yes.

 

The banks can pursue deficiency judgements in Florida for up to 20 years (if they renew their right after the first ten years).  

 

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

What about Caif and Ariz? Recourse?

 

Was talking to someone yesterday about buying investment property in the US and I was told that it is impossible to get mortgages on investment properties (for individuals) these days. Ok for vacation properties but not properties bought for rental. Does this sound right to you?

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I don't doubt the Vancouver area is overpriced, but doesn't Canada have recourse home financing along with, generally, large down payments?

 

What terms of recourse does the lender have in Vancouver compared to Florida which also has recourse financing?  And Nevada which does too?

 

What about Caif and Ariz? Recourse?

 

Calif is famously non-recourse.  Don't know about Ariz.

 

I just have Florida stuck in my head because I keep hearing people cite non-recourse as a major reason we had reckless borrowing.  Actually the Australians like to say that because they have recourse lending their borrowers will be prudent (but in reality they are doing 3% down financing).  Florida shows that recourse doesn't seem to matter much when it comes to prudence.

 

Was talking to someone yesterday about buying investment property in the US and I was told that it is impossible to get mortgages on investment properties (for individuals) these days. Ok for vacation properties but not properties bought for rental. Does this sound right to you?

 

I have been playing phone tag with a Comstock Mortgage guy in Sacramento for the past week.  When I finally get through to him I'll be able to tell you.  I'm looking for multifamily properties. 

 

 

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Mainstreet Equity is one of the most levered real estate companies in Canada with a fair amount of exposure to Vancouver.  I've said for a while this sucker is going to blow if rates rise or the market turns.  Cheers!

 

 

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Mainstreet Equity is one of the most levered real estate companies in Canada with a fair amount of exposure to Vancouver.  I've said for a while this sucker is going to blow if rates rise or the market turns.  Cheers!

 

 

Parsad thanks very much for the tip I will start digging.
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Guest Hester

Mainstreet Equity is one of the most levered real estate companies in Canada with a fair amount of exposure to Vancouver.  I've said for a while this sucker is going to blow if rates rise or the market turns.  Cheers!

 

 

 

Thanks for the idea. Does anyone know of a place where I can get a list of Vancouver/BC public bank or REIT stocks?

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Mainstreet Equity is one of the most levered real estate companies in Canada with a fair amount of exposure to Vancouver.  I've said for a while this sucker is going to blow if rates rise or the market turns.  Cheers!

 

 

 

Thanks for the idea. Does anyone know of a place where I can get a list of Vancouver/BC public bank or REIT stocks?

Hester I am going to assume that you are not one of the minions of the Sith Lord since others here have vouched for you. There exists no public BC reits or banks (They all went bust in the last cycle) there are only three  public companies which are direct plays on Vancouver RE which I am aware of Mainstreet is one which I am digging at now another is Madison Pacific Properties(MPC) which I was a shareholder of at one point and can vouch for the integrity of management they are VERY shrewd and scrupulously honest and have never sold a share and run an extremely lean operation do not short you will be wrong and another Wall Financial which is very tightly held and not a good canidate for any investment. From just spending 1/2 hour looking at Mainstreets filings its worth further exploration. If I could sell short the credit unions in BC I would in a heartbeat and Genworth will certainly endure some serious stress if residential real estate heads south, from the little I have scene and read it appears that the Australian mkt may provide more opportunities as the bubble appears bigger and more widespread and has perhaps more opportunity for profit. The Aussie mkt and the Vancouver mkt should pop at the same time for the same reasons, even tho they are about as far apart in the world as two countries can get . www.sedar.com is the source for company filings in Canada good luck and good hunting.
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Guest Hester

Mainstreet Equity is one of the most levered real estate companies in Canada with a fair amount of exposure to Vancouver.  I've said for a while this sucker is going to blow if rates rise or the market turns.  Cheers!

 

 

 

Thanks for the idea. Does anyone know of a place where I can get a list of Vancouver/BC public bank or REIT stocks?

