Monday, January 7, 2008

A 15% gamble

So we nearly bought. Someone very close to us is working very hard to help their kids get into the RE game. Not as investors, but using the "paying rent to yourself is better than to your landlord" belief. We will benefit directly from their generosity. For that, we are extremely grateful and felt somewhat compelled to take them up on their offer.

This person owns a 2-bed 2-bath condo, in-suite laundry, very close to downtown. It falls in the downtown catchment of MLS, but I hesitate to compare this property to other downtown condos, that are more, well, downtown. It is worth more than we would have considered spending in our search. It is somewhere we we discussed we could live for the next 5-7 years if need be (market or other financial issues dependent).

Through some gifting (no we wouldn't owe this money) we were set to get into this property for a perceived 15% discount from where this person felt it will be priced when it goes on the market. Honestly, if our own financial situation was different, like say where we plan to be in 12 months, we would have jumped on this regardless of my bearishness on this market (for the record, Ms. HHV does not share the same bearishness, she's certainly no bull, but let's say she's more of a JMK-type who sees value in this market and a soft landing and continued growth at 3-5% over the next few years). Despite this, we get on very well.

Now our financing situation is a wee bit complicated. We had a bit down, we have a bit of outstanding student debt and the price of this place was such that our entire debt would have to be retired in order to get traditional mortgage financing. When we sat down with the banker, we qualified, but it required a higher interest rate than we are comfortable with and a longer term than we'd like.

But the real kicker was when the banker, who was Ms. HHV's previous manager, and someone with 30 years experience writing mortgages, said to us

"I wouldn't recommend you get into this."

"Why?" we asked.

"Look at how many condos are set to come online and how many units haven't sold yet. There's your answer."

"I told you so." says I to Ms. HHV, but only once we've left of course. Needless to say I've been doing dishes like crazy since Saturday :)

Anyway, to make a long story short, we nearly bought, it didn't end at the trip to the bank either. When we went to tell the seller the news, they bent over backwards to help us even further. It was really difficult to say no. But at the same time it was really easy. Like I said in the title, a 15% gamble. Not really actually, it works out much less when we take time, interest and any other number of factors into it.

The moral of this story is that it's really easy to be a bear from the sidelines, not so easy to put your money, or the potential risk that another 8-10% gain would mean to us, where your mouth is. That and the really interesting aspect of a mortgage seller recommending that a client "don't do this deal" at a time when mortgages are not getting sold too much in the branch. HELOCs, that's a whole other story :)

UPDATE:

CBC MARKETPLACE has a special on condos tonight at 7:30 on Ch2. I'm watching now on CBC Winnipeg. You should watch this if you are thinking pre-sales are good deals.

56 comments:

olives said...

Wow HHV, it seems like lots of bears are capitulating lately. You almost did, another poster on here yesterday (?) and another one on a different site I visit. I think it is known as a sign of the "top" of a market.

Anonymous said...

Thank goodness for that banker.

You should be at that banker's house doing his/her dishes too.

My husband and I were discussing this just the other night about bears buying now and even bears get sick of waiting and just finally buy.

Real estate has to be the slowest moving beast I have ever seen and it is so hard to be patient.

I get so fed up myself that I am starting to second guess myself. When the heck is it going to end? Will it ever end? Maybe it won't ever end? Arrrrgh!

Then I talk to my husband and he reels me back in to reality or I come on these blogs and it helps give my head a shake.

Don't abandon us now HHV.

What?

Are you afraid you may actually have to buy us bears some beers when the 10% drop happens and you are trying to avoid that? I didn't think you were on a student's wages anymore. :)

S2

solipsist said...

Interesting anecdote. Thanks for relating it.

I just wonder who the vendor was/is, and their motivation. I presume that it was family, but is that a good measure of reason? The beneficent had some motivation, whether to unload something, or to help out the beneficiaries. Not always logical or altruistic.

I have thought more than once what I would do if I had some kind of significant wind-fall, and have always thought that I would do just what I am doing (waiting for reason to return), but with more world travel.

Mind you, if I came into multiple millions, I might be a bit looser with my spending...

I just noticed S2's comment while proof-reading.

10% drop? How about 40%-60%?

It will end, and is in the process. What happens in the US will happen here. We have Herr Harper warning of tighter times a-coming. The sub-prime debacle has barely started. There is talk of CIBC folding up and being bought out by Manulife Financial ... their stock has dropped some 20% because of sub-prime and ABCP. Scotiabank is reportedly in trouble, followed by BMO and RBC. TD was looking better, but is apparently exposed too. Sorry for no links, but I'm ranting. Google is good.

Pardon my hysteria.

olives said...

solipsist, I think the "10% drop" figure referred to by S2 is timing for the first "celebration" at the Bengal Room.

Anonymous said...

"Myth #3: Rent is wasted money."

If this isn't the universally-held belief in real estate, we'd like to hear your alternative.

As is our wont, when in doubt, we run the numbers.

All examples assume a 30-year fixed mortgage at 6.25%, 20% down and a 1.25% real estate tax rate. Principle payments and real estate taxes are taken from an on-line mortgage calculator. Maintenance is assumed 1% per year. (Clearly ignoring 40- and 50-year-old shacks are routinely bought in Silicon Valley with the full knowledge they have not been updated on 20 or 30 years and need massive renovations.)

