Sunday, March 11, 2007

What is it going to take...

for the market correction to begin and prices to be more reasonable?

We looked at five properties yesterday. We had hoped to get in to see one we'd viewed before; we were almost ready to make an offer. It was a 2 bed 2 bath condo that needing extensive updating but was ready to move into. We thought we'd be able to get in well under asking. Asking was close to assessment, we thought we'd get under that and in a year's time, be in a place to begin slowly updating our home. (by updating we mean, painting, new flooring, perhaps new counters/cupboards in bathrooms and kitchens: those would more likely be long term things though)

So, it sold before we got back into it. We're surprised to say the least. The location was convenient, but busy. There is no parking there for 2nd vehicles or guests, not even on the street. The parking isn't secure. The building isn't attractive, really it's rather drab. The common spaces haven't been touched in years. But the suite was big; at least 150 square feet bigger than anything we've seen in condos and it had two full baths. We gave it potential and thought we may be able to bargain.

We got the report this morning. The deal closed at assessment, only $4.9K less than asking. We'd planned to offer closer to $20K under. It wasn't meant to be.

So we spent the rest of yesterday fairly dejected looking at other properties. One building had two suites listed. The first one was owned by the strata president... there's a reason why Realtors tell you not to be home when your suite is shown... we'll leave it at that. Turned us off the building completely, won't consider it at all.

Two other suites we saw were nice. Both ground floor which are harder to sell and we feel a bit uncomfortable with the idea of being in busy neighbourhoods on the ground level. One had been on the market a while and had come down in price over $15K already. The other was completely updated and showed really well, but you could tell the building had issues, and the location was less than ideal.

We think we've decided to rent until the fall. We don't think we're seeing price increases at the moment, more like a market that can't decide if its going up slowly or coming down slowly. We'll have increased our income by $30K in September (I'll be done Uni then) so making a purchase will be less of a stretch than it is now.

After doing the math on two-dozen places over the past 2 months, we're not any closer to understanding the differences between renting and buying on average. The only building that we have seen that we know what rents are at has a difference of about $400/month. For a 2-bed one bath suite is that high or low? Given the gains in the market, what do you think is a reasonable correction. The unit I'm talking about has a market value of $225K. To close rent and purchase price it would have to come down $40K or just about 20%. When the correction happens, what do you think we can expect to see? The last time we saw prices in condos like that was 2002 according to the VREB historical price sheet.

If we don't buy now, we'd be losing about $800/month in rent with no chance of getting it back. If we buy now, we could lose some value in the correction, but we are all agreed that it is highly likely that the market will cycle up and over this level in a subsequent boom period, so you don't lose if you don't sell. History supports this. So if we wait a year or two, that rent money adds up quick doesn't it?

I hope you use the comments to weigh in on this debate. I think it's safe to say that most people reading this are outside the market looking in. What are you waiting for and why? If you're in, how do you look at it, and would you sell now to rent again?

14 comments:

Roger Need said...

We just sold our house in Parksville and are moving back to Victoria. We intend on renting for the next while. If you look at the VREB graphs at http://www.vreb.org/statistics_current.html you will see that the average sales price for condos and houses in Victoria has been levelling off for the last six months. If you look at active listings you will see they are higher now than they have been for several years and we are now entering the peak spring period for new listings.

What happens when the supply is high and demand is the same as last year or lower??

I think the easy money has been made. If you want to buy a home and are prepared to ignore market conditions for a few years jump in. However if you are an investor hoping for a quick profitable flip watch out. Investors with a mortgage will not get enough rent to cover interest, taxes and maintenance at todays prices. For example a mortgage at 5.2% on a 250K property is $1482 per month plus taxes of ~$200. Try to get $1700 rent in Victoria for a condo worth 250K.

Roger

Roger Need said...

"If we don't buy now, we'd be losing about $800/month in rent with no chance of getting it back"

A lot of renters believe this statement and it is not true. You are not throwing your money away. You have an occupancy cost whether you rent or buy. Consider the following example:

Lets say you have 250K in the bank and are renting an apartment for $750 per month or 9K per year. You can easily get 4% on your money with no risk and receive a taxable income of $10K per year. Your after tax income might be 6K to 8K depending on your tax bracket. Your annual rent is almost covered by the after tax interest with a shortfall of 1-3K. Now if you buy a condo with the money you will no longer get the interest and will have to pay heat, condo fees and taxes. Reasonable estimates are 100+180+160 for a total of $440 per month (5.2K per year) occupancy cost and you own the place!!