Hester I am going to assume that you are not one of the minions of the Sith Lord since others here have vouched for you. There exists no public BC reits or banks (They all went bust in the last cycle) there are only three  public companies which are direct plays on Vancouver RE which I am aware of Mainstreet is one which I am digging at now another is Madison Pacific Properties(MPC) which I was a shareholder of at one point and can vouch for the integrity of management they are VERY shrewd and scrupulously honest and have never sold a share and run an extremely lean operation do not short you will be wrong and another Wall Financial which is very tightly held and not a good canidate for any investment. From just spending 1/2 hour looking at Mainstreets filings its worth further exploration. If I could sell short the credit unions in BC I would in a heartbeat and Genworth will certainly endure some serious stress if residential real estate heads south, from the little I have scene and read it appears that the Australian mkt may provide more opportunities as the bubble appears bigger and more widespread and has perhaps more opportunity for profit. The Aussie mkt and the Vancouver mkt should pop at the same time for the same reasons, even tho they are about as far apart in the world as two countries can get . www.sedar.com is the source for company filings in Canada good luck and good hunting.

 

Thanks, I am very unfamiliar with BC/Vancouver other than what I've read about current real estate prices.

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I have been playing phone tag with a Comstock Mortgage guy in Sacramento for the past week.  When I finally get through to him I'll be able to tell you.  I'm looking for multifamily properties. 

 

Thanks! Care to share your views on relative merits of investing in multifamily properties vs single family? Better yields, better financing terms, tenant diversification, economies of scale in mgmt?

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Mainstreet Equity is one of the most levered real estate companies in Canada with a fair amount of exposure to Vancouver.  I've said for a while this sucker is going to blow if rates rise or the market turns.  Cheers!

 

 

You haven't gone over to the dark side, have you?  ;D JK.

 

The property bubble has not extended to multifamily rental apartment properties which, afaik, remain well supported by yields. Also, most of them still transact below replacement cost as a result of which supply remains constrained. I believe their leverage looks ok if their properties are valued at market rather than book and much of their debt is fixed rate and CMHC insured (still not quite sure whether this means it is non-recourse). It may not be an obvious short imo.

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It took me lsess than 30 minutes in reading the companies filings to discover some red flags. There is a lot of leverage and the company has piled on leverage on top of leverage in a very short period of time . The board appears consist of the ceo, a relative the co. lawyer and 2 others who have no large position. Ceo received largish and growing salary bonuses usual options and co has loaned money to him to buy equity. Rising interest rates would kill this thing I think and if co is so undervaled as co states in filings why not just agrresively buy stock and sell property seems a pretty low hanging fruit. Plus ceo earns commissions on purchases co makes in addition to other compensation.  I think I will take a drive out to Abbotsford to look at some of their property. They do have one shareholder who has shown up who does appear to be informed

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I have been playing phone tag with a Comstock Mortgage guy in Sacramento for the past week.  When I finally get through to him I'll be able to tell you.  I'm looking for multifamily properties. 

 

Thanks! Care to share your views on relative merits of investing in multifamily properties vs single family? Better yields, better financing terms, tenant diversification, economies of scale in mgmt?

 

Yes, better yields.

Yes, tenant diversification.

Not sure yet about financing terms.  Ideally, best loan would be 0% down negative amortization, but what a pipe dream that is.  FannieMae offers conforming 30 yr fixed loan if less than 4 unit property.

Not sure about economies of scale in mgmt.  I will be going with a property manager though.

 

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It took me lsess than 30 minutes in reading the companies filings to discover some red flags. There is a lot of leverage and the company has piled on leverage on top of leverage in a very short period of time . The board appears consist of the ceo, a relative the co. lawyer and 2 others who have no large position. Ceo received largish and growing salary bonuses usual options and co has loaned money to him to buy equity. Rising interest rates would kill this thing I think and if co is so undervaled as co states in filings why not just agrresively buy stock and sell property seems a pretty low hanging fruit. Plus ceo earns commissions on purchases co makes in addition to other compensation.  I think I will take a drive out to Abbotsford to look at some of their property. They do have one shareholder who has shown up who does appear to be informed

 

I have not looked into the corporate governance issues yet but the numbers do not appear so bad to me (maybe not good enough to buy but not bad enough to short, especially considering the yield).

 

Btw, they did buy back >4m shares in 2009 - smart move. Result is their share count has stayed flat while their revenue/share have risen >50% over 4 years.

