Thursday, October 8, 2009

The fall trend

Supply and demand ratios in Victoria may be the ultimate indicator of market trends for us watchers. Typically, supply and demand dance in unison throughout the year: spring's foxtrot morphs to the hand jive by the early summer until fall's traditional swing slows into the winter waltz.

But 2008 and 2009 have been anything but typical. After a lacklustre summer and fall of 2008, sales volumes were slow to trot January through March 2009. And then the Bank of Canada got the dance started with party favours not seen for 7 years: ultra-low interest rates.

It's important to provide some historical comparison in order to understand what is happening today. In 2007, between September and December, total listings dropped from just under 3400 to about 2800. In January 2008, total listings began piling up (nearly 2000 more listings than sales over 9 months) into the summer and by September reached nearly 4800, meanwhile sales volumes were plummeting.

Cue 2009, total listings never piled up. For whatever reason, homeowners didn't feel this spring and summer was the time to sell. But buyer's were--and continue to--buy any quality product that comes on the market. Sales to new listings ratios remain tight and total listings have consistently dropped since April, hence the rise in prices. What lies ahead for the remainder of 2009? All signs point to a mirroring of 2007 listings and sales volumes, without the corresponding jump in prices.

To gain further insight, and a from-the-ground industry perspective, I engaged Tim Ayres, Sooke-based REALTOR® in an e-mail question and answer session (answers in italics):

Despite the very high sales volumes, sellers just aren't listing their properties like they did last year. Is this because prospective sellers may be sitting on the sidelines expecting prices to rise again so they'll wait till next year to maximize ROI?
This is a really tough question. I think a lot of it has to do with new construction basically coming to a standstill late last year and early this year. The excess inventory (especially condos/townhouses) seems to have been snapped up with the low interest rates and relatively stable employment in our region. I'm not sure why anyone would be waiting.

If you have a house under $600K in Victoria/Saanich or under $500K in Sooke/west shore, it's selling like hotcakes, and you should definitely strike when the iron is hot. I've got at least three or four buyers I can't find houses for at the moment. Not just first-timers either. I don't think prices will increase too much year over year at the end of it all, especially when you exclude luxury/waterfront properties.


I think that we're reaching that affordability threshold again, when people will start to lose interest, despite the low interest rates. BCREA did a presentation at the board election the other day showing an interesting affordability graph (I will try and find the relevant slide) that would show what I mean.
Typically the fall months have sales declines because of 90 day closings and the holidays, do you see the high volume sales trend continuing through October and November? If so, do you see total listings remaining stable or declining further as we near the end of the year?
My guess is that listings will continue to decline. IMO, if we didn't see listings go up in September, we're not going to see them increase at all this fall. Stay the same or go down.
Obviously low interest rates have brought a lot of buyers into the market. Especially the first timers. Do you see a correlating trend in the move up market? Especially with the older home buyers--the boomers in the last decades of their working lives--are they buying and selling more, less or the same as in previous years?
I really can't comment too much on this one - I haven't been monitoring statistical trends as closely as some. I would guess that with all the equity and real estate market turbulence over the past year that many boomers/near-retirees are staying put until they feel confident about their financial position, especially if the house is paid off. I could be totally out to lunch, though.
Is it safe for me to assume that the largest actor group in the local market then is first time buyers? If that is the case, are sellers selling to buy up in the market or are they selling and leaving town, selling and renting etc?
No, I think there are plenty of upper-end listings selling too, so there must be lots of move-ups too. But I think a large part of the surge is first-time buyers, no doubt. Lots were scared off by prices and rising interest rates, and there is a lot of pent-up demand, and not enough good product out there.

If you look at the bottom end of the market, there are a lot of houses under $450K, but so many of them are junk! They aren't selling. What's selling is the nicer ones that are still reasonably priced - people are willing to pay a little more if they're not getting junky houses. Perhaps this has helped prices appear to have been escalating in that market segment. I have been looking with one couple in the Victoria core area for about 4 months now. You should see the junk that comes on the market and what prices they want. Properties that would have been priced $379K 4-6 months ago are trying for $429K or $439K, it's ridiculous - they won't sell. So naturally, the properly priced homes that are in good shape get snapped up.
I find Tim's responses interesting and appreciate his frankness. His answers confirmed my assumptions moving forward. Until we see sales volumes drop sharply, or listings volumes jump by 25% or so, I don't see any downward price pressure. As long as the sales to new listings ratio stays above 65%, total listing volumes will continue to decline.

