Wednesday, May 9, 2007

State of the Rental Market

I had a really interesting conversation with a manager at my workplace recently that inspired this post. There are about 5-6 full-time positions available right now in the association I work for. Employees only need high school and they make what I consider to be above average wages that work out to be about $34-$38K per year. Trouble is, the employer can't fill the jobs consistently. The association has about 60 FTE and 30 part-time positions and usually have a pool of employees of about 150, including casuals.

Lately that casual pool has dropped because people are leaving town. When I asked why she thought people were leaving, the manager stated that in exit interviews many people were telling her that they couldn't afford to live here anymore. Some were working two jobs and were single. Some were partnered and their households still had more than two jobs to finance their living costs. My assumption based on that conversation is this: if they wanted to get anywhere financially, these people felt they had to leave.

This industry isn't Victoria specific and jobs are available with similar pay across Canada. The "labour shortage" is by no stretch of the imagination isolated to Victoria. There are plenty of opportunities in cities larger and smaller than Victoria with cost of living being nowhere what it is here.

We figure we have a pretty good deal on rent. It is much more than I remember paying 10 years ago, but it isn't the most I've paid in this town or in other cities I've lived in.

A quick scan of Craig' s List and Used Victoria reveals a bewildering scenario: the rental pool is big and it's diverse. It is almost like the RE market in that its pricing makes very little sense. There are 1-bed suites ranging in prices from $600-$1000/month, there are 2-bed suites mixed in that range too and going up to $1300. You can't seem to find a house right now for less than $1500/month and many of those are just the major part of homes; many have additional suites that are already rented by the landlords.

The prices don't fit neighbourhood patterns either. I'd think Central Park or Sooke would be cheaper than say the University neighbourhoods. But not really when you do a quick scan of those sites I mentioned above. Sure there are suites that are "new", but everyone and their dog has gone to Home Depot and bought the laminate floor for $1.50/SF and "updated" their suites with modern paint colours. This can only mean there is competition for renters.

We looked at some dark, dingy places that were updated. We looked at some bright places that were above ground that still had their original 1975 shag carpeting and wood panelled walls. And guess what we found? The price had very little to do with the quality of the suite or the location. The price trends it seems, based only on my assumptions, are more to do with when the owner bought the house. If it was recent, expect a one-bed suite to be $800 plus.

I'll try to bring this back full circle now. If my employer is having trouble retaining people at good wages, how are other employers fairing? If you've been to the malls lately, you've likely seen the advertisements in the food courts. Low-pay low-skill jobs are always the first to suffer. But we don't hear the stories of $17/hour Tim's employees here like they do in Alberta. Coincidentally, that's about the average wage my employer pays. That works out to be around $800-$900 after deductions every two weeks.

I ask this in the hopes that people will contribute to a good discussion: is working for two weeks just to pay rent worth what Victoria has to offer? And if more and more people start deciding that it's not, what is going to happen to all these suites?

Do people really believe that the current stat of 0.5% is reflective of the true rental market pool; you know, the one that includes illegal suites? There are no methods of counting suites in homes, so that stat is basically meaningless.

UPDATE: Further to the discussion on inflation and CPI, check this out, I sure hope it's not true.


Vicguy said...

Good post HHV. Funny my coworker who makes in the $50,000 range is planning to move to cheaper BC locales cause he is fed up with the high prices of trying to get ahead here. My spouse and I would do the same if not for our kids.

I agree on the rentals too, there is no ryhme nor reason on the prices. I always remember each area of town was priced accordingly and some of the prices are a joke and expect they will either sit empty or they will have the tenants from hell. Who is gonna pay $1000 plus for a one bedroom basement suite,insanity.

greg said...

I would just add that in the current market, when I look at rentals on craigslist, or wherever, the rates come nowhere close to covering the current cost of a mortgage.

So rents are expensive, but mortgages are way more expensive.

There is no motivation for anyone to move here on the basis of employment, as none of the jobs based here pay enough to do much more than get by.

