Thursday, April 23, 2009

An Explanation for the Real Estate Bubble

Twenty years ago this month, I bought my first house. Like most FTB’s I went to the bank and asked how much money they would lend me, negotiated the best five year mortgage rate and went out and bought a house that matched up with the maximum amount the bank offered me. Back in 1989 the discounted five year mortgage rate was 11.25%. Today the best five year rate is 3.69%. Back in 1989 I could only extend my amortization period out 25 years whereas today I can go out 35 years.

So I started thinking that most of these FTB’s today are likely doing the same thing I did. They go to the bank and are told how much they can borrow. But today because of changes to both interest rates and amortization periods, the amount one can borrow has increased substantially. The chart below illustrates this.

So today someone with 10% down can easily buy a home worth six times their income whereas back in 1989 you were limited to about 2.5 times your income. If the 1989 family was able to save 10% of their income ($10k per year) and apply this annually to the mortgage, they could pay off their mortgage in just over ten years, but it will take over 20 years for the 2009 family to pay off their home. If the first family after paying off their mortgage continued to contribute the same amount into a retirement fund earning only 5%, they would have over $475,000 saved in the ten years while the former family was still paying off their mortgage.

This whole thing got me thinking that maybe we can explain most of the housing bubble through mortgage lending changes, so I pulled together an analysis of average income levels in 1989, 1999 and 2009 with mortgage lending practices and average house prices to see if there was a correlation. Results are shown below.

Amazingly the increase in SFH prices over the past twenty years is highly correlated to the maximum mortgage being made available to average families. This analysis aligns with what the greatest real estate investor I know once told me which was always to buy real estate when interest rates are at their highest levels because prices will always be lower.

Today many people that could not have qualified for a SFH because of their income levels, now can with these ridiculously low interest rates. This has increased the pool of buyers and resulted in a mini sales boom for entry level homes. It appears to be almost predictable.

Smart money will wait for interest rates to rise as this will both decrease the number of buyers in the market while simultaneously putting pressure on people renewing their mortgages at higher rates as others have well documented on this blog.

Looks like I plan to become a FoRenter as this is what smart people are doing.

by Reid.

91 comments:

HouseHuntVictoria said...

Reid slams another one out of the park. Brilliant.

You know, with posters like Reid and Roger, along with the great comments and additional analysis by the other regulars around here, it feels like we have an unfair advantage.

If only the MSM had such carefully crafted commentary and analysis.

hhv said...

I'd like to point out that the "mini sales-boom" these abnormally low interest rates have created is contained in one market segment: SFH priced less than $550K. Outside of this market segment, inventory is growing and prices are continuing to fall. I've even noticed new listings of SFH priced $550K or less are asking 2007 prices rather than 2008.

What this tells me is that despite the cheap money, people either can't or won't buy right now. Even though sales are up from January and February 2009, they are still below the 7 year average.

I suspect that come June through the rest of the year, real estate in Victoria will continue it's value decline of around 1%/month.

Ryan said...

Are the two of you not the same person?

Anonymous said...

If you buy now and lock in a long rate and make prepayments you will be far ahead of those that wait for a possible drop in prices. We are not going back to 1989 price levels so wasting your time dreaming about that is a futile FoRenter justification. Again nothing wrong with FoRenting because otherwise a lot of investors would lose their shirt. If you're a bear and don't want to be a FoRenter then make sure you contact a professional realtor right away. Professional realtors can refer you to reputable mortgage brokers, home inspectors and a variety of other professionals for no charge whatsoever. Many renters do not know that they could easily afford a home.

hhv said...

Following up with Greg's link to this article, I must admit, I like Peter--it is very refreshing to see a writer engage his audience and provide well thought out responses and respect for the other side.

hhv said...

Ryan, no, Reid and I are not the same person....

Metaldwarf said...

Nice post Reid.

Our interest rate environment is interested, the BoC has said they will not increase rates any earlier than June 2010. Last time I check the role of the central bank is to control inflation, not juice the economy with free money. But alas, that is the world we live in now. While I don't expect inflation to be a problem before June 2010, it is disturbing to see the BoC completely disregard is true purpose.

My crystal ball tell me...

Rates will stay low for the immediate future,probably 2-3 years. I am expecting a long "L" shaped recession. There is going to be more job loss (I just had my first client tell me they are laying off workers, construction btw) foreclosures will start, and RE prices will fall, albeit not as fast or as far as most here predict, free money will see to that... sadly.

As the economy does start to recover, rates will continue to be held low, as any increase would kill the fragile recovery. Soon, maybe 5 years from now, the economy will be roaring again thanks to half a decade of ZIRP. Commodity prices again go through the roof, price of gas, food and energy skyrocket. Consumers will feel the pain, people will have jobs again but their wages won't have grown, affordability of everything under the sun will be brutal.

Govt. will have held interest rates too low for too long and they will need to go up from zero.