A couple months ago, we wrote about a house near the median $750K. Last week we wrote about a 43-year old house selling in a few days at $1.25M. In that same missive, we thought the upper limit would finally be exceeded with another house at $1.75M, but this house also sold within a few days.

So here we go:

Price Tot$/yr Int+Tax
$750K $62.7K $46.5K
$1.25M $95.3K $69.7K
$1.75M $120.5K $86.6K

Everyone seems to ignore the actual $63K /$95K /$121K out-of-pocket and instead salivates at the prospect of huge tax deductions. Nobody seems to ever stop and think through "deductible" means you only actually "save" the deduction at the marginal tax rate.

The table could then be expanded to:

Price Tot$/yr Int+Tax Deduction
$750K $62.7K $46.5K $17.2K
$1.25M $95.3K $69.7K $25.8K
$1.75M $120.5K $86.6K $32.1K

In other words, out of $63K /$95K /$121K spent, the actual tax savings is only $17K /$26K /32K. Worse, anyone pulling down enough coin to pay out $63K /$95K /$121K is hitting the AMT at least every other year. To account for AMT eliminating your real estate tax deduction, you have to calculate a two-year average deduction:

Price Tot$/yr Int+Tax Deduction Ded >AMT 2-yr Avg
$750K $62.7K $46.5K $17.2K $13.8K $15.5K
$1.25M $95.3K $69.7K $25.8K $20.2K $23.0K
$1.75M $120.5K $86.6K $32.1K $24.3K $28.2K

So how does that $63K /$95K /$121K feel when the two-year average deduction is only $15.5K /$23.0K /$28.2K?

In addition, there is the opportunity cost from the 20% down payment. Adding in the after-tax gain on a 5% treasury bill:

Price Tot$/yr Int+Tax 2-yrAvg Act"Cost" OppyCost Tot"Cost"
$750K $62.7K $46.5K $15.5K $40.3K $4.7K $45.0K
$1.25M $95.3K $69.7K $23.0K $65.1K $11.8K $76.9K
$1.75M $120.5K $86.6K $28.2K $84.2K $22.1K $106.3K

Obviously, a renter's cost is just the rent. It's very clear. It's very simple.

We know you were waiting so, finally, here is the punch line.

A buyer's true "cost" is their total outlay minus the tax deductions, minus the principle payments and plus the lost interest. The "final" table for this exercise is then:

Price Tot$/yr Tot"Cost" Equiv Rent
$750K $62.7K $45.0K $3,750
$1.25M $95.3K $76.9K $6,408
$1.75M $120.5K $106.3K $8,858

Conclusion: We've shopped around. You can rent properties which sell at these price points for much less than these implied rents.

This suggests it's buyers "wasting" money, not renters.

From: http://www.viewfromsiliconvalley.com/id316.html

Anonymous said...

^^ Interesting article from a US perspective. Here people salivate at the large tax free capital gains at the end of the rainbow. It is not always there!!!

Besides, as a landlord of several rental properties, I'm happy to see more people preaching renting vs buying.

Anonymous said...

Yes, the FIRST 10% drop is when the beer is supposed to be flowing at the Bengal.

I'm sure we will have a lot more "celebrations" to come as RE careens down to a 60% drop.

Anon at 7:52am - Don't forget that as house prices go down rents can go down then also.

S2

MetalDwarf said...

The Story of how I almost bought... and may yet.

My girlfriend (lets call her Jane) and I have been living together in a 400square foot bachelor suite for the past year and a half. We are fairly happy there as it is in a wonderful heritage conversion on Rockland, and the rent is cheap. But it is SMALL. I have started to go a little stir crazy.

For the past year and a half I have been working a new job which is starting to pay pretty well. With more money coming in and my girlfriend training for a new career as well, we should have a combined income of ~$100K by 2009 give or take. Aside from the cramped quarters of our current place we have all the reason in the world to wait till that 2009 date, but much like HHV (I assume) the Bank of Mom and Dad are pushing us to buy, they are offering down payments, interest free loans, partnerships in ownership, truly bending over backwards. To add to the temptation my girlfriends dad (lets call him Steve) and his lady friend (lets call her Susan) are looking for a place together now.

Steve used to be a landlord, he also used to suite out old houses and set up group homes for the disabled. Together we have devised a scheme where we could buy a revenue property, triplex to 5-plex, my girlfriend and I live in one unit, Steve and Susan live in another and we rent the other units out. All told there would be 5 owners, me, my girlfriend, Steve, Susan and my dad. we would each own 20% my dad would provide the down payment, we would provide him with an income stream from renting the property to ourselves. It all sounds great but there are so many things that could go wrong, breakups, relationships, job loss, a market correction, interest rates, etc etc etc.

The thing that keeps me up at night is. why is it this hard? I think of all the ARM mortgages, 40 year mortgages, interest only and all those crazy schemes that arose just to "make it possible" and I think of how many people who took one of these creative solutions are getting stabbed in the back.

The reason I am a bear is because I HAVE TO BE. I am truthfully priced out of the market. Even with the potential of a six figure income in the next year or so I can’t afford anything better then a hovel of a condo. If the correction doesn’t come, if prices stay flat for the next 5-7 years it is very possible I will never be able to own a home in Victoria. And the truly maddening thing is that I am one of the lucky ones, I have support both emotional, physical and financial from both sides of my family, I have a career that provides well, I have zero debt and save 20% of my earnings. And I STILL can’t afford a house. If I can’t do it how can anyone?

hhv said...

metaldwarf,

most can't. but they ignore that fact and keep claiming how great their "investment" is. when the market goes sideways (now) and eventually down (it always does, even if slight) that investment doesn't perform and the house/ATM machine won't let them keep borrowing to finance the other expenditures and the deck of cards tumbles. hang in there, we feel your pain.