43 comments:

Tim Ayres said...
This comment has been removed by the author.
omc said...

That almost sounds like 180 degrees from the official releases. Maybe we should get him to do the releases? They wouldn't scare off those with more than 2 brain cells.

Seems to fit what I am seeing though as family homes are selling, and the 2 bed room shacks in south oak bay aren't. This is opposite to what I was seeing near the peak when anything in south oak bay caused a mania.

It is interesting to hear about the affordability thresh hold. I know people don't look far into the market, but new calculations will be needed when rates rise.

Tim Ayres said...

Oops, broke the link in the above comment. Here is the link to the BCREA slide mentioned in my response: Link.

HouseHuntVictoria said...

Tim, thanks for that. Is there any explanation of the lines?

Tim Ayres said...

Well, one is inflation adjusted average payment, and the other is mortgage rates in %. I think a useful third line would be average price or mean price. But I think you can see that lack of affordability peaked in 2008 and then started to decline as the market did and then interest rates did. Now we are headed back up, testing that threshold again.

Just Jack said...

Still keeping an eye on the back door of this market. It seems to me that rental rates are declining and rentals are remaining vacant for a longer period of time.

I was speaking with a home owner yesterday and they had rented their house for $1,600 per month before. Now it has been sitting vacant for three months and they have dropped the rent to $1,400. A perusal of Craiglist seems to be similar as I am seeing lower asking rates.

Does not look to good for landlords with dropping rents and longer rent up periods. Anyone else hear anything?

Mr.4AM said...

I still think that between the long term economic ignorance of the masses in regards to being tied to a mortgage for life + short term economic ignorance of the mass in regards to what's really going on in the macro global financial markets + the fact that the vast majority of individuals are naively optimistic + combined with the vast majority of realtors endlessly pumping the market + the government artificially lowering interest rates and offering house-owning incentives + banks still offering credit like October 2008 never happened...

... the only way I see the Victoria market tanking is when reality finally shocks all of the above masses into fast increasing interest rates starting in Q3 2010.

Until then, unless there's some black swan event, or another *shock* stock market dives 40%+ again... I don't see any significant force making this market turn around favoring re: bears.

But when that turn finally comes...I'm thinking a 30%+ correction over 2-3 years is not out of the question.

Mr.4AM

PainInThe said...

Mr. 4 AM, what size of a correction in values do you see when California legalizes pot to survive on top of all your other conditions?

Vic said...

As we suspected,the jobs party couldn't last.



Victoria's jobless rates climb while the rest of the country sees more employment


October 9, 2009 9:11 AM

Greater Victoria’s unemployment rate bucked the national trend by rising to 6.1 per cent in September from 5.7 per cent the previous month, despite B.C. creating more jobs than other provinces, Statistics Canada said Friday.

The change puts the capital region back to the July unemployment level. A year ago, Victoria had the lowest unemployment rate in the country at just 3.2 per cent, below what is considered full employment. We’re not in top spot anymore, trailing cities such as Regina at 4.6 per cent, and St. John, N.B., at 5.5.

But the recession took us from top spot. This region has lost 5,500 jobs in the restaurant and hotel sector in the past 12 months, said Vincent Ferrao, Statistics Canada spokesman.

Also down by 2,700 is the professional, scientific and technical services sector, he said. The transportation and warehouse sector has seen 2,300 fewer people working in the past year.

HouseHuntVictoria said...

Headline should read, Victoria's Jobless rate doubles in a year.

Vic said...

From the TC today:

"First-time buyers are a factor, but Victoria is a special market. It's a destination of choice, particularly for people moving from eastern Canada," Geurts said."


How come agents always say our market is driven by people moving here from eastern Canada but there is never any stats to back up these claims ? And those we do know of say only 5% of the traffic comes from Alberta. Credibility is waning in the RE bizz.

Reid said...