Here is where it gets interesting, if rates go up, defaults increase, everyone is already stretched to the breaking point as far as affordability goes, but this time, there is no interest rates to cut, no home equity to borrow from, stocks will be up, but probably just back to their 2007 levels.

Now which would you prefer, you own a McMansion with 30 years left on your 35 year mortgage, you financed at 3 interest, and you maxed out like Reid did. You have almost no equity, and no savings, scraping paycheque to paycheque.

A) interest rates go up to 6-8%, you can't afford your mortgage, can't refinance, no equity, can't sell.

B) Rates stay low, high commodity prices eat your paycheque and inflation steals your savings. You can't afford to fill the gastank or buy groceries.

the result
Option A)subprime all over, we run right back into recession mode, more banks and insurance companies implode.

Option B) civil unrest, crazy elections, higher taxes if the left wins, lower services if the right wins, both options suck.

Rock meet Hardplace, you guys are gonna be great friends.


FYI Reid, HHV if you save your text/graph based images as .PNG they will look better without the fuzz that often comes with .JPEG

Anonymous said...

A good question to ask is how would the current market be if interest rates were currently 8%+? It would be an absolute crash and only the cheapest crap would sell. Agents would have absolutely nothing good to say to people looking to buy houses.

It is an interesting philosophy that people out there will take every penny the bank can loan them and not give a damn about the role money plays in other areas of life. They are also extremely naive thinking they will pay the same rate for 25/35 years.

It is easy to see what happens when anyone and everyone gets easy access to more credit then they deserve. Look no further than south of the border.

We are Dave said...

Great post Reid and some good comments (aside from the bitter anonymous realtor).

Some old guy in a Starbucks... a very wealthy old guy... told me "You either rent a house or you rent money." There is no risk associated with renting but the downside risks in highly leveraged RE speculation (what else can you call a 0-5% margin on a $500k+ property) are astronomical.

I advised coworkers to get out of their investment properties (extra condos they were holding just for speculative gain) in November of 2007. Now I don't talk about realestate around them cuz they get stressed.

A lot of good people I work with are gonna get burned (one sitting 10 feet away lost her home in the 80's).

Scary how your analysis against family income so eerily matches SFH prices. Keep in mind that average family income is gonna take a hit. We laid off about 5% of our staff (all contractors but some had been contractors here for 10 years). Hard times a comin but not so hard if you are careful with your money.

Thanks for the excellent thoughts Reid et al.

Anonymous said...

When did CMHC start insuring mortgages for banks that didn't have 20%+ down? Once the banks knew they could loan out money and get refunded if the party defaulted on the loan, there was nothing to stop them loaning out higher values of mortgages. Of course they would prefer the parties to keep paying all that interest to them over time.

We are Dave said...

CMHC was insuring 0% down mortgages and NINA's (No Income No Assets) mortgages were available in Vctoria as of late last year.

The fedral conservatives reigned in CMHC a little in the last 4-6 months (correct me if I'm wrong) prohibiting them insuring anything more than a 5% down. Can you imagine if they set the bar at 10% or 15%. It would have been a melt down.

Anonymous said...

"The fedral conservatives reigned in CMHC a little in the last 4-6 months"

They reigned it in less than 2 years after they opened it up...I guess they thought nobody would notice

hhv said...

Given Reid's analysis, do we now have a new floor? Is affordability now based on dual incomes + interest rates + 35 years?

If so, will the market correct further if people don't lose jobs in great numbers, interest doesn't climb, or amortizations aren't shortened?

Anonymous said...

Anon 1:37, a drop to 1989 levels impossible?

On the contrary, that will be less that half of where we're going to end up, just like everyone else.

Anyone been able to find US real estate value charts during the Great Depression? Too many real estate bulls are blinded by the horn-high bullshit they're wading in.

StargazerXL said...

Great post, Reid. I myself have been recently wondering how ratios between SFH prices and incomes have evolved over the last 20 years.

Though interest rates (and long amortization periods) appear very much to blame for high SFH prices in Victoria, I am curious if such an effect is noticeable in data about other Canadian municipalities, which of course have had the same mortgage products offered to them over the same period. That is, if you took the average house price from, e.g. Ottawa or Regina, from 20 years ago, would you see similar relative increases? I am trying to understand how "we are different."

StargazerXL said...

Since we are talking about things I have been thinking about lately, I am curious what people's opinions are on the following subject:

How much can governments or central banks do to keep the party going?

I ask because this week the BoC has run out of its typical weapon to stimulate the economy, by reducing its interest rates to effectively zero. On top of that, they have uncharacteristically said that these rates will stay low for a year (with a proviso to change things if absolutely necessary). Today, there is news that the BoC will start looking into "unconvential methods" of monetary policy if the "freefall" continues (whatever they are).

New WeaponsIt seems to me that central banks are doing anything they can to get the economy going. What is the limit? Is there a limit?

The public doesn't seem to be expressing any moral outrage about borrowing wholesale from the future by printing money, running large deficits, or bailing out large companies. Also, sovereign funds seem willing (to me) to supply as much money that governments need.

