Thursday, June 25, 2009

Truth in numbers

Seems there may be a bit of a communications battle being waged between Teranet and the CREA these days.

You'll remember that CREA recently told us that the average home price jumped over 16% in the last month.

Teranet says:
Repeat sale prices for Canadian homes fell for a fifth straight month in April, dropping 6.7 percent from the same month a year earlier, a report on Wednesday showed.
The National Post had an OK discussion of methodology and what that might mean to the numbers:
With the economy in recession and unemployment increasing, Millan Mulraine, an economics strategist at TD Securities, said it was hard to justify a rise in house prices, as suggested by the CREA survey. But he was not convinced prices had fallen as sharply as the Teranet-National Bank survey had found.
Here's what I think: the numbers really don't matter. If you're a first time buyer, you're buying products in Victoria that are clearly in a sellers market, haven't experienced any kind of price correction at all and you can likely only afford them because of hyper-low interest rates. You may think you're getting a deal, but that's only because you're looking at it based on a monthly payment. I wonder how that will end up looking for you in five years time?

21 comments:

Roger said...

HHV said: You may think you're getting a deal, but that's only because you're looking at it based on a monthly payment. I wonder how that will end up looking for you in five years time?.

They will have much higher payments as shown by clicking here.

On a 550K mortgage they could see payments jump by 1/3 or $700 per month on a 500K mortgage unless they make additional payments during the first five years.

Property taxes, insurance and utilities will also go up. Recent increases have been more than inflation.

Where will the extra money come from? Wage increases?

talus said...

Waaayyy O/T but possibly a discussion for later. Over at Misch's blog there is a post on the validity of the long term buy and hold investing.

Long Term Buy And Hold Is Still Bad Advice

Here is a small sample...

"Now imagine you’re in your early 40s and investing for the past 15 years. Assuming you invested $175,000 [in the S&P 500] (roughly the 401k maximum over the time period) you now have less than $150,000 – a loss of nearly 18% over a 15 year horizon. Meanwhile, “my parents” experienced none of the volatility and have over $300,000 [in laddered CD's] – nearly an 80% gain. It is going to be near impossible for today's early 40s investor to overcome this 116% divergence. Even if the stock market doubles tomorrow “my parents” are still ahead of the average market investor."

Of course there is the disclaimer that this doesn't take into account stock selection etc., however it is an interesting post on misconceptions (and advertising??) nevertheless.

Roger said...

Readers might find this Economic Snapshot of Canadian Cities by CIBC interesting. How does Victoria rank?

Click here for PDF..

Just Janice said...

Is it just me or has the conversation around here died? I'm guessing that the supply of financial literacy relating to the housing market has outstripped the demand. I'm thinking that the occasional financial literacy post might be good - but that in general the major reason people came here was for observations/conversations about the actual housing market in Victoria....

Roger said...

Carla Wilson writes how the luxury home market in Victoria has changed significantly in just 2 weeks. Leading real estate experts explain it all to readers:

June 6 - Luxury real estate prices in Victoria suffer huge declines..

Prices for some of the most expensive homes in the region have dropped more than 50 per cent from their peak in the robust economy of 2007, when executives and millionaires snatched up estates and waterfront gems.

Between January and April, a total of 29 houses sold for $1 million or more in Greater Victoria. There was a rebound in May, when there were 33 sales of million-dollar-plus homes, outstripping the combined sales of such homes in the previous four months. Even so, total sales for the first five months of this year are 42 per cent below the 106 for the same period last year.

"Typically, when you are in a recessionary environment, the high end of the market will see larger price corrections than the lower end, just as in a rising market, the high end can see much more substantial gains in prices," said Cameron Muir, chief economist for the B.C. Real Estate Association.

There is "much more reticence to undertake such a significant purchase in a volatile economy," he said.

Lisa Williams, who has luxury listings with Century 21 Queenswood Realty, said when the economy worsened last fall potential buyers "shut down and no one wanted to make a move."

"Obviously a lot of people in the high-end market have been affected by the drop in the stock market," she said, although economic improvements have put many people in a "wait-and-see mode."
.