HHV, your overall thesis is exactly where my head has been the past few months. Inventories of decent homes under $650k are very low and when a decently priced house comes on the market, it sells quickly. Buyers appear to be more interested in renovated or updated properties and willing to pay a premium for it, so this has likely impacted the average and medium SFH prices.

As I mentioned in previous posts, the data today does not support a price correction in the shorter term. Something significant has to happen to shift the overall mindset and even then it will take 6-8 months to really settle in.

Longer term prices cannot really appreciate much given affordability and fact that interest rates will rise over time. So I still feel prices will come off, but it will likely be driven by interest rate trends. One may have to be patient as I do not think it is happening this winter.

If there is any opportunity in the market this winter, it may lie in houses between $550k and $650k that require work and do not have suites. These houses are not selling quickly even if in decent locations and once the winter sales slow down, there may be some opportunity to at least see a decent discount over SFH price highs.

I am not hoping for an economic collapse as some posters appear to be wishing for. If we head in that direction it will impact everyone and not for the better. Some of us may well end up buying a cheaper home, but would their lives improve? I very much doubt it. I have talked with many that lived through the depression and it is not something anyone should be wishing for.

HouseHuntVictoria said...

Reid,

I think the gravitation to ready to live in, with suites already built, properties is a function of cash flow and amortization. People aren't buying with cash in the bank.

If I can qualify for a $550K mortgage, I can't buy a $450K house and fix it up because the bank will only lend me what the house sells for, not what the house sells for plus the money to fix it up.

Unless you have 25% equity, you can't get a HELOC. Therefore you can't get the money to do repairs if you want to save on the purchase price. But the banks are happy to lend you more money on a house that sells because the work has already been done.

Sweat equity has been removed in this market unless you have cash reserves to afford the material costs. Few buyers do it seems.

omc said...

Reid,

I hope your gut instincts are correct as that is the market segment my wife and I will be looking at this winter. Probably $650-750k, no suites and needs work in a good neighbourhood. that is, unless a decent 3-4 br rental shows up between now and January. We would prefer to rent, but it seems that most landlords are charging silly prices these days. That and we have been waiting a long time for the correction.

Reid said...

HHV, I agree with you on the money side and why the renovated houses are selling at premium prices. Money is cheap and available if you can roll it into a mortgage.

I can afford to buy and have the money and skills to renovate. This appears to be the only part of the market where opportunity exists and this opportunity should only grow as winter sinks in. Recently I have seen better houses in my target areas with better layouts and design selling at $125k to $150k discounts to updated homes in the same area/street. I can update those cheaper houses for $50k and they will be far better than the ones selling at a premium as it be our renovations and layouts are better to start with.

So there is an opportunity to create a 15% discount on a SFH in Victoria, but it will only apply to those that have the skills and money to execute. As you suggest, there are few that can do this and consequently I assume this is the very reason why the opportunity exists.

OMC appears to be someone in the same boat as myself and could execute this. Although I am not bullish on the long term outlook for the real estate market, there are opportunities for those that place some value on home ownership.

Reid said...

OMC, I was thinking of you when I wrote this, but missed your post. I think you are seeing what I am and hopefully see the same opportunities.

omc said...

Thaks Reid, I am hoping as the weather worsens the sales slow down. I am not sure how to time this thing though, as in what month would be best. I am not seeing many oportunities at this moment though. Any ideas?

Reid said...

OMC, the best ones I saw were back in April through June where even though sales had picked up there was still lots of inventory and these houses were not selling. My sense is that once sales slow in Nov, Dec and Jan that some of these will sit and motivation will once again kick in.

My gut sense is tells me between Dec and Feb will be the time, but again all you need is that one property. My criteria is to find something in the right location as I am more interested in being in the right location versus getting the best deal. It costs too much to sell and repurchase, so do it once is my idea.

Olives said...

"I am not hoping for an economic collapse as some posters appear to be wishing for."

I don't get that impression from anyone here. Why would anyone "wish" for that?

Reid said...

Olives, there has been plenty of discussion over the past months on another impending economic crisis, hyperinflation, major stock market corrections and how when this plays out it will force may people (particularily those in major debt) into serious financial hardship. The end result being house prices will drop dramatically.

