Saturday, April 4, 2009

It is Not a Balanced Market

The VREB has been trying to spin to the public that we are currently experiencing a balanced real estate market. Statistics I have been collecting indicated that there are actually two distinct markets in Victoria; a strong seller's market below $650k, especially in the more desirable locations and the strong buyer's markets in all regions above $650k and especially above $800k.

Below is a summary of MOI (months of inventory) statistics for SFH’s in Victoria using March sales numbers and MLS inventory from March 30 2009. I have also provided a comparison to February 2009 and March 2008 (using quarterly data given lower sales volumes). My sales breakdown by price is estimated using medium and averages but any errors in this will not be material enough to distort the overall trends shown.

In March 2009, the statistics showed that sales for SFH’s under $500k were actually UP about 10% across Victoria. But if you just look at Victoria, Oak Bay and Saanich East which contain the more desirable places to live, sales in March 2009 were UP over 50% from March 2008. Now today you may get a slightly better house for $500k than last year, but a 50%+ increase is truly amazing given we are facing the worst recession since WWII and last year this time we were still in the greatest real estate bubble of modern time and few people were concerned about losing their job.

The current MOI data for Victoria, Esquimalt, Oak Bay and Saanich East are at or under 1.0. This would indicate a very strong seller's market. Combine this with much higher sales in these regions; new listings that are priced right are obviously selling, which is likely why we are not seeing inventory levels increase at the lower prices.

In contrast, above $650k, each area of Victoria has seen sales volumes drop between March 2008 and March 2009 while MOI numbers have increased. Last year on average it was a buyer's market, but a balanced market in the more desirable areas. Today we are seeing a buyer's market in all regions of the city at the higher price levels. Once you get above $800k, things get really ugly (from a seller’s perspective) everywhere.

So today you do not appear to have a balanced market anywhere as the VREB suggests, but rather a unique dichotomy where you have a very strong seller's market at the low end in the desirable locations and strong buyer's market at the higher end. How long can this dichotomy last? Will the higher priced home sellers drop pricing and push down the market? Do these mid to high priced sellers hang onto their price expectations as they see how hot the low end of the market is?

Given what I see in these statistics I am not overly optimistic we are going to see prices of the lower priced homes dropping soon. I know that my wife and I are in a wait and see pattern and based on what happens we will go after amore expensive property or look to buying elsewhere in the province.


HouseHuntVictoria said...

Great first post Reid!

I've invited Reid to share some of his analysis for us all on the main page. Please be kind and tell him how much you appreciate his work.

Just Janice said...

Newsflash - those with money are sitting on the sidelines (or trying to offload what they have)while those deluded by the illusion of the monthly payment (FTB's, mostly) are jumping in!

Hmmm...if I were a smart participant in the RE market, I think I would want to do what the well informed are doing and not what the amateurs are doing.

Great analysis...

roger said...

Reid - Great Job!!

As a stats guy I can really appreciate the time and effort it took to produce these charts. I hope you keep posting.

omc said...

very good job!

Dumb Canuck said...

Great job Reid - your analysis matches what I've seen in the detailed listings data that I'm capturing.

Of interest to me is that the MOI is way up in Sooke at all price points. Most markets have collapsed from outside and then in. One question is: are the lower-priced Oak Bay, Victoria and Saanich West houses that are selling reduced in price from last year?

Nick said...

Nice work Reid!

I wonder how many FTBers are left out there to continue to snap up these properties?

Anonymous said...

The stealth blimps are circling the city at the moment snatching up FTBs all over the place and wisking them off to mortgage brokers and realtors who convince them that payments are low on expensive real estate. Be on the lookout. These stealth blimps often circle starbucks and mocha house in cook street on Saturday and Sunday mornings looking for yuppies.

Reid said...

Thanks for the all the great feedback.

The stats are not what I was expecting after the economic crisis hit last fall. I figured then that right about now we would be in a buyers market at all price levels and prices would be coming off hard, but I guess it is was it is.

I am starting to think as Nick suggested that there has to be a limit to the number of FTB’s that will enter this market given all that is going on globally. There cannot be a lot of new jobs out there these days and incomes are not rising assuming you are able to keep your job, so at some point the the number of these uninformed buyers have to slow down.

