Total sales: 764
New Listings: 1094
Total Active Listings: 3509
Sales to new listings ratio: 70%
Sales to active listings ratio: 22%
MOM volume change: -19%
YOY SFH price change: +8%
Highlights from the spin cycle, er presser:
- it is usual for sales to slow in August
- the average price was affected by 17 sales of over $1 million... included two sales of over $4 million
- The median price increased $20,000 to $540,000
- Sales so far this year are running over six per cent higher than in the first eight months of last year
Expect in about 3 hours time, the TC will run a headline like: Prices, Volumes Jump in August: Buy now or be priced out forever.But they should be running a headline like: Despite record low interest rates, buyers still not buying like they did in 2005, 2006 and 2007.
And sales are falling at a faster rate in August 2009 than in the previous 4 years.
Thanks Roger for great graphs again.
125 comments:
So in other words,if the two sales over $4 million never happened then prices would not have moved up anything worthy of commenting. Then they then take the "shortage" of listings and say this will cause continued price rises ? More double speak.
It is quite surprising that they commented about the two 4mil+ houses in the writeup. Youd figure they would not bother mentioning that so the price looks like it went further up than it actually did. This is why you have to look at 3+month averages or look at graphs.
By the way the average goes down about 20k if you exclude those two 4mil+ whoppers.
NanHousing,
They have to temper sellers' expectations going into the fall. I think the standard line REALTORS are telling their selling clients is: The market is not as hot as you think it might be, if you really want to sell, you still need to make your price attractive.
When is the BC budget supposed to be announced today?
This afternoon Robert,usually the house convenes at 2 PM but the TC says they are "poring" over documents so maybe there will be some leaks before then.
The finance minister stated that they are delivering the budget on the assumption that we are at the bottom of the recession and the only place left to go is up. The budget might not be as full of doom as some have speculated. However, if their assumption is wrong that just means more of a mess down the road with even larger decifits than the estimated 2-4 billion we already are dealing with.
Oh and I heard on CBC radio this morning there mght be ANOTHER federal election this fall... Seriously WTF
My understanding of the HR strategy going forward for government is this. They are not going to lay off a lot of people, but rather let retirements and attrition combined with a hiring freeze allow their staff numbers come down gradually over the next five years. In 2001 when Campbell reduced the size of government all at once, they ended up hiring back most of those laid off as consultants after paying them severance because the remaining employees were “overworked”. They do not want to repeat this, so they plan on slowly reducing numbers and hoping remaining employees will pick up the slack incrementally.
Although there are going to be some decent layoffs in specific ministries, overall government layoffs are not expected to be significant in today’s budget (less than 5%).
BC Budget Release:
BC Budget
Somewhat off-topic but the G&M today reported that Len Barrie has been accused by his former accounting firm of misusing funds from Bear Mountain for personal use, like buying the Tampa Bay Lightning.
Barrie accused of misusing funds
Amazingly, reader comments for that story have been disabled "for legal reasons." Fortunately, our local newspaper has elected to avoid that and any other controversy by forgoing the story completely.
Just a quick thanks to Roger, you are helpling to keep my head up!
Just a quick thanks to Roger, you are helpling to keep my head up!
Depends on how you count government job losses...if you prefer to keep a strict 'ministry FTE' definition - the losses are minimal. If you take a broader look at it and include contracts that won't be renewed and the implied reductions in services, it's not a pretty picture.
It's also expected that the majority of job cuts will be in Victoria, BC.
So Barrie pays back the money so it's alright now ? I think corporate governance wasn't a high prioroty at ole BM, afterall there was good times to be had.
Agree on the TC,bet they won't go ten miles near this story,not good for business.
As per the budget it looks like the high tech business in Victoria will be taking a hit and a few closing up shop.
Vic said: As per the budget it looks like the high tech business in Victoria will be taking a hit and a few closing up shop.
Just Janice said: If you take a broader look at it and include contracts that won't be renewed and the implied reductions in services, it's not a pretty picture.
Here is a slide from today's Liberal briefing on the budget..
Click here for sad story..
Doesn't look good for all the high-tech and marketing consultants in Victoria and Vancouver.
..."Neccessary in order to protect health care and education..." got to love that quote, it's a gem....
There was a choice that was made: they could have raised some or held some taxes constant, they could have run a slightly larger deficit, or they could do what they did...
Cutting taxes for those who remain employed, cutting services for those who need them, and cutting jobs at the same time is going to be a losing strategy in the long run. It's like working a minimum wage job to avoid taking on a student loan.
We will be shifting away from 'investment goods' and towards 'survival goods'...
So good to see 'trickle down' economics alive and well in this province..
In other news, the VREB press release has been out for over 6 hours and the TC has not republished it yet. Instead, budget and bunnies own the top two stories.
Think the VREB is pissed they released the presser 2-3 hours early on the biggest press day in September only to be ignored?
I smell a stinker of a headline tomorrow to make it up to their biggest advertising group.
I'd love to see the numbers if the vreb only published statistics for the middle 80% of properties and excluded those properties in the bottom 10% and the top 10%....
Just Janice - only exclude the top ten percent - the distribution is left skewed.
Numbers are no surprise. Sales were pushed forward, starting with the low end, now to mid-price point houses. As the low end drops out sales are likely to drop substantially. The push forward should be just about done now (see Reid's comments on this two or three months ago).
Victoria Realtors please take notice, believe it or not, honesty actually pays. Just ask Jim the Realtor, he says the realtor selling handbook should have been thrown out years ago. These days, especially after the financial crisis & the world wide real estate bubble, people more than ever just want the truth straight up.
Why not give it try sometime?
Mr.4AM
Reminds of this quote... "In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell
Headlines like these in the TC will really help the real estate pumpers. ;)
B.C. budget fallout: Layoffs, contract cuts rock Greater Victoria
Greater Victoria's business community says it is facing a double hit from yesterday's budget -- layoffs in the civil service and millions in cutbacks in government contracts.
The one-two punch may be enough to put some companies out of business, said Bruce Carter, chief executive of the Greater Victoria Chamber of Commerce.
"We have an entire segment that exists to service government and right now that entire segment is starving," said Carter. "It's possible we could lose companies as a result of this."
Carter said government cutbacks to administrative, travel and professional service budgets made in February have already had a "huge" impact on the local economy, which services government staff and programs.
Almost 24 hours post VREB press release and still silence from the TC. Amazing really, all things considered. They could just republish the press release and rewrite the headline like they usually do. Must be short staffed over there.
Must be those UVIC rabbit stories taking precedence. ;)
Maybe someone at the TC is looking at buying ;)
HHV & Vic,
How can you have so little faith in the reporters over at the TC? Did you really think they were too busy to move the sentences around on the VREB press release?
Of course they had the time to do the job. But they planted it with an article for the Parkside Resort & Spa. However, the article headline was a big disappointment to their friends over at VREB.
Crystal Garden plants find new Victoria home..
Parkside project nears completion as market rallies
Here is a link to the article Vic commented on earlier..
B.C. budget fallout: Layoffs, contract cuts rock Greater Victoria..
Yesterday's budget identified another $1.5 billion in savings -- $225 million of which are for "professional services" such as contracts to local technology companies for computer systems administration work.
As many as 30 or 40 local tech companies depend largely on government contracts and have fared worse than expected since February, said Dan Gunn, executive director of VIATeC, the Victoria Advanced Technologies Council.
"We've seen reductions [of] as much as 40 or 50 per cent [in] revenue for some of these companies; it's just a matter of time before we lose one or two of them altogether," said Gunn.