I would rather see house prices drop gradually and maybe by 20%-25%as interest rate rise but we maintain a sound economic platform rather than seeing major crisis and shocks to that platform that result in house prices dropping 50%.

Vic said...

"I don't get that impression from anyone here. Why would anyone "wish" for that?"



So they can finally make use of that freezer full of gold bars and buckshot. ;)

Vic said...

Second leg down is on the horizon for housing


Data released by ZipRealty on Friday showed the number of home listings in most housing markets declined last month, suggesting continued stabilization of the
housing market.

But soon, a massive supply of homes already in the foreclosure process could cloud that picture, driving down prices even further, according to an analysis
from John Burns Real Estate Consulting.


http://www.marketwatch.com/

Bob leftcoaster said...

I wish interest rates would rise already! Why? Average household incomes will not rise significantly in the near future while interest rates certainly will. This means the mortgage approval amounts will drop and affordability will diminish.

This market is crazy and I believe that this will be the only cause for price corrections. My calculations agree with the 25% correction that follows a 3 to 6% interest rate hike.

My down payment will go farther in the long run but the wait is painfully slow.

greg said...

There's a difference between hoping for a reduction in housing prices (say tied to a rise in interest rates) and hoping for an economic collapse. The fact that both may be tied to the same event (say an interest rate rise) does not make those who hope for lower prices doomwishers for the masses.

As has already been shown in this crazy market, what happens and what triggers what happens are not always predictable - in other words, a rise in interest rates, while it might trigger a reduction in housing prices, it may not trigger an economic collapse.

Personally, with a decent downpayment, after observing the market for the last few months, I would like to see rates back up to 6%.

It would be far easier to buy in that kind of market.

Vic said...

RBC moved up their mortgage rates by .35 % on a 5 year,the shift has begun. Bond market was lively today with big moves on Bernake's talk on raising rates when the time comes.

Bob leftcoaster said...

I highly doubt a major economic crash would occur if interest rates rise to 6%. Some of the 0%/40yr and 5%/35yr crowd will be lucky enough to renew with a brand new 35 yr amort. Some will be able to sell at market prices and break even or take a small loss. A lesser amount will face financial failure due to massive loss. Those who wait and saved will be able to take on a 20yr amort even with a 6% interest rate.

Food for thought: There might not be a bloodbath in 4 years. The CMHC could easily create a second tier of high ratio mortgage insurance for those who bought during the housing rally but cannot qualify for a renewal at market rate. These people will get their second chance, but maybe at 1.5X the insurance premiums. Let's call it something pretty like CMHC Granfathered Mortgage Insurance.

Vic said...

The TC runs an article on the tiny houses they are building in Langford.
Nice location alright,Harleys,semi-haulers and trains roaring by would make my Langford living experience oh so relaxing.

How do you get two bedrooms into 56 sq metres ? = 600 Sq Ft ...bunk beds ? ...and when did the RE bizz switch to sq. metres ?




Small homes a big deal in Langford
Kettle Creek Station project boasts prices below the area's median


"Still, not everyone is sold on Kettle Creek and its tiny lots, which range from 195 to 335 square metres.

Richard Dobbyn has concerns about its proximity to the industrial and commercial phase of the development, which includes a new Sysco Food Services warehouse and the Steve Drane Harley-Davidson motorcycle dealership. Dobbyn likes the forested area behind the backyard, but has reservations about the E&N railroad tracks between those woods and the houses."


"The Kettle Creek houses range from $289,000 for a basic 56-square-metre two-bedroom house to $389,000 for a 140-square-metre two-bedroom house with a basement. Adding extras can push those prices up"


http://www.timescolonist.com/news/Small+homes+deal+Langford/2085229/story.html

Muriel said...

Can anyone tell me what the house at 725 Vancouver Street sold for? It was listed at 800k a couple weeks ago. My PCS search parameters don't go that high...

PainInThe said...

If THIS doesn't get a 50-60% drop in prices throughout BC, but mainly in Vancouver which will spread to here quick, nothing will.

I bet it will.

Mark said...

Why would this cause prices to crash 50 - 60%?
You would think more people would want to live here if they could just walk into a store and buy their pot, no?
BC would truly be the greatest place on earth......or so you would think in your stoner state of mind ;)

PainInThe said...