The benefit is its yours to remodel (extra $$), the pride of ownership and the opportunity to make a profit (or loss).

If you borrow the money your occupancy cost will be even higher. The mortgage will be $1482 per month on a 5.2% mortgage for 25 years. After 5 years you will still owe $222K on the mortgage (only paid off 28K). Your occupancy cost will be $1482 +$440 per month.

Renters need to consider why they are buying and do the math.

Roger

Vicguy said...

"If we don't buy now, we'd be losing about $800/month in rent with no chance of getting it back"


I agree with Roger,you can't think like that. If this market gets ugly in the next 6 months that money may be made back in one low ball offer as you were planning on that last place.

Demand is only there cause the psychology is like a frenzied panic backed by the MSM and the glossy ads. When one single housing stat number of a serious decline could be around the corner then the MSM will run with it morning, noon and nite and this market will turn on a dime.
Never ever panic buy wether it is a stock or a condo.Missing out on that condo was a blessing if you ask me.

hhv said...

Thanks for the comments guys. I didn't look at the situation as a panic buy. I agree that there is a occupancy cost no matter where you live. Obviously in this market it is significantly higher if you buy than rent.

Say we wait two years. At $800/month that is $19,200. If our mortgage payments plus fees/taxes equals $1200 our occupancy cost is $28,800; we have a difference of $9600. We can make both options work.

Assuming we don't need to sell in two years (so we haven't lost anything despite what happens in the market) are you saying that the $9600 is better invested outside of RE at this stage of the market. I look at a bull market in stocks that while may not be bubbling, is definitely indicating similar kinds of frothy behaviors as the RE market.

I'm not a fan of high interest savings accounts, nor GIC's and other 6% and below investments. When you take out the 3% inflation your money has pretty much stayed even.

So my thoughts are more that the $9600 that I have had to put out to be a buyer, has gone into an investment that over time will act much like those investments that I don't like to begin with: in other words average 5.25% gains over the 35 years it takes me pay the stinking mortgage off.

Roger, I'm not sure I follow your original: "Lets say you have 250K in the bank and are renting an apartment for $750 per month or 9K per year. You can easily get 4% on your money with no risk and receive a taxable income of $10K per year. Your after tax income might be 6K to 8K depending on your tax bracket. Your annual rent is almost covered by the after tax interest with a shortfall of 1-3K. Now if you buy a condo with the money you will no longer get the interest and will have to pay heat, condo fees and taxes. Reasonable estimates are 100+180+160 for a total of $440 per month (5.2K per year) occupancy cost and you own the place!!"

This makes sense if you have the $250K to buy and you're making a choice between RE as an investment as opposed to bonds etc. But if you have to pay cash to live somewhere, are you not always better to own than to rent over an extended period of time (25-40years)?

Roger Need said...

HHV,
You asked-

"But if you have to pay cash to live somewhere, are you not always better to own than to rent over an extended period of time (25-40years)?"

Yes, in general you are better to buy than rent if your time horizon is 25-40 years. However, there are a couple of things to keep in mind.

First of all can you make the payments principal, interest, taxes, heating, utilities and maintenance over that many years. You will have to renew the mortgage periodically (term of 1 to 10 years. Interest rates will fluctuate over time and I have been around long enough to see mortgage rates rise from 5% to 18% and down to 4% and to the current level of 5%. When your renewal comes up you will be stuck with the rates at that time. What happens if your payments go up by 50% in 7 or eight years? And don't figure that this can't happen again. The U.S. is trillions of dollars in debt and has a looming Social Security problem. They may have to raise interest rates drastically in order to get more loans which will lead to recessionary pressures and an economic downturn across North America.