Aleks said...

"The reason I am a bear is because I HAVE TO BE. I am truthfully priced out of the market."

This is how I look at it too. I don't find it hard to avoid buying because I don't feel like I have that option anymore. I'm not willing to pay the same amount to buy a crappy little 2BR condo with no yard (not even factoring in the down payment) as I would to rent an entire house.

I don't want to live in a condo, and I can afford to live in a house or townhouse. I just can't afford to buy one. If the market corrects, then I will buy. But for now I am priced out of the market, which makes my decision very simple. I like Victoria, I have a good job and can afford to live here. I just can't afford to buy, so I don't.

Anonymous said...

Metaldwarf....
When I bought me first house ten years ago, I could barely afford it either....we had to buy a relatively crappy place that needed lots of work. We barely were able to buy it, and then put lots of sweat equity into it.... then sold it three years later for about 50% more than we paid. Now, before all you number crunchers start doing your thing.....I dont care what interest we paid, what the paint cost etc......bottom line is that with a bit of appreciation, a bit of work, a bit of forced savings (principal paid down), a bit of a market appreciation ....it all adds up to three years later we had EQUITY so that we could move to a better place and do it all over (same outcome) Now ten years later.....we own our own house outright and have two investment properties, both with a good bit of equity in them.
All I know is, I wouldn't own my own home now if I had RENTED these past ten years!!!

Tony Danza said...

Anon 11:39,

Nice story, did the fact that your amazing investment was held during one of the biggest RE bull markets in history have anything to do with it? I think it might have, you got lucky, and if you could barely afford a house ten years ago in a market trough how the hell could you afford one if you were in the same financial position today?

Have you mortgaged yourself to the hilt again and upgraded to a McMansion yet? Why not follow your own advice, before you know it you'll be hanging out with Don Trump and Tom Vu!

cedarman said...

Tony Danza: why so much anger Tony? No need for that....I am just sharing my personal experience with the other readers.
The first few years I had houses were not boom years at all, as a matter of fact, the town where I owned was going through government layoffs etc....The last few years were in Victoria, and yes, I got lucky on those.
.... and no, I don't have a McMansion. I live in a very modest house, with no mortgage.

Anonymous said...

Anon.

That works great when the market is going up but doesn't work so great when the market is going down.

I will not buy now even though I can afford to because it is almost guaranteed that the market will correct.

I think I'll wait it out in my very affordable, no sleepless nights rental house.

S2

Anonymous said...

The point that Tony Danza was trying to make is just that your advice doesn't really apply any more, as it's looking in the rearview mirror. You may as well say that mutual fund X is a great investment because you invested in it 10 years ago and have done very well. In investing, one must do one's own research for how the investment will perform going forward. And all the evidence points to real estate being a terrible investment for the next 10years.

Well done that you've come out so well due to your investments 10 years ago, but your advice to Metaldwarf of "pull up your socks and just buy" is equivalent to saying "real estate is a great investment all the time, every time, including today". As noted on here repeatedly, if that were true, all anyone would have to do is buy real estate and we would all get rich. This is not possible in investing. Now that everyone thinks real estate is foolproof, this is precisely the set-up for collapse.

This is not so hard to see. Imagine fictional comic books from 1997 that were worth millions in 2007. You might have bought these in 1997 when these particular comic books were not very popular. However, if those same titles were now so popular that every mass media pointed to them as the greatest investment ever, then millions of people would pile in and buy up the 2007 issues. Would you then expect the 2007 issues to be worth millions in 2017, even though everyone "knew" they were the greatest investment ever?

The first few years I had houses were not boom years at all, as a matter of fact, the town where I owned was going through government layoffs etc....The last few years were in Victoria, and yes, I got lucky on those.

Of course you did well off those first houses. The town was going through layoffs etc, meaning real estate was not very popular. This is the time to buy. NOT now. YOu have seemingly, without properly realizing it, followed the cardinal rule of real estate investing, which is "buy when everyone else is selling, and sell when everyone else is buying". Following that mantra would have given you a buy signal in your dying town in 1997 (well done) and a sell signal everywhere in Canada today. Not a buy signal.


Billy TwoBaulz

Anonymous said...

to hhv

I fully understand your motivation to buy, even at this point in time. My inclination stems from the inordinate number of absolute junk out there in the market - if something good turns up it is really hard to ignore it, even at todays absurd prices.

My most recent find ended up getting 3 conditional on sale offers, plus our lesser offer (cash 6 week pocession) - but the seller took the conditional offer with the promise of more money. Oh well. I do think conditonal offers are going to impact the Victoria market, with us buyers with cash eventually getting an upper hand. But the waiting is frustrating.

cedarman said...

Billy,

Good post, very well put.

I would buy now, but very, very selectively.
No condos. Only houses that I was convinced were underpriced, and could have easy value added to them by relatively simple renos, or that had subdivision potential. Not an easy thing to find.

I do feel sorry for the first time buyers out there, and hope they get their hoped for 'correction'.
However I am not absolutely convinced that we will see much more than about -10% ....

Anonymous said...

You should speak to a bank officer about having 5 (five) people on title. Lenders may not be so receptive in lending to so many people. I believe that most will only go up to a maximum of 4 on title.

