Thursday, August 28, 2008

Kyle would never buy another pre-sale

If he had to do it all over again, Kyle Lake would never buy another pre-sale home. But, if some real estate experts are right, buyers are not likely to see the trend again for another seven to 10 years.

Lake and his partner, Ashley Hughes, are among the tens of thousands of British Columbia families and individuals caught in a hot real estate market in the last few years. To get into the market, they chose to buy a condo that had not yet been built, commonly referred to as a pre-sale.

A pre-sale is a contract for the purchase of a home, usually a unit in a condominium, made prior to its completion. In some projects, sales have been made before construction has even started.

Purchasers and developers enter into a contract that provides for units to be built within a period of time for an agreed price. Real estate agents or lawyers for the developer usually hold deposits in trust as part of the agreement.

In Lake and Hughes's case it took 15 months before they moved into their Langford two-bedroom-plus-den condo.

When the young couple put their deposit down last April, the target date for completion was March 2008. A series of delays resulted in them finally moving in in late July.

"If I had known it would take this long I would have looked for something else," says Lake, 23.

He says the real estate market at that time was characterized by a lack of new condos to choose from, a low inventory of existing resale condos and real estate values that seemed to rise steadily.

"Back then, there was this mentality to buy what you can and get into the market before they sold out."

While he estimates his new condo is worth more than the $299,000 he paid, the delays surrounding possession and repairs on deficiencies in the unit have soured the experience for him.

A recent cooling in the real estate market and an increase in the number of units for sale could signal the end to the trend.

At the height of the boom, real estate agent Guy Crozier estimates, pre-sale contracts accounted for 65 per cent of his sales. It is a cycle he has seen repeat itself every seven to 10 years. With a rising real estate market, many purchasers buy units on the assumption that property values will be higher by the time the building is finished.

Driven by high demand and low inventory of resale properties, pre-sales were a popular way for individuals and families to shield themselves from escalating prices.

"In pre-sales, clients were shown a hole in the ground and asked to buy a piece of air," says Crozier, one half of the Crozier and Marchant team based out of Re/Max Camosun. He points to an overheated market where many investors entered the market looking for equity appreciation. They bought condos like stocks.

The investors had no intention of occupying the suites, and usually sold them as the completion date approached. But their involvement in the market contributed to a shortage in supply, further driving up prices.

With a downturn, more units are available for immediate sale, so there is almost no demand for pre-sales.

"I haven't done a pre-sale in two months," Crozier says. "Condo listings are up 50 per cent."

The numbers might be down for now, but developers say there will always be a place for pre-sales in the construction industry. Developers looking for financing for multi-unit projects are used to financial institutions demanding proof of a certain number of pre-sales before they commit to financing.

"The more pre-sales you can bring to the table, the more confident the bank will be that the project will succeed," says Bob Gill, president of Parkway Alliance Developments. His Reflections development in Langford is 70 per cent pre-sold ahead of the project's September target completion date.

While he says pre-sales aren't suitable for individuals who cannot wait to buy, pre-sale pricing -- which is generally lower than what the units will ultimately list for -- can be a good deal for buyers.

But Gill cautions that pre-sale purchasers should do their homework and read the fine print on the disclosure agreements, as every developer has different wording in contracts. The contract is a legally binding agreement and buyers need to seek legal advice.

He says deposits, which range from 10 to 15 per cent of the purchase price, are generally not refundable. Buyers who change their minds and try to get out of the contract can forfeit their deposit and can be sued by the developer for damages. Pre-sale buyers who try to sell their contracts might also find certain restrictions and fees for doing so.

Even with a market slowdown, Gill is confident he will be able to sell the remaining units of his development.

He says, "Ultimately, people like to touch and feel what they are going to buy."

Emphasis mine. Kind of speaks for itself, don't it? Long story short: young guy and his girlfriend buy condo before built; young guy and girlfriend have less than positive experience with developer; young guy still confident that "my place is immune to downturn"; REALTOR confirms massive speculative buying drove prices upwards unsustainably and market is now very slow with rising inventory and falling sales, then says "sharpen yer pencil young fella"; Developer says: "I sell it all"; Developer doesn't say: "I dropped prices $20K" (he did, and will again); Market says: "Yawn, see you in 7-10 years".

There you have it folks... Buyer turned homeowner, CondoKing and Langford Beautifier all agree, this market has boiled out.

73 comments:

Anonymous said...

"if some real estate experts are right, buyers are not likely to see the trend again for another seven to 10 years."

This is not earthshattering news, it's the market plain and simple it goes up a lot, down a little, up a lot, down a little and up a lot again. Our grandparents paid $8,000 for the now $620,000 home. Ho-hum, what's next?

Don't spend spend 6 days picking on poor Kyle and his girlfriend.

hhv said...

This post was never meant to pick on Kyle. I don't feel bad for him, he has access to the same info I do. Nor do I judge his situation. I can only assume Kyle and his GF bought a place to live, can afford it and are just disappointed it took so long.

If the point of this story was that Kyle and GF planned to sell next week to buy a house closer to town, I may be tempted to toss a stone in a glass house, but that's not the point.

The point is, this is the first time I've seen the TC interview a FTBer, a REALTOR and a developer and have all 3 come to the same conclusion: things are not different this time, the market cycles, and the "experts" believe we're in a downswing, that only two months ago they were predicting "couldn't happen".

hhv said...