Dumb Canuck, as far as prices in Saanich and Oak Bay, I do sense that you are getting a bit more house for $500k than you may have gotten last March, but given how high prices were in March 2008, today’s prices still do not make sense to me.

patriotz said...

Price are falling just as fast as they were during the 1981 bust. They are also falling faster than any US city in the first year of the current bust. What more do you want?

Just wait until Gordo cuts back the public service after the election, tourism sees a dead summer, and the Olympics turn out to be a bust.

Just keep building up that down payment. Second half of 2010 is when the real bargains will appear.

HHV said...

This analysis got me thinking "why aren't prices climbing at the low-end?" So I did some digging into the effect of interest rates on prices:

$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

Want to know why this market is doing what it is doing? Look here.

You can go back as far as 1994 here.

In 2006, extended amortizations and no-downs bounced the market up.

In 2009, crazy-low interest rates aren't sending prices up, they are keeping low-end prices from falling fast.

Only one clear conclusion can be taken from this simple fact: the market is exhausted. Given current income levels, prices cannot climb.

If you were going to buy a $500K home today using the product above, you'd need an income of $120K/year.

A 1% interest rate rise reduces your purchasing limit to $430K. At 6% interest, the max buy is $385K.

If inflation is a rising concern, and it may be soon, what will happen in the Victoria market?

hhv said...

Adding to above: based on interest rates alone, you can see that a whole new round of buyers has found themselves "able to buy" in these conditions.

Some people would have found themselves priced out this time last year with peak prices and 6% interest rates. This spring's conditions coaxed them out.

I can't help but wonder if March/April 2009 prices will show a new peak point we'll use to measure the market for the next decade?

Anonymous said...

No matter how "good" things do this Spring, it won't be a new high point at any price point.

Not happening. Dead cats don't bounce that high.

vk said...

Interesting Sunday morning reading :
Time Colonist - Taking stock of unfinished developments post-boom

Bobisnotmyuncle said...

In my price range (condo under $300k) I am disappointed. Looking at the sales over the past 2 months (31 sales), the average sale has only been 3.4% under asking, with an average price of $238k. There have been few with larger discounts, but also a few at asking... I hope the fall is a big change, because I am not excited about the places I can buy at this price point...

Reid said...

HHV, your analysis on the impact of lower interest rates is clearly having an impact on FTB's ability to acquire and sales at the lower end of the SFH market. Lower interest rates means people can borrow more and Canadian banks appear to still be willing to extend huge credit to people. In the US banks quickly put the hammer down on credit after the subprime issue hit. We are not seeing that in Canada yet and this will stall the slowdown.

I went to my bank recently asking for pre-approval for a set amount that aligned with my personal situation. They came back offering us credit that was almost 3 times what we requested. I almost vomited when I got the e-mail. I have to assume many FTB's are getting the same realtive credit offerings.

hhv said...

Reid, agreed. And think too of how much further that number grows with the addition of parent co-signers. The only thing supporting current low-end prices is the willingness of people to leverage themselves into oblivion to pay them. I'd argue they are only agreeing to because of a misguided belief that prices will rise in the near future. It's going to take a long time for prices to recover to current levels once interest rates climb again.

vg said...

"I am starting to think as Nick suggested that there has to be a limit to the number of FTB’s that will enter this market given all that is going on globally. There cannot be a lot of new jobs out there these days and incomes are not rising assuming you are able to keep your job, so at some point the the number of these uninformed buyers have to slow down. "

Agreed, this one month blip is what it is going to be,a "blip" on the zig zag path downward. I overheard two guys chatting the other day how one was laid off from construction at BM and only a few are left and that the other in the public sector was also being experiencing layoffs in the labor sector as projects get cutback.

There is no way this FTB effect can keep up and is what happened in the last recessions when there was a slight pullback before the bigger drops. They all raced in March thinking you may not get another chance and you actually had another several years to think about it.

With inflation on the governments lips you know these low rates won't be here long. Sheep being led to the slaughter.

Fozzie said...