Remember, that if Susan is unlucky and is sued for something or anything. Under your scheme, the plantiff can go after the building.

Also, why not incorporate and each buy shares. Remember to add a "shot gun" clause of how you are going to disolve the partnership. Write out a list of what each of you expects the other to do in this venture.

Oh yes, one last thing: don't do it.

roger said...

cedarman said

However I am not absolutely convinced that we will see much more than about -10% ....

I tend to agree with you. Prices will not fall that far if folks on the sidelines jump in as soon as there is a bit of a correction. This thread has shown that many bears only need a slight nudge and they will start to buy.

In order to get a big correction we will need more than buyer fatigue. Rising interest rates, job losses or a recession would keep the snowball going down the hill but I don't wish this on my fellow citizens. However a trigger like a collapsing condo market would do nicely.

renter said...

HHV,

You certainly don't have to answer this question if it's too personal, but I'm wondering if you could give us an indication of what the interest rate and term the bank offered you were? I don't know anyone who's trying to get a mortgage at this point, and it would be very interesting to hear what's on offer to those who might have semi-complicated situations (as, I suspect, many first-time buyers do these days). No pressure to answer that, though.

hhv said...

"Prices will not fall that far if folks on the sidelines jump in as soon as there is a bit of a correction."

Otherwise known as the dead cat bounce, like say Calgary or Edmonton in Dec 2007.

Roger said...

HHV said
Otherwise known as the dead cat bounce, like say Calgary or Edmonton in Dec 2007.

My concern is that it won't bounce and fall again. Rather it will fall 10% or so and plateau for several years.

If the real estate believers sitting on the sidelines jump in and and are reinforced by VREB and the MSM it will be hard to get the correction many on this blog are looking forward to in the future.

I think a lot of people are getting carried away with this "own a house" mantra and pressure from their friends and relatives. Here are a couple of questions that nervous, tempted bears might want to consider:

1. If the you bought a property now and saw it appreciate by 3 or 4% per annum for the next five years would you be be content paying thousands a month in mortgage and taxes every month? (In other words you took out a large mortgage and you are not getting rich quick.)

2. If the you bought a property now and saw it drop by 10 to 15 % over the next two years would you still be happy and content with your purchase? (You would be watching others buy a similar property for tens of thousands less or buying a much better house for the same price you paid.)

3. Do you want to have a lot of money tied up in real estate that is no longer considered a great investment but simply a comfortable place to live? (The big boom is over. Even the real estate pundits are predicting much slower appreciation)

4. After you buy will you have any money left over to have some fun, take a trip or save for the future (RRSP, emergency funds, kids education)?

One final comment. The big boom is over and even the real estate industry is predicting balanced market conditions. If you are still renting don't look in the rear view mirror and expect to jump on to the boomwagon now. We are at or very close to the peak.

Comments anyone??

Anonymous said...

Just a 10% drop? Are we forgetting this graph?

http://tinyurl.com/zptel

olives said...

I don't think -10% is really going to cut it for first time buyers, or make it affordable for the vast majority of them.

The U.S. is entering a recession, and unless "it's different this time", Canada will soon follow. I understand dead cat bounces, but in the near future with a recession beginning, and then with a -10% drop, this should have at least the psychological impact of making the public wait for "even lower prices".

Anonymous said...

indeed, I think with talk of only a 10% drop etc we're falling back into the trap of just thinking "oh, well, things aren't that bad, so probably prices won't change much". This is akin to thinking that a car crash is unlikely to happen to us since it's (a) really bad and (b) rare.

It's instructive, as ever, to look at the US. Now that the US market is well and truly f@cked, the US MSM is happy to trot out pieces where some banking wonk works out that prices will have to come back to fundamentals (i.e. rents) before bottoming. It's also been pointed out that markets in the past have typically bottomed below fundamentals before recovering. None of this is now verboten in the US media, and it's accepted now as common sense that rents are the real indicator of sensible pricing of housing.

This will happen in Canada in time as well. Patriotz and Freako and others have gone blue in the face explaining the logical, supported case for a long time. And for prices to come back to rents, there has to be a much larger drop than 10%. Once Canadians get over the emotional resistance to this, I am sure the logical case will sink in.

The arguments, unless I've missed one, for flattening prices or a 10% maximum drop are based on no fundamental analysis, no previous market corrections, just a seat-of-the-pants, finger-in-the-air assertion that "we-ellll...I just don't see a real crash happening". Incredible really from a logical point of view, when we look at 1981 here, 1991 in the UK, the US today....but the same things were said in 1981 here, 1991 in the UK, and the US in 2006.

Billy TwoTestikles

roger said...

Just released on the CBC:

U.S. recession is here: Merrill Lynch economist

David Rosenberg, Merrill Lynch's chief North American economist, said Friday’s employment report — which showed the U.S. jobless rate jumped to a two-year high of five per cent in December on weaker-than-expected job creation — "strongly suggests that an official recession has arrived."

Of course Canada will be OK

Most economists say the Canadian economy will be hit by the downturn in the U.S. economy as three-quarters of Canada's exports head south of the border. But the consensus is that Canada will slow — rather than stall — escaping a recession this time, much as it missed the 2001 U.S. recession.

Nick said...

There's a lot of talk on the real estate blogs about how prices in Greater Victoria make it impossible for someone with an average income to afford enough mortgage to buy a place. That raises the question as to who, then, is buying all of these high priced properties, and how are they doing it?