Unless you count real estate developer, doctor or house flipper among your potential pool of first time buyers.

Nobody at VREB seems too concerned yet about what the lack of affordability will do to first time buyers, either....

When 2 bedroom condos routinely list at more than $200,000, something is seriously out of whack.

StargazerXL said...

Yes, trouble retaining employees is the flipside of the trouble recruiting employees. Unlike large metropolitan areas like Vancouver, Victoria doesn't have a concentration of high salary jobs that can sustain high RE prices (MLAs nonwithstanding ;-) ). Perhaps Victoria is being slowly bought up by highly paid Vancouverites, and it will become the ultimate gated community (with the Georgia Strait being the moat.)

Vicguy said...

" I would just add that in the current market, when I look at rentals on craigslist, or wherever, the rates come nowhere close to covering the current cost of a mortgage.

So rents are expensive, but mortgages are way more expensive."


Not sure what you meant on that one,are you meaning house rentals versus a house mortgage ? I was thinking HHV meant basement suites which are there to supplement the mortgage not pay the mortgage. And we both know the condo flipper theory won't work anymore with nothing down.

Prairieboy said...

I'd agree with the stat of .5% vacancy. My landlord owns a number of rental buildings in Victoria, and he has 0 vacancy.

On a side note, rental prices will continue to rise. My landlord agrees it is happening and will continue. He knows a local property management company that is aiming to have vacancies in their rental pool. They are doing this by renovating a suite when the renter moves out, then upping the rental price to a point where they have a hard time find renters. They believe that is the balance point.

Higher housing costs, higher energy costs, higher living costs, all these factors are signs of increasing inflation. I don't know how the Bank of Canada comes up with an inflation number of 2.3%! They are missing something. I really hope interest rates rise, and soon.

osiris_vic said...

I am on of those that have considered the move east many times. The only thing that keeps me here is family and the fact I just got a new position with great growth room at work. In 2 years, if things haven’t changed, I will reconsider Ottawa though. Houses are cheaper, the city is about the size of Victoria, lots of History, cost of living is cheaper, and I would get paid slightly more( and their hockey team is still in the playoffs). Sure it is a little colder in the winter but if the majority of Canada’s population can live there, then I should be able too as well. It frustrates me that while my wife was working we were making over 80k and could not afford to buy the quality of life that we have by renting right now. She quit her job(ps HHV, what type of work is your company hiring for) and I think that if we had bought, with me earning the average family income, that I would be underwater here without her added income, but would be comfortable in a nice house back east.

Also, the company I work for has been trying to recruit for a fairly major position with very little success. They tend to be applying from Toronto and usually decline the position when they find out that Victoria wages can't compete with what they are currently making.

I would be interested to see the inflation rates by province. I would expect that west is probably much higher than the east and the fact that a very large portion of the population is in Ontario/Quebec holds it at 2.2. I have talked with people from Toronto who say that though there housing costs are fairly high, everything else seems to be cheaper out there.

Anyways that is enough of a rant for me. HHV I would be very interested to see what type of work and where it is you are employed right now. My wife wants to get into a new field as the one she just left was high stress, high burnout, and low pay.

Anonymous said...

We are not a "young married couple" but have 4 young children. My husband has had property in Europe since he was 20 and we bought in Toronto 10 years ago. We sold and bought a lot here had a house built and sold again. (we did not like the house). Now we are in a smaller house in Oak Bay and with the addition of 2 children (we have 4 now ) we need a larger house. A house jump from what we have is huge.

We are shocked at the price of houses in the last few years. It is hard to move up to anything larger. I want to move to White Rock my husband's business is here and the commute would be too difficult Actually I want to move back to Toronto where I know I could get a larger house in a great central neighbourhood. We love the kids school however. Many people I know are in the same situation.

Many people thought Victoria would be a great place to move to bring up children but they are finding it too expensive. These are professionals with good incomes.

Anonymous said...