Darryl Walker, president of the B.C. Government and Service Employees' Union, complained that it's hard to tell from the budget how many jobs will be lost.
"We may be up around 1,500 or 2,000 people or more coming off the public service sector before this is over and done," he said.
The 300 immediate layoffs in government are spread across nine ministries, mostly headquartered in Victoria: Attorney General, Advanced Education and Labour Market Development, Citizens' Services, Finance, Forests and Range, Housing and Social Development, Labour, Public Safety and Solicitor General, and the Office of the Premier.
Nice find Roger, I'm not much of a botany fan, so I skipped that story.
I guess they feel it necessary to bury the "facts" these days!
RE: gov't lay offs. Let's say 75% of those are in Victoria, so 225. Let's say 50% of that 225 sell a home, either because of financial distress or move out of town for new work, that's 113 houses. Won't happen at once. And likely will result in a negligible impact on the market.
IMO, you'd need to see financial distress in the thousands (say 2000-3000) in the same calendar year to cause a significant shift in supply and demand ratios to create the conditions necessary for a substantial price decline (10%+). Much of the supply will occur in the middle-upper segment of the market too, as it will likely be near-retirement golden handshake layoffs that occur.
Will the lack of contracting out create these conditions? Perhaps. Time will tell for sure, but this local bear market rally in housing is over for this year IMO.
The mainstream analysts all said the demand was "pent-up" from last fall and early spring and that's what drove sales. Given the ownership numbers, I'd argue that the demand was borrowed, not pent up, and much like the 0 down 40 year mortgages, low interest rates borrowed future buyers for today.
Mish says we are not going to experience substantial inflation. I'm inclined to agree. There has been no marked increase in interest rates now for almost 6 months. I suspect this will be the case for another 12 months too.
In short, there are no sales triggering events left, and the recession has hit home for BCers for the first time because of the budget. We were immune, until now. Should be interesting to see what happens between now and Feb 2010 when the Olympic-sized hangover begins.
In short, there are no sales triggering events left, and the recession has hit home for BCers for the first time because of the budget. We were immune, until now. Should be interesting to see what happens between now and Feb 2010 when the Olympic-sized hangover begins."
Thats the bottom line HHV,there were alot of local community arts programs/groups that got hit and we all know those in this arena can be pretty oblivious to the real world sometimes and this will be a major wakeup call to those who thought "we are different".
OMC
Thanks for feedback. Here is a chart I prepared that you will enjoy.
Total MLS Sales in Victoria..
HHV, your 10:25 post is good. I was hopeful that we would see a significant price correction in 2009 after I saw sales slow down in May 2008 and then fell off a cliff in October. But after ten months of historically low sales, SFH prices had come off about 10%. I thought that government jobs were going to be lost in the spring budget and construction would remain depressed and therefore the downward trend would continue. If it had I think we would have seen SFH prices drop 20% from April 2008, but it all changed with lower interest rates and limited job losses this spring and summer.
Today I see houses regularly selling in the prime areas we desire at $100k and more over assessed value. This is a major move upwards from where it was only a few months ago. Today there is basically no inventory of good SFH’s in great areas. So I agree with HHV, we need an event or events that result in major changes to the market impacting thousands of houses or buyers before we will see a material change in the market. The events that I could see driving such a material change would include:
• Much higher interest rates (short and long term at >6%)
• Another financial crisis hits with depression looking outcomes
• Massive job losses drive require thousands to sell
• Our banks stop providing credit
My research shows that interest rates will remain low over the next year plus unless we see a run on equity markets (unlikely). Although I do think we will see more financial uncertainty this fall and winter, I am not sure it will be as ugly as last year and I do not see massive job losses in the short term. I also see people may start to retire here again now that equity markets have improved and real estate sales elsewhere are far better than anyone could have expected.
As a result of all of this I do not foresee a large price reduction coming any time soon. Houses are overpriced no doubt, but we need a sustained period (8-12 months +) of tough times to really change the buying and selling patterns in this town.
Unfortunately bears may have to be more patient that any of us desire. If you can wait three to five years, then when all these over levered home owners renew their mortgages, I think that will be a material event that will drive the market lower, but I cannot see such an event over the coming months.
But if the government has scared the willies out of the people- won't we all start to tighten our belts and save instead of spend. So, you end up fixing that fridge rather than buying a new one, repairing the car, sew up that tear in the coat, etc.
Consumer contraction equates to increased unemployment and lower incomes. Lower rents, higher vacancy rates, increased bankruptcies and loss of confidence in the market.
I hope that some economist out there is watching these blogs and learning how psychology affects the market. The dead cat bounce affects us all and pushes us into capitulating. Hence, the last rise in prices.
Luckily for me, my income has dropped substantially over the last year, so I no longer have to worry about buying a house, that decision has been made for me.
It has been hard for the last five years, not buying into the market. Three years ago, the bank would have approved me for $900,000 in financing. I shudder to think what I would be faced with today if I had taken the money.
So given that every bear that posts here basically thinks the market is going nowhere but up or perhaps just level for the next 5 years wtf is a bear who wants to buy to do? Any ideas?
Another question/observation here is that Vancouver has been left out of your equation. Don't you think Vancouver is setup for a big huge real estate dumpster dive? Even some bulls think that prices could decline post olympics. Seems like Vancouver could be heading for a big drop and doesn't have the big government buffer factor Victoria does. If Vancouver dumps wouldn't that affect our market too?
I made a few posts in weeks past that were in line with Reids last post. Though he phrased it better than I. I see a whole lot of flat coming.
I don't think a depression scenario is even a possibility anymore governments around the world have shown they will not let that happen.
Interest rates will stay low especially if there is more financial doom.
Mortgage resets in 5 years might not be bad as rates could stay low that long. Or if it does cause a crisis govt will bailout the renewals somehow.
Loading up in debt and leverage might be a good move considering that is we are in for stagnation. leverage will be the only way to get ahead. I have considered leveraging into the stock market these last few month but I'm too much of a chicken.
Let me finish that thought before the trolls do for me.
I still don't plan on buying because RE is still over priced in Victoria. Renting is still a beter value.
To me "pride of ownership" is perfectly offset by the stress of a mountain of debt to be repaid.
I'm a bear who hasn't changed my opinion. I expect equities will turn down again at some point(if they haven't already) and will go far below where they were in March - and real estate, commodities and employment will resume their decline as well.
As a follow up on my note, I still think real estate is overpriced and that that over time it will trend downwards, but to get a material price reduction we need some a major and sustained challenges in the market and I do not see that in the shorter term.
So IMO investing in real estate is not the best long term investment strategy today. The challenge many people that I speak to face is that they desire having a stable home for their family so their kids can go to school and lay down some roots (note IMO, I think this is far more important when your kids are 6-10 than when they are 0-2). So for many waiting 3 + years for a correction is a challenge.
Well Roger, lets just hope it's a whistler size down hill. Speaking of whistler, don't forget that things are going to be a bit shaky as the bills come due. I wouldn't be surprised to see many more lay offs after.
One thing I am noticing is, like others are mentioning, is the extremely high prices for most of the new listings. This has got to be reflected in the sales/new listings ratio.
Government changes their minds and coughs up the arts and sports group money. I could imagine the backlash was overwhelming,what a dumb move in the first place for the amount of cash it was.
On a side note,the TC will be covering the Len Barrie thing soon,just covering their butts first,in the legal sense I bet.
