Monday, July 28, 2008

The bear days of summer

You know the boom is really over when the MSM starts making sense of the spin:

First it was Canada's top 25 markets that were feeling that pain from a slowdown in housing, now it's clear the malaise has hit the entire country.

Two weeks ago statistics from the Canadian Real Estate Association showed the average sale price of a house in the country's 25 largest markets was down 0.4% last month from a year ago.

New statistics released Monday show housing across the country is now losing out to inflation. The average sale price of a home in Canada last month was $314,028, a tiny $35 increase from a year ago. For the first six months of the year, prices were up 3.6% from a year ago.

"In essence, Canada's housing market has pulled back from the record-setting pace set in 2007, but in most provinces it continues at or near sales levels set in the years before that," says Calvin Lindberg, president of CREA. "The increase in housing prices is also pulling back from the record-setting pace of last year, but we have yet to see any of the price contractions that have impacted the housing market in the United States."

CREA said there is plenty of good news in the numbers. For the fifth straight year, more than a quarter of a million units were sold in Canada. However, sales over the first six months of the year are down 13.1% from a year ago.

"Resale housing activity is cooling evenly in rural, suburban and urban markets," said Greg Klump, chief economist with CREA. He said rising fuel prices have not impacted the housing market. "There is no statistical evidence to date that shows increases in energy prices are prompting Canadians to relocate. Lifestyle factors remain the prevalent influence on homebuyer preferences." emphasis mine

If they keep this up folks, I may be written out of usefulness. I love the Klumpsters choice of spin: outside economics don't impact people's home buying habits. Sure. A decrease in sales volume is not good for homeowners the same as it's not good for Walmart. When prices aren't keeping up with inflation you are losing money in your home. Not such a good investment anymore for the short-termers eh? There goes 30% of sales across Canada. I'd wager that is a much bigger part of the local market.

UPDATE: please use html codes for creating links in comments and please don't cut and paste long articles etc.

Monday, July 21, 2008

Caviar Dreams, Champagne Wishes

and the median family income (sorry, couldn't resist).

When I was teenager (17) and moving out the summer after high school graduation, the search for my first apartment was an eye-opener. I had these dreams of finding a great place I could call my own (and use to impress the ladies) but no idea of the cost. Back then, I did what every other house hunter did and scoured the newspaper (the internet was not yet even local back then) and check out the offerings.

I must have toured a dozen places before settling on my first bachelor pad. Most of the places I looked at were shared accomodations for around $350 a month. I got my first basement, wood panelling and all, two-room bachelor suite for $425 inclusive (and not something I'd even invite the ladies into for that matter). The only bill I paid was my phone. It was on Shelbourne, a few blocks from Mt. Doug and not too far from where I live now. Fifteen years later, I have a one-year old suite, about three times the size of my first place, I pay $750 per month and my bills run just under a hundred, let's call it $850 even. Neither of these places qualify as the perfect apartment, but I'm not ashamed of where I live at all.

Tonight I had a visit with some friends who just moved into a Fairfield character suite. I don't know how much they pay, and really it's irrelevant. I know they don't own it and they don't care to. And I also know they searched for several months looking for their perfect apartment. It was like being in an episode of Friends and we lived in New York listening to the way they were talking. It's a fantastic place: big, bright, airy, quiet. I can't say anything negative about the place. Nor would I want to; I'm genuinely thrilled for them.

But it got me thinking: "Can you buy the perfect apartment?"

I don't think you can in Victoria. Sure there are lots of nice places in town. You can even pick up some condo conversions in old Maclure Mansions in the Rockland area. You can buy a great new flat in Shoal Point or at Bayview if you're a downsizing ex-executive boomer (though I question how great anything made in this boom will turn out to be). You can head out to the Metchosin sand pit and buy a McMansion that looks oh so similar to its neighbour not ten feet to the right, and left for that matter, if you're a non-ex-executive boomer. You can buy property out on Land's End Road, then tear it down and build the home of your dreams--if you win the lottery first, and even then, not likely at today's prices and today's jackpots.

The real estate myth that is "The Perfect Apartment" is a renter's dream; I wonder how long until we start hearing our friends talking about that regularly, instead of the condo they just bought in Sooke that they will trade in for the Gordon Head home next year? For me, it started tonight. Sign of the times I guess.

Wednesday, July 16, 2008

Nothing to see here says, Flaherty

Apparently, when you're the finance minister, markets do what they are told.

Federal Finance Minister Jim Flaherty shrugged off housing worries in Canada on Wednesday, saying there is no bubble. He did, however, continue to express concern over mortgages with 40 year amortizations and very small down payments.

"There is no bubble here," he told reporters after speaking to roughly 400 people at Chamber of Commerce event in Calgary.

He reminded the audience that the government last week introduced plans to ditch government-backed mortgages with amortization periods longer than 35 years, and require that down payments total at least 5% of the purchase price.

