Monday, October 12, 2009

Peak real estate

H/T to Tim Ayres for the graphic.

Peak average price for a Victoria single family home was April 2008 at $626,000. In September 2009, average prices hit $619,000. In April 2008, the average mortgage interest rate for a 5 year term was roughly 7% before discounting. In September 2009, the average 5 year term was 5.5% before discounting. Folks, we have a conundrum.

Mortgage rates for 5 year fixed terms are on the rise. Mortgage rates for variables are starting to drop because lenders are discounting them again in order to keep their sales volumes up.

The graph above clearly demonstrates the disconnect between mortgage rates and payments that occurred over the past 5 years because of escalating prices. Is this a permanent disconnect or a bubble signal?

Have we reached peak average prices based on average income affordability? I think we have. I believe that prices corrected between April 2008 and January 2009 because, first, we reached peak price based on affordability, and second, we then had significant supply increases due to weakening demand.

We have no more mortgage wiggle room. Unless the powers that be extend amortization periods again (that ship has sailed IMO), the only affordability room that economically exists is on the price side. From here on in, for every percent that interest rates rise, there will be (the laws of economics demands there must be) a corresponding drop in prices to correct for affordability. Any further increases in average prices will be attributable to a disproportionate number of million dollar plus homes selling month to month (much like we witnessed in September).

82 comments:

Vic said...

As per Janice's post on the previous thread,we need a change of thinking on what "value" is. The tech bubble showed us Nortel and those of the like stayed totally overvalued for longer than they should have and this is no different. Those who think this is the norm have there head up their rear so far there will be no hope for them when the walls come down.


Seen the MLS lately ? anything for $400-500,000 is as good as trash. This won't last much longer and will be much harsher a correction than last winter's warning shot.

Robert Reynolds - GBA said...

I am thankful for this post, pure gold.

It really has come down to monthly payments hasn't it. At least at the entry level. I think we are going to see something similar to the 90's dip. When I talk to people about that time, they tend to remember RE being flat or maybe dropping just a tiny bit. In reality, when adjusted for inflation the drop was fairly significant but it took years and years to pan out. I think we are in for another gently sloping downward plateau.

Robert Reynolds - GBA said...

LOL @ Garth

not funny ha ha, funny sad

jesse said...

The interesting tip-off for me was that the rise in prices from the winter has occurred in cities around the world, regardless of their absolute affordabilities. There is still an air of hubris surrounding owning property on speculation that hasn't yet been shattered.

Low mortgage rates, just like 7-8 years ago, are allowing people to carry large amounts of debt for cheap. But until the supply of homes for sale increases significantly, I don't see prices moving downwards anytime soon, even if rates tick up a % or two.

HouseHuntVictoria said...

Jesse, cause and effect. IMO, rising rates will lead to decreased demand. 3400+ listings in Victoria is historically quite high. If we see payment point pressure, and subsequent listings as a result, then it won't take much to add to total listings.

A good amount of Victoria's new housing stock never gets listed on MLS nor reported in total listings stats as a result. I see rising inventory next spring without increased demand. 2010 may well playout much like 2008 did, things looked great, then pop! 10%-20% drop for the rest of the year.

jesse said...

"IMO, rising rates will lead to decreased demand."

It will certainly shift the demand to a lower price point. In 2008 supply went through the roof with unemployment near record lows and rates not that high. It had all the makings of a liquidity squeeze that has been ameliorated in the past 8 months or so with low interest rates.

Until liquidity wanes again I don't see high for-sale supply, and with it price drops, occurring. This can come either in the form of a pick-up in private investment (forcing mortgage rates up) or a lack of income (liquidity) to support the carrying costs. We are starting to see lower incomes in the rental market but should be more pronounced once government cutbacks take full effect, both in Victoria and the rest of the province.

Marko said...

"A good amount of Victoria's new housing stock never gets listed on MLS nor reported in total listings stats as a result. I see rising inventory next spring without increased demand."

New housing starts are tracked and severely down. As a builder I can tell you that construction is still down. I see very little inventory as far as new homes and new condos go for next spring. (condo construction in Victoria and Langford has come to a scretching stop) Inventory will have to increase from existing homes.

A 20% drop in prices would eliminate virtually 98% of new home construction. We would have a break in prices, but how long would it last with no new inventory coming onboard?

Construction prices are down; however, not substantially to warrant a more than 10% decrease in new home prices. Unfortunately, new building codes just keep adding to prices. I.E. with the new changes to the electrical code as of October 1st along with everything else (rainscreen, etc.) it is approximately $8000 more to build a 2500 sq/ft now than it was in 2005.

Marko said...

- $8000 just based on new code requirements. It is way way more than $8000 to build a home now than in 2005 due to material and labor prices.

jesse said...

"A 20% drop in prices would eliminate virtually 98% of new home construction."

... because there is a shortage in housing? Much of the new housing being built merely vacates other housing, the rest is absorbed by the 1-2% annual population growth. Sometimes I forget how far inflation-adjusted prices have increased since the beginning of the decade and it's a lot more than 20-25%.

Mark said...

Marko,

You bring up that new codes increase housing prices but I suppose the question is, does it provide value? Do the new electrical codes + rainscreen provide $8K in value to homeowners?

I think home construction prices are going to have to fall along with home prices. If people can't afford to build houses then prices are going to drop until they can. Either that or houses are going to shrink until people can afford them.

I've got a graph kicking around that relates mortgage affordability to interest rates and terms. I'll see if I can post it later.

msr said...

Here's the link

Mortgage Rates

HouseHuntVictoria said...

I don't buy the "it's expensive to build and therefore prices can't fall much" argument we hear bandied about a lot. Here's why: over half the dollar value of a new home is land cost.

Bare land costs will fluctuate more in a downturn, driving construction costs down precisely because less people are building. In the early spring of 2009, you could build at a 10%-15% savings on land that hadn't changed value.