What's a bear who wants to buy do? Wait.
S2
I am surprised that some of the regular bears are not seeing price declines in the near future. I agree with Olives and still am bearish for the near future. Four months of madness during peak sales season is not surprising given the low interest rates. And I don't expect fixed rates to stay low once the Bank of Canada starts issuing piles of new bonds to cover deficit spending. Rates will have to increase to compete against massive US bond issues.
In several recent posts I have mentioned that we are now entering the seasonal slowdown period. The boom sales months are gone for 2009 and even August had much lower sales in July. Every month from now to Xmas will have fewer buyers. Agents will start pressuring sellers to lower prices in order to get a sale on their listing.
What else has changed? The BC budget will have a significant effect on BC consumer confidence. The smug "we are immune" attitude is now history. As layoffs and discretionary spending cuts start to be felt it will affect all spending, including real estate. And what happens to consumer and business confidence if we get a federal election this fall?
The stock market is now on shaky ground. The P/E ratio of the SP500 is now 130 and it is normally around 18. Stocks have gone up in anticipation of good earnings and many pundits believe the market went too far, too fast. The Dow has fallen three days in a row. What happens to consumer confidence if we have a big correction?
Patience is required or you might as well buy now and take your chances...
Vic said: On a side note,the TC will be covering the Len Barrie thing soon,just covering their butts first,in the legal sense I bet.
TC is too late. Investigative reporters get the scoop. The Globe and Mail is already running a second story and it has more details of what was really happening at Bear Mountain.
Barrie accused of using resort money to buy share of Lightning ..
This story is one to follow in the coming days...
I knew I could count on you Roger. All the "hoopla" since March was predicted by many - and predicted to be temporary. There's talk now of return to a steeping yield curve.
Roger, I fully expect that prices will mediate as they always do this time of year. But unless there is "an event" as Reid says I think we will see the market pick right back up in the spring again as it always does.
We have had just about every possible "event" befall us. Stock market crash, elections, us bank failures, a credit crunch, auto industry failure, huge swings up and down in the Canadian dollar, and yet we ARE still fairly immune. We had so much more ammo to back our bear possition a year or two ago. Victoria has weathered the storm remarkably well, far better than I thought it would. The bc budget isn't as bad as I thought it might be, like HHV said 300 layoffs is nothing. The impact on contractors while yet to be seen I think will be small. HST while reviled isn't going to bankrupt anyone. We will all feel a little squeezed but few will fall because if it.
We have two bullets left
unimployment, it's up but I still see lots of help wanted signs
interest rates, not going anywhere until inflation is roaring out of control, not for 3-5 years IMHO
the fact that this province is crazy overpriced doesn't seem to factor in, as much as it should, if at all.
Hey guys,
I have delayed the one house I am building on Bear Mountain because I can't find a framing crew for a reasonable price! Qualified crews (have GST number and Workers Comp) all gave me estimate that were 20-30% above last years boom prices. I had a number of really cheap price; however, people either weren't qualified, didn't have GST or had Workers Comp problems.
Anyway, I am delaying the start till October. You would think construction costs (esspecially labour) would be coming down considering no one is building big condo projects in Langford and that housing starts are 58%. I think the shortage of SKILLED tradesman is here to stay unfortunately....
thanks roger. CHEK mentioned tonite. I'd say ole LB is up the creek,secret numbered companies,outright lying to executive committees,etc. Just another maxed out millionaire who thought the pary would never end. This is going to have an ugly ending.
The whole thing isn't following logic (except the shark feed on Len Barrie), neither did it in the States. It will crash here due to random circumstances, as it did down south. What it is, we can't predict. Only that predictions will be wrong, including this one.
Robert Reynolds said: "We have two bullets left
unemployment, it's up but I still see lots of help wanted signs
interest rates, not going anywhere until inflation is roaring out of control, not for 3-5 years IMHO"
Yes, but those two bullets are the ones that count the most (aside from 'force majeure' & 'black swan' scenarios).
It's only a question of when, not if, but you're right I think it taking alot longer than most of us had originally anticipated.
It may very well still take a while longer, but I think it is still worth the wait. I see this as one of those once in a life time investment opportunities. You don't need to be an investment guru to retire early, rather, just do 1 or 2 large investments correctly and you could be set for life - patience however is a big requirement. Hang in there. In the long scheme of things, waiting another 2-4 years to ensure that I can retire 10 to 20 years earlier is worth the wait IMO.
Mr.4AM
When prices were at their peak I calculated them to be about 30%-35% above what they ought to have been. I was looking for a correction of that amount to bring them back in line with what they should be historically.
That said, what I had no way of knowing was whether prices would plummet over a couple of years, flat line allowing inflation to provide a normalized 35% decline, or a combination of the two. Currently, my thinking is we will see a combo.
There will be no stimulus next spring. Interest rates can't get any lower and I think the public won't stomach another cash infusion like we've seen in 2009. I can see prices dropping 10% from today, which would bring them back to where they "bottomed" in January. I can then see a true flat line for a number of years, say 3-5, with maybe a couple of smaller fall dips bringing us down to a normalized 30% drop from the peak.
Wage inflation won't keep up though. The real math, to me now at least, becomes when does it make sense to buy and stop renting. That's where much of my analysis is going right now, but I'm not confident enough in my numbers/assumptions yet to lead any kind of discussion here.
I would disagree HHV. "Inflation" will be for nearly other asset type, but not real estate. Real Estate will get crushed by rising interest rates - as it ALWAYS does, unless of course they are kept artificially low (but still higher than present) by the government. It is all about how they try to balance it out. My guess is they will try to keep them artificially low as much as possible to stimulate the economy until we get aprox 6 consequitive months of rising employment figures... after that it's high interest rates & inflation to the moon!
IMO the world macro economics aren't getting any better in the sense that joe average is still losing and will continue to lose overall buying power, because they continue to make average (ignorant) investment decisions. Recently by holding long term (as per their financial advisors)to mutual funds/RRSP investments while the market crashed, and next by inflation of most assets (including daily consumables - food & oil), creeping higher unemployment, higher overall taxes and wages that will fail to keep up with the inflated consumables, and lastly by crashing real estate values due to higher mortgage interest rates.
Unless you invest into the inflating assets during the inflationary period, you will not maintain your buying power - that includes investing in real estate too early. You would end up making a large chunk of your savings unavailable to invest in rising asset values (including certain commodity, energy & BRIC stock market sectors), while putting your money into an asset that is almost guaranteed to go down in value for a few years (assuming rising interest rates), or at best remain flat or certainly performing lower than CPI.
Inflation is next, but not before another leg down as promised in Q4 2009. Will it be as bad as Q4 2008? That I am not sure, but it could certainly be significant. Plenty of large-scale scary things that can still go wrong out there dragging the markets to potentially new lows.
Got your front row seat yet? :-)
Mr.4AM
Barrie accused of using resort money to buy share of Lightning ..
So it seems Victoria has its own Garth Drabinsky or Conrad Black?
Now that's world class!
I agree with Olives.
Whether we will decide to wait out the full crash before buying is another story, but at this point, I think waiting till Fall 2010 will be a good move. Real estate will probably continue to go down after that, but I think by Fall 2010, some of the current insanity will have been shaken out, and buying will be a better option than it is today.
Fall 2010 is also my planned date to seriously start looking at buying. My spouse is going back to school and will have finished her classes by June 2010, the bank wants 3 months of income history so that puts us at Fall for the first possible opportunity to buy.