Your grandparents also paid a penny to see a feature film back when they paid $8K for a house... for every boom there is a bust, we agree on this, I'll wait a couple years and buy your $620K house for $400K... that $220K is a nice cushion for my retirement plan, small price to pay for such a big reward by being patient and not getting caught up in the hype.

Anonymous said...

It won't drop anywhere near that far and it's not for sale. Actually I'll be in line bidding against you so we'll both be paying $550,000 for the next one guaranteed. Get in line.

hhv said...

you'll be bidding alone, so word to the wise: lowball. :) I can wait till it hits $400K and will, or I'll just keep renting without being bitter and laughing all the way to a great lifestyle and retirement...

Anonymous said...

As long as you can keep your perspective and keep smiling, it's all good.

A little side note, I've made a couple posts, they seem to dissapear and then reappear and now I don't see them at all. There's an interesting post to last thread that I wanted to read, but can't see it, yet I know it's there. Is this just me?

Anonymous said...

Good article HHV. I was around in the early/mid 90's condo price dip, and it wasn't a "little" dip, it was over 40% from peak to trough for my mother's condo. Her BC assessment went from $105K to 64K after several years of decline. This was a used (~25 year condo in Central Park area).

She had purchased it to live in, not for investing and eventually sold out in 2003 for $137K (nearly double) - but none of these prices are inflation adjusted.

If you inflation adjust the dip, it's more like 50%, and this time around it may be even worse. That TC article is but the beginning. Looking forward to seeing the price drops 2 years from now as all the current condos under construction are finally livable... if they make it that far.

Anonymous said...

I wanted to pull this up from the last post for any response:

"Many young families took out self-certification "liar loans" at five or six times their income as the only way to get on to the housing ladder. Now the banks are forcing them to remortgage at a higher rate and demanding large deposits."

This brings to mind something I have pondered before. If I owe 75% on my home at purchase and escape CMHC fees, but then take a second in the form of a LOC bumping me up to 80% and prices drop 10%, what happens on refinance?

My guess is that I would have a hard time refinancing, be at the mercy of my existing banker for rates - and end up paying CMHC fees! Does this sound likely?

Anonymous said...

Anonymous said...
"It won't drop anywhere near that..."

Isn't that what they said in Florida? California? Or was it Arizona?

It will drop more than that. When the banks stop lending the poop will hit the fan. Throw in higher interest rates and the fun really starts. Just for some perspective, imagine how cheap houses would be if there was no such thing as credit to buy one. It will never get that bad of course, but the correction will be drastic. "The higher the top - the greater the drop."

Anonymous said...

Anonymous said...
"It won't drop anywhere near that far and it's not for sale. Actually I'll be in line bidding against you so we'll both be paying $550,000 for the next one guaranteed. Get in line."

Keep this post in mind and bring it back up in 2-3 years.

S2

Anonymous said...

Fairfield is not langford is not california is not las vegas. I'm safe because I own an environmentally friendly, bicycle friendly, kid free home in Fairfield. All my neighbours are yuppies hippy types who hate sprawl and bear mountain and working people and all that. Everyone's very progressive in Fairfield that way. I think we're safe here.

Anonymous said...

Fairfield is not langford is not california is not las vegas. I'm safe because I own an environmentally friendly, bicycle friendly, kid free home in Fairfield. All my neighbours are yuppies hippy types who hate sprawl and bear mountain and working people and all that. Everyone's very progressive in Fairfield that way. I think we're safe here.

Anonymous said...

Fairfield, post it another eight times and you might BEGIN to believe it...

patriotz said...

imagine how cheap houses would be if there was no such thing as credit to buy one.

During the 30's you could buy a house for about 3 times annual rent, and even then you could get financing, albeit with very high down payment requirements.

She had purchased it to live in, not for investing

If you buy a house to live in, it is an investment. An investment is something you buy now which yields a marketable return in the future. Since a house or condo is rentable, having a place to live has a market value.

The popular definition of investment, "something I buy now which I think I can sell for more later on", is bogus. Businesses make all sorts of investments which they dispose of for less than purchase price, such as vehicles and computers. The reason they buy them is, of course, that they generate revenue for the business.

RE is an extremely bad investment at current prices because of its low yield (rental value/purchase price). But it's still an investment.

This BTW is the reason why developers build condos, not rentals. They make way more money selling them to fools than they would renting them out.

Anonymous said...

"This brings to mind something I have pondered before. If I owe 75% on my home at purchase and escape CMHC fees, but then take a second in the form of a LOC bumping me up to 80% and prices drop 10%, what happens on refinance?"



When it comes time to refinance at the end of your term, the mortgage is rolled over and you pay at whatever the rate is. As long as you stay with your financial institution everything should be fine.

I wrote a post about home equity lines of credit earlier and this is a good example of how people can over extend themselves. I'm sure the banks are second guessing how wise it was to provide this mortgage product in the light of declining prices. I expect that the banks will start cancelling these credit lines.

just jack

B2B said...

When the Times Colonist finally runs a story shouting "Realtors see cycle on downswing", then we really know we've arrived. The T-C is the last bastion of half-assed, provincial reporting. Thus - we have definitely turned the corner.