Obviously, inflation would cause the central banks to change their policy, but what will spark the inflationary fire? With all these "new weapons" will they be able to contain the fire?

Anonymous said...

Just an idea. Mid to High priced places are not moving. Most people who have money/assets that can afford these places must have lost a bundle in the markets and realize how nasty a loss can be. How many of these first time home buyers experienced a loss in there investments let alone lives? I assume little to none since if they had money they would have bought a few years earlier. Are these people oblivious to the conditions out there?

omc said...

I think we are a good representation of the mid/upper buyer and we aren't buying because it doesn't make any sense to. I wonder about the FTBs running around with their cheap mortgages and how much education they have and their ability to critically think.

Regardless of what the bitter realtor thinks, we know what we can afford, have a banker, can interpret stats and know the market better than they do (thats why we aren't realtors).

I know a number a of FTBs that bought in the last few years; I would much rather be a FoRenter.

Nick said...

Another good post Reid, nice work. Kudos to you and to HHV for opening up the front page to another poster, it really adds a lot to the site.

Anonymous said...

the weakness in the medium and high end of the market might be overstated. Looking at my PCS account for the last week, a lot of homes in the 600-800 are being sold, for close to asking. It looks like this market is coming back, at least temporarily.

One that shocked me MLS 260498. Assesed at 413, sold for 630. Just a normal late 50s bungalow in saanich east. WOW someone was chugging the Koolaid.

Anonymous said...

"I wonder about the FTBs running around with their cheap mortgages and how much education they have and their ability to critically think."

I wouldn't jump to conclusions about intellectual superiority, these FTB are spending $500,000 give or take. They're not likely stunted in the finance department.

Again, buying a house has far more considerations than price (even around finance.) Need we be reminded that, so far, "dire predictions" have fallen somewhat short of the 50 yard line in all of the past 12 months?

JD

patriotz said...
This comment has been removed by the author.
Anonymous said...

And yes, Patriots, I know for you it's all about price :-)

JD

patriotz said...

If you buy now and lock in a long rate and make prepayments you will be far ahead of those that wait for a possible drop in prices....

That is totally wrong. If prices fall to any extent the principal part of the mortgage payments will be far less than the drop in prices over 5 years. It's that simple, And someone buying 5 years from now will be paying the same interest rates as someone who bought today from that time on.

You cannot lock into to a low rate for more than 5 years. The banks aren't that stupid.

The person who waits 5 years to buy also has time to build up a bigger down payment (because renting is a lot cheaper than mortgage payments, remember?).

Compare apples to apples. If just the same amount of money is being put aside for prepayments by the buyer and down payment by the renter (and in fact the renter is able to save more money), it is always the best strategy to wait for lower prices. Always.

roger said...

Anon 9:14 said:

Need we be reminded that, so far, "dire predictions" have fallen somewhat short of the 50 yard line in all of the past 12 months?That is only because the Canadian government keeps propping up the market with lower and lower interest rates. But they are now out of bullets and sales are still below last year.

Just wait a few months when the spring sales season ends and the recession picks up speed. Then we will see more prices reductions, lower sales and the market will continue to fall.

BTW - Our drop of 1% a month is faster than the US market correction.

Anonymous said...

I would have to agree, financially speaking, if I wanted to buy a house I would now want to wait perhaps 2-3 years (not 5) for the prices to settle out - depending of course on all of the numbers including my personal expectation of both prices and interest rates (which I realize are only relevant to me.)

JD

Anonymous said...

"That is only because the Canadian government keeps propping up the market with lower and lower interest rates."

The why is only our opinion and irrelevant to reality, it's only the actual numbers that we can quantify for the moment.

BTW, the market that the typical buyers on here are considering have NOT seen 1% per month for 12 months.

JD

Anonymous said...

"Just wait a few months when the spring sales season ends and the recession picks up speed."
wasn't it you guys saying, wait for the spring, its going to be a bloodbath?

hhv said...

JD,

"BTW, the market that the typical buyers on here are considering have NOT seen 1% per month for 12 months."Many people are looking at different segments. I assume you're talking about the only segment that isn't seeing significant price declines: SFH priced under $550K?

Considering everything else is crumbling, one of two things needs to happen: those home values will drop too or that segment will somehow create a floor for the market.

My money is on that segment dropping too. I'm thinking this fall, albeit slowly at first, followed by another spring plateau followed by another drop, and on we go till the market as a whole corrects back to the historical trend line.

HouseHuntVictoria said...

Added a Case-Schiller style graph. I appologize for the poor graphic skills. A little visual perspective is helpful.

roger said...

Anon 9:55 said:

wasn't it you guys saying, wait for the spring, its going to be a bloodbath?I will try to reply to your comment even though I suspect your motive is just to taunt the bears on this blog.

On many occasions over the last few years the market has started to stall and then the market has been "stimulated" by CMHC or The BOC.