As for other investments, I have no doubt this fall will see some correction as the current market rally seems tapped out and bubbly in its own right.
I am not worried about a dollar collapse. World governments won't let it happen.
The world economic pictures is still pretty rocky, low rates will be held at least until we see 6 months of better employment and other figures, maybe longer. Figures that are lagging indicators, so the real recovery would have been a year old at that point. Low rates while the economy is recovering and gaining steam would lead me to believe we would experience price inflation, however, I think asset prices like real estate will be stagnant due to the current borrowing of future demand, an increase in the savings rate, and in Victoria especially, maximum affordability being reached (there was a good post, I think by Reid, showing the connection between monthly payments and sales). Without further reductions in rates (not possible) or marked increases in house prices to allow move ups (also not possible due to affordability), we are going to see a ceiling on RE prices.
So what options does that leave a bear who wants to buy? Time for one. If things flat-line as I think they might, we have time to continue to save and try and grow a down payment. In recovery we will see some price inflation with lagging higher wages so current prices will be slightly more affordable over time. A cooler RE market will also open more vulture opportunities, without the need to compete in bidding wars and other sillyness some "deals" might actually happen.
I don't see a crash there will be no fast decline like in the USA, there will be sloth, and boredom, and stagnation, until one day you wake up and prices don't seem quite as high as they did yesterday. And when that day comes buy buy buy because that's the day the next bubble starts.
DISCLAIMER: The contents of this post were written at 5am, after only one cup of coffee, the above may not make any sense...
The TC covered the BM controversy,covers all the allegations but says the committee and LB all kissed and made up. But was the committee not at part of the misuse of the funds ? Sounds very shady to me.
Was interesting to see Global run a segment on the late news last night with the UBC real estate expert who said this buying insanity cannot keep up and this will be a blip caused by the low interest rates. But this mornings news has no such report on this guy,just that all is fine in La La land and bidding wars are happening in all of the news anchors neighborhoods. What a joke, but what do you expect.
I think we are closer to a change than we know. Looking at this blog filled with bears shows the psychological game has played out. We give up thinking fundamentals will indicate market direction. Historically that is the point when things actually change.
On Mish's site yesterday he has a clip from Robert Prechter speaking about the US dollar about to rise against expectations. He uses the elliott wave to back up his prediction. I'm not claiming to know anything about the wave, but I did notice when the dollar peaked a few years ago it did a "B" wave pattern before dropping. Meaning it hit a peak then made a noticeable drop followed by another peak reaching roughly the same level as the previous peak. Once that played out and everyone thought the dollar was there to stay the bottom truly fell out. You could take the real estate price graph thus far and it would fit perfectly over the US dollar graph he was speaking of.
The last part of Prechters belief that is interesting for us bears is that psychology hits markets, rather than markets hitting psychology. We don't need a big event, we will be the big event. We saw how quick things turned last year, only to see the interest rates turn the thinking once again. That psychological drop will come again and the number of bullets left to turn human nature is running out.
Here is the link to the Prechter stuff. He is talking gold and dollar, but information is applicable.
http://globaleconomicanalysis.blogspot.com/2009/09/so-whats-behind-moves-in-gold.html
Mr 4am, My point regarding inflation was about how inflation erodes the true value of a home. I don't think that house prices and inflation correspond, so I am not expecting house prices to rise with inflation, I am expecting house prices to effectively fall with inflation, like they did between 1995 and 2001 when their prices remained flat but they actually dropped 18% relative to inflation.
Inglishmagor - check out some of Prechter's older books with socionomic predictions for the future - they are amazingly accurate. The changes in psychology are cyclical, fractal and mathematical and therefore pretty predictable.
Inglishmagor, I have stopped putting much expectation around the Elliot Wave theory, the thing is more like an art than a science. There's always alternative go-forward interpretations, and hindsight is always 20/20 - so while historical charts look impressive (sometimes *very* impressive), they are not necessarily a reflection of what all E.wave theorists believed would happen at a time, or to the same severity in either up or down direction or length of time.
I do however agree with your other point - people (psychology) move the markets, not the other way around. People's bullish psychology is about to get a reality check this quarter with another stock market leg down.
The hard thing about being a bear is that the vast majority of the population strike me as optimists, often blissfully ignorant optimists and with short term memory. I mean, how can you possibly start up bidding wars and lines up for Vancouver Real Estate already? Good grief!
Another piece of "evidence" is that historically and on average, bear markets tend to be far shorter than bull markets both in stocks and real estate. So being a perma-bear long term is not a good idea; however, I think right now being a bear in Vic real estate makes a lot of sense, and temporarily (1Q at least) for stock markets as well.
HHV, ah I see. Thanks for your clarification.
Mr.4AM
I see a number of posts talking about interest rates being held low by governments for some time.
The only rates that governments directly control are short term rates.
In Canada this is the Bank of Canada rate (.25%) and in the US the FED rate (.25%). The Bank Rate is used by the Canadian banks to set their prime rate which is currently 2.25%. The major banks are offering five year closed variable mortgage rates at prime + .4% or 2.65% and rates near prime can be had from other financial institutions. If the Bank of Canada changes their rate this ripples through to the variable rate mortgage holder at the end of the month.
Fixed mortgage rates are NOT set by the Canadian government or the Bank of Canada. They are based on the rates that the banks have to pay in order to get money for the mortgages. The benchmark 5 year government of Canada bond yield is one factor that the banks use to set their mortgage rates. The spread between their borrowing rate and lending rate varies depending on how they feel about future bond market direction and current operating costs.
It is the open and freely traded bond market that determines long term government issued bond rates. When the stock market is doing poorly investors flock to the safety of government bonds driving up bond prices which pushes down yield. The inverse happens when the stock market shows sustainable growth and investor confidence is restored. Governments may try to indirectly control the bond market by quantitative easing which involves massive purchases of bonds financed by printing money in an attempt to keep yields low. Most experts agree that this only works for a short period because of the massive size of the bond market.
In a nutshell the Cdn. government or BOC will not be able to directly influence fixed mortgage rates. When the economy improves, gov't. bonds will fall out of favour and fixed mortgage rates will rise (so will GIC's BTW). A heated economy will result in an increase in CPI and this will result in the BOC raising the bank rate and then variable rates will rise too.
What happens to house prices when fixed and variable mortgage rates increase
"The hard thing about being a bear is that the vast majority of the population strike me as optimists, often blissfully ignorant optimists and with short term memory."
Ah - but when we approach the end of the bear market everyone will be pessimists - and that is a good gauge of where we are in the cycle.
"Ah - but when we approach the end of the bear market everyone will be pessimists - and that is a good gauge of where we are in the cycle."
Exactly,when the majority of your friends and aquaintances tell you your nuts to buy a house after a 30-50% pullback then that is the time to buy. Happened to me and it was hard to swallow when you tell them homes are finally on a fire sale and the risk is low. Thats the hard part now is to see this insane buying at a high risk point of losing major capital. Dumb money as they call it.
I don't think that house prices and inflation correspond
House prices are correlated to wage inflation. Reason is simple, that determines ability to pay.
Consumer price inflation without matching wage inflation is negative for house prices because it decreases ability to pay due to lower disposable income and higher interest rates.
But of course BC workers will be able to keep their wages up with any future price inflation. Um, right?
I thought VREB knew how to spin a good real estate story but VIREB beats them hands down...
Housing market heats up in Nanaimo. Home sales surge in August in Nanaimo while prices dropped
Real estate experts say homebuyers should be ready to act on their instincts or be ready to lose the house of their dreams.