Uh Mark, you don't read so well. It said California was legalizing pot, NOT BC.

When California has pot fields in the central valleys as far as the eye can see, BC's narco-economy will find its consumer base shrunk from the entire US to Canada, whose population is the size of California's.

All the grow-ops driving up housing prices as little moneymaking factories will suddenly go bust faster than Detroit.

Or turn into crack houses, but I don't think the neighbours will be as happy with those developments so there will be far more reporting.

At any rate, housing values will crash further than they were going to after the Olympic slump.

MUCH farther.

P.S. Just for the record, I'm never smoked pot. So that's probably why I can figure out the obvious.

PainInThe said...

Another for ya....

California to Legalize Pot by 2010

Mr.4AM said...

Given variable rates are somewhat tied to the BoC's overnight rates, and we just supposedly had a rise in employment figures, it will only be a question of a few months (6?) before a decision needs to be made - will the BoC raise interest rates or keep them down artificially low?

As you might recall from some recent news headlines the loonie being as high as it is (95.9 cents USD) will hurt exports and could stave off recovery by nulling the effects of the bail-outs.

If the BoC raises rates, this causes the loonie to go even higher, if they leave it artificially low, the loonie will remain where it is or decline a bit. However the longer the interest rates stay low, the longer it will take for real estate market to correct.

It is interesting to note that Australia and the UK have recently made their decisions. Australia will raise interest rates, while the UK may keep interest low possibly up to 2014 - expect the UK Pound to dive at least 20% (versus Euro) as a result, maybe more.

On the US front, it is likely they will keep rates artificially low until a sustained (6+ months) employment growth pattern is seen, which may not occur until late 2010 - until then, expect the USD to continue its dive against the 6 major currencies (and gold).

What do you think Canada will do?
Mr.4AM

Vic said...

"However the longer the interest rates stay low, the longer it will take for real estate market to correct."



Remember that it is the bond market in the US that dictates the fixed term mortgage rates here,not the BOC. As we saw on Friday, RBC 5 year rates moved up .35%.



TORONTO — Royal Bank (TSX:RY) is raising its residential mortgage rates for fixed rate mortgages by up to 0.35 percentage points effective Saturday.

The bank said Friday its posted rate for a five-year closed mortgage is going up 0.35 percentage points to 5.84 per cent, while the rate for a one-year closed is going up 0.1 percentage points to 3.8 per cent.

RBC's special fixed rate offer is also going up 0.35 percentage points to 4.54 per cent.

Royal Bank's variable closed mortgage rate at prime will remain unchanged.

Robert Reynolds - GBA said...

Canada won't raise interest rates anytime soon. It would goose the dollar higher killing the Ontario manufacturing sector, which has a much louder voice than BC.

talus said...

Concur --- there is already too much posturing (and whining) about the strength of the Loonie (or weakness of the US buck).

Any rate hike just hurts our export economy.

Just Janice said...

I don't think we need higher interest rates to cause the market to turn. What we need is a change in perception about whether or not the housing market represents good 'value' and whether or not continued price appreciation is likely. If people begin to assess the housing market as risky, then the market will begin to turn.

1. Right now, even with the incredibly low interest rates, it takes two incomes maxing out a mortgage to buy something reasonable in Victoria (SFH wise).
2. Right now, compared to much of Oregon and California - places where mortgages are non-recourse, the weather is just as pleasant, and mortgage interest in income tax deductable - houses cost less than half of what they do here.
3. Right now, you can rent a place for less than it costs to own, without the risk of asset deflation, property tax increases, etc.
4. If everybody is spending all of their money on their mortgage - what on earth is going to support the local economy if no money is left to buy other things???
5. If the government (and this is a government city) also is maxed out, and refuses to spend anything more than neccessary - what on earth is going to support the local economy?
6. If the American tourist is maxed out and the Canadian dollar is strong - why visit Victoria when Disneyland is less expensive? Again - what is going to support the local economy?
7. If wages aren't going up - why house prices?

Sounds like a pretty risky situation to me. I don't think we'll need interest rate increases to tip the market. We just need a little bit of common sense and rational thinking.