If Victoria is truly becoming a "playground" for rich Albertans or rich whoever and the locals can't afford housing (rents or properties) - who really wants to live here? I sure don't....

I don't want to live in a city that is a playground for anyone.

This is a different scale but see what is happening to Salt Spring?????

Vicguy said...

"Higher housing costs, higher energy costs, higher living costs, all these factors are signs of increasing inflation. I don't know how the Bank of Canada comes up with an inflation number of 2.3%! They are missing something. I really hope interest rates rise, and soon. '

I don't get it either PB, with 80% of Canada cooling off and much lower average prices it seems we don't count when it comes to inflation numbers.
I know what will fix these rising rents, a good ole housing crash,sooner or later the buyer pool will run dry plus there is just too much media lately on how we are bucking the trend and building will just keep on going forever talking to the same old real estate agents with a biased interest. Why can't they talk to a an economist once inawhile ? When ever you see too much reporting on something that is booming that I begin to see danger looming.

Vicguy said...

If you take away the construction business and related spinoffs, Victoria's real economy is what it is always going to be,tourism and retail,both of which pay diddly squat. I remember Victoria in the last couple recessions and it can be an ugly place to try and find a good paying job to even support the rents in this town.

So what happens when the boom ends ? This could be a good subject for another thread cause we know it can't go on forever as it has been a 7 year run.

hhv said...

wow, gang, thanks for the great commentary.

PB, I agree about the inflation numbers. McLeans magazine this week has a blurb about how vegetable prices have gone up 11% this year alone. Tis' funny how gov't economists just simply dismiss numbers that don't fit their "management style" as inconsequential in today's economy.

Osiris: use the link on the main page to email me about work... I don't want to "expose" too much of that info to the wider audience, just to keep things more anony and not bring any unwanted attention to my employer.

VG, "Victoria's real economy is what it is always going to be,tourism and retail,both of which pay diddly squat."

Been downtown lately? More vacant tourist trap space and garbage tenants like 7-11 on gov't street popping up. The tourist business here has been decamated by the high dollar and the passport issue. Neither of which is going to change anytime soon. When the city of Victoria starts chasing the "perfect orgasm" in its marketing ploys, you know there is serious trouble.

The more we look at it, the more we can see ourselves ending up in Whitehorse come the fall. I think the next 12-24 months are going to show a repeat of the 90s here; young people with skills will be leaving the province, not because of lack of work as was the case then, but because of lack of "affordable" housing.

When we budget, we bank on a barely-6 figure income for our projections. That kind of money is available elsewhere to us. Do we really want to tie that much capital into an historically low return investment (housing)? No.

I tell you, just about anywhere outside Victoria/Lower Mainland/Okanagan is looking more attractive everyday.

hhv said...

I posted this elsewhere but thought it fitting to repost here:

In this market (and we just moved) we rent because our cost of living is subsidized by our landlord. Our current rent is approximately $1/SF/month. A mortgage on that square footage would be closer to $2.5/SF/month and that isn't including taxes, monthly assessments, maintanence and other owner-related charges.

Back in 2001-2002, anyone who could get a mortgage could purchase a condo for less than it would cost to rent the same unit, including those above mentioned taxes, m.a., maintenance etc.

We also rent because the rate of return on property in Victoria over the past 25 years (including the current excessive market inflation period between 2002-2006) was 6%. If you look at the real rate of return (adjusted for inflation) it is closer to 3% over 25 years. Our investing money (right now that is the difference between renting/owning which is almost $1.5/SF/month) does better long-term in balanced mutual funds, which in Canada, have a real rate of return closer to 7% (again adjusted for inflation). Balanced funds are 40% cash-equivalent and 60% equity investments and remarkably stable long-term historically.

Do we want to buy? Yes. Why? Not because we believe rent is throwing money away. Contrary, we believe home ownership has certain advantages that we are willing to forego ROI to gain, namely pride of ownership and freedom to live in a space we wish to create. If you look at that closely, that almost certainly eliminates us, by choice, from owning a condo.