Ghose said eager homebuyers should be aggressive with their decisions or they might lose out.
"The economy is recovering faster than we expected and the real estate is leading the way.
"Right now people have to make a decision quicker because if they wait too long it will be gone," said Ghose.
Craigslist has a great "deal" for 549K if you want a Live/Work home. Get in on the ground floor.
Craigslist Opportunity..
.
roger, If that VIREB article doesn't reek of total desperation I don't know what would. Sounds like all the MSM a year ago at the peak.
Do builders think the surge of sales is just a blip and they are sitting on the sidelines?
Times Colonist article:
British Columbia's residential construction sector will end 2009 at a near dismal low..
British Columbia's residential construction sector will end 2009 at a near dismal low, but 2010 should be a little bit better, according to the latest forecast from Canada Mortgage and Housing Corp.
For Victoria, CMHC is forecasting 1,320 starts in 2010, which is an increase from the 930 it expects to have been started by the end of 2009, but is still less than the 1,905 recorded in 2008.
HouseHuntVictoria said...
I am not expecting house prices to rise with inflation, I am expecting house prices to effectively fall with inflation, like they did between 1995 and 2001 when their prices remained flat but they actually dropped 18% relative to inflation.
Agreed
Olives Said...
Ah - but when we approach the end of the bear market everyone will be pessimists - and that is a good gauge of where we are in the cycle.
For those that haven't seen it before. This graphic sums it up nicely.
Roger Said...
The only rates that governments directly control are short term rates.
True Fixed term rates are based on the Bond Market, but they have some wiggle room as they are currently Prime + 0.3 or so. Not so long ago they were Prime -1.0 or so. Even if bonds push the rates up the banks have room. Also High Yield bonds are kicking butt right now compared to Govt. less secure sure, but huge yields in double digits. Are they pushing up the mortgage rates? Maybe a little but essentially no. If the Govt gets desperate and needs to raise money with bonds they might push rates to attract investors and raise capital, but we are already running a deficit, they don't seem to care about how much they spend, or how much debt they take on. I bet they leave bond rates low and just let the deficit grow, we ran a deficit for the better part of a decade not long ago, why not again?
Re: Roger's Craigslist deal
I actually think that's not bad. ugly color sure but it will get people to look at the building. as an commercial property you have great road traffic, maybe rent it for $1500/m and the suite for $900
gets you a ROI of 5%-ish if you ran your own business out of it probably an even better deal and future potential for a bigger development.
Lots of other factors to consider though but on the surface it is not bad.
Robert Reynolds said:True Fixed term rates are based on the Bond Market, but they have some wiggle room as they are currently Prime + 0.3 or so. Not so long ago they were Prime -1.0 or so.
You are confusing short term rates which are set by BOC and long term bond rates. The major banks base their prime rate on the BOC rate which is announced about 8 times a year and currently set at .25% The banks all use a spread of 2% to get their prime rate of 2.25%. The spread of 2% has been constant for several years. Short term or variable loans are based on bank prime. Banks then add a plus or minus % to the prime depending on the customer. This is the wiggle room you referred to. A business customer might get a line of credit loan today at prime +.1% and a variable rate mortgage client prime +.3%.
Robert Reynolds said: Even if bonds push the rates up the banks have room. Also High Yield bonds are kicking butt right now compared to Govt. less secure sure, but huge yields in double digits. Are they pushing up the mortgage rates? Maybe a little but essentially no.
High Yield or junk bonds have no effect on the market. The 5 Year GOC bond is the main benchmark bond used. They can vary the fixed rate spread a bit based on market conditions but sometimes they choose not to. When the 5 year GOC yield jumped .75% a few months ago the major banks increased their discounted rate by .8%
Robert Reynolds said: If the Govt gets desperate and needs to raise money with bonds they might push rates to attract investors and raise capital, but we are already running a deficit, they don't seem to care about how much they spend, or how much debt they take on. I bet they leave bond rates low and just let the deficit grow, we ran a deficit for the better part of a decade not long ago, why not again?
Dispelling this myth was the whole point of my previous post. The government does not set the yield on the long term bonds they issue. The bonds are initially auctioned and subsequently traded by investors. The price paid for a bond is set by the traders in a free market and this determines the current yield. That is why we had the last big jump in mortgage rates. The benchmark 5 year GOC bond started dropping in price in the bond market which meant the yield increased by .75 % in about a month. Banks wisely chose to increase their mortgage rates because they were paying more.
The only way the government can try to control rates is by buying their own bonds in an attempt to drive up prices and lower the yield. They need to print money to do this which puts even more pressure on the bond market and devalues the currency. This is known as "monetizing the debt". The US tried this recently and bond prices fell again once they stopped.
Summary: The government will set the short term rates and the free market will set the long term rates. The banks' fixed mortgage rates will follow the bond rates with some variance for loan market conditions. Governments that take on huge deficits and finance them with bond issues will find an market that will only buy them if the yield meets their expectations.
Another BM update in the Globe.
Lighting owner tries covering Bear Mountain tracks
Sources say resort company considered hiring firm to investigate claims against Tampa Bay co-owner Len Barrie
http://tinyurl.com/l2x5r4
Thanks for taking the time to explain that so clearly Roger.
Mr.4AM
Mr. 4 AM,
Here is a graphic showing today's government benchmark bond trading activity with my comments.
Bond trading - click here..
.
From today's Globe & Mail...
Snapshots of B.C.'s economy..
..
Interesting comment on the LB/BM situation in the Tampa Bay news.
"Barrie has insisted his Bear Mountain debt was $5 million and was paid back or accounted for. The audit and Bye said no money has been repaid.
"Me and him have never agreed," Barrie said, "so we're never going to agree."
"Without trying to be smug here, Len has what more than myself has termed voodoo math," Bye said. "He pulls out a white board, and we all are baffled how he comes up with things."
http://tinyurl.com/lg99c4
Sounds like how the CMHC calculates out how home sales will continue to go through the roof.
Tick tock, tick tock, sigh.
:-)
S2
http://americacanada.blogspot.com/2009/07/cmhc-and-our-government.html
This is a very interesting read...it's kind of spooky in the way that the analysis kind of leads you to think about how precarious the present housing market in Canada is....
Right now the only thing standing in the way of a correction is a mental inertia that somehow 'its different here'...eventually the lights will go on and the mood will change.
Great find Janice. Thanks.
Mr.4AM
Just Janice,
That is indeed an interesting link. IIRC, there was some question around when that was first posted whether the second chart in that article was accurately interpreted, but overall it was a great (and scary) read.
Based on that post alone, americacanada seems like it has the potential to be a potent blog. Sadly, the blog hasn't updated since that post on July 20.
Trying to sort out what the policy options would be for our federal government given the scenario that they seem to be in holding the risk for the housing bubble. No risk on the banks, the mortgage companies, etc. High risk on recent borrowers and those maxed out on HELOCs.
Options:
1. lower interest rates - done, can't go lower.
2. spread risk to banks - would cause bubble to burst almost immediately.
3. ensure that buyers had sufficient means to pay - would cause bubble to burst almost immediately.
4. hold status quo, hope bubble doesn't burst - in progress, depends upon trust, could backfire at any time. Depends on storyline, messaging holding over time.
5. increase # of buyers from outside of Canada - won't happen with relative house prices elsewhere.
6. Anything else?
To explain my last post, if I read and trust the linked article (and the comments here correctly), the bubble in Canada can be traced to willing choices to open up the housing market to higher risk purchases and to additional underwriters above and beyond CMHC.