Separately, Mr. Flaherty said he is satisfied that Canadian banks are "well capitalized and strong" as subprime mortgage woes hammer financial institutions in the United States, as well as north of the border.

Further, while he acknowledged that the economy is going through "turbulent times," it remains healthy. "Our economy is strong," he told the audience.

That will show them. Heh.
It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements.
Didn't happen here people. Remember. You've been told.

Tuesday, July 15, 2008

Last One, Best One

I drove past my favourite target this morning for the first time in over a week. I wasn’t surprised to see another price reduction, but I was surprised to read “Last one, Best one” on the sign.

For me, this crack shack became condo exemplifies all that is going wrong with Victoria real estate. Now please don’t misunderstand me. I’m glad the Larges went in, bought the place for a song, spent the better part of two or three years fixing it up while the market went insane and then attempted to sell them for a ridiculous price. In the end, the corner of Bay and Quadra has at least one less problem home.

The REALTOR who they hired to market this place hasn’t impressed me. First he dared to tell us Bay and Quadra (or maybe he meant Central Park) is Victoria’s Yaletown. Then he advertised it as a BIG PRICE REDUCTION and told us property only goes up in value in Victoria, all in the same MLS listing. Now after over 7 months on the market, he has told the two buyers of the units already sold that they paid more for less, but they should be “proud of their home.”

The real estate industry loves to tell us stories about how people like you and me are doing similar things all over town. After all, we’ve all bought run down properties and fixed them up haven’t we? It’s called gentrification, or urban density, or green living or whatever buzzword they tell us is in vogue. There’s just one problem: only 3-4% of Victoria’s properties change hands every year; which means that in the last boom, we’ve seen at most 32% of Victoria’s properties bought and sold. And this also means that neighbourhoods aren't changing fast enough for you and me to notice the difference within the time frames we will live in them.

That number may appear high at first glance, but remember there was also a lot of new construction and a lot of home flipping happening in the last eight years too. But people bought the hype. And they bought the run down properties with the intention of holding for a year and cashing out, moving up or whatever they were thinking.

Buying a home, whether a house or a condo, in this town, at this time may prove to be the single biggest purchase any of us will ever make. When you go to buy a car, do you see the sales person as friend or foe? Do you see the business manager as honestly trying to help you get into the car of your dreams? Or do you view the whole process as a necessary evil to living a convenient lifestyle? A healthy bit of skepticism of the advice being doled out to you by the industry "experts" is a good thing, IMHO.

This post isn’t about attacking the real estate industry. It’s about dissecting the hype. Many Victorians have, and continue to buy into, the “real estate always goes up mantra.” It doesn’t. It isn’t right now. In fact, all over town, property values are dropping. We haven’t seen YOY price drops yet, but we will. We have seen drastic price drops in the past two months. (H/T Roger)Drastic MOM price drops are not normal, even in a bear market. This one fact leads me to believe we are in for one hell of a ride down. Strap on your seatbelts, put on your helmets and keep your eyes wide open, no better learning opportunity for real estate purchasing may happen again in your lifetimes.

Aside: I’ve had good response in e-mails, Thursday is definitely on. I will send out an e-mail with details Tuesday evening.

Update: e-mail was just sent (5:50pm), if you didn't get it (or have yet to e-mail me in the first place, not too late) send me an e-mail and I'll give you the super-secret details.

Sunday, July 13, 2008

Cheers are in order

A promised pint is a promise kept... Thursday, July 17, 5-6pm NOT at the Bengal, so e-mail me for details.

Friday, July 11, 2008

Ya Think?

Brilliant. They are finally starting to tell it like it is: (H/T s2)

the market here could turn ugly too as more houses are being built than are needed, says an analysis released Thursday by Peter Hall, chief economist at Export Development Canada.

That holds true even in B.C., where the number of housing starts has begun to fall but is still outstripping demand, said Canada Mortgage and Housing Corp. regional economist Carol Frketich.

the feds are right to pull the plug by withholding guarantees on 40-year, no-down-payment mortgages.

Because, while buying a home may be the best investment many of us will ever make, it is never a sure thing. And there are times when people are better off not owning a home.

You don't need money in your pocket to buy. And the payments will be as low as they can possibly be - though the need to keep making them goes on, and on, and on.

So you'll love it if you're a speculator who wants the most-possible property for the least-possible cash outlay in the expectation that prices will continue to rise. Who cares about paying down principal in order to build equity if you're counting on ever-higher prices to do that for you?

A better option, I think, is for people to wait until they can afford to buy. And, in an odd way, this policy change will help them.

One of many factors that drive Metro Vancouver (and Victoria) home prices is the number of buyers. And it's an artificially high number as long as people are enticed into the market with no down payment and lowest-possible repayment schedules. If those kinds of would-be buyers no longer qualified to borrow, there'd be a little less pressure on prices.

Emphasis in quotes is mine. Yours in comments.