Specifically I mean:
- lowering the downpayment requirements to 10%, then 5%, then 0%
- increasing the amortization period to 35 then 40 years
- reducing the BOC rate until it is now the lowest in history at 0.25%

On each occasion the real estate industry (agents, real estate boards, mortgage brokers, developers, banks) have stated that this is a "great time to buy real estate". The mainstream media and even CMHC have jumped in and added more hype. This has pulled more FTBs into the market and increased demand with pressure on prices. Existing owners, looking at the new financing alternatives, have decided to move up. And so the price of housing in many cities is now unaffordable and in Victoria is in a speculative bubble.

So have I made predictions that have not come true? Sure but who would have thought that our own government would keep pumping the real estate market, encouraging people to take on record levels of debt in the hopes of keeping the economy going? I find it disconcerting when I see young couples, hoping to have a family, financially stretched to the max with 35 years of high payments ahead of them.

But where are we now? With low interest rates in a recession that is deepening fast. There are no more stimulus triggers for housing left, unless they backpedal on the 5% down and 40 year amortization changes. So stay tuned and see what happens in 2009 after the spring sales season.

Zep said...

So in others words roger, you would have been correct, except, except except...

My calls over the years would have all come true too, if only the circumstances had properly conspired to make it so.

turns out the world is an unpredictable place--that should be obvious given the financial chaos of late--one would think it would give anyone pause before being so very certain about Victoria RE--bear or otherwise.

Metaldwarf said...

RE mls 260498

Foosball table is worth at least 100K...

Zep, many of us think spring will show the way, not that it would be a bloodbath, prices and sales are still down, even with the lowest mortgage rates in history. If all was rosey don't you think sales should be through the roof with bidding wars left and right?

Joe Dirt said...

I have been following Roger's posts and predictions over the past year and, right or wrong, they are based at least in part on the stats that he is clearly in tuned with. His comments have been grounded in reality regardless of actual outcome.

I like HHV's suggestion that the floor on the market will be a return to the historical trend line (best fit.) That's history and that's as reasonable a guess and we can make, IMO.

I would add though that for those interested in the $400,000 - $550,000 (currently priced) homes that change will not be near as high as the historical average reflects. The median will not drop near as much as the average.

The result then will be perhaps another 10% drop ($40,000 - $55,000) over the next year or two. High rents and ultra low interest rates (or more appropriately the fear of rising interest rates) will continue to have an affect on the floor of this market.

JD

FoRentin said...

I think some bears should soon come to the realization that Victoria just isn't for them given the fact that so many on this blog vehemently deny wanting to be FoRenters. So what's a FoRenting bear to do? The answer is simple grass hopper. You must move away from this island of cat feces and seek out a proper location to settle down in. Here's a list I've come up with :

1) Edmonton. Probably one of the nicest towns in Canada other than Victoria.
2) Winnipeg. I admit I have not been there but I heard it's great.
3) Toronto. High class metropolis. Very liberal too so you can dress weird and read poetry etc.
4) Regina. Best prairy town in the world.
5) Calgary. Bring a cowboy hat.

Anonymous said...

A few things in my view:

1. Nothing can stop the fall of housing prices except a better economy - not gonna happen anytime soon.

2. No more bullets: Good point - but...I think they will invent more:

a. the Americans can lock in for 30 years - I bet Canada will join that wagon. How else can you convince some poor sap to buy a house at record low rates - with a 5 yr term - it is just an ARM isn't it. I figure a 30 yr locked in rate - like they do in the US will be an option - and another bullet. Won't stop the carnage - but it will help. And, why not - gov't is very willing to destroy our futures speculating on what may work - why not try that out?

b. The other bullet - print money - BOC said it was going to. 7.3 contraction in economy over past 3 months - article said 10 equals Depression and they will get creative. Geez - that is nice of them. Next to printing electronic money to buy - whatever - not even sure anyone knows how it works - a 30 yrs lock in doesn't sound too far off or very drastic.

3. Someone says energy and commodity prices will rise and that will negatively affect the housing price in Vic. I think the opposite - High commodity prices means lots of jobs for Canadians - BC and Alta in particuar - so, like Global Warming (which also benefits Canada (economically -don't get excited))- high energy, food, and other commodity prices will help keep the Vic prices outta my range. I just hope they stay low enough long enough for the prices to come back down and stay that way for a while.

In short - they are coming down - they should a lot (ie, 550 house should get back down to 350) - but I reckon it will stall about 450 for reasons above.

greg said...

I think some of the bulls on this blog should realize:

1) They aren't going to be able to unload all the presales. Suck it up, grasshopper.

2) Those friends who buy in a year or two are going to go on a lot more vacations than those other friends who bought two years ago, those unfortunate friends who are now contemplating paying penalties to break their mortgages and refinance at today's rates, hoping to staunch the financial bleeding.

3) Permabulls will discover the wisdom of Surfer X, which was out there to guide them, if they only checked.