Great work Reid!, and Just Jack thanks for the community price breakdowns on March's VREB post. I've book-marked it to refer to in the future.

HHV ... I think you right on the mark. FTBs are being lured to buy right now by those low interest rates and the fact that they're seeing that they can get a little better/bigger house this year over last year. Although, I think prices will still continue to decline a bit, and stay flat for many more years.

I think in the short term interest rates will stay low, but 1-2 years from now, they will go up fairly drastically. With all the money being printed, and pushed into the economy, when it all starts to recover, high inflation will come back (also driven by higher oil prices), and then govt/central banks will need to reign it in with higher interest rates. While the higher interest rates will make it hard for some of these current FTBs to pay their mortgage obligations, I think the govt. will try to keep them low enough not to cause too many foreclosures.

In democracy, govt. always manage by trying to appeal to the herd. Otherwise, they get punished come voting day.

So while I often don't agree with the herd, I try not to bet against it ...

phil said...

"In the US banks quickly put the hammer down on credit after the subprime issue hit. We are not seeing that in Canada yet and this will stall the slowdown."

Because the banks here carry little mortgage risk with the "built in" bailout of the CMHC. In the states they have to beg for the bailouts.

With that in mind, perhaps our bubble, crash and the aftermath may last somewhat longer than the US.

roger said...

Fozzie said:

While the higher interest rates will make it hard for some of these current FTBs to pay their mortgage obligations, I think the govt. will try to keep them low enough not to cause too many foreclosures.

The government will not be there for the homeowners to bail out foreclosures. Here is why..

- Variable mortgage rates are set by the mortgage lenders (i.e. banks) based on the bank rate which is set by the Bank of Canada at fixed times during the year. The BOC has a specific mandate to set this interest rate to keep inflation in a band of 1-3%. They will lower it when the economy is cooling and raise it when the economy heats up in order to stay in the band. These policies and decisions are not made in consultation with politicians.

- Fixed rate mortgages like the common 5 year term are based on rates in the bond market. The rates are not set by the government but by the investment community in an open market with bid/ask prices based on what people think the bonds are worth. The bond used as a baseline for setting 5 year mortgage rates is the Government of Canada 5 year issue. The banks determine the spread that they use based on competition for mortgage business.

When the economy shows signs of improving you can expect the fixed rates to rise first as investors move from the safety of fixed income and back into the stock market. this is because there will be lots of bonds sold which lowers the price and increases the yield. Fixed mortgage rates will follow.

When the economy starts improving and credit is freely available to businesses the BOC will start ratcheting up the bank rate. You can expect jumps of .25% to .50% at each of the fixed adjustment rates as they try to make sure inflation does not get out of control. By the time many variable mortgagees decide to switch to a fixed rate these rates will be much higher.

So in a nutshell don't expect the politicians to do anything to help the homowners that are in over their head once rates rise. They have no way of controlling rate increases and bailouts will not be popular to the masses who have been financially prudent.

When financial conditions change next year interest rates will go up quickly. This will catch many variable buyers by surprise. Those renewing fixed mortgages in 3 or 4 years will also be in for a big shock.

Anonymous said...

There's still no way you can go wrong buying a entry level home in Victoria. They always appreciate in value over the long term and no one ever loses money on a house.

Nick said...

Nice interest rate breakdown HHV. It would be one thing to buy a house based on low interest rates if it was fixed for the duration of the mortgage. However, with the virtual 100% certainty that rates will be higher in 5 years, I guess FTBers are counting on higher incomes in 5 years. Given the global economic climate, I'm not prepared to make that gamble.

Anonymous said...

Anon at 7:43. Ha, ha, ha, ha, ha. Thanks for that. I needed the laugh.


Metaldwarf said...

Good info on the duality of the market. I completely agree on the low end Vs high end. I assume most of the bears on the blog are looking for the low end ( as if 500k should be considered "low end")

I have seen, as I am sure you all have, some good blogs shut down recently.

All heil CondoHype, all heil UnRealEstate!