Unlike the US, we don't have sub-prime loans, liar loans, zero-down interest-only ARMs with teaser rates, option ARMs, etc. Those financial gimmicks enabled people to buy properties at inflated prices with the sole intention of flipping them, not living in them.

I believe that as well as the mortgage-bound folks, there are two classes of wealthy buyers in Victoria that have most (if not all) of the cash needed to buy a property, and they see that as a better alternative to leaving the money in the bank. These people have the cash in hand because they inherited it, made it on the stock market, or have businesses that made them wealthy. They are attracted to Victoria for the usual reasons--lifestyle, climate, etc., and far from shrinking, these two classes of buyer are growing and will continue to fuel demand in Victoria, albeit at a reduced level due to the previous few years of price mania.

The first class of wealthy buyer wants a condo, or more likely a house, to live in now. Why is paying $1M for a house better than investing the money and renting? Here are the numbers: if I want to invest $1M and rent using the returns from the investment, I can probably derive 4.5% using a mix of bonds and preferred shares. So that's $45,000 per year. Sounds good, but Ihave to pay tax on that. Assume my marginal rate is 40%. I'm left with $27,000. Then there is the issue of ensuring my investment portfolio doesn't lose value over time due to inflation. If inflation is 2% per year, then I have to take $20,000 of my after-tax returns and put that back into the investment fund. I have $7,000 left.

Now, if I owned a house worth $1M, I'd pay property taxes of $6,00 per year and maintenance costs as well--say $3,000 per year. If I'm renting, I don't have those costs, so add $9,000 to the $7,000 from my investments, and I've got $16,000 per year to cover my rent. That's $1,333 per month--enough for a two bedroom flat in a crappy area of town. I'd take the $1M house in a heart beat. I'm quite confident a $1M house will hold it's value over a ten year span (remember, I'm buying this house to live in, not flip), so as a place to park $1M in cash, a house that I'm going to live in isn't such a bad idea.

The second class of wealthy buyer doesn't live in Victoria yet, but wants to retire here in the future. This type of buyer is driving the mid to high end condo market. He buys a condo now as a hedge against future prices, assuming the long term appreciation of the condo value will beat what he could make in an investment portfolio. Since conservative investments don't return much more than 4% per year, he's not really making a big bet on condo prices in the long term (again, he's not a flipper). If he rents the condo in the mean time (take a look at VRBO.COM), it's to cover his property taxes and condo fees, not to pay a mortgage. So all of the observations about people renting their new condos at rents that don't cover their mortgage payments may be largely fallacious.

It's true that 20%+ increases every year in prices are unsustainable (even rich people have their limits), but I don't see a massive crash in prices along the lines of 30-50% as some people are fervently hoping for. The demographics and geography are against that. Victoria isn't Phoenix or Las Vegas. There are no ghost town subdivisions here.

hhv said...

"Victoria isn't Phoenix or Las Vegas. There are no ghost town subdivisions here."

There wasn't in those places either, until the market turned. You conveniently neglect the fact that in a prolonged period of negative asset appreciation (in RE that would be <3% growth/year), say of 1-3 years (which is what is being suggested by economists) the capital flight out of RE will be the same as the capital flight out of any non-growth "investment."

The wealthy people you describe are not the norm in society. Even with the baby boom bubble it is only the top 20% of any age group that has the wealth you suggest. Most boomers do not have cash. Many do not have savings. These are well known facts. The boomer generation is the worst prepared in the history of retirement for their later years. We will see many work until very late in life.

This whole notion of "they will keep coming here" is the about as much garbage as the so-called 50%-60% corrections you take to task. At least with the correction claims they are based on some sound economic fundamentals (even the stagnant period between 1994-2001 in the local RE market saw prices come down below rents). It's likely that this time next year when developments change or cancel their plans, they'll blame the fact they can't compete with real retirement markets like Florida, California, Nevada and Arizona.

No immigration numbers support the claim that thousands of people, let alone thousands of retirees are moving to Victoria. The developer of The Radius, which is 50% sold, stated that most buyers are locals. I wonder how many of those are trying to sell their contracts at a profit? A simple $50K investment has netted these specuvestors 20%-30% in 12-18 months over the past few years.

Could this not explain the current situation where condos sit empty because no one has bought them? These types are already walking away from Bear Mountain.

I don't foresee to know what the future holds in this market. My gut says it will drop, and likely fairly significantly. If the $500K house loses 25% of its value over the next few years, I am better off buying at $350K than paying the interest on a loan at $450K. That is a calculated risk I am willing to take.

If the market goes flat and bounces around seasonally for the next 5 years, you have an effective 15% loss when you factor in inflation.

I am not a bitter renter. I am a happy renter who would prefer to own, for peace of mind and security, but I won't compromise my happiness or my financial security to "get in before it's too late."

hhv said...

Roger,

"My concern is that it won't bounce and fall again. Rather it will fall 10% or so and plateau for several years."

This is where opportunity cost comes in. We had a good chat about this exact situation in the bank on Saturday. The consensus we came up with is it would still make better economic sense (for our personal situation) if this were the worst to happen. Add it up, say 10% in a year or two, then stagflation of about 3%-4% for another 2 and you are getting close to a compounded 20% correction.