Congrats all! Brace yourselves for more annoying trolling on here. We've still got a couple years to go yet and people will need encouragement to stay patient throughout.

Anonymous said...

Anonymous said...
"It won't drop anywhere near that far"


Keep this post in mind and bring it back up in 2-3 years.

S2


Yes. Then we'll see how truly and breath-takingly WRONG some people can be. This is going to end so badly, their heads can't comprehend just how low RE can go.

I watched the '81-82 crash and that will look like chump change in comparison to this one.

Anonymous said...

Because Fairfield has an army of urban planners who's mantra is to not build any roads and instead focus on sustainable, environmentally friendly, no kid policies we'll be safe.

womp said...

http://ca.news.finance.yahoo.com/s/29082008/2/biz-finance-new-listings-homes-sale-across-canada-set-record.html

Bob said...

Interesting listing in Fairfield. MLS #250624

Aug 5 listed for $569,000

Aug12. went unconditional for $630,600

I guess there are still enough buyers out there for bidding wars!

Nick said...

I was driving up Quadra a few hours ago and saw what looked to be sold stickers plastered all over the "last one, best one" sign at everyone's favorite crack shack. Did it actually sell and does anyone know what the sale price was?

Anonymous said...

When we were selling a property a couple years ago, and had a conditional sale in place, there was about 4-5 conmditional sales behind it. I wonder how many listings get taken out with every new buyer.

Anonymous said...

"If you buy a house to live in, it is an investment. An investment is something you buy now which yields a marketable return in the future. Since a house or condo is rentable, having a place to live has a market value."


A Picasso painting doesn't have a rent. Vacant land is rarely rented. I don't think that it is necesary for the widget to be rentable in order to be an investment.

I think of something as an investment if there is a reasonable expectation of future profit and/or provides a rate of return.

Businesses do make investments that they sell for less, but at the time that these decisions were made there was an expectation of future profit.

Beanie Babies at one time were considered an investment. Would you call them an investment today?

So what changed?

-The expectation of future profit.

So when you occupy a home you do not receive a monthy income from the home - the bank does - but you don't. If prices are declining what has happened to the expectation of future profit.
-Its gone.

So, is home that you occupy an investment?


just jack

hhv said...

JJ,

I think your definition of investment is slightly different than mine.

I don't look at a Ferrari or a Picasso as an investment. I look at them as high priced art that either holds its value or goes up in price with time. People who do look at these things as investments are typically extremely wealthy and uber savvy investors. I'm not saving my pennies to put them all into a F430Spyder.

If I buy an "investment" I ask two questions: 1. when do I get my initial money back? and 2. how much more than my initial money will I get back in said time period. Armed with that info, I can calculate the ROI and make an informed decision. There is of course, some historical valuation assumptions that may or may not hold into the future here.

My home, when I buy one, will not be an investment. I think I will pay a premium over renting to be an owner because I will have pride of ownership and I will have an asset (not investment) that will have a value in the future (that value is declining rent payments).

If I buy a second home and rent it, the calculation is very simple: how much does it cost me to carry it? When it costs me less to carry than I take in, by 20%/month, I'd likely become a landlord. then I'd look at said property as an investment.

Bare land, to me, is the same as a Ferrari...

Happy owner said...

Hey anonymous, do you feel like sharing with us the year your grandparents bought their house for 8k.

-cheers-

patriotz said...

Businesses do make investments that they sell for less, but at the time that these decisions were made there was an expectation of future profit.

Profit is a business's revenue minus expenses. The definition of "profit" you appear to be using is only capital gains.

Avis buys a car for $30,000 and sells it two years later for $10,000. Did they expect to sell the car for more than they paid for it? No. Did they expect to make a profit on the car? Yes. Because they were renting out the car during those two years and the income from that exceeded the loss on selling the car.

Get it? That's what investment is about - buying something that generates future income, not just buying something you think you can sell for more later. Indeed, the only valid reason for an investment to sell for more than you bought it for is because it produces more income - what is called an improvement in fundamentals. Someone who buys an investment only because he thinks someone will pay him more for it, regardless of fundamentals, is called a "greater fool".

BTW, collectibles such as Picassos and such are not considered investments in the economic sense because they do not produce any marketable yield, i.e. they are not capital. Unless you can charge people to see them. Nor is gold.

Anonymous said...

"Hey anonymous, do you feel like sharing with us the year your grandparents bought their house for 8k."

-cheers-

Likely somewhere around 1935 - 1940 they bought a house and about 15,000 sq lot for $300 down, $30 per month (as I recall being told.) They later subdivided the lot and built new, which is the house currently in the family.

Anonymous said...

And yes, they sold the original house and I'm sure got their money back out plus a tidy profit. So, I guess they actually paid less than nothing for the current house.

Anonymous said...

I bet they would have paid at least double if they'd bought in '28 or '29.

Timing is everything.

Anonymous said...

"Someone who buys an investment only because he thinks someone will pay him more for it, regardless of fundamentals, is called a "greater fool".


It must be frustrating for you to see so many "greater fools" who have bought and sold real estate over the last few years. If they only had your intelect and could realise how stupid they are.