If average home prices drop 10%-15%, and sustain that drop for 12 months or longer, look for land prices to drop 20% or more.

patriotz said...

"A 20% drop in prices would eliminate virtually 98% of new home construction."

Why? When house prices were 80% of what they are now, in the recent past, were new starts only 2% of what they are now? Hardly.

If prices drop builders will simply reduce the price they are willing to pay for their inputs, most notably land, as HHV noted.

Mr.4AM said...

A few little videos I ran into recently...Don't say you weren't warned.

1. Meyers - Market over valued by 40%

2.Home Depot Co-founder - 'Horrible Economic Storm'


3.Rickards - G-20 secret agenda: IMF issuing SDRs / USD to depreciate (50% over 14 years)


4.Tavakoli - 'Our Meltdown risk now is greater than in 2007'


5.Saluzzi - In the end, the house of cards will fall


6.Ferguson - Another dip? Highly likely.


7.Salinas - They thought they could borrow continuously


Bonus video...

8. Fisk - The dollar to be ditched in oil trade by 2018

Vic said...

"I don't buy the "it's expensive to build and therefore prices can't fall much" argument we hear bandied about a lot. Here's why: over half the dollar value of a new home is land cost."


Exactly HHV,building a new home has always been a dicey option no matter what house prices are. Every market I have owned in, building new always came with a premium as you were up against the major cost of land. Labor and lumber costs etc always fluctuated but overall if you built new you pay the price and it was never a determining factor on overall average/median prices. There has never been major tracts of land developments in this town to influence prices up or down.Exisiting homes call the shots and always will.


I really don't see the relevance on Marko's statements "if the building stops the prices will never go down". Thats just not true. Victoria has never been a builders meca,it's only at the peak of the booms the builders overextend themselves,then whine when they can't make any money. With little land around I wonder why,they are charging top buck.

maniac78 said...

I've decided to stop waiting around because Victoria is just not worth it. I'm really thinking about moving to Calgary now. You can buy a nice house in Calgary for $350k. Most homes have forced air heating, proper insulation and were built in the last 20 years using modern materials. Sure it's cold in the winter but it rains here every day and the wages are way better in Calgary too. I could probably be mortgage free in 10 years in Calgary instead of being a mortgage slave here for life. Even if house prices drop 20% here it's still 20% of stupid for a piece of garbage 1960s or 70s buldozer bait box. Do you people really want to live in a poorly insulated, moldy dump?

Dave said...

I think Marko makes a very good point about construction costs.

I don't buy the theory that land prices will adjust to make up the difference. Firstly, there aren't very many lots for sale to begin with (east of Colwood), nor is there much land available for development. Secondly, I don't recall seeing lot prices drop during the Fall 2008 correction.

HouseHuntVictoria said...

Dave,

Lots aren't typically owned through first mortgages. Lot's tend to be owned as pieces of larger real estate pies. Lot owners are not subject to the same types of price point pressures as homeowners.

Most lot creations east of Colwood have been subdivisions of existing properties over the past 3-4 years. This segment of the market is tiny, and therefore has inconsequential impact on the market as a whole.

Tracts of land that municipalities make available for redevelopment are what we should be analyzing. Municipalities must always increase their tax bases. There are two ways to do this: increase taxes or increase total taxpayers. They will continue to make new land available for construction regardless of the state of the real estate market because they have to.

As I pointed out above, we'd need to see a sustained price drop (12 months or longer) before we see downward price pressure on bare land. If that happens, it will happen, because it always has. Land has always been the most volatile piece of the real estate pricing structure.

There were price drops in bare land last fall, despite that, no one was buying because developers felt uneasy and banks were hesitant to lend on new construction.

Just Jack said...

Land has no value unless it can be put into production or put to a use that is in demand.

The Theory of Substitution is basically:

If demand for new homes declines, then vacant land prices and/or construction costs must fall, until the land reaches the difference in the value of a new less the cost of constructing the home including builder's profit.

In otherwords, why would you pay more to build a home than one that just been built.

Or by extension

Why would you pay $600,000 for a new home when you could buy a 1 year old home for $550,000?

On the way up in the marketplace, new construction lead the market. In a declining market, new homes lag the market.l

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

I'm thinking in real terms, prices now are not at an absolute peak. If you consider that most home purchases involve some financing, there is room to go higher based on past history, since the levels reached in April 2008 were reached with higher mortgage rates. Therefore, the rally may continue if lower rates are sustained for awhile longer.

Now with the loonie ramping up in value week by week, and the recession declared "over", hopefully those maniacs at the Bank of Canada will come to their senses and do the right thing, and prevent these stratospheric values from rising further.

Not counting on it, but you never know...

Marko said...

"Do the new electrical codes + rainscreen provide $8K in value to homeowners?"

- The home looks the same inside and out, the guts of the home are improved. Is that value?


"If people can't afford to build houses then prices are going to drop until they can. Either that or houses are going to shrink until people can afford them."

- It is not quite that simple. No one is going to sell you materials for a less if you can't afford to build a home or the builder can't turn a profit. Prices of material are influenced by demand from countries such as China, India, US etc. If construction in Victoria comes to a stop because the real estate market corrects it doesn't necessarily mean that prices of materials will move downwards whatsoever.

- I really doubt homes will shrink, judging by this blog, people aren't satisfied with a 1000 sq/ft rancher anymore. People want 2000 sq/ft and up homes.


"Bare land costs will fluctuate more in a downturn."

- I agree to some extend. Possibly in Langford. However, there is very very limited inventory elsewhere. Inventory of ready to build is extremely lot.


"If prices drop builders will simply reduce the price they are willing to pay for their inputs, most notably land, as HHV noted."

- First of all, I disagree. If prices drop builders will stop building. For example, Bear Mountain Corp. has three lots for sale. So, prices might drop, but where will you get a ready to build lot? They certainly aren't developing anymore lots, and neither is anyone else to a large scale.