If I paid $300K for a condo today and we had a four year period that witnessed a cumulative 20% loss, my condo would be worth $240K, I'd be out around $65K in interest, I won't have any equity because the market ate that up (I'd likely have negative equity actually) and I would have lost the earning potential of the $1100-$1200/month that would be the difference between me owning and renting. Even conservatively invested, I'm way ahead.

No I know that many people don't save the difference between owning and renting. But If I do, I come out in much better shape.

Anonymous said...

So nick, house prices are kept high because rich people keep buying them?

What about so many of my friends that have bought homes in the last 3 years and are stretched to the limit financially? Didn't they add to the boom? What happens to them if rates go up 2%? Or when their 5 year term is up and the their house is worth $50k less?

Oh ya, I forgot, its different here.

Nick said...

Anon 3:45,

What about the WW II boom? That run-up in prices (a little less than the current run-up in percentage terms) was never reversed. You can just as easily find "evidence" in history to deny an impending crash as to support it.

HHV,

I'm not suggesting all market activity is driven by the wealthy, just that it may be a factor. For example, there are only about 250 SFH sales in Oak Bay per year--it's a tiny market and it doesn't take "thousands" of retirees to drive it. I bet demand from fewer than 50 incoming retirees per year, combined with normal churn of existing residents, would be enough to keep the market tight. There is no vacant land in Oak Bay--only existing housing inventory.

Anon 5:37,

Yes your friends did add to the boom (at least at the low end of the market--high end buyers don't need mortgages, at least not to the extent they would be financially squeezed by them). My advice to your friends would be to tough it out if prices drop--after all they still need a place to live, and if their mortgage rates go up 2% and they can't afford it, that has nothing to do with the value of the house. That's just bad luck.

hhv said...

"Yes your friends did add to the boom (at least at the low end of the market--high end buyers don't need mortgages, at least not to the extent they would be financially squeezed by them). My advice to your friends would be to tough it out if prices drop--after all they still need a place to live, and if their mortgage rates go up 2% and they can't afford it, that has nothing to do with the value of the house. That's just bad luck."

There are a lot of high end ($800K-$1M) homes with suites being added. Very few people are adding suites unless they are moving their parents in to look after them (rich people don't have to do this, they pay for homecare) or looking for a mortgage helper. Bear Mountain is a perfect example of this. So many $700K+ homes have suites up there.

If rates go up 2% and that pushes people out of their homes it has nothing to do with luck and everything to do with poor choices. We are still at 30 year lows in mortgage rates. If people were banking on staying below 7.5% they had either bad advice or non at all. That's why banks and other responsible lenders won't give you more than 35% of your income in mortgage debt. If you stick to the fundamentals, then a 2% shift in rates shouldn't hurt too much.

Anonymous said...

Nick Said:

"Victoria isn't Phoenix or Las Vegas. There are no ghost town subdivisions here."


I would suggest you take a drive up to Shawnigan Lake. Take the Shawnigan Lake turn off near McCurdy. Travel along the road and you'll see completed fully serviced subdivisions - but no homes built. Continue up to Shawnigan Lake and take the Sooke Lake turn off - same thing again. "Ghost Subdivisons"

roger said...

HHV

The other problem is many BC buyers are taking out 40 year amortizations as discussed in this article: BC Prices Supported by 40-year Ams.

If interest rates go up they don't even have the option of increasing the amortization cause they are maxed out. With 40 year you are paying little principal in those first five years so you are only building equity if prices increase. If prices stay flat and you have to sell all you ended up doing was paying lots of interest to the bank, city taxes and maintenance on the bank's property.

BTW - Nick glad to see you on the blog. I wonder if you are related to one of our other bull posters JMK? Gosh, I miss that guy - he was always ready to jump in and get things going. VG seems to have disappeared too.

Nick said...

Anon 7:22

By "ghost town subdivisions," I mean subdivisions of new, empty houses which have been purchased by speculators and sit empty because they won't sell at a price anywhere near what their owners paid for them, or because their owners walked away from their deposits instead of closing on the purchase. A subdivision of empty lots owned by a developer is not the same.

Roger,

Thanks for the welcoming words. I'm not related to JMK, and I'm not really a "bull." I'm just not as bearish as others. I do think the US market has gone right down the toilet, but we have to be careful about jumping to conclusions about the Canadian market based solely on what's happening in the US.

hhv said...

Nick,

"because their owners walked away from their deposits instead of closing on the purchase." This doesn't sound at all like what is happening at Bear Mt. does it. I know, anecdotal unsupported evidence. But if it's happening there, it's happening elsewhere. Anyone else heard anything?

vg said...

I'm around here HHV, just busy with work stuff.

Great thread and a very interesting experience for you and Ms. HHV or shall we say "enlightening" experience :) . I can see one being tempted by 15% if it was the right place and you have been looking for a long while and as long as it was not 15% below some gouge level.

Didn't like the sound of a higher interest rate. To me that is a sign the bankers have really tightened up the purse strings, 6 months ago you would have go the best rate hands down.


Best to stay away from family deals I found,if they don't work out it can create problems for many years all over a stupid house.

Anonymous said...

metaldwarf,

I hear you. My situation is a bit different, but my wife and I already make $120K/yr combined income with it likely increasing to $140K by the end of 2008. We save over 50% of our monthly income and we already have over $100K in the bank for a down deposit.

Could we afford 'something' today that we could live in for the next 5 to 10 years at least? You bet! Absolutely. But I also absolutely refuse to be in debt for 30 to 40 years, when I can just wait 3 to 5 years for the market to dip significantly and save ourselves a good 10 to 15 years of WORKing for the boss. RE markets work in cycles (historically ~7 years), and so patience is a virtue.

