Tuesday, August 4, 2009

The buying opportunity

Some of you will remember last fall, during the worst stock market crash in recent memory, the Prime Minister of Canada declared a "buying opportunity." Many Canadians, and not just politicians, vilified him for his unsolicited financial advice.

I thought it'd be a fun little exercise to track what has occurred since then and maybe offer some reasons why we are where we find ourselves today--in a place that no one in these parts has accurately predicted.

On October 7, 2008, the TSX was at 9,829 points.
It "bottomed" on March 9, 2009 at 7,566 points.
Today, the TSX is at 10,936 and climbing.

If you rushed out and bought an index fund on October 8, 2008, you'd be "up" about 9% today. If you were patient and picked a better buying moment, you could be "up" almost 31%.

Considering all that has gone on in the global financial market, I find these numbers remarkable. At the same time, I struggle to explain the index numbers as a whole on the basis of any sound fundamental analysis (although when you look at individual stocks, you can see stars, dogs and reasonable valuations, especially in some financial stocks).

What happened in the local housing market?

Median Greater Victoria price in October 2008: $495K
Median in June 2009: $530K

July numbers are out, along with hyper-spin, and the median price dropped to $520K. My earlier guess was off, I had expected price hikes, avg and median prices both declined MOM. What this indicates is that it is properties priced below $500K that continue to fly off the shelf as fast as they are listed while properties priced $600K or more move slowly if at all. Official sales stats are: 516 single family homes, 252 condominiums and 103 townhouses or 933 in total--the highest July sales volume in 19 years.

The "buying opportunity" in housing occurred exactly 3 months after the fall declaration: interest rates dropped to equal the lowest on record and buyers bought. But real estate analysts should be concerned that previous high water marks weren't surpassed--considering the frenzy during the fall of 2007 and spring of 2008 was happening with interest rates more than 2% higher than today's.

These are weird and wacky times. I suspect we will be offered new buying opportunities in the near future.


Just Jack said...

According to a Scotiabank report home ownership amoung immigrants is up from 68 percent in 2001 to 72 percent in 2006. For Canada born those percentages increased from 73 to 75 percent.

The ultra low interests rates over the last three years must have brought those number up a smidge from 2006.

So if 75 to 80 percent of the Canadian population is living in a dwelling owned by a household member - why are the vacancy rates not increasing and rents declining?

If Craigslist is an indicator, it shows that there are some 834 rentals available in Greater Victoria. Anecdotally, I know of people who are moving to less expensive rentals. Is this Victoria's weakest link?

Will the future trend be for declining rents? Would this make those who have bought requiring suite income to be at a higher risk of default? In some cities of the USA, like Miami and San Diego this is occurring. Could this happen here too?

My thought

- for anyone buying a home where they require suite income, is to only use half the monthly rent in their mortgage payment calculation. If you require 100 percent of the rental income - then you should put down a larger downpayment to reduce the mortgage payment.

Roger said...

VREB has released their stats package. Click HERE--

July 2009 Statistics - Monthly Analysis--

June 2009 shown in ()

MLS Sales - 933 (946)
MLS listings - 3632 (3794)

SFH Average - 565.5K (588.2K)
SFH 6 mo. Avg. - 562.9K (559.8K)
SFH Median - 520K (529K)
All SFH Sales - 516 (539)

Condo Average - 328.4K (298.2K)
Condo Median - 290K (275K)
All Condo Sales - 252 (242)

Town Average - 443K (413.2K)
Town Median - 421K (375K)
All Town Sales - 103 (104)

Year-over-Year Analysis--

GV - Greater Victoria
July 2008 shown in ()

MLS Sales - 933 (616) - Up 51%
MLS Listings - 3632 (4557) - Down 20%

GV SFH Average - 565.5K (578.2K) - Down 2.2%
GV SFH Median - 520K (529.9K) - Down 1.9%
GV SFH Sales - 471 (335) - Up 41%

GV Condo Average - 328.8K (302.6K) - Up 8.7%
GV Condo Median - 290K (285K) - Up 1.8%
GV Condo Sales - 253 (166) - Up 52%

GV Town Average - 445.7K (447K) - Down .3%
GV Town Median - 421K (415K) - Up 1.4%
GV Town Sales - 99 (51) Up 94%

Just Jack said...

Impressive stats.

Can Victoria sustain this increased level of sales? Dropping the interest rate in half made the market more affordable for several hundred more households in Victoria.

You can get a variable mortgage at 2.75% over 35 years or $370 per $100,000. For the typical condo that's about par with rent.

This must be having an affect on rental suites in Victoria. Not so much the 1970's built apartment buildings which are typically the low end of the rental ladder. But basement suites in Bear Mountain or newer condominiums have to be getting nailed in high tenant turn over and a longer lease up period.

Roger said...

As usual VREB has issued a "spinorama" press release which will be reprinted by the reporters at the Times Hollowness. One needs to be remember that VREB, as a sales organization, represents commissioned sales agents and they want to say and do what is in the best interests of their members. There is no doubt that July sales were good news for real estate agents - they are making big commissions.