Seeing the high end die is gratifying and satisfying. I don't know if the low end is ever gonna die, short of thee "greater depression" which we all know won't be allowed to happen. I can't afford to buy...still. I am starting to think about begining to play "their" game. Leveraged investment, high risk, junk bonds, market shorts, maybe I can make my millions in the stock market and buy my home outright.

Anyone want to get together and discuss what they are doing right now to save, prepare, get ready for all the "deals" we all hope are coming.

vg said...

"I am starting to think about begining to play "their" game. Leveraged investment, high risk, junk bonds, market shorts, maybe I can make my millions in the stock market and buy my home outright."

It's the only way to go,own outright or small mortgage at worst. I think there will be many good deals in the junior companies who survived with cash or the ability to raise cash. Some have come off their bottoms so you have to be choosy. Energy plays are my focus with the occasional tech play who make profit with low debt loads.

Metaldwarf said...

Re: Discussions on the future of interest rates.

I don't see rates moving much for probably the next 3-4 years, and even then it will be moderate. While there is a lot of talk about Hyperinflation from all of the stimulus, people fail to realize that the amount of wealth that was destroyed eclipses the stimulus many many times. I was reading (sorry cant find the link) that the stock meltdown last fall vaporized 60 Trillion US dollars worth of wealth. The entire global bailout is something like 5 Trillion so far. This also doesn't account for loss in jobs, productivity, home prices, etc.

Rates are going to be low for a good long time.

Anonymous said...

"What is happening with unfinished developments post-boom"

TC online article.
i thinks is a good one, balanced.

>it will be a long time to recover
>two year inventory
>rezoning, re-design for retail, commercial.

hhv said...

"Just because our banks didn't collapse, Canadians are running around saying, wow, aren't we terrific. But the reality is this economy is going to get whacked just as hard as economies around the world," Mr. Clark said.

Anonymous said...

"Some people would have found themselves priced out this time last year with peak prices and 6% interest rates. This spring's conditions coaxed them out."

not this FTB, had a deal last summer, that i backed out of due to inspection, that was 150K higher than the one i just got, and all this by-the-way with out mom and dad --not all FTB are as dumb or as poor as you think!


hhv said...

"not all FTB are as dumb or as poor as you think!"

adw, I understand your need to defend your purchase decision, but you need not put words in my mouth. I have never stated that all FTBers are dumb or poor.

Anonymous said...


I am sure that you are happy with your purchase decision. Enjoy your home and make it comfortable to live in for many years.

Now that you are a homeowner I suggest you stop reading bear blogs and watching RE market prices. You will only become unhappy as the market continues to drop over the next few years. Just take a long term view. In ten or fifteen years your house will be worth more than you paid for it.

Anonymous said...

CALGARY — The Conference Board of Canada has laid out a grim outlook for employment in 2009 and 2010.

The board's director of national and provincial forecasts says unemployment numbers will steadily rise this year at peak at 9.5 per cent in the middle of 2010.

Pedro Antunes says he's predicting 340,000 lost jobs in Canada in 2009.

NanHousing said...

Hi all, I have finally updated my blog with a new post about Nanaimo price levels. If anyone is interested click on my name. Thanks.

Anonymous said...

MetalDwarf said: "Rates are going to be low for a good long time."

Don't count on it. The fastest way to pay for bail-outs and recover an economy from printing money is inflation and taxes. #1 way to inflate is to raise interest rates.

In this 21st century with the digitalization of stock markets & global media , debt destruction will occur at much faster speeds compared to the 1930's. Just look at all the "surprising" developments in 2008. Nearly everyone is caught off guard due to the speed of events taking place.

Further, continued "Quantitative Easing" and the expansion of "Fed debt monitization practices, GUARANTEE massive devaluation of the US dollar and by proxy inflation.

This ain't over by a long shot, and certain critical events will occur much faster than a lot of people think.

Oh yes, but don't worry, Victoria is located on Mars, so we're completely isolated!

Anonymous said...

This morning was looking at real estate a bit further out then the Victoria, Langford, Sooke area and, of boy, it looks like a Tsunami is coming our way.


Anonymous said...

Anon 10:13... you are being overly-optimistic.

Housing will not reach last years' peak prices for twenty to thirty years, just like in the last Depression.