Sunday, July 6, 2008

Strategies for a buyer's market

I'm in Vancouver this weekend and everywhere I look are news stories proclaiming the obvious: BC is now in a buyer's market.

What does this mean? Does it mean buyers outnumber the sellers? Does it mean today is a great day to buy? Should you jump into the ever-shrinking pool of people looking to get rich in real estate because you now have more choice?

I won't tell you not to buy. But I will tell you, based on my research, today is this worst day in the last eight years to buy a piece of BC real estate. It doesn't matter, in my opinion, if that piece of real estate is a SFH, a townhome, a condo, a recreational property, a float home, a mobile home, or whatever... all residential real estate is about to start posting real, year-over-year, declines in value. I'm predicting an October/November time frame for this. How low it will go is anyone's guess. But I think 25-30% is probably likely, and most definitely necessary.

So, you disagree with me, or maybe you're tired of renting, or maybe you can't fathom going to your workplace or a dinner party anymore and being the only person there who doesn't own at least two pieces of over-priced real estate. You've decided you're going to buy anyway.

What can you do in this buyer's market to protect yourself from declining prices? What strategies can you employ to take advantage of that "opportunity of a lifetime" your REALTOR may be telling you this market is?

Here's my list of helpful hints:
  1. Don't buy. (OK I deviated from what I said I won't do above). This is the best strategy. No matter what anyone tells you, the numbers don't lie. Real estate prices are not going up anymore. Look at all the price changes and sales below asking prices on PCS. Sure the YOY numbers are still up, but the 2008 trend is down. The Victoria market numbers in June are over 7% below the April 2008 price peak. Does this tell you prices are increasing? Wait. The longer you wait, and the longer people around you wait, the cheaper real estate will become. So don't buy.
  2. Take your time and look at 100 properties. Make your REALTOR (and you should use one, there is no reason not to, just be in control of your own decisions) do the work. They're hungry right now. They've had a hell of a run, but there are a hell of a lot of them now, so the competition is fierce. Use that to your advantage. Look at a lot of properties and see what the market is really like.
  3. When you've seen 100 properties (this should take a couple of months) take a weekend to review the ones you're interested that are still for sale (current sales statistics tell us most of them will be (80% plus)). Pick your top ten out of the one's remaining, then have your REALTOR search for new listings on the same block, go look at those.
  4. You've narrowed your search down to ten properties and seen a few of their neighbours, now narrow these down to the two or three that require no updating, no painting, no nothing. If you're going to pay top dollar for a piece of over-valued real estate, you shouldn't have to pay another dime to make it nice. If you can't find any immaculate houses for sale, keep looking. You should not have to pay for updates, make the current owners do this, and the only way to do this is to not put in offers on places that need updating, the market will make them fix their own problems.
  5. When you're ready to prepare an offer, look at what has happened to the market over the last few months and take that trend and extrapolate it out over the next few months. For example, between April and June 2008, the value of SFH's in Victoria dropped about 7%. So that should be the minimum below the asking value you should be willing to pay. I suggest doubling it for the first offer, that is, make your offer on that $400K home, 14%-15% below asking, or $340K. Do not be afraid of offending anyone. If your REALTOR refuses to take this offer to the vendor, get another REALTOR who will, there are plenty of them out there right now who will do this.
  6. Don't buy. I've said it again. I think I needed to, for me at least. Many realty companies also do rental or property management (Duttons and Pemberton Holmes definitely do) get one of these REALTORS to show you rental properties that are similar to what you are trying to buy. Do the math on these places and calculate the price difference between owning and renting including all the ownership related costs (monthly assessments on strata properties, taxes, maintenance etc). Buy when the ownership costs are the same (plus or minus 5%) as renting.
  7. If a low ball offer is refused, walk away. These sellers don't understand the market they are in. Rejection is the best medicine for them to get it.
  8. If a low ball offer is countered with a 1%-2% below asking price change, walk away and see point 8 above.
  9. If a low-ball offer is countered with 5%+ below, you've found a dance partner. Don't immediately jump to the halfway point between your first offer and the counter, add 1-2% to your original offer and stick to that price. No matter what. If it doesn't work on this house, it will eventually work on another, it just takes time, and the longer you wait in a buyer's market, the cheaper properties will get.
  10. If you are under any time constraints to buy, prepare yourself emotionally to lose. No one wins making rushed decisions in real estate during a buyer's market. (The reverse is true in a seller's market although the risks are still there). Find a way to be patient. Your family will thank you in the long run. And no matter what anyone tells you, there are no good opportunities to make money in declining assets. There are opportunities to prevent yourself from losing too much should something occur in the near-term before values start rising again. There are no guarantees that future values will rise above current ones should this market correct significantly. If you bank on prices increasing above current values, you are gambling with your family's future.
Now, you didn't pay for this advice. And I'm not actively out there practicing what I'm preaching (except point one above). So it really is only worth what you paid for it.

Your tips and strategies for FTBer's in comments.