4) Prices will keep going down. All that transitory spring gloating isn't quite as meaningful, when prices keep going down...

5) Investment advice from anonymous bored realtors isn't really very helpful to people making real world financial decisions.

Feel free to discuss these ideas at the next office meeting, and to draft an email on how to deal with forenters who won't buy into the you must buy now hype.

Buy now, it should be obvious that there's no other way to collect a commission...

Anonymous said...

Renting is cheaper than buying, and will remain so as we suffer through this dead cat bounce. But who knows, renting could stay a winner for perhaps another 1,2,3, or more years?

From my perspective, the longer renting remains cheaper than owning, the longer renters stay on top, holding the smart money--this should be deeply satisfying, and one would think that renters would embrace this state of bliss for as long a time as possible. If renting remained cheaper than owning, say for the rest of time, so be it--the renter comes out smiling, well, forever.

But instead I see many bears having angst about the length of time it is taking for house prices to bottom out.

What's the rush?

I sense that some here have an almost irrational attachment to being "right" about the timing and severity of the oncoming declines. But really, why should it matter?

Anonymous said...

Duh, I paid $150,000 for my honda civic, why should it matter that I could have waited until I got to that other car lot selling them for $25,000?

I had an irrational attachment to owning a honda civic as soon as possible.

Anonymous said...

well at risk of further mixing the metaphor...if taking the bus is cheaper, and just as effective, don't buy the honda at all.

Anonymous said...

I think they start around $16,500 and Honda is currently running a near zero (.9) interest rate promo - it's a great time to buy a Honda Civic!

Come to think of it, the RE agents will be running "near zero interest" promos this summer. Maybe wait a few months.

Reid said...

The goverenment is going to do all it can to prop up real estate sales as stimulates the economy. Each home sale generates a lot of revenue, often results in the purchase of furniture, appliances and often renovations.

But I think we are coming close to the end of the incentives. I cannot see five year rates getting much below 3.5%. Moving back to 40 yr amortizations after they just pulled back on these would be a disaster.

So after more than 20 year of on-going interest rate declines, I think we are very close to the bottom. A huge part of the climb in real estate can be attributed to these massive interest rate reductions.

If the economist are right and we will see inflation 2-3 years out, rates should rise and that will have major implications on the market. If rates stay low for the next year or more which is what BoC is driving to, then thousands more FTB's may get sucked in and when rates rise there will be even more households at risk.

Because we do not have 30 year fixed mortgage rate like the US, I see what is being created here is a Canadian version of the US sub-prime crisis. It has all the same fundamentals. The only thing that will stop it is if interest rates stay at these low levels or the government invents some new instrument that allows homeowners to reduce payments in a higher interest rate environment.

I am a homeowner, but it is smarter to a FoRenter today.

Anonymous said...

I would just like to thank Ian Watt for inventing the term FoRenter for you group of losers who waste us realtors time. After reading tons and tons of FoRenter blogs it's clear you guys just don't and never will have the juice to pimp out a place of your own. Yes owning a home has become for the elite among society with the FoRenters paying the way. That's just something you're going to have to accept.

Anonymous said...

Why, you can thank Ian Watt personally next time you see him, anon 11:56... by swallowing next time.

Anonymous said...

Well the sweet days of success are over.

High unemployment, low wages, higher taxes, falling rents and a decreasing population are heading our way.

Nick said...

I love the way that FoRenter was intended as an insult, but has become a badge of honor. If someone as obviously clinically retarded as Ian Watt thinks I'm making a bad decision, I'm even more sure I'm on the right track. It's like Jim Cramer's stock picks, do the opposite and you'll be fine.

Recent buyers can call me a loser renter, but I can afford to put two or three times as much in the bank as they are putting towards the principle of their mortgage. However, unlike many recent buyers, I won't be eating Fancy Feast if the recession impacts the job of me or my spouse.

mln said...

Check out this article:

Why Housing Is Not Coming Back

hhv said...

Anybody want a FoRenter shirt? I'd proudly wear one.

Anonymous said...

Similar to the article above, I found this clip on youtube. Keeps it simple and easy to understand:
http://www.youtube.com/watch?v=VWeeTdR7ud8&feature=related

StargazerXL said...

Reid wrote: "The only thing that will stop it is if interest rates stay at these low levels or the government invents some new instrument that allows homeowners to reduce payments in a higher interest rate environment."Indeed, this is my nightmare scenario: that the government will use my tax dollars to prop up other peoples' foolish decisions. (I guess, however, they are already used to spending my tax dollars on their foolish decisions!) Keeping homeowners happy is a simple way to keep voters happy.

The reason I brought all this up is that it seems to me that the government will do anything to get or keep people into homes, regardless of the "moral hazard". This attitude is my ultimate concern about possible scenarios that say people en masse will lose their homes when (not if) interest rates go up. If the government is willing to step in anytime, anywhere, they will save these people some how. (Obama is experimenting with this right now.) And if so, will house prices ever go down?

