Monday, October 29, 2007

The Bear's Dilemma

Back in 2002 my friend whom I've written about before bought his first house. In 2000, his sister had sold a house she had bought in 1995 for a $30K loss, or 18%. My friend was nervous about the market. He'd had to over-bid to get his house and paid just about the average sales price for an average property in an average neighbourhood. He'd been able to put down a significant down payment and take out a 14-year mortgage for the rest. If the market tanked on him then like it had for his sister, he was confident his financing arrangement would help him weather the storm. Couple that with a fairly nice place that he and his new wife could grow into, and stay for some length if necessary, and his nervousness was abated.

Back then we were talking a lot about the stock market crash in 2000. We figured that, like most cycles in economic history, the bull market in housing was a direct result of capital fleeing out of risky equities into stable real estate. We both saw signs of economic growth in equities and figured that the local RE market wouldn't have legs to sustain the growth it had experienced over the past 18 months. I was decidedly bearish. He owned a house and of course didn't want to see a correction.

At that time, I was earning great money in a job I didn't want to do anymore. My dad was urging me to buy a home. I decided that a mortgage would be a life sentence to a less-than-satisfying job and decided to go back to school and get a university degree to open new employment doors. I could play the what if scenario forever here, so I won't. I don't regret the decision I made. Hindsight being 20/20, I realize I could have done both.

Fast forward to today. We have a rarely witnessed situation: parallel bull markets in both local RE and world equity markets. One seems to have endless legs, the other, I'm not so convinced. RE prices in the western world are correcting: everywhere except Canada. East of Manitoba, the market didn't have the heat that the West did, and manufacturing is getting hammered, so I believe the RE market will soften there very soon. West I don't know. I want to believe that Alberta will continue it's downward trend to a negative year over year loss. But I doubt it will. Currently it's negative month over month; it will take a massive hit for it to go below the 30% or so it had gained already this year.

So what is the Bear's Dilemma? Roger asked an interesting question over the weekend: "how low does the VREB published median price have to go before they jump in?" And that question my friends outlines exactly what the Bear's Dilemma is: when is low enough?

I've maintained on this site for some time that being an owner of a property is better than being a renter. There are many reasons for this:
  • pride of ownership
  • building of financial equity
  • flexibility and security in living arrangements
  • asset appreciation
There are well-documented-around-here downfalls too. But I'll state unequivocally that if you find a house/condo that you can afford--i.e, it fits under the 30% gross income shelter costs recommended by financial planners everywhere--you don't have to amortize over 40 years to make this happen, and you will be happy there no matter what the market does then now is just as good a time to buy as any.

The trouble for us is we can't find those kinds of places; either we'll be unhappy in the unit/neighbourhood for any great length of time or we'd be stretching our budget to the point where we can't afford to save for our other financial goals, like eating and retiring. So we wait for our income to explode or this bubble to burst. I wonder which will come first?

When prices start falling, how will we judge when is the right time to buy? All around us we're inundated with media extolling the benefits of buying property right now by telling us how good it would have been if we bought a year or more ago. When the market goes down the opposite will be true: societal reinforcer's--media and our peers--will be saying the opposite: "don't buy now you'll be losing money."

To which I state the only answer I can come up with for the Bear's Dilemma: "If you are happy with your purchase, you don't blow your budget, you don't compromise on your retirement and other savings, and you can live in the place you buy for 7-8 years or more, you will have nothing to worry about."

To answer Roger's question: for us, I figure that a 30% correction on the median SFH price in Victoria will give us the legs to get into the market and stay there.

Current median: $520,000
30% correction is: $156,000
New median: $364,000

Is this realistic? We hope so. If it's not, who knows what we'll do.


Anonymous said...

I will be leaving Victoria to purchase a 224K Home in the USA.

6 bedrooms
5 acres
beautiful area

I cant even get into a crack apt for that amount.

What does Victoria offer a 28 year old sucessful business owner with over 150K per year income? .



Nothing.... I didnt get ahead of the game by paying 3K a month mortgage.

Anonymous said...

I want to leave. I have 4 children to bring up. We own property but the jump to a bigger house in this city is huge. I don't want to be fighting for space with a bunch of teenagers in years to come.

We left Toronto a city I loved thinking it would be fun to live in Victoria. My husband has taken a huge salary cut and we are so much worse off than if we had stayed.

Everyone says this is a great place to bring up kids. I never had to worry about needles and homeless downtown there. Also I had a great house for a decent price and it was considered high at the time.

hhv said...

Had a really interesting conversation tonight. If you look at our dollar value, even if US prices hadn't gone down, we got a 25% break this year. WOW.

Anonymous said...

I love this site. 5 votes say 30% to 40% drop and no one bats an eye. Over on the bull site I'm on I say 30% drop and they roast me alive. Poor them. They don't even see it coming.