Possibly even longer. Possibly even never.

Metaldwarf said...

Anon 1:10

The way the bailouts have been structured was actually fairly smart as far as inflation is concerned. The banks which have been handed money are all hoarding it. If the money never reaches the public, there is no inflation. Also, the bank have lost so much more money than they are getting in bailout, even if they did pass the money on, it still wouldn't make much of a dent. Lastly, the Fed can claw back the funds from the banks down the road when things do get flowing again. Assuming inflation does start to rear its head, the fed will just suck money back out of the banks.

Inflation is a long way off.

Anonymous said...

ITA Metaldwarf.

Surprising numbers for Nanaimo - Nanhousing, I thought up island was on a faster decline than us, not slower. Maybe it's different up there....

Dumb Canuck said...

We're going to be away for a while, so here are my April/early May ramblings/predictions:

(1) March Victoria unemployment will continue the upward trend, be listed at 5.4%, but due to the three month rolling average, actually be 5.9%. MSM will start to express surprise at how quickly the value went up. Pundits will downplay it, saying that it is still close to full unemployment
(2) FTBers will still buy lots of low end houses in April as MSM and federal politicians tell us everything is fine in the economy, not to worry (nothing to see here, move on)
(3) Bear Mountain financial woes to be finally outed in the TC. Len Barrie to try to sell his shares in the Tampa Bay Lightning
(4) Condo market to start to severly crash
(5) Harper and Flaherty to start to take heat for their nothing to see here spin. Of course, when someone says nothing to see here, that means that there is something really interesting.
(6) Several more RE offices to close in Victoria
(7) Commercial real estate to continue to look rosy, but really CRE lags residential by around a year, so vacancy rates will start to climb, especially as government doesn't hire any more and everyone else lays off people quickly.
(8) April numbers to come in close to March's (I go for 525 average, 495 median), spin to be that market is stable. Reality is that the putrid decomposing cat splatted a bit more than bounced.
(9) Election campaign to be nasty
(10) More anonymous posters show up here to troll at the community. Reality is that they are scared.

See you all in May!

NanHousing said...

Anon 7:34:

Well just starting to go down, don't think it is any different. Too bad condo sales are so few and far between or I would have decent stats to work with.

Most of the sales these days have been quickly gobbled up shortly after being listed or after a decent reduction. Looks like people are getting a clue how to price. Old stock continues to sit and waste away while it gets skipped over from being overpriced.

patriotz said...

"Just because our banks didn't collapse, Canadians are running around saying, wow, aren't we terrific. But the reality is this economy is going to get whacked just as hard as economies around the world," Mr. Clark said.

Remember that no major Canadian bank failed during the 1930's either. Fat lot of good that did anyone else.

Anonymous said...

No major Canadian bank failed in the 1930's because Canada had more than enough gold to back up its currency then, unlike the US.

patriotz said...

That is complete nonsense. How much gold the government or central bank has on hand has nothing to do with the solvency of any bank. Canada was not on the gold standard in the 1930's BTW. The US was.

Anonymous said...

Patriotz, you crack me up, I wonder what the gold touts are going to say to that. You just called them out on their assumed gold standard - and a deafening silence falls across the web.


Just Jack said...

Last month some 175 condominiums sold in the greater victoria area. The median price was $267,000. I believe that the typical households is selling at around seven years of ownership. Seven years ago, in March 2002 there were 120 condominium sales with a median price of $132,000.

The price difference between the two time periods is $135,000 which I believe constitutes most of the down payment for a detached home today. And this is why I believe that the market for homes under 600K, in the central core municipalities is the strongest market. Simply because this is all the condo sellers can afford.

I also think that the trade up market for detached homes has slowed considerably. People who currently own detached homes are more reluctant to move because of the economic times. Unlike condo sellers who see their homes dropping and price and want to move on to a property that they percieve as being a "safer" investment.

And this may be one of the reasons why the number of listings in Victoria has been dropping, while the number of listings in Oak Bay has been increasing.