June 24 - Sales of Courtnalls' former estates signal rally in Victoria luxury market..

Scott Piercy of Sotheby's International Realty Canada said "Upper-end sales reflect "sellers' knowledge of what pricing should be, and buyers are realizing that there is value there,"

The transactions are among 66 sales, or pending sales, through the Victoria Real Estate Board's Multiple Listing Service, of homes priced at $1 million or more between April 1 and Wednesday, said Randi Masters, board president-elect. "There is definitely movement again in the upper-end properties," said Masters. "There is a lot of confidence out there," she said, describing the market as balanced.

.

Roger said...

What happens to fixed mortgages rates when Canadian government bonds fall in price and yields rise? Answer: they go up.

Well here we go...

Ottawa initiates new record bond issuance..

The Canadian government has taken advantage of cheap borrowing rates and increased its bond issuance program to a record $103-billion to fund its expanding budget deficit.

The Bank of Canada said late Thursday it would increase its bond issuance in 2009-10 by a massive 25%. The increase is estimated to be worth about $21-billion based on the $82-billion program announced in the January Federal budget.

Michael Gregory, a senior economist at BMO Capital Markets said while there was likely some upside to the deficit, the government was likely taking advantage of low bond yields now to borrow for a rainy day. "I think we’re probably in an environment where yields are going to be steadily grinding higher, slowly but surely," he said.

Bubble 'n Fizz(le) said...

Is it just me or has the conversation around here died?

Well, I guess the armagedon real estate theories didn't work out so the "experts" are turning to financial planning, aka "theoretically if you eat kraft dinner for 40 years you can retire." Of course, their financial advice is about as good as their real estate advice, i.e. not very good at all!

PainInThe said...

It's not over until bubble and fizzle (shitting pretty) POPS into nothingness and won't have the guts to show its face around here for decades.

Or the need, since it will have left the real estate business, finally, for good and gone back to Pizza Hut.

I say we're about 4-5 months away.

Inglishmagor said...

For me the slow down in visiting this blog has nothing to so with the blog... I've just given up interest in real estate for a while.

For years things were out of shape, but I was waiting for the Micheal Bay explosion to end the run up. Then things finally did stop and the world saw what the future holds. Now 5 months later everyone is back to happy buying because the papers said to. How does education trump the masses.

I've taken on a simple formula for real estate. price = average income of an area x interest rates x competition factor. Right now the interest rate reduction combined with the media attention has increased the competition factor. It will take a few years for the competition factor to mellow down to a reasonable level. So I have no choice but to mellow my interest.

As an aside, I think it's a good sign this blog is quieting a little. An easing of housing as a premier topic for people is a big step in prices drifting down.

Roger said...

Saturday edition of TC had this story:

New developments coming to Island..

Developers are putting out a range of incentives, such as lower prices, and covering interest costs for a period of time..

One of these developers, Sunriver Estates, is offering 1.95% mortgages for 3 years or a 20K reduction in purchase price. Maximum mortgage is around 380K.

The best 3 year fixed rate according to ratebot.ca is 3.5% from HSBC. Is it better to take a 380K mortgage at 1.95% or a 360K mortgage at 3.5%?

Click here for calculations..

The difference in monthly payments is $235. However, opting for the 20K discount and the 3.5% mortgage works out to a savings of $4,786 (after accounting for the difference of payments over 3 years).

Is a 3 year fixed mortgage a good idea in any scenario? It only works out better if interest rates have not gone up considerably at renewal time. Using the previous "deal" here are the tradeoffs:

- If the buyer took the 1.95% mortgage the renewal rate must be less than 4.6% in order to beat taking the 20K discount and a current 5 year fixed rates at 4.25%. If they were pre-approved at 3.7% a few weeks ago the renewal rate has to be less than 3.2%.

- Buyer takes the 20K discount and arranges their own mortgage. If the buyer took a 3.5% mortgage the renewal rate must be less than 5.6% in order to beat current 5 year fixed rates at 4.25%.

Conclusion - Be careful when considering developer mortgage deals. You may be much better off getting a discount and arranging your own financing.

HouseHuntVictoria said...