Anonymous said...

What is the bull site others are referring to? I would love to listen in on their conversations.

Also, HHV, what did you mean by 25% break due to the rise of the Cdn dollar, I didn't understand that.


Anonymous said...

Well articulated and useful post hhv, thanks.

Yes, I'd also like to know the answers to anon 10:44's post.

Anonymous said...

Well written post.

I would like to echo the comments of the first two posters.

I personally know of 2 families that are moving out of Victoria and two couples that are moving in.

The families that are moving out are doing so because they cannot afford to live here and are returning to Edmonton and Toronto. Like the earlier poster they thought that Victoria would be a lifestyle improvement but have found that you cannot enjoy the lifestyle if you have no extra money to spend.

The couples moving in are both semi-retired couples. They have bought condos downtown and plan to use them a month or two a year while they travel.

If you think about it we have a vicious circle. Working families moving out which then drives up employment which increases the cost of inflation/living which causes prices to increase which forces more families to move out.

On the flip side developers make $$$ selling luxury condos to "visitors" who don't live here and don't contribute to the labour pool that is being driven out.

I think that housing prices may be on the decline, but my bet is on the downtown coffee shop that will be charging $5 per cup of coffee!

hhv said...

My point was about exchange rates. Because our dollar has worth about 25% more than a year ago against the US $, so the same as it's now cheaper to travel to the US, it's now cheaper to buy a US home in markets you want to be in, like San Fran, San Diego, Arizona, Florida, Hawaii etc... regardless of how their local mkts are doing, simply because our dollar is worth more than it was.

vg said...

Scanning MLS last night there is so much over priced homes out there and a wide discrepancy between different levels.

Some places in Oak Bay for a million can be found for $250,000 less with $80,000 in renos and the million dollar places are one third the size.
And still more 2 bed, 1 bath places going for $470,000 not in Oak Bay but close to the border with the only landscaping plants is two little bushes by the front door the size of my coffee pot and the grass is dead and was reno'd 7 years ago. How anyone can go into this market and even get a fair deal at these price descrepancies is like walking amongst land mines.

Anonymous said...

The site I go on is called Kids in Victoria and it is a parenting site for people in Victoria. It is mostly stay-at-home moms.

I post real estate stuff in the Cafe KIV section once in a while and then sit back and watch the fur fly.

There is a post entitled House Prices that I think at last count is 28 pages long. I think I will post an updated House Prices in the new year and see what the reaction is then :).


Anonymous said...

How low must it go before HHV buys us all a beer? Wasn't it 10%?


vg said...

Loonie could swoon next year, EDC says

The Canadian dollar may sink to the 85-cent to 90-cent range (U.S.) by the end of next year as commodity prices weaken and investors return to the U.S. currency, Export Development Canada predicted Tuesday.

DJ said...

A 30% corretion. Hmmm. I really find that almost impossible to believe. I just dont think it will happen.
I think realestate prices are like water.... the money flows to the lower priced markets...a bit of a leveling effect. If Victoria is going to drop 30%, then almost all of Western Canada would have to do the same.
I just can't see it. I hope you are right though, it would be really fun buying houses during a 30% off sale!


vg said...


I didn't believe it 1982 either but it happened to the tune of 50% on some deals if you were patient, it was something to experience.
And you don't need 19% interest rates, 8% should about do it when talking 4 times the house prices then back then and wages that have gone up only 2.5 times on average during the same period.

If it can happen just south of the border then how can you not fathom it happening here ?

I just saw on BNN today Mr. Holt of RBC who wrote jmk's bible on housing affordability and he said the stall in the interest rate hikes is just a blip and they will continue upward in 2008,the BOC will have no choice,what will that do to mortgage costs if we are maxed out as it is ?

JMK said...

If it can happen just south of the border then how can you not fathom it happening here ?

What is "it" and where has it happened south of the broder vg? Don't get me wrong, there is a housing slump there, but it is nowhere near 30% in any markets I've heard about. Case-Shiller is down about 10% in San Diego, but thats about as bad as it is.

Could it get worse? Yes. But I don't think it is a foregone conclusion that prices will drop 30% in the US anymore than here.

BTW, to put this all in perspective, take a peak at San Diego's 10 year return (I'm looking at this site). It was 200%. Same with Miami. That means the price went up by a factor of 3. Our 10-year growth is still less than 100%. So even if their prices did dip by 30% tomorrow, they would still be much higher than Vic's market.

vg said...


$160,000 waterfront Miami condo's, Phoenix condos 50% off, Las Vegas ghost towns of empty houses half built, etc etc, do we really need to drag this out again ? How about record forclosures ??.... I know you are in denial but give it a break, and at least turn on your TV one of these days ....but maybe you can't afford cable with all those high payments and strata fees.

vg said...

jmk, whats up in Sacremento, take a peak someday,you are American right ?