Also, the median price for condos in 2001, 2000, 1999 etc. seems to plateau. I take this to mean that the $135,000 potential down payment for a detached home is maximized. Since condo prices are continuing to fall, the spread between the current price and original purchase will continue to be reduced. In otherwords, people selling their condos will have less each month has a down payment for a detached home.

What we are seeing now in the detached house marketplace is a temporary uptick in specific locations, property types and price range.

A healthy marketplace would see growth in all segments. I'm taking this current market to be a "bear trap" or dead cat bounce.

greg said...

I also wonder about the spread betweent he top and bottom of the market. I'm sure seven or 8 years ago, while there might be a few exceptional properties that would break out of typical price ranges, the majority of properties were priced in a band from say 150,000 to 500,000. Now we see prices from anywhere around $200,000 (condos) to 1 million plus (shacks at Willows).

The difference of course is that wages have not kept up with this asset inflation, so there is far less stability at the top of the market. While everyone played the trade up game, this was fine, but now that houses and condos are dropping in value, or at best treading water, the weakness at the top of the local market, or even at its mid point (say properties from $550,000 to $750,000) has been exposed.

I keep waiting for the top of the market to begin a cascade of prices downwards - ie, the high priced homes start dropping to the mid range, the mid priced homes start putting pressure on the lower range.

I think we are already seeing this in some neighbourhoods, if not others. Right now, things are relatively hot in Fernwood, meanwhile, they're dead in Oak Bay. How much longer can those Oak Bay sellers hold out for the perceived value if there are just not enough buyers?

I think there is a cheap money effect getting into the market for first time buyers at the fringes (I'm one of those). It remains to be seen how long this bounce effect will last. Last spring a high was reached in April, and it was all downhill after that. I would suspect the market this year will be weaker - the only thing preserving the market right now is less inventory is coming on stream than last year at this time. We'll have to see how that all works out...

boomer said...

" that the putrid decomposing cat splatted a bit more than bounced."


Anonymous said...

Talk around the water cooler in my office.

3 baby boomers.

One selling principal residence and looking to downsize to a townhouse. One trying to sell their principal condo to buy another condo but can't sell their condo. One thinking about selling a detached house investment property bought 3 years ago.

Just thought I would share. I've also been told that now is a great time to buy. I told them we are still waiting for further price drops. They all agree these are coming.


Metaldwarf said...

Overheard a Realtor the other day.

"The market is back baby! sales are up in March, even saw a bidding war like the good old days. Don't fear Mr. Market, the worst is over, buy now! Sales are up...*sheepishly* though prices might drop a little further..."

Soooo much spin, and then their conscience got the best of them just at the end. Definitely the best time to buy when prices are falling, but at least people are buying more houses than last month!

Slime, vile spinning slime.

Disclosure: I have a wonderful real estate agent who is a family friend. He has shown me a bunch of properties over the last two years or so, and when I told him last summer I planned to wait and see if prices came down he responded "good plan." not all real estate agents are scum, just some of them. Same goes for insurance agents *looks in mirror* ;)

Anonymous said...

Anon 8:14... a mere 6 hours between 2 and 8 AM is a deafening silence to you?

No WONDER you're an idiot.

Anonymous said...

Mr. "Deafening Silence":

I'm going to really enjoy watching you burn your paper for heat.

Anonymous said...

Squawk, continual off topic postings by panicking gold bugs, squawk, nobody cares what they say but like obsessive compulsives, they gotta sy it.

Squawk, just cause they care about us, even while they damn and curse anyone who challenges them, squawk squawk.

hhv said...

Please keep your comments on real estate related topics.

Nick said...

Looks like TD Economics is calling for a return to fundamentals. Sorry for no hyperlink, for some reason my browser crashes when I try and post a hyperlink in here...

Anonymous said...

4333 Northridge Cr.


Does anyone else price-reduction combined with condition and timeline threat somewhat insulting? It smacks of desperation and the April 21st thing comes across as a ridiculous bluff (which i pray does not fool someone). It's an absolute failure as a write-up i think and it solidifies Suzy Hahn's position as my least favorite realtor in town.

Sorry to break topic - just so tired of the sales hype and needed to spew.

I'm new to the blog. I like it. Thanks for the effort put in.