So we look for a house, and like many other Victorians, the only way to afford a house at today's prices is to have a suite and rent it out, thereby subsidizing someone else's COL. Are we against that? Certainly not, but again, we would be compromising one of our reasons to purchase (freedom, ask anyone with tenants).

Some people who rent can't qualify for a mortgage. Some people who rent can. Renting is not throwing money away for either of them. Regardless of whether you own or rent there is a cost of living associated with your housing that you can never get back. To arbitrarily state renting is throwing money away does not account for all the costs associated with owning (interest, taxes etc) and is short-sighted. Of course that is just my opinion and is not meant to judge anyone in anyway. To each their own.

If anyone wants to argue that a mortgage is a forced savings plan, go ahead. For some people that may be a good thing. But there are costs associated with mortgages which make them very inneffective investments compared to other investment options.

Your home is not an investment as long as you don't collect money on it. It's a liability. Your home becomes an asset when the amount you owe is less than the amount it is worth, but only marginally and in proportion to the amount of equity built up. The greater portion of that asset remains with the bank until you owe less than half of its value. Your home only becomes an investment when you get a return on it, which a real RE investor will tell you only happens when you are collecting rents that exceed the costs associated with ownership or when you sell it; for many people buying in this market, that simply is not the case.

In the investment world, purchasing an investment on credit is called buying on margin. It effectively double's your risk and most unsavvy investors aren't given the option by brokerage houses who underwrite that debt. Because of the relative stability of the RE market, and the cost of homes, purchasing on margin is most people's only option. The risk is still double that of paying cash for the same property and that risk only grows in a hyper-inflated market like the one we have today. I figure if one puts one's cash in GICs because it's less risky than mutual funds, then if one understood the real risks associated with buying RE on margin, one would likely think twice about buying a home.

Just my $0.02 on why we choose to rent and will continue to do so until the market changes in this town or we move on to more "investment" friendly pastures.

Greg said...


I was just pointing out that, if even rent is too expensive for the average person who works in a job that is njot highly paid, what exactly is the point for someone who works in a food court to be here, unless they are still in high school living at Mom and Dad's?

On top of that, the dream of home ownership, which is a strong motivator to stick around, is completely out of reach now for most people like that - another reason for them to move.

As far as rents increasing to catch up with mortgages, it's not going to happen. No matter how low the vacancy rate, landlords are paid based on current incomes. Therefore, rents can't go much higher, except for specific, high end properties - which is not most of the rental stock in Victoria.

Hope that's clearer.

Vicguy said...

How immune to the US problems will we be ? Keep hearing talk that Canada may decouple from the US but if we start to see the same as what is happening there I can't see how the cheap credit spending machine can survive.

"NEW YORK - Stocks retreated Thursday after many of the nation's major retailers reported weak April sales, raising concerns about consumer spending in the coming months.

Wal-Mart Stores Inc., J.C. Penney Co. and Federated Department Stores Inc. all reported drops in business in April, and analysts said rising gasoline prices were a contributing factor in the downbeat results.

Investors were also disappointed to hear that the U.S. trade deficit rose to $63.9 billion in March, its highest level in six months. The trade deficit figure was wider than Wall Street's forecast of $60 billion."

Vicguy said...


In the late 70's all us young bucks out of high school had to leave town or work at Smitty's washing dishes for $3 an hour so we all high tailed it to northern mill towns and got our trades tickets and job/life experience unless you were university bound.
Today it is Alberta they are heading too but we will have to see how long the oil sands boom goes with all the global warming issues and high costs to produce it.

Vicguy said...

Thanks greg, I got it now and agree,the rents can't keep rising,at some point the buck stops and a renter is not like a buyer, the renter will just keep living in the crappy cheap apartment when the next level up is 50% higher due to a greedy landlord. Will be interesting to see how many of those are still empty in the next couple months, I have seen a few repeating their adds cause they are a gouge and no one is biting.