These were concious policy choices by the Feds (I won't draw distinction to political parties), likely as a result of lobbying about the 'success (at that time)' in the U.S.
Now there are unintended consequences. The main action was to maintain the bubble by lowering interest rate. This ammunition is gone. House prices are very high, people are highly indebted and there is tremendous downside risk on the books of CMHC and the Feds. This risk is probably not stated in the books (akin to the U.S.), but is likely projected in a mark to model scenario.
At high levels (and some in the trenches) people will understand the risk and what could occur if it unravels. The whole model, however, is based on people not asking, on trust that everything is o.k. When it crashes, look out for everything (aka what happened down south).
Hopefully the Auditor General looks into it - sounds like a confidence game to me.
Garth pretty much lays it all out in his latest post.
Sorry, second link should have pointed here
Mr.4AM
Another good article from Financial Post about whether MLS is violating the Competition Act, amongst other good points.
i.e.
PRO - much more search/detailed options available at the 'Realtor' version of the MLS site
CONTRA - potential privacy issues prevent more data to be available to the general public (somehow I doubt this is true for all the data they are not disclosing).
What happened to the Victoria RE market in the first week of September?
Real estate sales continued to fade and new listings increased as shown in these graphs.
Weekly sales..
Weekly sales and new listings..
Four week running sales totals..
Inventory continues to drop:
Active MLS listings..
You can expect to see the usual mid-month "pump" releases from CREA and BCREA in a few days saying how much better things are now than in 2008. But 2008 was a dismal year for sales especially in the last quarter due to the financial meltdown.
These chart puts things in perspective and are my "counterspin" rebuttal.
2009 compared to past 4 years..
MLS sales - yearly analysis..
Canada's own Zillow is FANTASTIC news... Zillow had a lot to do with eye opening idiot sellers and their ridiculous ideas of their home's value in the US. In some states of the US (like Nevada) tax load is kept low by tax assessments well below current market value (half and below!). Here, it's just the opposite. So when Zoocasa starts listing many high end homes $100,000 less than appraisal, we're going to really see the fur fly.
Globe and Mail Update
Wednesday, Sep. 09, 2009
Affordable Canadian homes slipping away?
The cost of owning a home, as measured against household income, has fallen for the fifth consecutive quarter, Royal Bank of Canada economist Robert Hogue said in a report published Wednesday. “There has been some fairly significant improvement [in affordability], the most significant improvement since the early ‘90s recession. Home ownership is much closer to many families across Canada,” Mr. Hogue said.
But with interest rates levelling out and housing prices firming, “this restorative phase of the affordability cycle is likely running out of steam.” Here's a look at his findings:
Affordability has improved primarily due to lower interest rates, and due to slightly lower prices. The author says that prices are going to go back up due to "higher family incomes" laughable, we are in the middle of a recession, we are still shedding jobs at a record rate. Incomes aren't going anywhere except maybe down or sideways. Interest rates have no where to go but up so that will be bad for affordability, but I don't think they are going anywhere soon. I also subscribe to the theory of "the monthly payment" we are maxed as far as affordability goes. Earlier this year sales plummeted because prices hadn't moved and mortgage rates were still higher, I believe if rates hadn't fallen prices eventually would have. Something had to give, it was rates rather than prices. As rates fell affordability increased back to its apparent natural ceiling.
Now that we are back at the maximum people can afford on a monthly basis we either tred water or if rates do rise prices will have to go down to compensate.
House prices will go down when interest rates rise as there is a VERY high correlation between income and interest rates with house prices. The problem IMO is that we need to see interest rates get above 6% (long and short) before we are going to see a significant impact on pricing (note: 5 year mortages are now getting back under 4.0%). This may still be 2-5 years away depending on how the economy does.
The only other thing that will cause prices to tank is another economic/financial crisis. Without this I think one needs to look at waiting two plus years if you want prices to come off 20% or more. Long term prices will come down as interest rates rise, but you are going to have to be patient unless we hit another crisis.
A friend just listed a house in SE yesterday, hit mls today. He had 14 showings within the first 24 hours (before it hit mls), fours offers are already lined up for this afternoon and realtors are asking for more time before presenting offers as they want their clients in on the action.
The market in Victoria for a decent house at a reasonable price (which this one is) is still totally crazy with far more buyers than sellers. Prices under $650k are not going to come down with todays buying interest and low inventory levels. My guess is that prices will flaten out this fall, drop a little this winter and next Spring prices will all depend on the economy and interest rates.
It's amazing how four walls and a roof up for sale are reacted to like a pack of crack addicted homeless people when the town's drug supply runs dry and the newest dealer is stalked like a pack of animals. I mean c'mon,this is not a market,it is a psychologically fuelled cult to have people act like this insane manner.
I am sure in the next decade the university psych students will be studying this bizarre phenom. There will be a mass fallout in the years to come with a new label attached to this behavior....something like "WTFWITD" ...also known as: "WTF Was I Thinking Disorder".
VIC SAID:
"It's amazing how four walls and a roof up for sale are reacted to like a pack of crack addicted homeless people when the town's drug supply runs dry and the newest dealer is stalked like a pack of animals. I mean c'mon,this is not a market,it is a psychologically fuelled cult to have people act like this insane manner."
Wow! is it as insane as 15 people dedicating hours every day commenting on a real estate blog for years on end predicting a return to real estate pricing last experienced 30 years ago. The critical and calculated anaylasis of the market some of you do here is very interesting, but I think you guys have anaylised yourselves into a corner. You pretty much beleive what you want to believe.
I think in reality, most of you either have no balls & no money to enter this market. If you did, you would have been in years ago.
"I think in reality, most of you either have no balls & no money to enter this market. If you did, you would have been in years ago."
Spoken like a true dillusionist. Buy high,go broke.... great advice there oldtimer.
But you are correct, I don't have the balls to roll the dice and risk maxing out my financial life/future on the highest odds of all time that more greater fools will be able to qualify/afford record high prices for a chance just to call myself a "happy owner". I'm into making money, not losing it by the bucketloads thanks.
Nope Happy Owner, it is called trying to form a disciplined investment strategy based on investigative analysis and a lot of patience. There's really no arguement, it is inevitable that prices will go down substancially. Only a question of when, not if.
Remember, the brain-numb lemmings always end up falling off the cliff, even if they can climb tall hills.
Financial Post: "Get ready for steep rate hikes in 2011"
"OTTAWA -- When the Bank of Canada does start raising its key policy interest rate in either late 2010 or early 2011, Canadians should brace for "aggressive" increases of up to a percentage point at a time, says a report from the chief economist at Laurentian Bank Securities."
'nuff said.
Mr.4AM
Or if you prefer the "greater fool" version which provides a little more arrogance, but also more technical and deeper explanation paralleling Roger's comments a few days ago.
Clip-clop clip-clop
Who's that clip-clipping across my bridge?!?!?!!??!
Don't feed the trolls
I guess I'm one of those bears who posts on blogs for 15 hours a day too. I have no time left to write up purchase offers for $100k over asking. Woe is me.
The trolls obviously don't read the papers much. Maybe someone else can post the whole link from the TC.
Victorians pay highest home costs
Ownership carries a heavy price -- and it's getting heavier, says study
Owning a home in Canada may have become more affordable over the second quarter of 2009, but in Victoria there's been little change as the city boasts the country's highest mortgage carrying cost for a standard bungalow, according to the Royal Bank
Vic,
Here is the link to the TC article:
Victorians pay highest home costs..