- Other inputs are also really difficult to decrease. I've lost a contractor electrician to the shipyard and one to Suncor. No one is going to come wire my house for $25/hour when they can go work for Suncor in the oilsands for $35/hour. With the price of crude going up to $75 today, who knows what it will be by next year. Qualified tradesman find work by switch industries and moving. Unqualified people end up costing you the same because they don't know what they are doing.


"Tracts of land that municipalities make available for redevelopment are what we should be analyzing. Municipalities must always increase their tax bases."

- I considered developing a small subdivision in Langford myself, until Langford told me they wouldn't participate in any infrastructure funding (sewer, etc.). Municipalities are short on cash and unlikely to help fund infrastructure for residental homes. For developers infrastructure costs are massive undertaking. I won't even tell you how much it costs to pull a sewer line 1 foot.

"Why would you pay $600,000 for a new home when you could buy a 1 year old home for $550,000?"

- As a builder, why would you build a new home with construction costs of $550,000 when a similar 1 year old home sells for $550,000? I am not stupid, I rather go do small renovations or just let me wife support me ;). This is the exact point I am trying to make, if the market corrects, construction will severely correct as well.

Just Janice said...

By nearly any measure available we are in bubble territory. I don't know if Japan at its peak was as loonie as Victoria - and I'd be willing to guess it wasn't...

Dave said...

Well said Marko.

It saved me from saying the same thing.

Do you GC for clients who have their own lots?

jesse said...

"If prices drop builders will stop building."

If prices are dropping builders stop building because they are building on spec. Marko, as a builder you are 4-way squeezed by land owners, contractors, material costs, and buyers. With so many parties, three of which are almost certainly shrewd, the first instinct is to pass on the costs to the fourth. That seems to work well these days when money is so readily available.

If you can't turn a profit because land costs are too high all you can do is wait until land prices (or other inputs) drop. I am pretty certain, though, that building will always be competitive regardless of land prices. I genuinely wish you the best of luck passing on the costs -- and margins -- to buyers.

Marko said...

Currently I am building one home as a builder, and I just started a home for a customer acting as a GC.

Both methods have their pros and cons.

Prices for some things have come down. For example I just poured a foundation for $140 per cubic meter of concrete versus $170 during last years peak construction. However, other things such as lumber are only slightly down in price. Builders don't run a huge margin (contrary to many beliefs) and a 15% correction in prices would drastically decrease construction.

Personally, I don't think people are losing out by not getting into the market right now. I can't see prices going higher but I don't see this 20% correction coming. I see possibly 10% correction with sideways movement for the next 5-6 years. Maybe I am wrong. However, the one thing I ESPECIALLY don't see coming is a 20% correction in prices and construction continuing because builders will lower their "inputs." That is highly unlikely to happen. I certainly won't be building at that point.

Vic said...

"No one is going to come wire my house for $25/hour when they can go work for Suncor in the oilsands for $35/hour. "


If there is such a shortage of qualified electricians here as you have previously said why would one want to go to the unforsaken Fort Mac when they can make the same money here ? Even if they were charging $25 an hour the electrician is far ahead here as rents for one bedroom 600 sq ft apartments are $1800 a month. When you do the math you are farther ahead to stay here charging less.


If you like working 12 hours every day til you drop then that is a different story but can't see that many people leaving here when there is work to go there unless they have paid housing and/or gauranteed 100 hours overtime a month. Not to mention the quality of life with minus 40 degrees and living like a mushroom.

Marko said...

The point I was trying to make is that qualified tradesman are by no means starving, and by no means willing to work for 2003 like wages. If you can find a qualified experienced electrician, plumber, etc for $25/hour you would make a killing as a builder.

In a current downturn a really good plumber is not going to drop his prices from $45/hr to $25/hr because a good plumber has a variety of customers, knows how to run a business and will switch his or hers revenue stream to small renos, boiler and other repairs, etc. So, as a builder you have the option of hiring a non-experienced plumber for less and get nothing accomplished (he or she will be slow, you'll fail inspections, have possible leaks etc.)

Keep in mind most of the things I am discussing here are from experience in construction and may not reflect reality 100%. I acknowledge that.

Animal Spirit said...

o.k. where's Roger's month by month comparison?

Roger, where are you Roger?

talus said...

This whole discussion on "what it costs to build" is crap.

Crap because NO ONE CARES.

Just like I don't care what it costs the farmer for fertilizer, a new barn, fuel for his tractor, or.... bla, bla, bla.

I only care what the final price is at the grocery store and if the product is worth it. You can bet your a** that if milk was 2-3 times it's normal price I would find a substitute.

VALUE people! VALUE...that is what it is all about.

We agree that the "$400-500,000 is as good as trash." We can see that Joe-consumer is aware this lack of VALUE and is adjusting his shopping accordingly and purchasing more expensive homes.

So, just what is allowing this larger purchase price?

A shortage of housing? -- No we already said there is plenty of inventory, crappy as it may be.

Immigration/jobs? -- That is dead too and recent cutbacks to all economic sectors will bring more downward pressure on this element.

Wages? -- Not likely, they aren't increasing. We have beaten this to death.

How about cheap credit, lengthy mortgage terms and lax lending? -- Bingo!

Take out the source of funding and buyers (as well as sellers) will need to set their sights lower. No one has pulled this plug yet and the buyers (and sellers) keep getting a government discount and guarantee. The G'men are also keeping the party rolling by insuring all those crappy mortgages.


BTW...

If Marco cannot find GOOD trades persons then I would be forced to say the downturn is hitting Victoria bigtime --- but I'm not saying that...yet.

Because either there is a massive building boom and all the good trades people are not available...

OR...no good trades people here means there is INSUFFICIENT DEMAND for tradespeople.

The fact that Marco can find crappy trades persons just means we haven't entered into the recession here yet.

