A Tale of Many Markets
They are the best of times and the worst of times, depending on whether you’re buying or selling
by Max Fawcett
Canadian homes, it is widely agreed – at least, by those who aren’t directly employed in the sale of them – are overpriced right now. After all, it’s not just outside observers like the OECD or Pimco that are suggesting prices may have run ahead of the fundamentals. Even the people writing the mortgages think a correction could be inevitable. In February, a TD economist warned that Canadian housing was overvalued by 10 per cent, but that a correction in prices could hit 25 per cent in response to either a macroeconomic shock or a sudden increase in interest rates.
Recreational properties, on the other hand, have already endured a substantial correction of their own. Take Sylvan Lake, which Edmonton Realtor Robert McLeod describes as the “quintessential Alberta recreational property market” and uses it as a barometer for the market as a whole. “If you go back to 2009, your average lakefront property – a nice one, more than a cottage – was about $1,125,000. In 2013, that price adjusted to $750,000.” The same story is true in virtually every market popular among Albertans. In B.C.’s Okanagan Valley, prices have fallen as much as 50 per cent, while a string of high-profile projects went belly up. And while there’s been less carnage among developers, Gulf Island properties haven’t fared any better when it comes to resale pricing.
That’s been bad news for people – many of them Albertans – who bought at or near the peak. But for those looking to buy a slice of heaven in 2014, it presents an interesting scenario. Just ask Ozzie Jurock, a high-profile B.C. real estate expert and investor. “There’s always two sides to every story,” he says, “and the buyer right now I think has some spectacular opportunities – as long as they’re careful.” And while Canadians looking to score a deal have looked south in recent years, they’re beginning to turn their gaze back north, where those favourable prices and a weaker Canadian dollar make buying local the increasingly prudent thing to do. “Those same people are now looking at what’s in our own backyard,” McLeod says. “People have come back to that market.”
Why did they leave in the first place?
And why did the value of recreational real estate in Western Canada crater while that of homes in its larger metropolitan areas practically soared? In part, McLeod says, it’s because they don’t trade on the same metrics. “From 2008 through 2011 the recreational property market was just destroyed in Alberta because rec properties are typically fuelled by those with excess cash and who own their own business. It’s not just the person who makes the regular salary who’s going to save up and buy it. People need to feel like the economy’s buoyant, that there’s growth.” And with the prices of Alberta’s key commodities showing strength and merger and acquisition activity returning to the energy sector, that buoyancy is back.
But despite that, McLeod doesn’t think buyers should be looking at a recreational property as an investment. “I don’t see people saying ‘I want to buy this cottage because I want to make a 14 per cent return,’ ” he says. “That has absolutely no bearing on it whatsoever. And I say to anyone that’s ever looking at buying recreational or resort property as an investment that it’s completely foolish. The resort and the recreational market is tied to a completely different economy – an economy based on confidence.”
Jurock agrees. “I find that most people always think they’re going to have an investment and also something for personal use. In my experience, it just doesn’t work. I used to have a condo at Whistler, and my friends would always ask, ‘Can I stay with you?’ And I’d say, ‘Well, don’t you have your own unit?’ And they’d say, ‘Yeah, but I’m getting $300 a night.” And perhaps that’s the biggest lesson prospective recreational property owners should draw from the last few years, one that saw a flurry of investment drive up prices only to have them come back down. Recreational real estate is an asset, not an investment, and those who treat it as such tend to do better than the rest.
Now, if we could just get people to think that way about their homes.
Not Your Father’s Cabin
Robert McLeod’s first recreational property wasn’t actually his, of course. It was a cottage on Wabamun Lake that belonged to his grandfather, who bought it in the 1940s, unloaded it in the 1980s and did hundreds of hours of work on it along the way. “It used to be that at the end of June when the kids were done school, everyone packed up and went to the lake until the day before school. And back then, with no satellite TV or cellphones or Internet, it was easy to be away.”