Hogue doesn't expect to see much change in terms of the affordability of the Victoria and Vancouver markets over the next two quarters, as he predicts the economic recovery will be slow and gradual.
"The economy in general is on an improving trend but we're not expecting a sharp bounceback. It will be mild recovery, meaning job creation will return but it won't be gangbusters and the unemployment rate will probably trend slightly higher into next year but then softly come down," he said. "That means there will be uncertainty persisting, income increases will be moderate -- there's nothing to jolt a huge amount of interest to heat up housing markets."
In the same article it talks about housing starts on Vancouver Island. Not much has changed since last month. Builders aren't buying that the market is hot and are sitting on the sidelines. The HST next year will make them even more reticent to build spec homes.
Click here for housing starts numbers..
There has been some discussion about interest rates in this blog in recent weeks. What effect will quantitative easing, the increasing US & Cdn. deficits and all the money being printed have on the interest rates down the road?
Here is an interesting perspective by a market analyst at Custom House (a successful Victoria currency trading corp.)
The Quantitative Easing Binge and Hangover..
Marko,
What do you and your builder associates think about the HST? Will you build spec homes for sale after July 1? Will you include HST in the price or watch buyers gulp when they add in the tax?
Like to hear your point of view...
"Builders aren't buying that the market is hot and are sitting on the sidelines."
- It is still way to expensive to build leaving small margins. I've delayed the only house I am building till winter due to current costs.
- The market is hot in my opinion. New homes below $600,000 are sell very well and there is demand. However, construction costs are still very high. The drop in housing starts has weeded out the unskilled. Unfortunately, people who know what they are doing, have a GST number and an up to date Workers Comp. account haven't dropped their prices.
- Aka you can hire a inexperienced crew to frame your house for cheap, but if they fall off the roof you might get sued because their employeer doesn't have Workers Comp.
"What do you and your builder associates think about the HST? Will you build spec homes for sale after July 1? Will you include HST in the price or watch buyers gulp when they add in the tax?"
I will continue to build. The HST will certainly be passed onto the buyers. Either you will price the home $750,000 taxes includes or $6xx,000 + taxes. It doesn't matter whether the HST is included in the listing price or not, they buyer is paying for it one way or another.
HST will decrease both demand for new homes, and construction of new homes. Building starts are down for a reason despite prices holding steady. IT IS EXPENSIVE TO BUILD.
My hope is that a huge reduction in housing starts this year, and probably worse next year due to HST will equal decreased demand. If you want a new home, you will have to pay and I can't see construction costs getting cheaper with the extras the building code will require next year.
Marko, you will just have to buy the land cheaper or take less profit.
You may want to think of buying a half dozen Bear Mountain lots to keep your crew working steadily. Hopefully, you can get a discount for buying six lots.
I don't know how you can just stop building and leave your crew idle, you would never get them back. Maybe this is why your having trouble getting framers today.
It wasn't too long ago that the builders had to be their own framing as well as manage the site as there was negligible profit to be made, the builder was working for wages and to keep his/her crew together.
You can't frame with a cell phone, maybe its time to pick up a hammer.
"Hopefully, you can get a discount for buying six lots."
If the heat brewing under BM explodes I am sure there will be many "six lot" deals to be had. Mighty quiet in the media on that subject the last few days,would love to be a fly on those walls but the paint might be peeling about now. ;)
"Marko, you will just have to buy the land cheaper or take less profit.
You may want to think of buying a half dozen Bear Mountain lots to keep your crew working steadily. Hopefully, you can get a discount for buying six lots.
I don't know how you can just stop building and leave your crew idle, you would never get them back. Maybe this is why your having trouble getting framers today.
It wasn't too long ago that the builders had to be their own framing as well as manage the site as there was negligible profit to be made, the builder was working for wages and to keep his/her crew together.
You can't frame with a cell phone, maybe its time to pick up a hammer."
- Bear Mountain had only 8 lots available as of this morning, the cheapest being $249,000 + GST. Point being "cheaper land" is non-existent. Secondly, you can't just decide to buy 6 lots and build. Do you have any idea of how much financing is required for that?
- I don't have a crew. If I had a crew I would have long gone bankrupt. People don't realize the expense associated with having employees. I do a lot of the work myself (masonry, tiling, flooring, entertainment system etc.), but framing a 4600 sq/ft home is not an option. You don't realize how much work goes into a home, you can't do everything yourself. Most builder's who build approximately 2-3 houses a year do a lot of the work themselves.
Trust me, if builders were getting rich on their cellphones housing starts wouldn't be down nearly 70% this year.
I understand the perspective people have on this blog: we are in a recession so labour is cheaper, materials are cheaper, and housing prices have bounced back so builders must be doing well.
That couldn't be further from the truth. Labour prices are back were they were last year, materials are only marginally better and steadily going up as commodity prices go up due to demand from China, and the building code is getting my complicated adding to new home construction costs. A 2500 sq/ft home will cost approximately $7000 more to build in 2010 than in 2005 just due to code changes! You can't even physically see these changes when you walk into a new home but they are there.
"If the heat brewing under BM explodes I am sure there will be many "six lot" deals to be had. Mighty quiet in the media on that subject the last few days,would love to be a fly on those walls but the paint might be peeling about now. ;)"
Echo Valley is sold out, Players' Drive has only 8 lots available. They have almost eliminated their inventory of 80+ lots they had three months ago. Bear Mountain has very poor management which will hamper them going forward with development. However, they have eliminated a lot of inventory (both building lots and condos). Essentially, if they have no lots, even if they explode they won't have deals to offer.
Hey guys - lets cut Marko some slack. I was the one that asked him what he thought about market conditions and he answered in a polite fashion. He provides a different perspective on real estate and makes honest responses.
Marko - While I agree with some of your points here is my take on things. I think next spring builders will stop building spec. homes for several reasons.
The impact of the HST will be considerable on all homes; even those under 400K will only get a partial rebate. It was one thing when buyers over 400K saw net GST added around 4-5%. With HST on a 600K house they will see the tax rise by 22K to 52K (around 9%) Builders will be extra cautious until they see how the market reacts.
Interest rates are the driving factor right now. Once the economy gains some traction the BOC will raise short term rates fast to contain inflation. Fixed term rates will rise sooner for the reasons I gave in my earlier post. This combination, plus the dreaded HST, will cool sales in the RE market and demand will be reduced for all types of housing.
In a downturn the first type of real estate to drop is lots. Homebuyers back off from buying a lot and getting a builder, developers try to unload their inventory and builders like yourself lose interest in spec houses. This is evident up island in places like Parksville-Qualicum right now.
What is absorbing the labour pool right now is commercial construction, pre-sold residential (Langford) and the few remaining condo projects around town. What will happen their in mid-2010?
The price of materials in BC, with the exception of commodities like copper, will also fall once new real estate construction falls even further. The price per sq. ft. (excluding land costs) is lower in other provinces because the market will only support a certain price level. Material and labour costs are lower. Why is BC any different? Because new home buyers were prepared to pay more in BC. Attitudes will change once HST and higher mortgage costs arrive.
In summary, new home prices will drop in the face of reduced demand. Everyone will get a little less. Developers and independent builders will see less profit, overall construction wages will drop, materials will get cheaper and the price of lots will drop. Even the towns and cities will be forced to reconsider development charges if they want projects to move forward.
"In a downturn the first type of real estate to drop is lots."