Why? Well, the crappy tradesmen are the first to go out of business in a downturn. The good ones hang on and survive. Marco says so himself "...because a good plumber has a variety of customers, knows how to run a business and will switch his or hers revenue stream..."

Conclusion: Marco can still find crappy tradesman so no recession here yet. However, Marco has cut back on his product because he doesn't have enough customers -- that tells me we are slowing.

Pull the funding plug and this tub will drain quickly.

What you really need to ask yourself is how long Canada can hang on at PAR with the US Dollar.

GDP Exports Chart

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

Good post talus.

One final word on the electricians. I have worked with oodles of them over my career and almost every one of them hates doing new house construction. Why ? Because the developer/builder is always trying to cheap out and get them for less than fair value. As well,as far as an electrician's true "trades skills" go,they hate doing houses because they are boring and there is no challenge.


Boring holes through 2x4's all day and feeding wire is tedious work,thus the reason you get the bottom of the food chain. Most real electricians like working on industrial jobs where there is a real challenge and they get to use their training and skills to the max. In house building there is none except at the end when they wire in the panel.

Same goes for painters etc,they avoid new construction unless they know the developer is desperate and that he even has the money to pay them in the end. Many a trades guy in this town has been screwed by developers who suddenly can't pay up when the job is done or make them wait forever to be paid.

Working through the union and big projects or household troubleshooting repair/reno work is much enjoyable way to make money. Nuff said on this,if they pay,they will come,simple as that.

October 14, 2009 7:53 AM

msr said...

Marko said:

"Do the new electrical codes + rainscreen provide $8K in value to homeowners?"

- The home looks the same inside and out, the guts of the home are improved. Is that value?


Ok, if I didn't have to have those upgrades installed would I want to have them installed? What are the benefits of having them installed?

Robert Reynolds - GBA said...

MLS horror show of the day

MLS: 267854

Price History
Original Price: $510,000
Sept 17: $509,900 (One hundred dollars....? seriously?)
Oct 14: $495,000 (-$14,900 or 3%)

Lot size: 2,280 (postage stamp 40x57)

The photos are the real killer

Outside looks like an 80's townhouse. Note the stunning stained glass...

THREE (one, two, three)pictures of the same room from slightly different angles all highlighting the weirdness going on in the ceiling. Is that "window" just textured glass over the beams in the wall?

bizarre kitchen staging, with microwave, toaster oven and strategically placed turkey platter above the sink. Fire extinguisher not included.

Two (one, two) identical shots of a plant obscuring the view into the neighbors yard

two (one, two) wonderful shots of some papasan chairs, I wonder if they come with the house?

Three (uno, dos, tres) identical pictures of some stained glass blurring out what appears to be a much nicer house across the street.

the inside of the shower, Tilex ad

WOW

Reid said...

The chart on this post shows again that real estate prices are driven primarily by interest rates and amortization periods. A patient buyer will ultimately be rewarded but do not expect it to happen quickly. What readers need to understand is that buyers in BC have been borrowing the maximum permitted by financial institutions for over twenty years; borrowing to the max is nothing new. What is new and why prices have gotten out of control recently is the combination of very low interest rates and the extended amortizations.

On a separate point, I am starting to question the average income level reported for this city. I think it may be higher than most people think for the following reasons:
• A much higher percentage of the workforce here appears to be self employed than I see elsewhere in BC and I bet you a lot of these people do not report their true incomes
• A lot of people who live here are not employed in Victoria. I fly into Victoria a lot from various BC and Alberta locations and I am amazed at the number of people I meet that make great money elsewhere but choose to live in Victoria

jesse said...

Reid while that may be true I'm pretty sure the same demographic was present 10 years ago, only prices were a tad lower compared to reported incomes. Add to that the majority of homeowners didn't enter the market during the boom so are mostly immune to price fluctuations. (At least the ones who didn't HELOC!)

Animal Spirit said...

Next in my on-going update on the 1134 Dallas Road classic flip / tsunami bait (think that the bankers are getting nervous yet?

MLS®: 258338 (used to be 250314):
~ 1 million 1.5 yrs ago (bought)
250-300K reno cost
95 K carrying cost (5%/yr)
45 K agent fee (assuming 1.5M sale)
20 K staging cost
1,410,000 Total Cost

~1,790,000 list in the summer
1,675,000 (first week of Oct).
1,595,000 (list shown Nov. )
Jan. 1/09 - taken off market, lock box on door
1,495,000 Feb. 6/09 re-listed (same agent)
1,395,000 Mar. 18/09 price drop
1,295,000 sometime before May 2/09
1,245,000 sometime in July
1,095,000 early October/09

??? sales price
695K drop in list price, or 38.8%
??? % drop to sales price

2009 assessment: $1,173,000.

Just Jack said...

Oh my, you don't think Roger BOUGHT do you!?

S2

Vic said...

Lunacy in Las Vegas Housing

http://www.cnbc.com/id/33310096

Roger said...

S2,

Just lurking these days...

After over 2 years of posting I have nothing new to say about the Victoria real estate market. I stopped producing the stats graphs - too much work and not much interest anymore.

Nope - haven't bought a house. Probably leaving Victoria before too long - better value elsewhere.

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

Re: Lunacy in Las Vegas Housing

Wonder who the cash purchasers are?

Wonder what their intentions with the property are?

I am assuming they aren't all moving to Vegas full time so this would be vacation/rental property for them.

Could this be a massive shift in wealth? Were there significant numbers that sold on the upside and waited for the downturn?

Robert Reynolds - GBA said...

Roger, I know you have posted before about up island homes. I was in Campbell River over the weekend and there is TONNES of stuff for sale up there, even some waterfront for Fernwood dump prices.

There is also a lot of cars, trucks, boats, RV's for sale in front of these homes. No doubt many are financially stressed, and could be vultched.

ian said...

