January 2018- Reversal of Fortunes?
The second half of 2017 was met with a series of unfortunate events: A sudden $2,460 dental bill, $11,880 special assessment, $895 legal fees, $1,500 from a broken windshield (which broke again by a rock at this time of writing) and damaged bumper, and a woman who drove me crazy and made me wonder how people with such terrible attitudes existed. The construction season was unusually slow; 2017 income was much lower than anticipated. Overall in the second half of that year, my net worth moved little – I just hardly broke even- though debts actually rose, as the net worth gains were due to payments towards principals.
As the construction season came to a close, I went back to city liquid waste hauling. It was good for 3-4 weeks until the client had to wait for its prime contractor to renew a contract. Then it also hired 2 new drivers from its social circle, in anticipation of more work for all of us. Unfortunately that did not happen, and November and December income ended up being abysmal. One more project then came to life due to start on Jan 3, nevertheless was quickly cancelled due to road bans resultant from unexpectedly warm weather.
As the first week of January came to a close, the client passed my name onto his friend who owned an oilfield services company out of Valleyview, Alberta. The first two work offers I declined, as I prioritized my school and the more stable (even if less) city income. One to work in Saskatchewan was somewhat tempting at first, but upon doing the math, the downtime of travel and days off offset the additional financial benefit of working out of town down to approx. $350/week. This was an amount obtainable with a second in-town part time job, while living happier being able to sleep in my own bed, and avoiding the bitterness of drilling rig work. It did not make sense.
However, with almost an entire week of 0 earnings, my situation became more dire, especially with decreased cash reserves after Christmas time with family and friends in BC. I also was running out of time to reduce my debts by $30,000 to close on my new pre-construction condo- and that does not yet even get close to retaining my 1 new property/year objective. So finally I took the 3rd offer to go to an approx. 45 day Fracking Job approximately 1 hour northwest of Fox Creek for approx. $20,250 compensation- where shelter, fuel, and a company pickup were supplied. From experience, like the women of the tradesmen-dominated oilfield life, the promise of work and money can disappear just as quickly.
Today as I write here on the Frac site, I’ve been up for about 20 hours, with 4.5 hours remaining in my shift. The morning I’ve spent attending an appointment, packing, and travelling to Valleyview. Then I’ve offloaded my supplies in the well shack I’m staying in for the job. It feels like I am in the distant corner of civilization here with occasional semi trucks disrupting the eerie silence of deep, cold forest. Being an hour away from the paved highway, even getting supplies and food is going to be difficult. The gravel and snow roads are riddled with ice; it’s easy to hit a ditch or snow bank without subtle care.
The Frac site is different than most of the sites I’ve been to to-date. There are many detached trailers of chemicals lined up and supplying materials for the fracking operation. Then there are the tanks and mixers that contribute to the fracking process. The working population is the classic oilfield one- dozens of older grown men among two women, with strict, aggressive, cut-throat management. The prime oil company is one I’ve never heard of; I assumed a smaller exploration, high-risk one. Out of curiosity I looked at its financial statements and stock and my predictions are right- it is within the few hundred million marker capitalization rate with a significant portion of its assets bought with debt- which explains the sharp share price drops as of late when losses are also reported. In fact, it’s experienced almost a 50% loss in just the past 12 months, despite significantly improved oil prices.
I am more strongly considering real estate in BC lately, unsatisfied with the low appreciation rates in Alberta and the lagging rents in wake of the recession. The new OSFI stress testing regulations also introduce a new opportunity.
The stress test isn’t new – it’s just now applied to those not even being insured by CMHC.
In Alberta when it was first introduced, the detached housing market stagnated as the first time or other low-equity homebuyers were forced to buy cheaper homes. BUT in turn, the duplexes and townhomes about 15 – 25% cheaper appreciated by 7% YoY. Money doesn’t disappear; it just shifts where it gets its worth.
Similar idea for BC minus the stagnation part; the lower priced homes took a dramatic jump in price. Even in Coquitlam (1 hour outside of Vancouver, where the average HOUSEHOLD income is about $51,000/yr), condos appreciated by 20-25% YoY at times; a low $300s condo last year is now in the mid $400s+. A family member’s 2008 townhome (1600 sq ft.) appreciated from $400,000 – mid to high $700s in just 4 years, and supply is little to none.
Above a certain price point where CMHC and other higher-ratio mortgages aren’t typically used, these policies won’t do much as they are unaffected. Even CIBC, who holds about 60% of Canadian mortgages, admitted about 9/10 of its mortgage debt balance sheet is largely unaffected.
– First-time and other low-equity homebuyers looking to collect 20% downpayment previously as a means to dodge CMHC and avoid the first stress test rule, or just need it to get into the home they want.
– First-time or other novice real estate investors reliant on smaller downpayments >=20%.
– Tradespeople and other employees/businesses with a significant exposure to lower-priced homes often bought with debt products affected.
For a more precise analysis, using GVA as the example, the average household income is approx. $71000, and average BC non-mortgage debt $23522. Income suggests a $2367/mo. total debt serving allowance. While we don’t have an exact breakdown of the BC household debt, being lenient and assuming it is just standard good credit auto loan debt (72 months, 3.9%) and there is 0 credit card debt (where 3% of the balance is treated as monthly debt service), this is approx. $320/mo.
So really the average household has around $2000/mo. to play between mortgage payment, property taxes, and 1/2 of condo fees and utilities… about $375,000 of mortgage room; $468,750 of home with 20% down with the new rules; $473,000 of mortgage room and $591,250 of home under old rules. This is a 25% decline in mortgage room. Based on these numbers, homes around the $400 – 500s bracket may actually appreciate more aggressively due to the sudden rush of mortgage funds from average 20% downpayment buyers. But, beyond that bracket, appreciation may slow, depending on how much cash the homebuyer/investors actually have to play- which we or the government do not know with accuracy. Really what will happen, time will tell…
It’s laughing stock for real estate investors who have the risk appetite and balls to go into less of a seller’s market (e.g. common 1-2br condos) that sits around that $400 – 500K bracket.