But lets take a closer look at the numbers and some facts:

- Sales dropped in July from June as I stated they would a few weeks ago. Even though sales have boomed in the past few months the seasonal slowdown has begun. And sales year-to-date are only ahead of 2008 by 2%.

- Note that the biggest drop in sales from June to July was in single family homes (SFH). Condos were up slightly and townhouses were flat. I leave it to other readers to suggest why this may be the case.

- Prices for SFH are down MOM and YOY and the six month average is flat. So even with near record sales and record low interest rates prices are well below the peak levels of April 2008.

Most of the pre-approval letters for 3.7%, five year term mortgages expire in a few weeks. Fixed interest rates will start rising now that the stock market has recovered. The seasonal slowdown in sales will continue for the rest of the year just like it does every year.

So.... What will happen to SFH prices in Victoria?

HouseHuntVictoria said...


I think SFH sales are down because inventory is down. Inventory is either $550K+ or is sold as fast as it is listed because the only people buying right now are those who are a)moving up by selling first or b)buying for the first time. The sheer lack of volume transactions in SFH priced under $500K prevents substantial sales above that level.

I would guess that many FTber's have bought Langford condo "deals" and many condo sellers have moved into low-end houses. I don't think there are significant numbers of new FTBer's getting into SFHs anymore.

The real story in the stats is the decline in inventory. This isn't good news for those wanting to see a rapid decline in prices. We will see a continued slide in prices through the fall IMHO (though likely bouncy) but I don't think we will see a substantial or sustained decline in prices until interest rates climb by 1%.

Vic said...

" Prices for SFH are down MOM and YOY and the six month average is flat. So even with near record sales and record low interest rates prices are well below the peak levels of April 2008."

Near record sales with no price leap = massive distribution, just what we wanted to see. Whose left in the pool ? Winterization time coming soon.

VREB spinorama will wear thin once the sheep all realize the price gains are history and your next five years is paying off the land transfer tax bill.

Roger said...

Vic said,

VREB spinorama will wear thin once the sheep all realize the price gains are history...

You are right on the mark with this comment.

Once the real estate always goes up myth is shown to be false sanity will slowly return to the market. The current rush to buy is driven by a fear of being left behind, dreams of big profits and low interest rates. Flat or falling prices, rising interest rates and lower sales every month until Xmas will have an effect on buyer psychology.

Vic said...

"The decline in the number of properties available for sale means we can expect some upward pressure on prices, though it is important to note there will always be month-to-month fluctuations in prices depending on the properties sold," said Markham. "

Translation = we have no frigging idea why prices didn't blast through the roof but keep your fingers crossed for next month...or maybe the next. We just didn't get enough of them high priced suckers to mess with the prices. ;)

Roger said...

It didn't take long for the Times Hollowness to reprint the VREB stats release. Here is Carla Wilson's version of the news release. Hardly any editing was required :>)

Victoria's July housing sales highest in almost two decades..

HouseHuntVictoria said...

And once again the Times Colonist completely misses the point. We're going on two years that I keep scooping you, if you're going to take all that extra time to repost the VREB press release, the least you could do is rewrite it some, don't you think?

HouseHuntVictoria said...

Roger, you and I are thinking the same thoughts at the same time today. Spooky!

Roger said...


There are some readers that already think you and I are the same person.... :>)

Vic said...

Of course the comments section in the TC article is closed. Nothing like a one sided newspaper, at least professional papers like the Sun and Province allow all comments on real estate.

Just Jack said...

"Near record sales with no price leap = massive distribution, just what we wanted to see. Whose left in the pool ? Winterization time coming soon."

Someone should write an economics text book on these market anomalies. We saw the reverse happen on the way up in prices which signified a change in the market. I remember months where the sales were down, listings up and contrary to economics prices were UP.

This current anomaly may signify a price ceiling for real estate. You could measure this in price which would show a flattish market or as a monthly payment which show a decline of some 13 percent. Last year buyers were paying $425 per $100,000 for the same price home. Today they are paying $370.

My thought is that we are dipping deep into the barrel of that last 20 percent of Canadian prospective purchasers. New mortgages at the big banks are down, but brokers are busier than ever. You can get a zero down mortgage at six times your income from a broker - you would find it quite difficult if not impossible to get the same from the chartered banks.

The pool of buyers is shallow and substantially interest rate sensitive. The unemployment rate is escalating in Victoria with the loss in construction jobs and government cut backs in using contractors.

Victoria is a two horse town where then number one and two employers are the government and real estate. The recession could quite possibly be deep and prolonged in the Garden City. Not a place to take on a half million and more debt on a 1940's bungalow with a vacant suite near a needle injection site.

The preceding commentary was provided free of charge - and for once, you have gotten what you paid for.

HouseHuntVictoria said...

Roger, those are the really smart readers. The rest of us know the truth.

Roger said...

In a previous thread I mentioned that I had developed a Buy Now or Wait spreadsheet calculator. It is now available for free download.

The calculator has a number of input parameters which are entered by the user to reflect their financial circumstances. The output shows which is better in terms of outstanding mortgage balance in five years. An extensive description of the methodology is included.