These greater fools took a chance, and some still are taking chances. Looking strictly at fundamentals, this market should have been over three years ago when it became cheaper to rent than to buy. But, you forgot one thing and that was human phsycology. To call these people "fools" is an insult that you relish in. Probability is on your side, and eventually most of what you have said will happen.

Fodder said...

A little something related to our present economic situation. I just got a letter from our credit card company. They have an offer right now that lets me purchase my gas and groceries on the card without paying interest on this debt until January 2009.

To me this has two ugly heads. The first being the trouble with debt people will have to face come January when the interest rates do kick in. The second is that this strikes me as a scheme to keep the middle class spending beyond their means to prop economic numbers for two more quarters.

Like 40 year mortgages it looks like average people will be thrown under the bus for no long term reason other than to put off the inevitable a little longer.

vg said...

"this market should have been over three years ago when it became cheaper to rent than to buy. But, you forgot one thing and that was human phsycology."


actually you missed the predceedor to the "psychology" and that was the massive switch to loose lending rules that kicked in 3 years ago.

If this event did not occur then the psychology would not have been allowed to develop in the first place and we would be exactly instep with the US.

But then again they kept telling us "we aren't like the US, we have tight lending rules here, we have no subprime in Canada, etc etc".. yeah right. And I see forclosures are up in Alberta 4%, home of the oil soaked wealthy.

vg said...

this may have been posted before but is well worth a second read.



Real estate collapse? Bring it on!


Vancouver Sun
Published: Thursday, August 28, 2008


British Columbians with loved ones invested in the real estate market may want to steer them away from precipices and sharp objects for the next while.

Real estate, the increasingly dominant part of a given person's wealth, appears to be headed in a direction that it hasn't seen in more than a decade - down.

What they're doing is taking on previously suicide-inducing levels of personal debt, a strategy in which the Bank of Canada, lending institutions across the country, and the government are all full partners.

The government has created a program through the Canada Mortgage and Housing Corp. that allows prospective home owners to obtain mortgages with down payments of only five per cent, or in some cases nothing at all, thereby removing the primary safeguard against real estate speculation and creating access to the market for people who probably shouldn't have it.

Meanwhile, banks generously extended the available term length on mortgages from 25 to 40 years, allowing homeowners to spend the rest of their working lives paying off the hundreds of thousands of dollars in extra interest that those terms will have added to their mortgages. With the relatively late age at which Canadians are buying their first homes, it is entirely possible now for the mortgage on a house to outlive its owner.




http://www.canada.com/vancouversun/features/usaid/story.html?id=560c333a-a888-4d19-aa14-d4b5108c208f

Anonymous said...

August numbers are going to be mostly bad for the bulls. From what I have been able to calculate August single family home listings are up 50 percent in relation to last August. The number of sales are down 43 percent for the month of August, 2007 to August 2008.

Prices have fallen 1 percent which is basically unchanged.

I recall, that in January the year over year price increase was around 17%. Today it is minus 1. To me that means are prices are dropping at the rate of about 2% per month or roughly 24% annually.

This is a very rough extrapolation, take it for what its worth, as being only 1 person's opinion.


just jack

Anonymous said...

From today's Vancouver Sun

"Location, builder take the pretension out of High Street

Realtor James Mramor knows a good deal when he sees one. That's why the 22-year-old bought his first home -- a two-bedroom -- at High Street in south Surrey."

HE'S 22.

When I was 22 I thought a good deal was when my credit card bill at the bar didn't go over $50.

http://www.canada.com/vancouversun/news/westcoasthomes/story.html?id=309cef69-0d38-43bb-9f18-4cab64d5b863

S2

Anonymous said...

From today's Vancouver Sun.

"Parksville suites' views are whole"

"They are not expecting to cover all costs with rental earnings, at least for a few years, but there's another thing to consider. "If you want to spend two weeks in the middle of summer at any of these resorts along here it's going to cost you $5,000. So that's $5,000 I don't have to pay", says Doug."

Okay. Doug is a banker and I'm not. Could someone do the math for me with regards to saving $5,000 by getting on of these?

"Not surprisingly Mike Anderson, the general manager, agrees that the units are a good investment.

"Certainly getting in now you'll get a better price than once they are finished," he suggests. As the resort unfolds it will just make it more attractive."

http://www.canada.com/vancouversun/story.html?id=e038c1e7-27e4-40a7-9239-78818107a665&p=1

S2

patriotz said...

Timing is everything.

No it's not actually. They got a great return on the house not because of when they bought it, but because of how much they paid for it, which was a historically low multiple of annual rent.

Buffett is as clear in writing as he is in person: “The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”

Buffett article

You can substitute "house" for "business", it works the same.

Notice Buffett did not say something like "buying a business when everyone is bullish and hoping someone will pay you more for it".

Anonymous said...

Took a drive from Duncan to Ladysmith on the backroads yesterday.Couldn't believe how many homes for sale.For every kilometer their were an average 3-4 houses for sale.Really nice country and a lot of nice properties but just a mind boggling amount of listings.

vg said...

What happens to BC commodities if China tanks ?



Warning signs from the centre of the boom


New orders at factories are down sharply. Bankruptcies are up. Last month, industrial production grew at the slowest pace since the spring of 2007.

Stock prices are down about 60 per cent since last October. Property is showing signs of weakness too, especially in the booming southeast where flagging exports would have the most impact. Even the Chinese lust for new cars is beginning to cool.