Bubble 'n Fizz(le) said...


1. Right now, even with the incredibly low interest rates, it takes two incomes maxing out a mortgage to buy something reasonable in Victoria (SFH wise).

So what? This is not a recent development. It was true several years ago when prices were going up in leaps and bounds.

2. Right now, compared to much of Oregon and California - places where mortgages are non-recourse, the weather is just as pleasant, and mortgage interest in income tax deductable - houses cost less than half of what they do here.

Irrelevant. As I have pointed out in a previous post, most Canadians would be unable to move to the US (as permanent residents). If you want to live and work in Victoria, what houses and mortgages are going for in Oregon or California is of no consequence.

3. Right now, you can rent a place for less than it costs to own, without the risk of asset deflation, property tax increases, etc.


See point 1.

4. If everybody is spending all of their money on their mortgage - what on earth is going to support the local economy if no money is left to buy other things???


See point 1.

5. If the government (and this is a government city) also is maxed out, and refuses to spend anything more than neccessary - what on earth is going to support the local economy?


Huh?

6. If the American tourist is maxed out and the Canadian dollar is strong - why visit Victoria when Disneyland is less expensive? Again - what is going to support the local economy?


People buying houses in Victoria aren't cleaning rooms or slinging beer at the local hotels.

7. If wages aren't going up - why house prices?

See point 1.

Mr.4AM said...

All good points Just Janice,

"I don't think we'll need interest rate increases to tip the market. We just need a little bit of common sense and rational thinking."

However, I think you underestimate the ignorance and naive optimism of the masses - as did I about 3 years ago when I started asking deeper questions about how in the world people in VIctoria could afford mortgages at such inflated prices.

At this point, I believe the market will tank, when the middle class masses above are *forced* by external market events into a lower middle class or into poverty. The day will come, but to imagine that the vast majority will wake up one day and become market/fundamentals aware is wishful thinking.

Most Victorians, IMO, are destined to learn the hard way.

I still meet people every other day who think real estate in Victoria is a great investment, even if it means maxing themselves out into long term debt and buying 'investment' properties of which the rent doesn't pay even 75% of the mortgage - because they think the asset prices will keep climbing nearly indefinitely.

It's sad, but it seems to be the reality I see around my circles.

Mr.4AM

PS. The analysts I read, still predict a major (stock) market correction and/or a massive USD devaluation (10%+) anytime between now and Feb 2010. Will this cause the Canadian masses to start thinking twice before they believe the next realtor/MSM commentator about green shoots and that everything is hunkey doorie? Time will tell - eventually the lesson will be learned - hopefully for them not at the cost of their networth.

patriotz said...

All the grow-ops driving up housing prices as little moneymaking factories will suddenly go bust faster than Detroit.

Why aren't they driving up rents too?

And how come they aren't driving up house prices in Trail? Won't the dope grow there?

PainInThe said...

"Why aren't they driving up rents too?"

Just an obvious guess... because when a landlord walks into a tenant's grow op that tenant is immediately evicted? With a shotgun?

OF COURSE grow-ops would have no effect on rentals, only sales, because only an idiot would try to have a commercial grow-op in a rental. Especially since they were rolling in dough to buy any house they wanted at any price in any neighborhood, and the nicer the neighbourhood, the less chance of discovery.

And how come they aren't driving up house prices in Trail? Won't the dope grow there?

Just guessing again (not being in the biz) but perhaps most businesses and factories want to be near FREEWAYS? Distribution channels?

Like the same reason Trail isn't a bustling economic business park center like Surrey?

Now, while I'm sure Vic doesn't have near as many grow-ops as Surrey, what happens to housing values on the mainland happens in Vic sooner or later.

jesse said...

"what happens to housing values on the mainland happens in Vic sooner or later."

I think that's the real key. Victoria has different employment demographics than Vancouver yet prices are behaving in a similar way. There is no telepathic link between Vic and Van that align their prices. Lower mortgage rates and government spending seem to be two similarities, though.

If a house is used for a grow show it reduces total dwelling demand, which includes both rentals and owner-occupied. If the drug trade were measurably taking up the dwelling supply we should see both rents and prices trend higher.

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