Anonymous said...

Off topic and I'm sure this has been brought up before but how much of a correction do people think is going to happen? We think 30%.


olives said...

Do you really think that because the cost of some items has increased that there is much inflation? Is this really a very good indication of inflation?

Mish's blog had an interesting discussion yesterday about how while credit may still be expanding, M1 is actually flat or contracting.

Vicguy said...

Just saw Nick Majendie of Canaccord Capital on BNNTV today and he is calling now for an increased chance of 50% of a US recession beginning in the next several months up from his previous 25% prediction. The TSX he is calling to fall 10-20%.

The interesting part was his mention on the excess liquidity in the market which he says can, and will change on a dime. He stated this twice so I am thinking this fall will be the wake up call to all those bulls screaming we are different. Tighter lending in Canada will change the dynamics of this real estate bubble in a heartbeat and the bulls won't know what hit them.

Anonymous said...

Just received - Quotes from the Real Estate Cheerleaders!!!!!!

Robert Toll
Noteworthy bubble-blowing role: CEO of McMansion builder Toll Brothers boasted of a new era in which rich suburbanites would pay half their incomes on mortgages and average homes would sell for $4 million.
Catchphrase: "Why can't real estate just have a boom like every other industry? Why do we have to have a bubble and then pop?
Ignominious end/debunking: Toll Brothers stock down almost 40 percent since Toll appeared on the cover of the New York Times Magazine in October 2005.
David Lereah
Noteworthy bubble-blowing role: National Association of Realtors economist, incorrigible optimist, published book in February 2005 titled: Are You Missing the Real Estate Boom? The Boom Will Not Bust and Why Property Values Will Continue To Climb Through the End of the Decade. Housing prices peaked a few months later.
Catchphrase: "This may be bottom." (May 2006)
Ignominious End/debunking: Regarded as domestic Baghdad Bob. Left NAR in May 2007.

Anonymous said...

"Housing costs up in 16 cities in March

Canadian Press
May 10, 2007

OTTAWA (CP) - The cost of buying a new house rose 0.3 per cent in March from the previous month.

Statistics Canada says contractors' selling prices were up 9.3 per cent from a year earlier, down from the 10 per cent increase in February.

Sixteen of 21 metropolitan areas surveyed registered increases, with Saskatoon leading the way (up 10.5 per cent) due largely to the higher cost of trade labour.

The cost of buying a new house in Regina rose 2.4 per cent largely because of materials, labour, land increases and carrying costs, while St. Catharines-Niagara climbed 1.6 per cent also had gains due to material costs.

There were also notable gains in Vancouver, Windsor, Winnipeg, Hamilton, Calgary, St. John's, NL, and Victoria.

Land prices rose in seven of the 16 metropolitan areas surveyed.
Overall, three metropolitan areas registered no monthly change. Kitchener, Ont., down 0.8 per cent, showed the largest decrease due to a moderating market. Charlottetown showed the only other drop.

Edmonton, with a 39.8 per cent gain, posted the largest 12-month increase followed by Calgary (30.8), Saskatoon (22.7), Regina (16.1) and Winnipeg (6.8)."


Anonymous said...

Interesting discussion. We are actually moving to Vancouver (call me crazy). We were a bit bulled-over by the rental market there and almost gave up. But looking in Victoria, as a backup plan, we are finding that rents here (and the quality of suites for rent) aren't hugely different from Vancouver.

Example, a decent 2 bedroom main floor in Kits on a quiet street will cost about $1600-$1800 (if you can find one and don't wait more than 2 hours after it is listed). A decent 2 bedroom main on a quiet street in Fairfield will cost about $1400-$1700. Of course you can always find deals but looking through Craigslist here and there, these seem to be the average range.

Don't get me wrong, Victoria is a pretty town but when I take into consideration the relatively small difference in rent and the amount of entertainment, festivals, big-league sporting events, cultural diversity I think we are going to continue the hunt in Vancouver.