A slowdown in export growth caused in part by the shrinking spending of North American and European consumers is “rippling across the economy,” Jing Ulrich, a China watcher with JPMorgan in Hong Kong, says in her research note this month (though she remains an optimist on China)."



http://www.theglobeandmail.com/servlet/story/RTGAM.20080829.wcover30/BNStory/Business

Anonymous said...

Patriots said "No it's not actually. They got a great return on the house not because of when they bought it, but because of how much they paid for it, which was a historically low multiple of annual rent."

Purchasing a home is a lifestyle choice, not an investment per se'. It just happens that it's a choice that has historicaly increased in value over time.

It is not when they bought it or for how much, it is the fact that they did buy it. Even those that bought in the last year will see a long term appreciating asset (assuming they can weather the short term.)

Anonymous said...

Anonymous said... "(assuming they can weather the short term.)"

LOL - like what, 15 years?

Anonymous said...

No, maybe 3 and down perhaps 10-15% depending on the area. After that it'll settle out to a long winter and then start back up again in 5-7.

In 15 years both my home and my rental mortgage will be nearly paid off - free and clear. Man, that will be nice.

Anonymous said...

Anonymous said...
"No, maybe 3 and down perhaps 10-15% depending on the area. After that it'll settle out to a long winter and then start back up again in 5-7."

Well then I guess I really am "Priced out forever"! Wait a minute, aren't we already almost down 10%?

patriotz said...

Purchasing a home is a lifestyle choice, not an investment per se'. It just happens that it's a choice that has historicaly increased in value over time.

Purchasing a home is an investment per se, whether you rent it out or live in it yourself. It's a capital good that returns future income (value of accommodation). It's an investment just as much as buying a stock or bond is. It has the same parameters as other investments - P/E, yield, capital gain/loss, total return.

An investment is not "something that increases in value". In fact almost all physical investments depreciate, i.e. decrease in value. When Air Canada buys an airplane or Hertz buys a rental car, these are investments, because they return income to the company.

And buildings also depreciate, but RE usually appreciates nominally in the long term because land doesn't depreciate.

A stock is also an investment whether it increases in value or not. It isn't an investment just when it is going up.

patriotz said...

It is not when they bought it or for how much, it is the fact that they did buy it. Even those that bought in the last year will see a long term appreciating asset (assuming they can weather the short term.)

That is dead wrong. If you buy any asset for more than it is really worth (fundamental value), you are going to lose money in the long term, regardless of whether the nominal price rises back to what you paid for it.

This is the kind of "can't lose" thinking that has led to the current RE bubble.

The reason is that the holding costs of the asset (interest, taxes, etc in a case of the house) must be compounded and carried forward to the future. This is money that could have been invested elsewhere. If you bought a house for 600K in 2008 and sell it for 700K in 2028 you will have lost a huge amount of money.

Anonymous said...

"Purchasing a home is an investment per se, whether you rent it out or live in it yourself. It's a capital good that returns future income (value of accommodation). It's an investment just as much as buying a stock or bond is. It has the same parameters as other investments - P/E, yield, capital gain/loss, total return."

Buying a home is primarily for personal reasons, finance is not even secondary. How many people do you think that buy homes would have any clue or at least give any thought to ROI?

It in no way resembles stocks, bonds or other income producing investments. Average homeowners are not performing finance valuations beyond what they think they can carry. They want to know how much their mortgage payments are, whether or not their furniture will fit the new surrounding, and where the baby's room will be.

They do believe that one day they will not have a mortgage and rent payments will be long gone. That is important to them.

Anonymous said...

Today's $600,000 home will be at $1,200,000 in 20 years - allowing for two 25% retractions. Up a lot, down a little, up a lot,down a little, up a lot... The "fundamental value" theory is getting old.

Anonymous said...

Anonymous said...
"Today's $600,000 home will be at $1,200,000 in 20 years"

And the POS will still rent for $1500/mo LOL!

Anonymous said...

No, $1,500 was about 5 years ago, it would now rent for $2,200 - $2,400 and by 2028 will be $6,000 per month. If history is any indication.

The primary financial advantage in buying a home is that rents always over-take mortgage payments and after say 20 years the mortgage payment is gone, rents still have to be paid.

vg said...

" after say 20 years the mortgage payment is gone, rents still have to be paid."


No one is saying they want to rent forever,but by waiting out the peak of the boom and investing the difference saved by giving it to the bank never to be seen again.

This will save tens,possibly hundreds of thousands on a probable chance of a correction with almost ZERO risk that house prices take off above the recent record highs. Do the math, if you save a $1000 to $1500 a month and invested it smartly you could possibly double it and even if for some biazzaro reason the RE market stays flat you are still years ahead on paying off the mortgage.

If there is a 20-50% correction then you are half a mortgage lifetime ahead of the game. It's like waiting out the peak of the hurricane, the US story is so far from over and that will effect us as long as they are hurting.

vg said...

"but by waiting out the peak of the boom and investing the difference saved by giving it to the bank never to be seen again. "



oops, meant to say " "rather than" giving it to the bank never to be seen again".

Anonymous said...

Quite right VG, I wasn't suggesting that today is a good time to buy. Clearly 2-3 years from now will be better, but more likely 10-15% better, not 30-50%.

