Tuesday, March 27, 2007

Perfect Storm Brewing?

There's been a great discussion of current market trends over on Victoria's Truth this weekend. Some of the generally accepted facts are that current prices have reached an affordability crisis, that an increase in inventory is leading to a softening in the market (if it's still going up, it's not happening quickly, some actually think the downward trend has started), and that it will take a significant economic event like an increase in interest rates or a recession to trigger a market correction.

This post is about a significant economic event brewing right here in Victoria that already has municipalities screaming not in my yard! Sewage Treatment. Whether or not you think it's necessary is irrelevant to the economic impact that a major infrastructural project like this can have on the group of 13 that make up the CRD. Estimates put the average costs to the municipal taxpayer at $500/year. My guess is once it actually gets built, like most government projects, cost over-runs will be considerable and taxpayers will be on the hook. Remember too that the $500/year is only representative of 1/3rd the total cost; if the Federal or Provincial governments 'adjust' their contributions as they often do, it's the CRD that will have to make up the shortfall.

So what does this mean to the housing market? Consider the tables below:

Municipal Taxes


Business Rate

Residential Rate

Bus:Res Ratio

North Saanich

12.78

1.57

8.15

Metchosin

7.48

1.64

4.55

Colwood

12.15

2.81

4.33

View Royal

10.04

2.36

4.25

Saanich

14.71

3.59

4.10

Sooke

9.49

2.50

3.79

District of Highlands

11.06

2.95

3.75

Victoria

14.27

3.89

3.67

Sidney

8.73

2.83

3.08

Langford

8.03

2.63

3.06

Esquimalt

16.49

5.53

2.98

Central Saanich

10.25

4.05

2.53

Oak Bay

5.91

3.18

1.86


Capital Regional Levies


Business Rate

Residential Rate

Bus:Res Ratio

North Saanich

3.12

0.38

8.15

Colwood

1.62

0.37

4.33

View Royal

1.24

0.29

4.25

Saanich

1.24

0.30

4.10

Sooke

3.97

1.05

3.79

Victoria

1.68

0.46

3.67

Esquimalt

2.06

0.63

3.29

Sidney

1.36

0.44

3.08

Central Saanich

3.51

1.39

2.53

District of Highlands

0.94

0.38

2.45

Metchosin

1.02

0.41

2.45

Langford

1.36

0.56

2.45

Oak Bay

0.97

0.52

1.86

These are the 2006 tax rates for business and residential properties in the CRD as stated by the Victoria Chamber of Commerce. I can't find any average numbers for properties, but let's use the $520K average price for houses in what we call Victoria. I'm going to calculate the tax based on Saanich, because it is most representative of the average due to being the biggest municipality and the most average in the price range. So: $520K at 3.59% = $1867.00 in annual tax. Add that to the CRD levy of $156/year and you get $2023.00/year.

So to check how accurate my calculations are I called my friendly neighbourhood homeowner. He lives in Saanich (Gordon Head), his 2006 assessment was $467K, his 2007 property tax bill is roughly $2400 after his $900 principle residence home owner's grant. I'm not even close apparently.

I know it's a complicated formula that gets used, but the crux of my argument is this: will the average $500 tax increase affect how people feel about purchasing? I'm going to argue yes. And here is my reasoning:

It's not just $500. It's a combination of factors. And that $500 may just be the elephant in the closet.

Factor One: If you lived here during the referendum on the new Arena, many homeowners were pissed about a minor increase in property taxes to pay for a $30 Million project. Now we're talking about an estimated $1.44 Billion project (adjusted for inflation) that the CRD will have to come up with $480 Million for. That's 16 times greater, and they can't even agree on whether we need it, or where we should put it.

Economics are already tight for downtown business owners; think you that they will quietly take this? I imagine many business owners may choose to close and retire (I have anecdotal evidence of two such choices already made). Walked around downtown lately? There are plenty of empty business spaces; out in the new Westshore strip malls too. When business tax revenue goes down, residential taxes will have to go up. And when businesses close, people get nervous about the economy and people lose jobs, and this get's labelled as a recession.