Ryan said...

"Ryan, no, Reid and I are not the same person...."

I meant hhv and HouseHuntVictoria.


The way our mortgages are structured, there is no way buying at a higher price saves you money. As Patriotz said, today's buyer will have to renegotiate their mortgage in five years. Therefor, both today's buyer and the person who waits five years will be paying the exact same interest rate from that point on. The only way today's buyer comes out ahead is if the drop in prices is less than the amount they pay on the principle. That's pretty unlikely, considering how little goes on the principle especially for a 30 or 35 year mortgage.

In the US, it might make sense to lock in early, because you can get a low interest rate for the entire term of the mortgage. However, most people in the US didn't do that, they got variable rate and interest only loans with a reset. That's basically what we have here--a five year teaser rate that will most likely reset several points higher.

Nick said...

Ha, yeah, you should sell T-shirts, HHV. Maybe the Case-Shiller graph or the "Mr Housing Bubble" cartoon as a picture with "FoRenter" as a caption.

Anonymous said...

I give you bears a great laugh and you miss it altogether: "Come to think of it, the RE agents will be running "near zero interest" promos this summer. Maybe wait a few months."

Hint, "I'm not talking Bank of Canada interest here." :-)

Anonymous said...

I think some of you bears are finally starting to get a handle on the situation here. The socialist coup was a sympton of the problem. What we're seeing here is classic socialist dogma. The responsible, productive memebers of society yet again get to pay for the stupidity of the iresponsible.

Anonymous said...

I just want to know how to take advantage of the current economy... what to invest my cash into, what to stay away from...

Anonymous said...

Long term - oil the world needs it- they are running out of it- and not making anymore.

It was at 140 something in the summer - it is at about 50 now - maybe it'll go down to 35 again - but in a couple yrs - it'll be back up at 100 - 300 - if nothing else - inflation ought to drive it up.

Metaldwarf said...

so BoC is going to hold rates low until June 2010.

they have said they will pull out the big guns of quantitative easing if low rates don't work.

so what the hell is quantitative easing? government needs to raise money, so they issue bonds, investors essentially are loaning their capital to the govt.

becuase rates are so low, bond yeilds are also very low. BoC, then uses tax payers money to buy Govt. Bonds, this higher demand pushes the price of bonds up, essentailly giving free money (from the tax payer) to the investors who bough the bonds.

This is robbing peter to pay paul.

so here is one observation. variable rate mortgages are tied to BoC prime, but 5 Year mortgages are tied to Bond markets. if BoC artificially pushes up the price of bonds, then wont 5Y mortgage rates also have to go up?

catch 22, just let it all fall apart orderly and start again.

Anonymous said...

Keep the anecdotes coming.

I noticed that even at the BK in Duncan they had the "buy any value meal and get a free whopper" promotion. I wonder if it is at all the BKs? If so, it is a big sign that their sales are way down.

Anonymous said...

That's simply marketing to get people going into the store. As mentioned, FF joints may fair better not worse in a downturn economy.

Anonymous said...

My lowest on the totem pole, labourer, now unemployed homeowner neighbour is the "elite" of society. I'm doomed.

Bawwwww, ha, ha, ha.

S2

roger said...

Here is an interview with our local real estate tycoon Len Barrie.

Barrie: "I want to be hands on"--

Len Barrie, from whom we haven't heard much this season, said he plans to be more involved with the team in the future. That was the message this week as he continues to work towards the sale of his Bear Mountain resort in Victoria, British Columbia.

"I wanted to be hands on, but with the whole real estate world blowing up, I had to be hands off," said Barrie, referencing the worldwide economic crisis. "I want to help them more. I feel bad I haven't been able to. But the world seems to be settling down now."

But Barrie said condo sales at Bear Mountain lately have been good, and a long-in-the-making sale of the resort to a group in Dubai has regained momentum, and he expects next month to travel to the middle eastern country. Though Barrie said there still are "a lot of ifs" to the transaction, "we're going to flush it out one way or another," which should, he added, allow him to concentrate more on the team.

Anonymous said...

"if BoC artificially pushes up the price of bonds, then wont 5Y mortgage rates also have to go up?"

No, bond prices and yeilds go in opposite direction. If the BoC pushing bond prices up yields(and therefore mortgage rates) will fall. This is the point to lower rates and spur investment. The downside is your printing money and expanding the supply of money which will lead to inflation at some point.

vg said...

If they're walking from condos and cancelling major deals in Seattle then how can BM hope to complete phase 2 ? I say LB may be in a tight spot right now.



"At pricey high-rise Seattle condos, some buyers back out


At Fifteen Twenty-one, developer Opus Northwest says more than one-quarter of the original buyers have walked away, some forfeiting deposits of $100,000 or more."



http://seattletimes.nwsource.com/html/localnews/2009113376_condoclosings24.html



$300M project at Seattle Goodwill site canceled

A $300 million development that would have brought 600 apartments and condominiums and a Target-anchored shopping center to the Goodwill site in Seattle has been canceled, its developer announced Friday.


http://seattletimes.nwsource.com/html/localnews/2009116421_webgoodwill24.html

Anonymous said...