As I've said before, the only ones taking risk today are recent buyers and recent sellers. The rest of us, owners and renters, get to watch.

Anonymous said...

"It's like waiting out the peak of the hurricane, the US story is so far from over and that will effect us as long as they are hurting."

With the CDN $ almost at par, some US real estate off 30%, and interest rates still at all time lows, why are we not buying US Real Estate? Seems like a pretty good opportunity to me.

hhv said...

One only need look at Japan for an example of what happens when real estate maxes out. Japan collapsed and has yet to recover to its craziness in almost twenty years.

I don't believe statements like this "Today's $600,000 home will be at $1,200,000 in 20 years" to be anymore accurate than when we read a bear's projection of 75% price declines in our market. Regardless of who's side history may be on.

Past performance does not guarantee future performance, up or down.

Anonymous said...

You're entitled to believe what you want.

Maybe you would take the opportunity to remind us of this when people refer to the 80's and 90's etc, when overall RE has continued up.

vg said...

"With the CDN $ almost at par, some US real estate off 30%, and interest rates still at all time lows, why are we not buying US Real Estate? Seems like a pretty good opportunity to me."



All indications I have been following say that next spring there will be the next wave of fallout by the ALT A borrowers who are now renewing and it will be the final leg down.

There is great debate out there wether now is better than waiting but personally I would wait and see what comes out of the US financial mess this fall. If the other shoe drops it could get very ugly.

On the flip side the value of the US dollar could well make a difference if all settles down in the US and oil pulls back under $100 and the loonie tanks as well as the Euro. Should be an interesting fall/winter.


Just read an article today on the US housing fiasco by Peter Schiff.


"Let’s Get Real about Real Estate




Once again, real estate market watchers have pounced on a shred of seemingly positive news to proclaim that the long sought “bottom” is in sight. The routine is becoming extremely stale, but somehow the media never seems to tire of it. This time the “good” news was that the percentage declines in national home prices (according to Case Shiller) in July where not as large as they were in June. Although the report contained many other negative data points, including increased inventories and a spike in foreclosure sales, it was the slowing declines that got spotlight. Talk about grasping at straws. The truth is that real estate has been grossly overvalued for years, and the adjustment process back to realistic pricing has only just begun.

The problem is few among us seem to appreciate the magnitude of this adjustment and its implication for an economy dependant on inflated assets values. "


cont'd

http://howestreet.com/articles/index.php?article_id=7327

vg said...

"Maybe you would take the opportunity to remind us of this when people refer to the 80's and 90's etc, when overall RE has continued up."


It continued up but each decade had two moments when it corrected,once severely and the second one a very healthy one. I am banking on three times lucky and stepping in when the time is right. This run has been much longer than the previous and has more potential for a more severe type correction. All in my humble opinion of course. :)

olives said...

HHV - 75 percent declines were apparently the norm in the 1930's - why do you think it is so far-fetched now? In places like Detroit with severe economic conditions we have seen 95 percent drops (ie the houses that won't sell for $5,000 because there are no buyers). Japan drops approx. 85 percent since late 1980's, Robert Prechter is calling for 90 percent drop in western countries.

I know is sounds extreme, but given the above, is it really? why are we different?

Anonymous said...

Good point Olives. I don't think any of us can tell what the future holds, however, if the banks stop lending NOTHING is out of the question. History has a habit of repeating itself.

hhv said...

Olives,

I'm not saying it won't or that it's different, I'm just saying that when someone states that it will as fact, the same as someone stats that the market will double in x number of years as fact, I give them about the same amount of credibility.

We don't know what the market will do. We know which way we think it will go, but have no idea how far... you've all read my predictions of a 35-40% correction based on rent to price valuations. That's what I'm looking for, but I couch it that it's just a prediction. An opinion, not fact.

hhv said...

Olives,

Further, Mish has some pretty decent analysis on the California market, which I would anticipate that Vic/Van will end up looking fairly similar to, maybe not quite as drastic in some markets, but who knows.

Link here

Anonymous said...

The concern that I have about future prices is the current high level of home ownership in Victoria, together with the high level of ownership of non-principle residences. Both of these are at historic highs. Which asks the question - where are tomorrows buyers coming from?

When the construction and real estate driven employment decreases, are we going to see a mass exodus out of Victoria? We experienced this after the mid-1990's market correction.

Victoria's average population age is about 10 years higher than the rest of Canada. Will we see the affects of a declining population sooner than other Canadian cities?

Canadian baby boomers are aged 43 to 63 and the boomers parents are 64 to 84. If our average age is 10 years higher than the Canadian then are we now at the begining of a boom in deaths that will probably peak around 2035. Could this be the reason why our stats only show a 1 percent increase in population, but anecdotally we feel like a lot more than 1 percent have moved to Victoria.

I just feel that our prices are not sustainable and Victoria is going to suffer more than Vancouver or the Fraser Valley because of our lack of good paying, non construction related, jobs for people under 30 and our demographics.

If I were a large insurance company looking to put money into long term real estate, I would stay away from retirement communities.

Enough doom for today.

just jack

patriotz said...