^ interesting. Those are similar product characteristics to what added to the housing crash in the US. What happens here if interest rates are higher and prices are lower at the end of those 3 year terms? Can you even get a mortgage for the same amount as you'd owe, or would the banks be issuing cash calls and forcing you into receivership?

Roger said...

HHV,

Good points. The 1.95% and 5% down offer is very tempting for the first time buyer. If they can barely afford the payments at these rates they will not be happy campers in three years. If they took the 380K max their payments now would be $1247 per month. If rates are 5% for a five year fixed at renewal time (conservative) the payments will be $1852 which is 50% higher. If rates hit the historical average of 6.2% for a 5 year fixed the rate payments will be $2119.

There may be some good deals in Sunriver in 3 years.

Roger said...

A number of readers have asked for more posts on buying and selling Victoria real estate. Here goes...

A landlord in Fairfield is trying to unload his rental property for 529K. It is a house divided into upper and lower suites with a total rental income of $2040 per month.

Click here for the ad..

Lets here your thoughts on this one. Is it a good deal? Would it be a better deal if the owner lived in one half and rented the other half. Are you on your way to see it tonight?

HouseHuntVictoria said...

Roger,

My answer is the house is grossly overpriced. Here's why:

If I buy to live in myself and rent out a suite, let's assume I keep a tenant, my costs, using a combination of 10% down (either saved up or negotiated price difference combination) for mortgage payment alone are almost $2650/month. See here.


Now, if I want to be a traditional real estate investor to buy, hold and rent out, even if I were to put down 25% and amortize over 25 years, I still wouldn't even cover my mortgage costs alone. See here.

Metaldwarf said...

Heads up for people with RRSPs

most providers send out statements in January and July
a bunch of providers are not sending out paper statements this July to "save paper". You can get an electronic statement if you want but you have to request it.

The real reason is that the statements suck and they are hopeing you don't look

so if you don't get a rrsp rate of return statement in the next month ask you broker to get you an electronic copy

PainInThe said...

RE: Carla Wilson's article...

The reason luxury house sales are crashing is simple. The rich are usually in the know with what is really going on, and the first time buyers are the clueless newbies that are being suckered in by lower interest rates.

People who have a great deal of money pay attention to the crashing world of finance; bottom feeders don't and borrow with their glands.

Couldn't be more simple, or a better indicator that we're nowhere near the bottom. When you see luxury properties being snapped up like POS's at 50% off peak, then you'll know the bottom is in and the bargains won't be getting much better.

When it comes to finance and finance ONLY, emulate the rich. There are many reasons why they are rich and you are not.

patriotz said...

Over at Misch's blog there is a post on the validity of the long term buy and hold investing.
...

Mish is in the business of investment management (managed portfolios). Now he is up front about this, but keep in mind the way he makes a living is going to bias anything he says about investing.

Dumb Canuck said...

Calculated Risk is running a hilarious "The Revenge of the Renters" Dilbert cartoon:

Revenge of the Renters

Bubble 'n Fizz(le) said...

Posted by "Victoria opinion" on Garth Turner's doom blog today:

another greaterfool in Victoria, just read her post, the bloody house isn’t even built yet????

Her quote,

“Well who knew that one day I would have to eat my words. I said that would never be able to afford a house in this market. However, the market dropped and we were able to buy. It was pretty quick as we weren’t looking two weeks ago and now we own a house.

However, it was one of those things that we got the place we wanted within a 15 minute window so if we hadn’t moved on it we would have lost it”

http://www.kidsinvictoria.com/forum3/viewtopic.php?f=7&t=3717369&PHPSESSID=19686530880c4f9535e43c368b435c92

it’s going to be a NIGHTMARE for people like this, when their mortgages reset…and an unbelievable buying opportunity for everybody else:



Since you were to cowardly to post that on KIV I took the liberty of doing that for you.

HouseHuntVictoria said...

B&F is busted.

Look at the times of posting: On KIV 9:34pm. On GF: 9:26pm. On HHV: 9:44pm. Nice try clown. Want me to get all ISP on yer a$$. WTF is your problem?

womp said...

It's like it's June 2008 all over again.