Factor Two: Affordability. We're already at 50% gross earnings for the PIT on an average home in Victoria; fundamentals are 30%. Factor in that an average house price is 6-7 times average annual earnings in purchase price, when fundamentals suggest that you shouldn't consider anything over 3 times earnings, and what you get is unsustainable. Something has to change: either prices come down, or earnings go up. The only other way to finance this is for banks to introduce longer-term amortization and interest only options, which they already have. This also happened in the States during the run-up and sub-prime mortgage meltdown news is getting worse every day. There is talk of a recession in the US Federal Reserve. The BoC has indicated it may raise interest rates to calm inflation, and oil prices are on the rise; none of these point to increases in affordability for the average Victoria home owner through increased earnings.

Factor Three: Inventory is on the rise. I see no arguments against this right now. Even the VREB states a return to a balanced housing market is underway. There are many new units scheduled for construction, some won't happen, but a lot will. Inventory will continue to climb for the next few years. Population growth is not keeping pace.

Conclusion: When the three factors converge, and they will, a perfect storm will form. The market is fuelled by fear and greed. We've just had five years of greed. Seems to me that a few years, at least, of fear-driven storming is due. The MSM will pick this story up eventually and drive it like they have driven the wild winter weather = global warming theory proven story (OK that's just a guess really). Sewage treatment will be the focusing event needed in Victoria to let the elephant out of the closet.

8 comments:

Vicguy said...

Anyone tracking all the new hot sheet listings ? It only gives you 50 on the list and I count a full 50 just looking for the first time today. This would be the highest one day amount I have tracked so far. This months numbers will be most interesting on the inventory side.

Anonymous said...

I can't wait for the March stats from the Victoria Real Estate Board to come out. I think we are all going to be surprised...or maybe not. :)

greg said...

It seems to me inventory is growing at a pace right now that will see higher levels than last year.

Last year the highest levels of inventory were reached in October, and there was a steady increase before that during the summer - last May there were about 1200 single family homes listed in the VREB area, so like anonymous said, the March stats should give a likely trendline for the rest of the year.

At present there are about a thousand single family homes listed, so we shall see if inventory can grow by more than a couple of hundred in the next couple of months.

If inventory isn't increasing by at least that rate, I guess we can all hold off on our housing doom talk regarding prices until at least the summer....

Anonymous said...

I wouldn't only look at the rate of listings but also at the rate of appreciation. If that goes from 17%-19% a year or two ago down to 6%-7% this spring than that might be the straw that broke the camel's back for the speculators to get out. Oh, then I guess it would be good to look at the rate of listings.

greg said...

anonymous,

Higher prices on lower volume usually indicates a top in the stock market.

Even if prices are increasing for a select group of houses that are selling, it is turning into a much riskier game for those planning to buy and flip on an expectation of 10-16% gains, if there is a greater chance of the house sitting and not selling!

Of course, there will be those who believe otherwise, and when the music stops, some of them will be without chairs.

Expect a number of housing gloom blogs to spring up at that point.....

Anonymous said...

Not sure whether local conditions are really a good predictor of overall housing market trends. History seems to suggest that this thinking is a bit of "the tail wagging the dog".

The last two corrections/stagnation periods in the Victoria housing market (early 1980s/mid-1990s) definitely coincided with North American economic downturns.

I would say that property taxes have only a marginal impact on buying decisions, as most people look at the "point-of-sale" costs, which would also include needed repairs.

The bigger "perfect storm" brewing right now is the sub-prime crisis and its possible impact on the short-term money supply in the US. Defaulting mortgages, collapsing mortgage lenders all could have a chilling effect on broader money lending in the US and on consumption and investment. This is what happened after the US savings and loans collapse in the early 1990s.

If the US falls into recession, Canada will surely follow and likely China as well. Add to this the serious housing inaffordability and governments that will likely respond by tightening the purse strings (can anyone explain the economic theory that says you blow hundreds of millions on mega projects - read "Olympics" - during an economic expansion when output is already at its peak (?!?) leaving zero money to spend when the economy tanks?).

Then again, maybe the big sewage plant bill will be just more fuel for the coming hurricane...Lets call this one Allen.

Anonymous said...

I'm calling this hurricane Greenspan.

Roger said...

greg said

It seems to me inventory is growing at a pace right now that will see higher levels than last year.

I made some forecasts of sales and listings for the balance of the year. You can find them on my website

The spread between active listings and sales continues to grow.