Those days, he says, are over – and with it the kind of recreational real estate people used to prefer. “Nowadays, a lot of the consideration for me is around how far away I am, how quickly I can get back home and whether I can do the things out there that allow me to work remotely.” He’s not alone, either. In our relentlessly connected world, getting away from things is increasingly difficult, and it may not even be desirable. Likewise, given both the capital cost and the time commitments needed to justify such investments, preferences are shifting away from seasonal places and towards more all-purpose, year-round properties.
That’s why, in the place of the rustic fixer-upper four hours away from town and uninhabitable between October and April, people are increasingly turning to pieds-à-terre that are close enough to the city but far enough to get away from it. “When you own your own business and you work 24-7, you just want to get out of town,” McLeod says. “You want to go somewhere that’s just far enough that you can decompress.” And so, when he bought his own recreational property in 2008, he picked a place that was an hour’s drive from Edmonton, and one that didn’t require much in the way of sweat equity. “I know I can get there on a Friday night after work, be there when the sun’s still up and when I go out there I can relax.”
Best of the west
There was a time, during the frothier parts of the last oil boom, when it seemed like everyone was buying recreational property west of the Rockies. Those days are over. “Be it the Sunshine Coast or Vancouver Island or the Kootenays or the Okanagan, they’ve all taken it on the chin,” says Ozzie Jurock. “Some were overbuilding, and some, like Kelowna, got too expensive.”
And while most properties got hit, it was the resorts and both the companies developing them and their early investors that got whacked the hardest. Look at what happened to the Wyndansea Oceanfront Golf Resort in Ucluelet, B.C., a proposed development valued at $650 million once fully built out that would feature an 18-hole Jack Nicklaus-designed golf course, a luxury condo development, a five-star hotel and a series of oceanfront residential lots. Only the service infrastructure for the lots ended up getting built, and the developers, who ran into the teeth of the 2008 recession and still owed their lenders $24 million, tried to sell it for $37 million in 2009. This past April, it was still on the market – re-listed for $8 million. It’s hardly the only resort project that got sideswiped, either. “You look at Tobiano, one of the finest golf courses in a great area [Kamloops] and they saw their resort go for under $3 million,” Jurock says. “Recreational is OK, and it’s coming back in general, but the resorts are not.”
So, is it worth trying to do some bargain-hunting in B.C.’s bombed-out recreational property market? Absolutely, Jurock says – with a few important caveats. He says that so-called “full-use, 24-7” properties have done fine and will probably do even better in the years to come. There are those sorts of properties located throughout the Kootenays, he says, that sold for $300,000 five years ago and are listed for barely more than half that today. There is, for example, a duplex in Kimberley – a fully-furnished 980 square feet with two bedrooms, two bathrooms and a hot tub – that he thinks epitomizes the kinds of deals that are out there. “It sold originally at $250,000, and it’s now available at $160,000. And at $160,000, it’s a smoking deal.”
About those caveats, though. First, he thinks anything that involves timesharing or partial ownership is a waste of your time – and probably your money. “Quarter shares have gotten killed,” he says. “They’re down 40 per cent on average.” Second, he says that buyers should avoid buying into the second phase of an existing resort. “Phase 1 is focused on use, while Phase 2 has 28 days in the winter and 28 days in the summer. That sounds good on paper, [but] in 12 years the values in those units have not gone up.” Those Phase 2 properties also tend to have higher marginal tax rates than the Phase 1 equivalents, and a resale market that’s “just not there.” Third, and most importantly, he suggests staying away from hotel projects at all costs. “The worst is the hotels – the hotels have collapsed between 60 and 70 per cent.”
It’s a mistake to look at B.C.’s recreational property market as a single market, or even an aggregation of a few of them. Instead, he says, it’s about the deal, and buyers need to make sure it makes sense for their needs. “There are opportunities here,” Jurock says. “And the funny thing is that when things were at the high, everything seemed to be wonderful, and when they’re at their low we back off further. But from an investment point of view, you have to be careful.”