Patricia Croft yesterday at the PH&N seminar said pent up demand and low interest rates are the only things driving housing and showed a picture of the 1.1 million 900sq ft bungalow that sold in Kitsilano for 200,000 above asking.

There was a great chuckle in the room and she concluded that this can't possibly continue but many nods of affirmation from a generally older boomer financially happy crowd.

Regardless, I'm packing up my Ph.D. and going elsewhere. I know prices will eventually come down but I can't wait for Financial Armageddon.

THanks to all for the great discussion.

Cheers all.

Bubble 'n Fizz(le) said...

After over 2 years of posting I have nothing new to say about the Victoria real estate market.


That's because the market is pretty much the same as it was two years ago, give or take a few per cent.

I stopped producing the stats graphs - too much work and not much interest anymore.

Yup, after two years of predicting a crash it gets a bit old.


Probably leaving Victoria before too long - better value elsewhere.


Now that's really strange. Most people choose where to live based on job, family, environment, etc. and then match their financial resources to available housing options. To base the decision on perceived housing value is odd--the tail wagging the dog, so to speak. I guess it does explain your determination to see a housing crash in Victoria. I guess you have finally realized it ain't gonna happen. Good luck in Comox/Courtney/Campbell River or wherever you end up, although I suspect you'll find it rather "provincial" after living in Victoria.

msr said...


Good luck in Comox/Courtney/Campbell River or wherever you end up, although I suspect you'll find it rather "provincial" after living in Victoria.


Seriously? The entirety of the world is Vancouver Island? Are there dragons in the rest of Canada? Crossing the Rockies doesn't require a massive expedition anymore.

Why can't you post like Marko? You know, intelligently.

You keep bringing up that a housing crash can't happen here despite it happening everywhere else on the planet but never explain *why*. That's the real rub, all the explanations given are weak, imply that we're different in some vague or unsubstantiated way.

At least Marko can defend why he thinks construction will come to a grinding halt in a dropping market.

Inglishmagor said...

It has been a stagnant wait for a while now hasn't it. I thought I'd go back and look at how different it would look buying 5 or 6 years ago rather than today.

We've gone over what the monthly picture looks like and how it's drastically altered by interest rates. I was more interested in what the entire package looks like comparing then to now.

2003 ish a house could be bought for 320,000$. The mortgage would be a 25 year term with an average of around 6%. This would give you payments on an accelerated bi weekly plan of 2,046$ a month. Over the course of the 25 years you'd end up paying 559,763$. Most people then would have a reasonable down payment lowering the total amount paid by a fair bit.

To purchase the same house now one would be paying 470,000$ (I went conservative). The term would be pushed up to 35 years and the new buyers are not bringing a down payment. Although the interest rates are low today we have to assume they would still average out to 6% over the long haul. So the monthly payments would ease up to 2,656$ per month... and over the 35 years you'd end up paying 956,312$ for the home.

I just can't find a way to justify that increase in what I'd have to pay to buy right now. I also can't buy into a 25 to 35 year purchase because the first 5 years are at a reduced rate. I don't even fall for that when choosing a cell phone or a new bed.

Just Janice said...

Bubb'n'Fizz just likes rattling the bears. The analysis and logic justifying a correction in Victoria is sound, the case has been made and restating doesn't make it any sounder than it was not that long ago.

I think most of what we're seeing right now is the result of first timers, who have never lived through a 'real' correction and who appear to like the 'illusion of ownership'. If given the choice between paying rent or paying a mortgage, they are choosing the mortgage because they are unable to think critically of the situation (beyond well, I'm spending x$ per month anyways). Some of them may even think that Mom and Dad who were oh so helpful with the downpayment, will bail them out if the proverbial $#!T hits the fan. Many of them have never had the experience of having to carry multiple mortgages as one property just won't sell or of becoming reluctant landlords. Many of them just don't get the gravity of the agreement that they're signing up for. Many of them have never bothered to understand the reasons why markets rise or fall, and so fail to understand the fragility and riskiness of the present Victoria market. Many of them (Bubb'n'Fizz) included have never realized that a higher quality of life might be realized by trading location for cheaper mortgage payments....or maybe even by renting!

There's more to life than being a mortgage slave!

Vic said...

Bubble's attitude only solidifies Victorian's reputations as stuck-up and arrogant cliquey elitists that don't understand the real world.

I know there are some very nice people here(and on this blog) but that is how so many I have met in other parts of BC view us on our little rock. Wake up Bubbs,fantasy island this is not...you're like CNBC in the year 2000, a talking head preaching the "new world" mantra.

omc said...

Best of luck Roger. I have lived in other areas of this country, even the island, and Victoria isn't the be all end all. I certainly understand why you would move and if I could get my wife to understand this I would already be gone.

People like bubbles can't understand the decrease in quality of life that extreme mortgages cause. Being stressed and against the wall all the time is actually the #1 cause of divorce. I know too many younge families that are too stretched. The lawyers will be busy in a couple of months as the rates rise.

I am not sure what we are going to do on the housing front as it appears that we may be forced into the market with our next child on the way. We are in a far better position than most, but neither one of us has any confidence in the market.

I do not know of a worse time in history to invest in Victoria real estate. Peak prices, tight sellers market and a 100% chance of interest rate increase in the very near future. Best case scenario is that prices don't change for many years until inflation catches up. My gut instinct is Marko's prediction of a drop (I don't know how much) with many years of flat after.

PainInThe said...

I can't understand why anyone wouldn't at least wait until March and the big post-Olympic splat.

HouseHuntVictoria said...

The value to be obtained an hour north of Victoria is incredible right now. We've been looking all over the country now for the past 6 months. We will likely not purchase in Victoria. We've considered the Okanagan, Edmonton, Calgary, Ottawa, Kingston and London, Ont. Ottawa, Kingston and London have attractive communities and decent employment prospects at very attractive prices, next on the list is Chemanius north.