VG, your point is the same as mine. If the owner is paying, say, 36K a year to hold a house, and the renter is paying 18K, that's an extra 18K a year that has to be compounded at the interest rate of the mortgage (because that is the rate the owner is paying to borrow money). This is the accumulated deficit of the owner,

To say the owner comes out ahead at the point where rent passes monthly ownership costs is complete BS. That's like saying a company that has been losing money for 10 years comes out ahead in the first year it makes a profit.

Buying a home is primarily for personal reasons, finance is not even secondary. How many people do you think that buy homes would have any clue or at least give any thought to ROI?

It in no way resembles stocks, bonds or other income producing investments. Average homeowners are not performing finance valuations beyond what they think they can carry.


The owner's knowledge or motivations are irrelevant. A share of Coca Cola has the same investment characteristics whether it is held by Warren Buffett or your grandma, and the same applies to a house.

Houses are capital assets (i.e. investments) and share the same characteristics as other capital assets - including reversion to fundamental value. If you want some evidence for my theory, I have some numbers for you: 1981-83, and 1995-2000. And from south of the border, 2006-??

Anonymous said...

"Houses are capital assets (i.e. investments) and share the same characteristics as other capital assets - including reversion to fundamental value. If you want some evidence for my theory, I have some numbers for you: 1981-83, and 1995-2000. And from south of the border, 2006-??"


Patriotz, I think I understand what your trying to prove. However, I so, so disagree with your theory that there is a fundamental value to real estate. The years you quote were periods of recession in Canada, they show the bottom of the cycle not the norm.

The problem with determining a fundamental value for your own home is that this value can not be calculated with any certainity and shows no relevancy, except for brief periods when prices pass through this fundamental value during an upswing or downswing in market value.

You tend to limit what you use in your calculation in order to fit your model. Where does consumer confidence, interest rates, economic condtions, etc. enter into your calculation.

Yes, property values are way off the long term trend line and historically have corrected and over corrected. However, property values have never followed the trend line for any significant period of time. So why is it that home prices are so eratic? Why can't they just behave and follow the trend analysis. The problem is not with the market - but with people trying to impose their nebulous theories on the marketplace.

Fundamental value is not the panacea that will make you a property baron. Understanding how human nature affects the market-place is certainly a better tool, however, this isn't as catchy a title as "fundamental value".

There is little emotional attachment to a share in Coca Cola. But come home one day and tell your spouse that your selling the home - and look out, because it is gonna hit the fan!

It's the emotional attachment to the home that makes it different from all other types of assets or quasi investments. Get rid of the emotional aspect of a home and maybe your fundamental value would have some validity. But in aint gonna happen!


just jack

boomer said...

-and Victoria is amongst the most house-proud cities on the planet, so detached RE estate value calculations here are usually ignored out by wild eyed participants---actually much like the equity and commodity markets at their extremes..

"the market is always right"

hhv said...

JJ,

I agree with some of your points. Here's a question:

Does a property investor (not own home) see anything more than a fundamental value in their investment asset? Put it this way: is a rent producing investment property any different than a dividend producing stock? I don't think so.

Patriotz is partly (i think anyway) arguing that it is the investor that sets the market price, not the homeowner. When the investor leaves the market (as they are now) it is the investor that will then decide when to re-enter the market, which should mark the bottom when they do it en masse.

The average homeowner buys a house when it makes sense for them and does little in the way of market research. On the extreme ends of the cycle, average homeowners get caught up in the hype (up or down) for sure. But I don't think average homeowners act as a group enough to have significant effects on the market. Right now investors aren't buying and FTBers are priced out. That is a big market segment.

Mr.4AM said...

Well written as usual JJ. It's nice to see that we can have some healthy respective and meaninful discussions around here, and that we can (naturally) have different perspectives even though we are mostly on the same side and have similar conclusions of where the market is heading.

In general I agree with you JJ, though patriotz arguement also makes logical sense - but ultimately, his "fundamental" value appears to only be true at the bottom of the market. That being said, considering how high and long of an upswing we've had, there is the possibility also that when the market corrects that it will over correct for a relatively short period of time, meeting or perhaps even exceeding patriotz' fundamental threshold valuations.

But right now that is probably at least 2++ years away, so it's a wait and see situation.

What I find interesting analyzing real estate and stock market is that the vast majority of humans are optimists (bulls) and few are logical and truly look at fundamental values. A 2 minute look at the stock market where the value of some company is reflected by 20+ times its earnings instead of 1 or max 2, says it all to me.

I think most of the population are generalists, and don't want or care or enjoy looking at details. When one is a generalist it is easy to take any random (anectodal, cliche, etc) arguement and use it to support your generalistic theories which nearly always lack any fundamental detailed analysis. For example, realistically will the Olympics really cause foreigners to buy property in BC? Yes, but the percentages are likely so miniscule as to be nearly irrelevant; yet so many people bought stating that as their justification or at least a significant part of it.

Markets don't follow fundamentals, they follow the psychology of the lemmings. Corrections happen when too many lemmings fall off cliffs due to the fundamental reality that if you walk off one, you will get hurt.

For investors, I think it's a lot harder to be sucessful if you are a bear (though there are plenty of successful bear investors, but they are likely the exception), because from what I've seen (and I'm one), bears tend to point out the reality way before it affects the masses. And those masses will drag on the price of whatever until it can't possibly go up any further, to the point where even the bulls think the price is ridiculously high, nearly always reaching bubble territory. A simple example to show this is that bull markets in the stock and housing market last many more years than bear markets on average.