The US economy is on the verge of a recession if not already in one, and Canada may not be that far behind once that happens. Plus hey, the 2010 olympics are just around the corner now, and that will be the (somewhat irrational) but big 'sell' button for a lot of "investor" folks in BC. So I have little doubt this market will turn. Come on, it's already a far cry from the crazy 2005 days of selling your place 2 hours after it goes on the market and not even making it to the MLS site.

Why not do what we did? We spent 1.5 months looking for a very nice place to rent. Yes our rent has increased by almost double, but it is still a fraction of any mortgage we'd have. We were living in a 600 sqf apartment. Now we live in a 1100 sqft house suite with 2 bedrooms, suitable for having 1 child for a couple of years, and in a better neighbourhood.

Fortunately, for us, I don't have family pressure to buy. In fact, I've managed to convince my soon to retire (2010) mother to sell her house this year and rent for 3 or 4 years until the market turns.

With the huge overstock of condos scheduled to hit the market later this year, this party will be over soon enough! My banker who himself flipped condos for 3 years ending in mid 2007 said to me just yesterday that people are insane to buy now and that flippers are lucky to get out with $5K profits if they are lucky to do so. And $5K is not worth anybody's year worth of renovations efforts.

The smart money sells when there is money to be made, and buys when the prices are justified or better.
It's simple, but patience and rationality is required.

Your parents and Jane's parents should be old enough to remember the 80's and the mid 90's. Go pull out some library newspapare clips of the housing glut from those years and prepare yourself with a few spreadsheet scenarios, and then tell Jane that you are comitted to finding a nicer place to rent.

Best Wishes!

olives said...

Anon @ 4:01 a.m (?) I am in the same position as you, almost exactly. I think the key is being in a great rental, which we also are.

Although I was a teenager I do recall the "housing glut" in the early 1980s - I remember For Sale signs all down our street and people desperate for jobs. A developer friend of my family went bankrupt when he couldn't sell or then rent many of his condos.

I don't understand those who think there is only likely to be a minimal price drop in the future when in the early 1980's the correction was 45 percent (inflation-adjusted). It's not too hard to find many many people (in the know) who believe we are in much much worse global economic condition now than we were then. In fact the last credit crunch led to the great depression, and the derivatives meltdown is just beginning, another $700 trillion problem.

MetalDwarf said...

anon 1:25

We would be setting up a corporation which would own the property, we would each own shares in that corporation, a lawyer would indeed set up a shotgun clause.

There are downsides to the corporate approach, if a shareholder was sued, there is the possibility the plantiff could take the whole house. Additionally, we would have to apply for a business loan which usually requires a higher down payment then a personal loan (30%-ish)

Anon 4:01

I have been looking for a bigger place to rent, I haven't had much luck. There really is not much available right now to rent. Low vacancies are no doubt due to all the people would would like to buy but can't afford it and being forced to rent. I have also noticed a substantial increase in rents over the past 6 months or so (no numbers to back this claim up sadly, everything just seems more expensive) a year and a half ago my cousin rented a very nice 1 bedroom basement suite in Fairfield for $700/m. A month or so ago I looked at a subterranean, leaky moldy 1 bed basement suite a few houses down and they wanted $1050/m + 1/3 utilities.

The low vacancies are making people desperate for somewhere to live, landlords know this and price accordingly.

Anonymous said...

HHV,

Personally, I think that if you are being offered help and/or able to afford your payments, still have some money left over for going out and etc you can never loose owning a home.

I look at this way. People try to save money for one major reason and that is to buy a residence.

Timing the market on a downturn is just as greedy as trying to time it when it trends up.

When the market drops you never know where the bottom is until it start to go up. Psychologically you will always think next month is going to get lower. The month that it creeps up a bit you get into the mentality that you think it is a one off and correct. By that time fear comes into play and people will start pushing prices again.

No matter how much people want to talk about fundamentals buying RE has an "x" factor of emotion. Also, fundamentals do not calculate i.e., inheritances, loans from families, foreign buyers, etc.

There is only one certainty. You can control what you can control. If you can buy your home today, afford your payments you will most likely never sell in down market. If you can make it some months and not others then you are susceptible to selling at the wrong time.

Anonymous said...

The comment about "ghost subdivisions' got me thinking.
Would not the sale of vacant lots be a precursor to the future real estate market?

So, if the sale of vacant lots were poor - would that translate into fewer home starts - which would lead to higher unemployment -which would lead to a drop in sales - an increase in listinge - etc, etc,

So, I looked at how many vacant building lots are currently up for sale in the CRD. - 317

How many sold in the last 6 months - 111

That gave me a 17 month supply


I looked at how many were listed for sale in the last 6 months -285

How many of these sold in the same time period - 40

That gave me a sales to listings ratio of 0.14


So, what does this mean? You may judge for yourself. I certainly would not want to be developing a subdivision today.

roger said...

metaldwarf said

I have been looking for a bigger place to rent, I haven't had much luck. There really is not much available right now to rent.

Have you been looking on Craigslist? This week there have been more rentals than I have seen in a long time.

On a related note to condo meltdown - Check out all the Bear Mountain condos for rent yesterday on Craigslist.

MetalDwarf said...

Roger

I perhaps should have been more clear.