This makes sense in 90% of markets; however, where is this inventory of lots in Victoria? I paid over $200,000 for a Cordova Bay lot in the 1990's when you could be a very nice house in Oak Bay for $275,000. Lots have never been cheap in Victoria and never will be. Where are you going develop a massive amount of lots without having to tear a mountain apart? Sooke, Duncan, etc. However, some people don't want to drive 45 minutes every day and prices of lots in those areas reflect that.
Marko said: This makes sense in 90% of markets; however, where is this inventory of lots in Victoria?
Here is your answer..
Greater Victoria - current lot inventory..
Prices went up by 70K this year. Next year they will go down.
Lots have never been cheap in Victoria and never will be.
I never said they were historically cheap. Just that they will get cheaper next year from today's prices.
Where are you going develop a massive amount of lots without having to tear a mountain apart?
This is a common argument that does not hold water. I have heard it for years but they have built many new subdivisions in Saanich and Langford. What about Westhills - 6000 homes.
Well at those lot increases, you should be buying vacant lots and holding them - not building. Why buy a lot and build on it when you are getting almost the same profit just for holding the lot.
So finance six lots, go to Mexico for six months and make yourself $200,000 when you get back.
Jack brings up a good point.
How much builder profit can be attributed to direct value-add (actually building) versus a holding profit?
I'd define a holding profit as the difference in price of the lot + house at time of lot purchase vs price of the lot + house at completion/sale.
"How much builder profit can be attributed to direct value-add (actually building) versus a holding profit?"
Holding profit has definitely been more for most builders in the last 5 years than builder profit attributed to the actual building. The profit of the actual house runs maybe 6% to 10%. It is always always better to try and find someone who has bought their own lot and build a house for them as builders usually charge a 12 to 15% builder's fee on building expenses. On top of that you aren't risking your own money, and you get the job done faster because you aren't necessarily interested in finding the absolute best prices.
"Prices went up by 70K this year. Next year they will go down."
Those statistics are extremely misleading. For example, every lot that has sold this year on Bear Mountain via MLS (not via BM directly) sold for less than it did when originally purchased. I bought a lot for $270,000 that sold in 2006 for $388,000. When I shop for lots I pretty much look at every lot available in Victoria because there simply aren't that many. Prices on lots have not gone up 30% this past year. A lot just sold by Camosun College for $364,000 and an almost exact lot on an adjacent street sold for $372,000 last year.
I bought three lots in 2007, two in 2008, and one this year. There is no way prices have gone up 30%. Show me one lot that has been bought within the last 2 years and resold for more than 30%??? Most lots being resold are going for less.
Pssst.... lots are not cheap because we live on an island, and we're not making any more land.
No, really this time! It seems all that nonsense about California slipping into the ocean... it was really about all of Vancouver Island west of the Saanich.
Marko,
Generally I agree with you, but on bare land I don't.
In the mid-1990s there were many 5000SF+ lots sold for well under 150K in Victoria proper, including dozens in Esquimalt for under 100K. Someone I know bought one of those and built his current residence for under $225K.
He also has a reno project in the View Royal area with two bare lots on either side that recently sold for 10% under asking prices.
There is lots of land available between Sooke and Sidney. The whole running out of land thing is a myth. There just aren't significant tracks of land that attract large scale spec home developers to "community build" like they did in the 1980s. But there has been considerable subdivision and new street address creation over the past decade.
There are 11+ acre lots available out Sooke way that will allow for 4 houses priced around $800K, throw up some 2300SF homes on them and you'll have 2+ acre SFHs for under $500K.
Land has always been the most volatile part of the real estate equation, that's why they say buy big lots on the way up and little ones with big houses on the way down.
"In the mid-1990s there were many 5000SF+ lots sold for well under 150K in Victoria proper"
Yea, I know;however, in 1998 I paid $185,000 for a 2500 sq/ft home in Fernwood with a suite. So $140,000 to $150,000 for a 5000 sq/ft in Victoria was actually very expensive.
A 5500 sq/ft lot sold in Fernwood on August 15th for $329,000. A 2500 sq/fthome with suite in Fernwood will run you at least $500,000 or more. If anything the spread % wise between lots and homes has increased, noteably due to increased construction costs.
I was watching the news last night and they were talking about the price of cars. The example they used was a Nissan. The same model now costs the same price as it did 5 years ago and the product is much more advanced (engine, fuel economy etc.). When you account for inflation it actually costs less.
In 2004 if someone told you that the next generation car model in 2009 would cost less and give you more features would you have believed them? Most people would say no way - labour costs will go up and material costs will increase. And shipping costs will add more to the final price.
Why is it that so many folks today believe real estate (new or resale) can only go up?
Roger, I think that people today on average are less bullish on home price increases than they were a few years back, but most people feel their homes will retain their value. IMO, people today simply desire to "own" a house/condo they can call home and the real question buyers face today is can they secure the financing.
In the US there is no way today an average person/family is getting six times their income in mortgage debt, but in Canada, no problem. This is driving the Cdn market and it is why there is such a difference between here and the US. Simply put, if our banks are willing to lend at these levels, many buyers will continue to buy.
Unfortunatley these buyers do not apply great financial analysis to the process of buying real estate. Given the size of the investment it is terrible they do not perform better due diligence. If they did, many would not buy a house today.
But the market is driven by the masses and the masses are financially illiterate. We need a major change to either drastical reduce their borrowing capacity or force many existing homeowners to sell. Higher interest rates and/or massive job losses are the only things I can see that will create this mental shift.
The question is how long will this take. Some would argue the world will go into the tank this fall, but I feel it will be interest rates hikes that drive the change and I sense we are two+ years away before rates get high enough to have a material impact to shift mindsets and borrowing capacities.
A friend and I were talking about the meaning of "value" this morning. He had brought back a new Sony MP4 MP5 player from Cambodia which cost him $20. He tried loading up some songs, but could not figure out how to do it, so he was just going to junk it. His reasoning being that it must be crap for $20.
But is it? Similar sonys here sell for over a $100. If he had paid $100 would he have junked it or tried to get it working.
End of the story is I bought it off him for $20, loaded up music, radio shows, a movie and a couple of games and took some pictures and a video with it. Took it over to his place and showed it to him. Now he says he sold it to me, way too cheap!
Value is part cost, but largely perception. And that includes real estate as much as it does sony players. When real estate looses its appeal, it too will be junked.
Marko -
that Fernwood lot (on Belmont) was for sale for months at around $400,000 - finally it sold for $329,000. They must have taken a low ball offer, booked the lower price and closed the deal. I know a bit about it because I enquired about the lot after the lowered price turned up on the MLS. At that point, the lot was sold waiting for a long completion date (in August).
What this tells me is that lots in Victoria are not scarce, they are too expensive.
Around a 20% cut to get a sale in a desireable area of Fernwood? I suspect many of the half million dollar and up lots cuurently listed in Fernwood, Fairfield and Oak Bay are going to require similar price reductions in the future, or they are not all going to sell. Maybe none of them will sell without reductions? How much money could a builder make buying lots like these and building average houses? I'm guessing very little. What do you think?
Marko said:
in 1998 I paid $185,000 for a 2500 sq/ft home in Fernwood with a suite.
...
A 2500 sq/fthome with suite in Fernwood will run you at least $500,000 or more.
Wow! That's a 170% increase in home prices in 10 years. That's 10.4% compound growth per year. No wonder people were going goofy over real estate.
It's outperforming the stock market and you can live in it.
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