It's amazing what you can get for under $300,000 up island. Duncan has some value, but it's basically become an acceptable commute to Victoria so I suspect the town will change for the worse, not the better.

Victorian's like to look down on the up island towns. To me, Parksville/Qualicum and Cumberland/Courtney/Comox neighbourhoods are far more attractive for quality of life than Victoria is today. I know Roger feels very much the same way.

It's going to be a toss up for us, either up island or Ottawa/London/Kingston. Right now, the island for it's lifestyle and proximity to family, combined with lower taxes is proving more attractive. Ultimately employment opportunities will make the decision for us.

I suspect we're not alone in our desire to leave the crazy Victoria market. It just isn't worth it; people who argue it is are using the same argument that a broker trying to get you to buy a stock with a price to earnings ratio of 30 is using. Overpay if you want, you may not end up losing too much money, but you've handcuffed your earnings potential and made a significant opportunity cost error.

As B&F states so eloquently, the market hasn't changed in 2 years, so he's only losing money to debt servicing, maintenance costs, taxes and other home ownership fees; Victoria real estate has become a dog investment at best with no signs of change on the horizon.

I'm not worried about B&F though, he'll keep clicking his ruby high heels together and wishing "there's no place like home, there's no place like home."

Vic said...

Agree with Pain, why not wait til after the Olympic fall out if you have waited this long. You know when the real bills start rolling in there will be some major new tax levy goin down.

HHV, north side of Nanaimo up to Parksville is a steal versus this place. At least a $200,000 difference for the same place in nice neighborhoods that I personally know.

I can not believe how bad traffic congestion is getting here as well. Travelled behind Sears the other day to Mayfair,no accidents etc and it was backed up from Finlasyn hill to Shelbourne bumper to bumper crawl like Colwood at rush hour. Took 30 minutes to travel what should take less than 10. You want density,you got it. I have hard time envisioning this place in 5 years, total gridlock all day on every main route ? No thanks.

omc said...

After the olympics leads us into the spring. The spring means lunacy with real estate in victoria. We have a much better chance in the winter. There have been many reasons why the market should have corrected, it didn't.

Bubble 'n Fizz(le) said...

You want density,you got it.

I assume that when you're not here telling everyone you'll be moving away from Victoria any day now, you are over at Garth Turner's doom blog. Well, you should read his rants more carefully: Garth says the value in RE in the future will be in dense, urban neighborhoods, not in far-flung suburban or rural areas. He recommends buying small properties in city centres.

omc said...

I have read Garth's stuff before, though I find him quite a bit of a dooms-dayer. He talked about buying houses closer to town, he does not talk about individual communities. Victoria, reliant on the fossil fuelled ferries with virtually no industry or agriculture, probably wouldn't fit the armagedon bill.

I wish you well Roger and hope you let us in on your plans when they finalize.

On another note I am observing the suited house land lord market to be in trouble. Misrepresentation of a suite to be an entire house in the ads and price drops seem to be the rule of the day. Not that the rents aren't out of line to begin with.

Vic said...

"I assume that when you're not here telling everyone you'll be moving away from Victoria any day now, you are over at Garth Turner's doom blog."




Actually Bubbs I very rarely post on his blog (unlike yourself who seems to gloat there about some temporary paper profits and posting BS stories via KIV), as the back and forth bitching is hard to digest. Even the bulls there can't even make a case for higher prices without dredging up Japan or something stupid.

I do read his posts and he ALWAYS says how grossly overpriced it is here and in Vancouver and that in time things will come back to earth. The value will be in many places but unlike yourself, I just want a home to live in at a reasonable cost,not the level of greed you desire. In the meantime,best you stock up on some Depends.

Vic said...

Maybe you should be more concerned with what CMHC is doing there with your paper profits Bubbs. Looks like they are maxing out the line of credit that will wind up causing one hell of a tanking if the loonie keeps rocketing and the Victoria jobs keep nose diving. I think you would make a good slumlord though,you have the right attitude. ;)



CMHC's growth fuels worries over new risks


The federal government has quietly given Canada Mortgage and Housing Corp. more financial muscle, raising concerns the multibillion-dollar agency is expanding at an unprecedented pace with little oversight.

For the second time since the beginning of 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding. The increase moves the cap to $600-billion, up from $450-billion and nearly double the $350-billion limit in place at the end of 2007.



Critics charge that such growth demands more oversight, pointing to the fact that even though CMHC is now central to the financial system, it is not regulated by the financial industry's main watchdog, the Office of the Superintendent of Financial Institutions. It's also a risk for taxpayers, because while CMHC sets aside billions as a cushion against losses, and is very well capitalized, Canadian citizens are ultimately on the hook for losses on its insurance should the housing market falter and those reserves prove too small


http://tinyurl.com/yjqf66v

Vic said...

"After the olympics leads us into the spring. The spring means lunacy with real estate in victoria. We have a much better chance in the winter. "


omc,

You are missing the interest rate rise potential here. Bernake is already beating the drums for higher rates sooner than expected in order to save the dollar as it keeps dropping.

Mortgage rates went up last week which was most unexpected. He may not raise it til after Christmas but it's coming much sooner than expected and then we will see the kids who all bought with nothing down bring down this house of cards. Pop pop,fizz fizz.

omc said...

Vic,

I am aware of the interest rate thing. There are 2 popular opinions out there and niether one is calling for substantial increases. The worse case scenario is that the US could have extremely low rates until 1014. If they raise the rates the economy crashes, if we raise our rates the loonie soars.

I despise the idea of buying in this market, but I may not have a choice. The rental market is crazier than the housing market. Most of the semi (under $2500)affordable "homes" for rent are greedy landlords not telling you about the suite, or suites in the basement.

We are going to have to move and a decent rental is our first choice. There just aren't any out there any more. We are screwed no matter what we do.

Just Janice said...