Readers should find the detailed breakdown of annual rental vs. owning costs interesting.

Here is a printout in pdf format for a 500K house and equivalent rental..

The excel spreadsheet may be downloaded by clicking here..

Reader comments and feedback appreciated. Feel free to modify or distribute to others.

Disclaimer: As with other free software no warranty is expressed or implied. User assumes all risk for use etc...

omc said...

The realtor's spin on the market reminds me of that shirt from the early 80's; "millions of flies can't be wrong". Not only to the fecal reference which I feel fits the "buying opportunity", but also to the follow the pack mentality. If you follow the recomendations of the TC or the shirt you will end up with a similar taste in the mouth.

HouseHuntVictoria said...


Sry about lack of feedback. I've been playing with it but really can't find anything to say to other than I think it's excellent. I have no idea how to improve upon it.

I'll add those links to the sidebar under resources heading.

Leo S said...

@Roger. Thanks for releasing this spreadsheet. Very nice. If I have some free time I might make an online version of it..

Leo S said...

Perhaps an option to check for first time buyers would be useful. They would be exempt from the property transfer tax on units under 425k

Leo S said...


Also a field for how much extra money to put towards the mortgage a person has. If I bought now I would pour everything I could into the mortgage to get it paid off ASAP. That will skew the calculation quite a bit.

Of course that needs to go into the savings as well. So if I could state that I have an extra $20,000 a year after all my expenses, then that should be deducted from the mortgage in the buy scenario, and added to the savings in the rent scenario.

Additionally, on the Owning Vs. Renting page, the owning option should state how much equity is built up in the house after years one and two. That should be deducted from the expenses. Just comparing what was paid in mortgage to what was paid in rent is not accurate, since some percentage of the mortgage payments are not actually lost.

Roger said...


I deliberately left out the first time buyer savings. Not only does it affect property transfer tax but there is now a federal homebuyer credit as well. I started to do it but it just got too cumbersome. If it is a couple making the purchase you have to factor in the eligibility of both partners as well. Furthermore, it does not make much difference when comparing the options because all three cases would get a similar reduction in outstanding balance.

Re: Your comments on additional payments. I have tried scenarios with additional payments and it does not make a big difference because the mortgage balances go down about the same for all three cases. There is a lot of debate on the merits of paying down your mortgage as fast as possible with extra cash. In some cases it is better to use the extra funds as a contribution to a TFSA or RRSP. It depends on a number of factors such as whether the individual has a defined benefit pension, mortgage interest rate and the the return on investments inside the sheltered investment. You need a separate spreadsheet in order to do the analysis. I deliberately left it out of the program.

Leo said: Additionally, on the Owning Vs. Renting page, the owning option should state how much equity is built up in the house after years one and two. That should be deducted from the expenses. Just comparing what was paid in mortgage to what was paid in rent is not accurate, since some percentage of the mortgage payments are not actually lost.

The goal is to see what the final mortgage balance would be under the different scenarios. If you read through the explanatory text you will see that I was trying to do an apples to apples comparison. This means that in all cases the annual cash flow must be the same.

- the difference between annual rental costs and ownership costs must be saved by the renter so that the same monthly outlay is incurred. Annual Rental Costs + Savings = Annual Ownership Costs

- in the same way the monthly payment for the buy now owner is increased with extra payments to equal the same monthly payment as the buyer that waits.

The equity is not deducted from the owner costs because it is accounted for as a reduction in mortgage balance in the final mortgage balance calculations.

Leo S said...


Thanks for the clarification, that makes sense.

Roger said...

From time to time we get "happy" landlords dropping by the blog to talk about their investments. Here is a detailed analysis of what happens if they buy a house or high end condo today for 500K with 50K down and a 4.25% mortgage.

Property investor - click Here..

If they unload in five years they need to sell for 542K and be fully rented at $2395 per month in order to break even with investing their down payment and principal payments at 5%. Rent for anything less and they are losing money every month hoping for a selling price over 542K.

omc said...

Your #s make sense to me Roger. I have friends who do the invest/rent thing and none has purchased in the last 3 years.

Village said...

Gah! Victoria Scale Rail is missing! I stopped buy there today hoping to pick up some HO scale Thomas cars to find the space empty and for lease!

This is far more horrible news then anything Real Estate related. Wonder if he retired or victim of economy/video games. (Or moved and didn't leave an indication as to where)

Vic said...


there is a small place at Oak Bay Junction that sells all that cool stuff...tucked in beside Sound Hounds.

Just Jack said...

Nice analysis Roger, you're missing vacancy and bad debt. But that is probably quite minor say 1 to 3 percent of the gross income, depending on where the building is located, tenant mix and if the rents are a full rates. But there are so many variables that it is difficult to make a program that will fit all properties. So many of these old buildings include heat and electricity in the rents, it becomes more of an art than a science to normalize the income and expense statements.

Suffice it to say, that a capitalization rate of just 4 percent is pathetic, given the risk and capital invested. Bonds would provide you with a better and safer return.

So how do you become a millionaire in real estate?

Start off as a billionaire - and wait.

Tay said...
This comment has been removed by the author.