"Though Barrie said there still are "a lot of ifs" to the transaction, "we're going to flush it out one way or another," which should, he added, allow him to concentrate more on the team."

Translation: I'm getting out while the getting is good.

S2

StargazerXL said...

Wow, Len Barrie is hoping for a bailout from Dubai investors? That place can't finish its own projects, and it ain't getting better anytime soon:

The Dark Side of Dubai

Anonymous said...

All this talk about the BOC and interest rates and the scum inheriting the earth:

There are at least 10 people on here that could, if they got together and chose to, finance the purchase of a house for one of the bears.

This could be a great opportunity to set up a self-funding group that after say 10 years you could be financing each other. No more Mrs. Bank, no more Mr. Nice guy! You could use your RRSP's to mortgage this scenario.

I'm not saying jump out and grab the first house that comes along, look for only the very best deals - maybe starting this Fall?

Anonymous said...

The old buddy up scenario done a bit of a different way?

S2

boomer said...

"so here is one observation. variable rate mortgages are tied to BoC prime, but 5 Year mortgages are tied to Bond markets. if BoC artificially pushes up the price of bonds, then wont 5Y mortgage rates also have to go up?"

backwards,metaldwf

bond prices up = yields down.

Anonymous said...

"There are at least 10 people on here that could, if they got together and chose to, finance the purchase of a house for one of the bears."

The bears don't want the asset, because its overpriced and has much further to fall. Its not financing that's the problem.

greg said...

I have to agree, I've been holding off buying since the summer 2007, and I'll admit I'm looking, but only for what I'd consider a "good deal". They're still not that easy to find.

Metaldwarf said...

sorry my bad

Rhino said...

"There are at least 10 people on here that could, if they got together and chose to, finance the purchase of a house for one of the bears."
Not only does the bear not want the house at current prices, whats in it for the financiers? They would have to at least match the banks rate of 3.8% on a 5-year fixed. Seems like an awful return for the risk your taking on. Why not just buy a 5-year grade A corporate bond for a 5% return? Thats the problem right now, govt actions are mispricing risk. In a few years when we get the massive inflation and rates spike your idea would be good.

Anonymous said...

I think the good weather is spuring on the housing boom in this town right now. Also since cruise ship season is here again we'll soon see more out of town buyers who come in on cruise ships and buy condos before leaving again. For this reason I have bought 3 condos for me and one for my wife.

Fooder said...

Following what you guys are saying, but unaware of bond markets. I'm waiting on the sidelines taking safe GICs not liking any risk. It sounds like some pretty low risk bonds are available now with 4-6 % returns. Is this something that would need a financial advisor to help with? Or are the bank bonds safe and available through the banks?

I know this is off housing topic, but it's kinda on topic of what to do while waiting for a house.

Rhino said...

Fooder,
The bond market is not as transparent as buying equities. Bonds are generally sold in bulk to large investment groups. A retail investor trying to buy an individual corporate bond pays a large premium to what an investment bank would pay. Retail investors usually use a bond fund, and unlike equities the management fee is worth it.
The biggest risk to buying longer term bonds right now is inflation. If you get a 5-year bond at 5%, and in year 3 inflation goes to 6%, your stuck with a bad investment. Bond funds that are laddered helps reduce this risk a bit (since they are always buying new bonds). I would recommend the Claymore 1-5 corp ladder (pays about 5%) as it only has a management fee of .25%.

Anonymous said...

"The bears don't want the asset, because its overpriced and has much further to fall. Its not financing that's the problem."

I wasn't suggesting there was any problem. Just an idea that could be floated in 6 months or in 3 years from now. The biggest cost of a house isn't the purchase, it's the financing. It's always good to have a discussion about possibilities and think outside the box.

roger said...

Rhino said:

A retail investor trying to buy an individual corporate bond pays a large premium to what an investment bank would pay.To a large degree this depends who you buy them from. I use TD Waterhouse discount brokerage and the bid/ask spread is not too bad. In small quantities the commission works out to 1% which is better than bond fund MERs.

If you are just starting out with bonds there is a good Canadian Website & book by one of Canada's best known fixed income experts.

In Your Best Interest

Fooder said...

Thank you for the info guys. I am by all means a beginner. My natural instinct is to put it all under my mattress, but the iota of common sense I have is kicking me to become aware of the tides.

patriotz said...

The responsible, productive memebers of society yet again get to pay for the stupidity of the iresponsible.I think that's better described as "oligarchy", as personified by the recently departed Dear Leader south of the border.

It's just oligarchy lite now.

Art Vandelay said...

@We Are Dave: Why is everyone who disagrees with the prevailing, ahem, wisdom on these circle-jerks a "bitter realtor"?

Are you Kresgin?

Art Vandelay said...