Secondly, what if there is a collapse in the real estate market? Are you prepared to ride it out or will you fear for your equity and bail? When I lived in Ontario I watched prices plummet in Toronto. Prior to the crash they used to run a weekly real estate column showing a picture of a house with the caption "Look how much they got" Remember there are two powerful forces in Real Estate - greed and fear. In a sellers market the buyer is fearful of not getting in and the seller is greedy to squeeze the deal for every dollar. In a buyers market the seller will fear getting less next week and the buyer will be greedy and squeeze him with a lowball. In a panic market prices fall at a faster rate than when they went up because sellers start reducing prices and buyers will lowball and move to the next deal if it doesn't work. If you aren't planning on moving then this won't affect you over the long term

Another consideration is career path. Will you always live in Victoria? What if you get a great job offer in another city? Are you prepared to sell and move? In the first five years of a 25 year mortgage you will only have paid off 10% of the loan. Real estate fees will eat into that equity and if the market has remained flat or turned down you lose all your equity and maybe owe money to get out of the property. This happened to my wife's co-workers in Calgary in the early 90's (hard to believe now isn't it).

So there are many things to consider and there is no right answer. Will houses be higher in Victoria in 20 - 25 years? History has shown that house prices rise with inflation and this is a pretty sure bet. But it will go through several buyer and seller markets in the interim.

Roger

Roger Need said...

WILL THE CONDO MARKET CRASH in VICTORIA?

I believe there will be some real deals in condos in a year or so. You only have to look at the number of projects underway, approved and proposed at http://www.vibrantvictoria.ca/development/mcp.htm

If you look at the prices per square foot and the size of the units it is shocking. 400-600K for 1 or 2 bedroom units under 1000 square feet. What is the market for this type of property? The price is is too high and the size too small for the average working family in Victoria. It might suit some retirees but with average house prices in Canada around 300K most will not be able to sell and move into one of these units.

Many of the buyers are from out of town: Alberta, Ontario, Americans and folks from the lower mainland. They don't live in Victoria and consider these an investment for the future. They will not be able to rent them for anywhere near their carrying costs of 4K to 5K per month!! So they are speculators with a belief in the "bigger fool theory". (Someone will come behind and pay me more).

They will try to flip them before they are built or months after they take possession. But there will be more coming on stream and the developers will offer incentives like free appliances, hardwood floors, reduced mortgage rates etc. So they will reduce the price in an effort to unload. But who will buy them? If the market is trending down other investors/speculators will linger waiting for the bottom. This is starting to happen in Vancouver. Even the guru Ozzie Jurock recommends against buying in the overheated Vancouver condo market.

When the price of these expensive units starts to fall it will result in a reduction in the Average Condo price reported monthly by the Victoria Real Estate Board. Folks will erroneously believe that ALL condos are falling in value and there will be price pressure on the other units in the 200 to 400k range. Lowballing will become the order of the day??

What do you think?? Am I reading this all wrong??

Roger

Vicguy said...

Great posts Roger,you are on the money. I have seen the highs and the lows too and this whole generation of real estate buyers have never lost a dime, they don't know how to lose 10's of thousands of pure profit over night.
Once a decline starts the largest profiters can afford to take a haircut to get the deal done. The guy who got in late will hold tight to conserve his losses but will get caught holding the bag,especially the condo owners.

It is a gut wrenching event and a high percent will not be able to stomach the pain of losing as the media turns negative day after day. And don't forget, if you think the media/internet played an important part on the bull run, they love to show pain and despair and they will be all over a market crash like a fly to crap.

Will you be able to ride out a correction of 20 % or maybe more and keep saying "I am here for the long run" over and over and not have it phase you ? If you have no doubt then buy away, if not 100% sure then I would seriously consider waiting at least 6 months and see where this all plays out in the world markets,these are dangerous times in the next while.

Roger Need said...

vicguy,

Thanks for the comments. You are right about the media. They will love a "new angle" on real estate and will help fuel the downward trend. Pundits will be interviewed saying a market downturn was obvious and inevitable after the long run up.

We should not forget the real estate agents. They also make money in a market going down and will encourage sellers to be "realistic" and "priced to reflect market conditions" while encouraging buyers to make an offer, any offer.

Should be an interesting year. Market is already turning up island. I loaded the last five years of monthly averages and median stats for single family homes into a spreadsheet and computed the rolling 6 and 12 month averages. All three showed a peak about 3-5 months ago and we are now on the way down.