On a few occasions I've seen somebody post a link to the emotional roller coaster ride of investments (exhiliration, anxiety, fear, panic, etc), and I think there's some truth to that, and that to some extent supports JJ's view point.

Lastly, at the risk of becoming a flame bait; I will try to use Buddhist principles to point out my above conclusions.

From a buddhist perspective, life is suffering (everyone gets sick, everyone gets old, everyone dies), and buddhism tries to solve that problem (a path to nirvana/enlightenment). Buddhists resemble bears because they focus primarily on the fundamental reality of life and use logic derived from deep analization of reality (and not imaginations of it).

The "problem" is (this is a joke btw) that the vast majority of the world are Christians who rely on faith and not necessarily reality!

Mr.4AM

PS. I was raised as a Christian family but no longer consider myself one, but I am also not a Buddhist.

boomer said...

so the inflated re estate market is the fault of the christians?

i knew it-damn bible thumpers!

roger said...

VREB RELEASES AUGUST STATS

August 2008 Statistics - Monthly Analysis


July 2008 shown in ()

MLS Sales - 517 (616)
MLS listings - 4657 (4557)

SFH Average - 549.9K (578.2K)
SFH 6 mo. Avg. - 592.6K (596.7K)
SFH Median - 512K (529.9K)
All SFH Sales - 269 (359)

Condo Average - 302.2K (302.5)
Condo Median - 280K (285K)
All Condo Sales - 160 (168)

Town Average - 414K (454.9K)
Town Median - 382K (417.5K)
All Town Sales - 53 (52)

Year-over-Year Analysis

GV - Greater Victoria
August 2007 shown in ()

MLS Sales - 517 (846) - Down 39%
MLS listings - 4657 (3352) - Up 39%

GV SFH Average - 549,914 (576,632) - Down 4.6%
GV SFH Median - 512,000 (515,000) - Down 0.6%
GV SFH Sales - 244 (399) - Down 39%

GV Condo Average - 302,200 (298,478) - Up 1.3%
GV Condo Median - 280,000 (275,000) - Up 1.8%
GV Condo Sales - 160 (217) - Down 26%

GV Townhouse Average - 415,327 (396,129) - Up 4.8%
GV Townhouse Median - 382,000 (378,950) - Up 0.8%
Townhouse Sales - 51 (95) Down 46%

Anonymous said...

"Does a property investor (not own home) see anything more than a fundamental value in their investment asset? Put it this way: is a rent producing investment property any different than a dividend producing stock? I don't think so."


Well, you can paydown a mortgage. You can drive by your rental property and see that it is still there. A house is a tangible asset. A rental property probably has a more secure income stream. You probably have less risk than a stock, because you have more control over the tenants and upkeep of the property. Your relying on yourself in the decisions regarding the asset rather than a board of directors. You make most of your decisions keeping your self interest at heart - which may not be the case of the board of directors.


just jack

Anonymous said...

"Patriotz is partly (i think anyway) arguing that it is the investor that sets the market price, not the homeowner. When the investor leaves the market (as they are now) it is the investor that will then decide when to re-enter the market, which should mark the bottom when they do it en masse. "


I don't agree with this. In a boom market, the typical buyer's profile would be as a home owner not an investor. Hence, emotion provides the catalyst for prices and not reason.

And even though our current market appears to be a limbo stage, I still think emotion is governing this market. I believe this because, I still see marginal properties (ie busy street, small lots with crumbly homes, still selling. When we start getting the media reporting how people are losing their homes to foreclosure -then the market may fall preciptiously.

Eventually, as sales activity drops, the mix and profile of the typical buyer changes to one of the investor and we should experience an eye popping drop in prices. We are getting close to this point, but not quite there yet. The profile of the typical seller also changes from one who is testing the market to one that has to sell. You don't have to have the majority of sellers under duress circumstances, only enough to feed the smaller pool of buyers. The estate agents will take care of the over priced stuff by getting the home owner to lower the price or the agent will not list the property. Let us not forget that when prices have plumetted, the investor is going to be tapped out too.

So, in my world, it is currently the prospective home buyer that has been pushing prices up. Mostly, because of fear. Home sellers are mostly working on greed with time on their side. If your a home seller all you had to do was wait until market prices came up to your asking price.

Of course the pendulum will swing back, but how much of a drop is in our future can not be known and can not be calculated. My opinion is that is will be substantial, only because the rise up was substantial.

The greed will then be with the prospective buyer and time will be on their side. The home seller will have the fear of not being able to sell.

To me, it's better to watch human nature and listen to the talk around the water cooler, than non-workable theories. During a recession, people do not make large purchases on houses, cars or even house repairs. There attention is on building income and not accumulating assets.

just jack

boomer said...

thanks v m Roger----first again with the numbers that matter...

roger said...

Looks like Carla Wilson at the TC has jumped on the bandwagon. This article just popped up on their website:
House prices keep on sliding

Housing prices are continuing to drop in Greater Victoria as sales slow and inventory floods the market.....

Sales skidded to 517 in August, down from 846 in August a year ago. July saw 616 sales. The average price of a single family home slid to $549,914 in August, down from $578,000 in July. The median price came in lower at $512,000.