JMK said...

Hi VG,

Miami is down ~8% this year according to the Price-Shiller index. Your anecdotal half-price condos are apparently not dominating the market.

Sacramento is down 11%. Not sure if you've ever been there, but I'm personally surprised it was ever up 11%.

you are American right ?

No, but thank you for asking.

vg said...

Your anecdotal half-price condos are apparently not dominating the market."

anecdotal ? man you are in denial,but I'm not the one paying the bank 90% interest every month for the next 40 years, you are so that explains your numbers games that don'r reflect reality.

Anonymous said...

Well, this article claims that central California is in bad shape, down 41% from the peak two years ago!

vg said...

anon 8:38,

just another example that jmk wants everyone to do his leg work for him.
There are many areas within major metros in the US taking a hit just like that article and the rich areas nearby are unfazed,thus jmk's insistance is based on the official broad stats not the reality of the under $1 million range where the average joe lives.

If it was really just 10% everywhere the media wouldn't be doing major segments on every channel day after day with "real" evidence,not jmk's imaginary "anecdotal". Some people just don't want to live in reality when they overpay for something and will go to great lenghts to dispell the obvious,thats why they call housing booms "feeding frenzies",it's a psychological condition that is slowly reversing itself.

JMK said...

Interesting article.

Did you notice how before prices dropped 42% in Atwater CA (pop 28,000, median family income $39k), they rose from $109k to $392k. 3.5 times. Puts Victoria's factor of 2 in the last 10 years into perspective.

hhv said...


What should also be noted is the fact that Victoria homes and those Modesto ones also share something in common: multiples on median income. So while the points you raise are correct, so is the fact that the fundamentals of income to median sales price are also very similar.

Anyway, the point of this post was not to argue that a 30% correction will happen here. Roger asked a question, I tried to explain an answer. I wouldn't give myself any kind of odds on a 30% reduction. I was simply stating that's what I'm looking for.

It has been 20 years since we've had sizable market reductions. I'm guessing when RE "specuvestors" start seeing losses of $50-$70K (which may only be 5-10% on many properties in Victoria) that the "get out now" impulse will be as strong here as it was in every other market that had this happen around the western world in the past year or so.

I know a Victorian who bought a house in Kona Hawaii yesterday. He got a 45% discount on last year's peak (20% in property value, 25% in dollar exchange value). I'm willing to believe that this will be the next trend for "rich ALbertans, drug dealers and retirees" and all the other people driving up the prices of the average Gordon Head townhome.

vg said...


my point was when you get a 10% drop across the board you get many sub groups that crash much harder and this is what happened in 1982. The stats jmk always harps on may have shown lower percentages than 50% but he was still in diapers then and never saw the deals all over the place of 30-50% off and some even more cheaper if you were buying lots.

Anyone considering buying real estate for several years during that crash was considered totally nuts cause everyone thought it was going much lower,thats when I stepped back in, go against the herd and in the end you are usually right.

olives said...

Whether the correction in the U.S. so far is 10 percent or 41 percent, you have to bear in mind that the correction is just in the early stages. Trillions of more dollars of mortgages are to adjust in the near future and credit conditions are deteriorating.

I don't see the dilemma - rent something you are really comfortable to stay in for at least a few years, or at least pay down your debt and build up your savings.

roger said...


Thanks for posting the question to the readers of your blog. I don't think we will have more than a 10-15% drop in Victoria for several reasons:

1. Once the average price drops below 500K or the median drops below 400K fencesitters will have a tough time resisting the urge to jump in. The MSM, VREB and the realtors will be whipping up the crowd with statements like "its a buyers market - grab a bargain now" or even worse "you have been given a second chance to own a home". Prices will then plateau and some semblance of sanity will emerge. Price increases/decreases will then be moderate.

2. Interest rates will probably remain the same or fall in the next few years and this will take pressure off owners to sell. The US economy is in bad shape and interest rates there are already falling. Canada's economy will also stall if the US goes into recession. The high flying loonie will also make it harder to export and make any money. Our interest rates will also decrease (the GST reduction and higher loonie will dampen inflation).

3. There are a lot of real estate believers on Vancouver Island. Their beliefs are beyond reason and as long as the crowd keeps the faith it will be hard to see major price erosion. Without significant interest rate increases, recession or some other financial catastrophe it will be difficult to get the snowball rolling down the hill. Unfortunately, newcomers (boomers, Alberta investors etc.) get conned and join the cult.

I hope that I am wrong and that there will be lots of bargains to feed the bears but for now this is what I see in my cloudly crystal ball.

roger said...