OMC -

The rental market is highly seasonal in Victoria, the worst time to move is in the fall (August to October) as that is when there is a large university influx who are willing to pay $600 per bedroom for a house. The best time for rentals is typically November to July. I have a large number of resources I use when I am searching for a rental...and I check them often when I'm looking:


http://www.duttons.com/rental-properties-unfurnished.html

http://www.boorman.com/for_rent.php

http://www.property-managers.net/

http://www.baywood.ca/propertyrentals.htm

http://www.brownbrosrentals.com/index.html

http://www.phpm.ca/Real_Estate.Metchosin.html

http://www.devonprop.com/index.php?m=1

http://www.rentbc.com/

http://www.housing.uvic.ca/ads/index.php

http://www.davidburr.com/

http://www.newportrentals.ca/rentals.php

http://victoria.en.craigslist.ca/apa/

http://www.cornerstoneproperties.bc.ca/

http://www.househunting.ca/sale-and-rent/index.html?branding=timescolonist

Also, consider offering them a longer lease (18months to 2 years) or doing yard work or paying utilities to negotiate a slightly lower monthly rental rate.

Vic said...

omc,

I understand your situation and it is never easy. When I moved back here in 2001 on short notice it was precisely this time of year and the students had sucked up all the good ones and I paid top buck for a crappy apartment.


As far as rents go the slumlord market will be pricing itself out as what happens at peaks. People stop moving here and these slumlords are left holding the bag.

Just noticed a major Craigslist gouge. A one bedroom suite in a house for $1100 PLUS utilities and shared laundry. They obviously want to you to pay for their reno but these gougers don't even understand average incomes in this town. Good luck on that one, but I can see where some like yourself just give in and buy a condo/house.


On the interest rate thing, yes there are two camps out there but will they let the US dollar crash ? I think not,at some point they will step in. House prices will keep tanking down there regardless due to unemployment but we are not talking any great effect for them if they raise rates a point or two over the next year in a slowly rising/flat economy.

In my opinion the next six months will tell the tale bigtime. Spring in 1981 had alltime peak prices and rising rates in a crappy economy. They all screamed that there is no way they can raise rates to 20%,but they did. So I will not rule out at all a repeat performance. It smells the exact same scenario to me.

Good luck in your decision.

omc said...

Thanks for your support Vic,

Just feeling over run I guess. I am going to have to stop looking at craigslist and spend more time looking at the management companies. Too many goofballs and time wasters on craigslist.

Just Janice said...

If I were a landlord, I would definitely prefer to rent to a mature family - if for no other reason than property maintenance and reduced risk of 'headaches'.

What I think would help right now in this city is a shift away from thinking that renting is less honorable than owning. It amazes me how much people think that 'owning' is so much better than renting without really questioning why that is or isn't the case. The reality is that until that mortgage is paid off, you've got all the responsibilities of owning, but at the end of the day you're still just renting, it just happens to be from the bank.

Vic said...

omc,

Easy to be overwhelmed,good idea to avoid Craigslist and stick with the management companies Janice listed. Most of them know the limits of affordability and the private deals always seem to come with caveats. Landlords that like to pop by, hidden expectations etc. I've used Devon and Brown Bros and they were decent.

talus said...

I've used Pemberton and Brown Brothers with good results.

As for product -- we moved here in 2006 and the 3 bed listings on craigslist totaled 75 units. Right now there are over 300.

I have notice some nicer SFH's recently with more reasonable rents. There are also several that have been listed for more than 2 months and are making slow $50 price reductions --- if they simply took $200 off they would have it rented!

omc said...

MOst of the houses listeed on craigslist are actually just suites. I don't know what they are thinking, waste thier time and maybe they will pay too much for our suite?

Just Jack said...

I was speaking with a person that owned a half dozen Victoria homes back in the early 1980's. And contrary to popular belief, it wasn't the interest rate hikes to 20 percent that caused him to lose all six rentals.

The Victoria economy had tanked and people moved to Alberta and Ontario where the jobs were. One by one his properties went vacant and even with reductions in the rents he could not get renters. Eventually, the lossed income from the suites caused him to fold as he could no longer make the mortgage payments. It left him in debt and so stung by real estate that he has stayed out of buying rental properties ever since.

Victoria and Vancouver have always been boom/bust cities. Its the wild, wild west out here. The players have changed from Skalbania to Barrie, but the games the same.

talus said...

Ok... small retraction. This recent spate of craiglist Saltspring Island listings shows a serious disconnect from the market... and reality.

omc said...

Thanks for all of the links Janice. I went through them, but nothing right now.

It really feels like the gov't is trying to float an entire economy on the back of an over stimulated housing market.

I really don't understand the permabulls like bubbles. I am by no means a stock market genius; I am way too conservative and lose out because of it. But when I do research and decide not to invest in something as I feel it is over valued, I have never been personally attacked because of it.

Robert Reynolds - GBA said...

Why the Canadian housing market didn't crash.

Steve Ladurantaye

Globe and Mail Update Published on Monday, Oct. 19, 2009 2:00PM EDT Last updated on Monday, Oct. 19, 2009 3:36PM EDT


Via http://twitter.com/JoeSquire

Robert Reynolds - GBA said...
This comment has been removed by the author.
Vic said...

"Victoria and Vancouver have always been boom/bust cities. Its the wild, wild west out here. The players have changed from Skalbania to Barrie, but the games the same."



Well said JJ,we are in the late stages of a government fueled bubble at yours and mine's expense. Whose left in the pool to buy ? The taxi driver ? maybe the gas pump jockey ? or maybe the local TC reporter working in a world where today the New York Times just turfed 100 people in a single swipe.


This town has limited resources to withstand the next wave coming when inflation rears it's head. No inflation the media says...really ? Oil hitting $77 and rising, gold holding firm and looking like it's going higher with the Loonie. Apples IPod's earnings will not hold up tourism and a dying US dollar,government workers with no more wage increases for probably 5 years, plus a couple hundred VIHA workers jobs lost,and toss in the almost 2000 tech jobs lost here in the last year. I thought this was the new tech mecca of Canada ? Guess not.