My girlfriend doesn't drive nor does she have any desire to learn to drive no matter how much I harass her. Bear Mountain is out of the picture. I'm pretty much limited to walking distance to downtown and major bus routes. So James Bay, Fairfield, Rockland, Oak Bay, Fernwood, etc.

Aleks said...

I keep hearing that it's a tight and competitive rental market, but it really didn't affect me. We looked through the ads last week, viewed three houses on Saturday and filled out applications for two of them, got chosen for both, and took the one we liked better.

The only difference between this time and the other times I've had to move was that previously I only ever applied for one place, which removed the hassle of having to stall one landlord while waiting to hear from the other. You do pretty much have to make a decision when you view a place, but it's not like there were bidding wars or something.

Then again, I'm not exactly the average tenant. I've had TWO landlords sell the house I was living in and offer me a suite in their new house.

Roger said...

aleks said

filled out applications for two of them, got chosen for both, and took the one we liked better.

Last time I looked at a property managers application form I was shocked at the level of personal detail they wanted (dr. lic#, SIN, bank account #s, credit card#, birthdate etc.) I am concerned about identity theft and was not going to give this information to a stranger. So I walked away.

Could you and the other posters tell us what is required nowadays on an application?

Anonymous said...

Last time I looked at a property managers application form I was shocked at the level of personal detail they wanted (dr. lic#, SIN, bank account #s, credit card#, birthdate etc.) I am concerned about identity theft and was not going to give this information to a stranger. So I walked away.

Could you and the other posters tell us what is required nowadays on an application?



I am a bit surprised by the bank account numbers and credit card numbers - this seems a bit mental. But the other info seems reasonable for them to set up a credit search. I help out with the landlord duties for a house right now as well as rent myself, and both for myself as a landlord and a tenant I can't see why anything other than a credit check and a previous-landlord reference or two wouldn't be sufficient. I wouldn't give my credit card number or bank account numbers out on an application either.

Billy TuBaulz

renter said...

i especially wouldn't give anyone my SIN number. there's no reason they need that, unless they're putting you on payroll.

the rental market is definitely tighter in the areas that metaldwarf mentions.

Bubble 'n Fizz(le) said...

I figure Victoria deserves another bubble blog to point out the signs the party is over. Please visit and comment! I'll try for new posts at least twice a week.

Bubble 'n Fizz(le)

greg said...

Okay, I will link to my site, just because it's clear we are 12 years into the current cycle - much further than the usual 7 year cycle, and so the end is very near. Check out what happened in Phoenix when listings completely overwhelmed sales, courtesy of housing doom, in the graph at the bottom of the story.

On another note, when looking at sales on the PCS a couple days ago, it seems more than half have price revisions downwards and are selling for less than asking. Looked like around 5-10% reductions. If you don't believe me, get signed up to a PCS service and check it out.

On a personal note, there has been some discussion in my own family about buying.

I don't care about getting the lowest price, but what I might start trying is looking, then making conditional offers 15% under asking for the places I like.

There will be a time when the sellers will be very glad of any offers, even mine.

hhv said...

Anon at 9:53am,

I have always maintained that if you buy a place that fits your economic fundamentals (i.e. 35% of income) and you will be happy there long term then now is a great time to buy. Market conditions don't matter too much when you're buying a home.

But if you compromise on happiness, or spend too much money to be happy, you are setting yourself up for a bad time over the short to medium term.

Our situation over the past week has fit this scenario exacty and that is why we didn't buy. We won't be happy in this place long term, short term yes, but long term no. So we didn't do it.

"Timing the market on a downturn is just as greedy as trying to time it when it trends up." I don't think I agree with this. I've never advocated that people time the market either. Only buy when it makes economic sense for you. Simple.

My dream for this blog is that when the market does turn, we see a slow exodus of the regular commentators, and the not so regular commentators, coming on here stating "glad we waited, just found a great place we can stay long term at a price we were comfortable with."

My only beef is that housing (condos included) in this town has inflated so much that this scenario is not a reality for most people. I'd be willing to gamble that most FTBers and many moving up the ladder types have compromised their quality of home life to live the dream of RE wealth in 2-3 years. People's financial memories are ridiculously short term, until they get burnt.

What I'm seeing going on economically right now looks like its going to burn a lot of people, including those that thought they were on the sidelines. Just my opinion though.

Anonymous said...

Has anyone been following MLS# 235126 on PCS? It's a real estate agent selling their own property on the corner of Jutland/Finlayson and Burnside. Maybe they aren't in a hurry because it's been up there going on 4 months now with 4 price changes. Or maybe they just suck at their job :)

hhv said...

I drive past that place every workday... they don't suck at their job, they just have a sucky place

Bev said...

Nick,
You can buy a sfh with pool in Phoenix for under $200k. For $500, you can buy a mansion. Then again, Phoenix doesn't get 30 days of rain straight. Which makes less than the perfect climate we have here. And, of course they don't have the Olympics, the flood of US/Alberta investors that we are getting and all the other bullshit. Speaking of shit, Phoenix does not have an ocean to dump shit into, like we do in Victoria.

Anonymous said...

Nick,
Another attraction this city has besides the gray winter weather is an inordinate rate of rusty scrappy polluting cars.

Aleks said...

We didn't get a chance to look at any professionally managed properties, because by the time they phoned back on Monday we had already found the two places we liked.

The ones we did apply for required a SIN to do the credit check. According to the Tenancy Act, that's acceptable (my gf looked it up).