I did the same with the Greater Victoria stats and they show the market flat over the last six months. With active listings higher now than in recent years and the spring listings coming on stream it will be interesting.

There may be a few "short haircuts" later this year. I'll be watching from the sidelines - I want to be a lowballer.

Roger

hhv said...

Roger & VG,

I am glad you guys have weighed in on this post.

I consider myself fairly well informed. I'm in my early 30's. My father has been in and around the construction business in this town since 76. I remember vaguely the early 80s and the interest crisis which contributed to his divorce, subsequent loss of house, and subsequent loss of business. I remember clear as day the stock crash of 87. I remember the black days of NDP dominance and recession in the 1990s and I partook in the dot.com bubble (only in a minor way). It was at that time that I realized money did not come easy and decided to go back and get a degree or two.

We're in no rush to buy... and don't feel any pressure to do so. We got into this venture because we have to move and wanted to gather as much information as possible about renting vs buying, the RE market, and the buying process.

We think the arket is disgusting, but almost equally disgusting is the thought of paying steep rent for some of the crappy suites we've seen.

Can we stomach the heat? I'd like to think so. I've watched other investments tank, but the economy of scale doesn't even come close. That said, your comments strike a cord with us that gets strummed a half dozen times a day as we check our guts, give our heads a shake and return to craigslist and uvic websites looking for rental suites.

Vicguy said...

"That said, your comments strike a cord with us that gets strummed a half dozen times a day as we check our guts, give our heads a shake and return to craigslist and uvic websites looking for rental suites. "


I know where you're coming from. My girlfriend and I have been eyeballing the possibility of a new rental this weekend when we thought we would stay put but a new neighbour who who likes to have fratt house parties in what is a quiet adult building has made us reconsider moving if the management here doesn't deal with it properly.
I am shocked at the quality of rentals and how one can throw in the towel and want to buy after seeing the gouging going on out there.

From an economy angle there are some important numbers coming out of the US later this week that may indicate if the US is closer to a recession then they think. A stock chart site I subscribe to who is a 30 year market veteran figures the US is basically in a recession already but of course they will wait til it is 3 months old to declare it official. Now this morning the chance of recession has now moved up to 50% chance and Trump is even selling some large asset,not sure what it is. Red flags everywhere.

roger,

Very true about the RE agents wanting the deals done and will encourage reductions cause the market is now "balanced" which means "lower your price now or be left behind and you will go the bottom of my list".

hhv said...

Given the number of price changes downward over the past 5 days on the properties we're watching this may be starting.

But that said, the stuff is still selling in under a month on average. Isn't it going to take 45+ DOM averages to get sellers out of the gouging mentality?

Vicguy said...

But that said, the stuff is still selling in under a month on average. Isn't it going to take 45+ DOM averages to get sellers out of the gouging mentality?


I would think it might take that long before reality of a quick sale is out the window. Then throw in some data on increased inventory then the agent will go to the seller and warn them that competition is increasing and they will have to decide how serious they are in selling. The ones that have to sell will always be the catalyst and set the down trend in motion.
When I sold in 1990 I waited about 6 weeks til I lowered $10,000 on my first drop. It may take to til May or June to see the price declines really accelerate if indeed the planets are all in alignment as they seem to be.

As far this subprime thing goes, maybe Canada won't be effected directly but perceptions are everything and the worse the story gets the more it may impact psychology here as the US housing story worsens.

hhv said...

My fiance works for the bank... let's just say that expectations are real low on mortgage sales and campaigns for other lending products are heating up

Roger said...

hhv & vicguy

VREB does not publish the days to sell data on a monthly basis but the Vancouver Island does and they are available here:
http://www.coastrealty.com/markets/

In just about every region on the island (Duncan to Campbell River) the days to sell number is getting bigger over the last few months.

CREA publishes numbers for Victoria here: http://creastats.crea.ca/vict/mls_stats.htm

Check out the Market Conditions page and you will see days to sell has risen to 42 days and sales as a % of listings has been on a downward trend except for a blip up this last quarter.

The real scary part starts in July/August when inventory is at a peak and seasonal sales are going down as shown here: http://www.vreb.org/images/vrebgal.pdf

VicGuy - I think a lot of sellers will have brushcuts by the end of the year.

Roger