The peak of our market was April 2008. Back then, 5 year fixed mortgage rates were approaching 6%. It was also a time when everyone believed the escalating price party was a permanent part of the local real estate market.
And then, like an energetic toddler running forward in the schoolyard while looking backward, we hit the affordability wall;
no one saw it coming--well almost no one anyway (H/T to all you regular readers here).
Sure there were warning signs. But Victoria was insulated. Sure prices were high. But wealthy boomers were coming. Sure the length of the run up and the newfangled mortgage products encouraged FTBers to buy sooner than ever, robbing the market of new entrants years in advance. But buying still made more sense than renting.
And then all of a sudden it didn't. Prices dropped 15% in 9 months. All the while industry told us they couldn't. And when they did, industry told us they wouldn't last at that price long. And then the recession hit Canada, but industry told us Victoria was insulated, that this was a once in a lifetime opportunity that only fools would choose to miss.
Ontario's pain, it would be told, creates a magical, even mystical, opportunity for buyers to take advantage of plummeting interest rates and reduced prices to finally own that home they'd been craving for so long. And oh! how Victorians did buy.
January 2009 was the worst month that anyone could remember for sales in the city. But February, sweet February, how the buyers did return to the triumphant ringing of real estate church bells. And then March, gracious March, your gift of stable prices led to the realization that this time it truly is different. This time, by your grace, prices would not fall off the Cliffs of Insanity to crash hard at the soft, sandy beach of true affordability.
Which brings us to April, and 50-year low interest rates. And the myth of affordability. As if average homes selling for 7.8 times average yearly incomes somehow creates a new benchmark of affordability when the historical trend has been 4 times income.
I wrote comments in Reid's first post here a couple of weeks ago about the effects of interest rates on monthly payments:
$500K @ 4% over 35 years = $2200/month
$500K @ 5% over 35 years = $2500/month
$500K @ 6% over 35 years = $2825/month
$500K @ 7% over 35 years = $3160/month
Difference between now and 10 months ago: $960/month.
If you've been watching the market for any length of time, or have done some digging into how this whole mess got started in the first place, you'll recognize that the ingredients today are very similar to 2002.
In 2002, we were just getting over the dot com collapse and the 9/11 effects. The world's money elite, in their infinite wisdom, spurred a buying frenzy in real estate with artificially low interest rates. Get out and shop. Consumers are the savior!
In 2009, in the beginning stages of a global economic event not seen since the Great Depression, caused by an addiction to debt, the world's money elite, in their infinite wisdom, spurred a local buying frenzy in real estate with artificially low interest rates.
Remember that affordability issues, caused by high home prices, caused the local market to correct. A 15% correction thus far still left Victoria 18% over-valued according to TD Economics research. Buyers buying on monthly payments alone, often in places they don't plan to stay in for longer than a few years, are propping up the bottom of the market. Everything else is languishing unsold. Few people think now is a good time to sell, so they are waiting to list their properties. Interest rates can only go up--causing the fog of affordability to be pierced by the true blinding light: falling prices.
Reid has an excellent predictive graph on the effects of interest rate changes on median single family home prices in Victoria.
The BoC has taken the unprecedented step of telling us interest rates will remain unchanged until late 2010. Will prices drop further between now and then, or will the monthly payment addicted True Real Estate Believers™ continue to prop up the Victoria market?