 

Their reported leverage ($400m debt, $400m assets, and negative equity) is scary but misleading because their porperties are held at cost less depreciation. If you take their rental income of $53m and apply a conservative 8% cap rate, you arrive at a fair value of $660m, implying a LTV ratio of 60% - not excessive for this type of business.

 

I agree that they would hurt from a rise in interest rates but most REIT type businesses would. However, this would be alleviated by their very high proportion of fixed rate CMHC insured debt. Also, if your assumption of higher interest rates is predicated on a rise in inflation, they may have an offsetting rise in rental income (which is inflation index controlled, I believe). Anyway, their current debt service of $20m is covered by about $30m in net rental revenue.

 

I have to say my initial impressions are that it is quite well run. Besides, the segment of the market they operate in is quite different from the million dollar housing and condo markets in Vancouver that have seen the most speculative and frothy activity. They are dealing in $100K per unit properties which rent out for perhaps half the absolute rent of the high 6 figure condos which probably yield less than 3% gross. (Using book, MEQ's portfolio's gross rental yield is about 15%!).

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It took me lsess than 30 minutes in reading the companies filings to discover some red flags. There is a lot of leverage and the company has piled on leverage on top of leverage in a very short period of time . The board appears consist of the ceo, a relative the co. lawyer and 2 others who have no large position. Ceo received largish and growing salary bonuses usual options and co has loaned money to him to buy equity. Rising interest rates would kill this thing I think and if co is so undervaled as co states in filings why not just agrresively buy stock and sell property seems a pretty low hanging fruit. Plus ceo earns commissions on purchases co makes in addition to other compensation.  I think I will take a drive out to Abbotsford to look at some of their property. They do have one shareholder who has shown up who does appear to be informed

Thanx I just skimmed thru most recent quarterly and one annual report looking for things that seemed problematic I will parse the numbers and drive by some properties and will likely try to compare it to some of the residential reits that are out there and make a decision on that basis.

 

I have not looked into the corporate governance issues yet but the numbers do not appear so bad to me (maybe not good enough to buy but not bad enough to short, especially considering the yield).

 

Btw, they did buy back >4m shares in 2009 - smart move. Result is their share count has stayed flat while their revenue/share have risen >50% over 4 years.

 

Their reported leverage ($400m debt, $400m assets, and negative equity) is scary but misleading because their porperties are held at cost less depreciation. If you take their rental income of $53m and apply a conservative 8% cap rate, you arrive at a fair value of $660m, implying a LTV ratio of 60% - not excessive for this type of business.

 

I agree that they would hurt from a rise in interest rates but most REIT type businesses would. However, this would be alleviated by their very high proportion of fixed rate CMHC insured debt. Also, if your assumption of higher interest rates is predicated on a rise in inflation, they may have an offsetting rise in rental income (which is inflation index controlled, I believe). Anyway, their current debt service of $20m is covered by about $30m in net rental revenue.

 

I have to say my initial impressions are that it is quite well run. Besides, the segment of the market they operate in is quite different from the million dollar housing and condo markets in Vancouver that have seen the most speculative and frothy activity. They are dealing in $100K per unit properties which rent out for perhaps half the absolute rent of the high 6 figure condos which probably yield less than 3% gross. (Using book, MEQ's portfolio's gross rental yield is about 15%!).

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Thanx I just skimmed thru most recent quarterly and one annual report looking for things that seemed problematic I will parse the numbers and drive by some properties and will likely try to compare it to some of the residential reits that are out there and make a decision on that basis.

 

 

Let us know what you come up with.

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  • 1 year later...

Flash forward a year, and it looks like the Vancouver real estate bubble is now in the early stage of bursting. Even with mortgage rates still at record lows, it seems the party is finally over. There's just nobody left to buy.

 

Normally June is the start of the busy summer season, but this year June property sales hit a 10-year low, down 28% from last year and 17% from last month. Inventory of listed homes is swelling rapidly. And 38% of listed homes have now had at least one price drop.

 

With much tighter government rules on mortgage lending coming into effect next week, it seems like this will only accelerate. If so, the next 2-3 years are going to be very painful for a lot of Vancouver homeowners, especially recent buyers who took advantage of now-extinct 40-year amortizations and cash-back down payments.

 

Will be interesting now to see if this spreads to the rest of Canada, particularly Toronto. 

 

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