ForRentin writes: "You must move away from this island...and seek out a proper location to settle down in. Here's a list I've come up with:

1) Edmonton. Probably one of the nicest towns in Canada other than Victoria.
2) Winnipeg. I admit I have not been there but I heard it's great.
3) Toronto. High class metropolis. Very liberal too so you can dress weird and read poetry etc.
4) Regina. Best prairy town in the world.
5) Calgary. Bring a cowboy hat.

Either you are on glue or this is brilliant satire.

Edmonton. Lived there. Shithole.

Calgary. Lived there. Asphalt-covered shithole.

Winnipeg. Friends there. Shithole's shithole.

Toronto. Been there. You can't compare Victoria to Toronto any more than you can compare the sun to the moon.

Regina. Best prairie town is like being the best pimple on my @zz.

dub said...

Calgary. Lived there. Asphalt-covered shithole. I've had more than a few close friends move back to Calgary(all were originally from there) over the last couple of years. It's not that they disliked Victoria, it's that they missed aspects of Calgary that Victoria doesn't offer.

I'm not sure why people have such a hard time accepting that folks enjoy different cities and areas for different reasons. To each their own.

hhv said...

VREB month to date stats: 608 new sales, 1049 new listings, 3846 total active listings.

Sales to new listings ratio: 58%.

I expect no price changes MOM in April.

greg said...

I wonder if speed of listings will pick up or sales will tail off in the next few months? That sales to listings percentage could be considered bullish.... unless it is all concentrated in the below median properties.

My PCS is still showing the majority of listings going just under list, and also a few returned listings with big price drops selling quickly.

I'm expecting the median and the average to drop again, we'll see what happens...

greg said...

HHV, as to your twitter comment on Victoria being the best city to live in Canada, how on earth could that be possible with this criteria?

"Criteria included what is important to people who live in a city, rather than to tourists, such as income potential, the likelihood of finding a job, housing costs and weather."

I kind of like the weather here, but income potential and housing costs are definitely sub standard. Low unemployment rate is temporary result of construction boom that is now over.

This is one of the most expensive places to live in Canada. Sheesh.

hhv said...

Yes Greg,

Avg price = $550K
Avg SFH square footage is 2100ish
= avg price per SF of $260

avg build cost is around $125-$150/SF right now.

Avg hours of sunshine 2100
Avg price per hour of sunshine to live in Victoria is $260.

I love this town, but that sure is one expensive tanning salon.

hhv said...

The Star confirms what we've been saying all along.

Could this be a start of a new paradigm in the way the masses think about RE?

hhv said...

"There's so many myths around real estate," says James McKellar, a professor of real property development at York University.

"Let's not forget that before the 1980s, the motto was that a home was a money pit. Over a long period of time, housing does not keep pace with inflation. Don't look at it as an investment. A house is a cost. You don't buy a car as a good investment – you buy because you need it."

Reid said...

Medium and lower priced homes in Victoria are selling and all indications are that it is still a sellers market at these price levels especially in the nicer locations. Many of these buyers look at Victoria as some sort of paradise and are willing to pay huge money for crap houses as long as they can access the debt. So as long as interest rates stay low and credit remains available I have to assume the buyers will be there.

For the buyers to back off they have to feel threatened about their financial security. I travelled this weekend to a town which has been hammered by the recession. It was ugly and people there are scared and stressed. This town is 100% the opposite of what I see in Victoria. There is NO recession in Victoria yet; nothing has really changed. So as long as people are not concerned about their jobs, why not buy a place in “paradise” when interest rates are so low?

I know their purchase decisions are stupid because I spend the time to study it and understand the longer term financial implications. But I am sure these FTB’s look at their friends and family who have bought homes in the past 20 years (exception being last two) and created financial security through this decision, it appears logical to follow in their footsteps.

If long term mortgage rates rise above 6% we will have created a sub-prime crisis in Canada and those who heavily leveraged themselves will likely suffer the same fate as many we have witnessed in the US over the past two years. Salaries and wages are crappy in Victoria and are likely to stay that way, so income growth will not pull these people out of their dilemma.

But it takes knowledge and patience to stay out of the market when you have an opportunity to own a house in “paradise”. I do not think those attributes exists amongst most FTB’s of SFH’s in Victoria. So given the low long-term interest rates (which BoC is trying to push even lower) bears will have to wait a lot longer before we will see a real buyers market on entry level homes. But once that buyers market exists, prices will come off hard.

(I do not share the "paradise" view of Victoria. It is a beuatiful city, but there are a lot of other places in BC which are as nice to live in as Victoria)

Anonymous said...

A quote from that article: "Maybe we should have a change of view, thinking that a house is actually a home like they did in the old days. Back then, if you bought a house and sold it, it would be the same price. No one expected the houses to go up in value; they only expected to pay them off."

I'm not sure what Old Days they are referring to. My grandparents and my great grandparents bought several houses and made money along the way. Just imagine the development opportunities that existed a way back when.

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