Some of your readers that want to buy a home and are unable to do this for affordabilty reasons might consider moving where house prices are more reasonable and they can have a financial future. Tradespeople or service industry workers might look up island where there are lots of jobs. Professionals might considering moving out of the province.

I have had the opportunity to live in many parts of Canada and have enjoyed the lifestyle, cultural diversity, work and recreational opportunities that each offers. Victoria is a nice city but is not the only city in Canada worth considering as a place to live.

Due to global warming many other places in Canada do not get the severe winters of 30 years ago. For example, Ottawa (voted #1 place to live in Canada by Moneysense magazine) is truly a world class city and the severe winters of yesteryear are history. You can buy a great house for the price of a Victoria "crack shack". It is also possible to save some money, top up your RRSP or have some disposable income for holidays, fun or hobbies instead of paying a large portion of your income on mortgage interest. There is lots to do for families and single folks and ferries are not an issue when taking a weekend getaway.

I am not trying to slam Victoria or the lifestyle. Just trying to offer an alternative to those who do not wish to be mortgage poor or unhappy renters.

I am planning on taking my own advice and moving on as well. I just spent some time on and there are lots of great homes available at reasonable prices in other parts of Canada.

olives said...

As for "real estate believers"... i agree that this is all that has to change - the psychology of the majority - it is slowly changing. It is drastically different here than it was two years ago and will continue to evolve

hhv said...


Thanks. I'm going to address your points by number:

1. Couldn't the opposite also be true? Couldn't the huge decline in real dollars (even though its still only a small percentage) work to undermine the security people felt in home ownership and make them reluctant to buy? I'd imagine it would take some leveling out for Mr. and Ms. Average to hop back into the mkt.

2. The Fed dropped interest rates amid speculation by themselves that inflation is an issue. We all know inflation is significantly higher than reported. I'm guessing interest rates don't change or go up. Bond yields are already headed up. I don't expect mortgage money to be as cheap as it is today for at least several years, maybe even five.

3. You are absolutely right. I have no idea how to counteract the nonsense.

I'm not meaning to suggest that I believe a 30% correction is coming. It's a possibility, but very unlikely.

You're also right about Ottawa. We are actively looking there too. Ms. HHV went to Uni there and would go back in a heartbeat. When the spring rolls around if the market doesn't change here I'll state this openly now: we'd make more and spend less by moving to Ottawa where we believe our quality of life would be the same if not better. And we will likely go.

We're also weighing our options in Saskatchewan and the Yukon. The world is a warmer place for us. We're witnessing unprecedented economic times. We believe whole heartedly that we would be economically foolish over the long term to buy into the market-driven nonsense here and not be able to afford anything but our home.

vg said...

If all you expect is 10% reductions then why not buy now ? There are lots of places that have lowered their prices the past month by 5-10%,if you low ball them abit you will get 10-15% now so why wait ?

On the interest rates I do not see them going lower based on $100 oil and all the signs the RBC man Mr. Holt stating we are in an inflationary enviroment and this is just a blip,many of the smarter Canadian analysts see it the same,thats why gold is going thru the roof,it is a barometer of inflation.

I'm actually suprised at both your comments that this market will not correct, I sense your confidence is shaken and your throwing in the towel,always a sign the top is in. As olives stated we are in the early going here.

roger said...

vg said
If all you expect is 10% reductions then why not buy now ? There are lots of places that have lowered their prices the past month by 5-10%,if you low ball them abit you will get 10-15% now so why wait ?

I have been watching the prices on PCS quite carefully and there are price reductions but they tend to be on overpriced, poor condition or bad location properties. Quality homes in good areas are unfortunately still selling at close to their asking price if the owners were realistic when they listed. The 10-15% I was referring to is on the published median and average prices published by VREB. Until these drop by 10-15% I am not interested.

On the interest rate front I diasgree. The strong loonie is killing exports as we speak. US buyer demand for our products, with the exception of oil, is dropping. Cdn. manufacturer profit margins are being hammered. The high loonie will reduce the price of imports and the GST cut will reduce prices and these factors will dampen inflation. Next year the economy will be sluggish and wage demands will drop. The BOC will be choose between a weakening economy and moderate inflation and probably reduce the BOC rate. The bond market may also follow suit and mortgage rates will decrease.

I'm actually suprised at both your comments that this market will not correct, I sense your confidence is shaken and your throwing in the towel,always a sign the top is in.

Au contraire VG. As I clearly stated above I am looking for prices for all houses to drop by 10-15% not just a few price reductions on overpriced houses.

roger said...


Now a question for you. Tomorrow is VREB statistics day. What is your prediction? (sales, median, average price)

hhv said...

Sales down slightly (5%-10%) from September. Median down to $515K. Average up slightly due to high price sales (there was that $18.5M that sold for $14.5M) and slightly lower sales volume. All in all, you can spin it good for either bull or bear but not really good for either.