This is where the shleps like Bubbles are clueless and will be hit like a 2x4 between the eyes when the mortgage rates keep climbing and the buying pool runs bone dry, if it isn't already within an inch of the suction pipe.

Marko said...

People take determinants in either direction as positive predictors that the Victoria real estate market is going to crash. When oil fell down to $35/barrel everyone was talking about how that was going to put Canada into a large recession, out-of-province shoppers would disappear, etc, real estate crash was coming.

Now that oil is heading back up, real estate will crash as well?

When oil was $147/barrel unemployment in Victoria was the lowest in the country, and real estate prices were too high, when prices dropped to $35/barrel unemployment grew a bit but real estate prices still too high. Now oil is at $80/barrel and prices are still high.

Yes, higher commodity prices will cause inflation and increased interest rates. However, BC is also sitting on some huge natural commodity reserves. For example, apparently natural gas reserves in BC are sound of the biggest in the world. Increase in commodity prices would definitely help the BC economy.

Vic said...

"Yes, higher commodity prices will cause inflation and increased interest rates. However, BC is also sitting on some huge natural commodity reserves. For example, apparently natural gas reserves in BC are sound of the biggest in the world. Increase in commodity prices would definitely help the BC economy."



Increased interest rates will kill the commodities bubble that is forming. The world is drowning in natural gas,they're not even drilling for it, so there won't be any massive gains there. But higher moving mortgage rates at peak prices ALWAYS kills real estate.

You are basing your assumptions on the past 7 year bubble not historical indicators. Every cycle lasts approximately 7 years or so and this one is on borrowed time.



Bernake talking of raising rates and Canada not is pushing the Loonie down 2 cents today. Will US rates higher cause mortgage money to go up ? Damn right it will. The wider the spread between fixed and variable rates, the more dangerous overvalued real estate comes to crashing.

Marko said...

"The world is drowning in natural gas,they're not even drilling for it"

Have you been to Dawson Creek lately? With new technology they are really taking advantage of the massive natural gas shale plays. Dawson Creek commercial park is at full. I even saw NEW HOUSES being built, that must be the first new homes in Dawson creek in 20 years. It won't take much for places like this to experience a boom, just a couple of bucks more in the price of natural gas. Yes, there is a MASSIVE amount on inventory of nat gas, some places are out of storage! However, many reserves in the gulf of mexico are coming to their end life and people aren't going to drill anymore where it isn't attractive. In two years the spot price of gas could easily be over $10 again. Especially if crude continues that way it is, people will look to nat gas as a viable alternative in some industires. Who thought in Feb and March that crude would be trading at $80/barrel?

Commodities bubble? Real estate bubble? Stock market overvalued?

Is there anything that is at fair market price in your opinion?

It is too bad that today we got confirmation again that interest rates aren't going anywhere anytime soon. I really want to experience this interest rate effect very everything from real estate to commodities drops like a tank. Wishful thinking.

Vic said...

Maybe you should learn to read charts Marko and maybe you will notice the chart says the gas pipes are full. Just because they are building a few houses there does not mean gas is going to $15 anytime soon. But then maybe you could go build there and make a buck instead of starving here ?


http://www.stockscores.com/quickreport.asp?ticker=ung


Maybe check out the copper prices,the have doubled in a recession due to Chinese hoarding and a falling US dollar. Any double in a recession says "overvalued" to me. If it continues then a real copper bubble will occur and interest rates will go up and kill it. History says so,did you see what happened to Gibralter mines in the 90's ? it shut down when copper went to 50 cents. Same possibility exists today if you keep an open mind.


But I'm a trader/investor who looks for overvalued and undervalued conditons and right now everything is getting overvalued,only a fool would think otherwise.


Keep beating the builder drum though,many before you have got their heads handed to them on a silver platter getting caught in the downdraft.

maniac78 said...

Ok here's my situation. I own a place and need to get a bigger place in the next year or so. I've looked around and basically I can get into a place built in the last 5-6 years of the size we need and have a mortgage of about 300k. If we went with a 15 year amortization and 5 year fixed we're talking just under 33% of our income and only a few hundred dollars over rental rates. Is this is a good move? What would you do in my situation?

omc said...

Hey Maniac,

Your not actually telling us much about your situation. Are you in a condo, looking to go to a house? Equity you have?

Moving up costs big bucks in realtors fees and taxes, but can be a good idea if it minimizes your exposure to the volatile strata market. If you are in a condo, looking to get a bigger one I would skip that. If the market flattens condos go down(this is extremely likely), the more expensive the more they drop. However, if you are going to be needing cmhc to reenter you would lose your fees if you sold and didn't rebuy.

Houses are complex as some segments hold up better in different markets. Last year if it was south oak bay it was gold, now the family type houses are holding and the small war shacks are down quite a bit in south OB.

Reid said...

Maniac:

As omc stated it is very difficult to advise without understanding what you are looking at and where you are coming from.

If your sole objective is to maximize wealth, then best to sell and rent your target home. Most people on this blog appear to place limited value on home ownership and if you share that view, then it is best to get out of the market given that you need a bigger place anyways. The chances of the real estate prices increasing over the next few years are very limited IMO.

But if you place value on owning your own home and have enough equity to avoid any CMHC fees then buying could be an option. I am finding updated houses in nice areas to be way overpriced and yet outdated houses in the same areas far more reasonably priced, so if you are looking at something newer I would be careful as you may simply pay too much for the updated home.

But I would also only buy if you know you can stay in the new home for a long time. It is simply too expensive to sell and buy a home even though realtors love this concept. I would advise against buying if you think you cannot live in a place at least five years and ideally a minimum of ten years.

Just Jack said...

Hey Maniac,

If its right for you - then buy.

None of us have a crystal ball, we can't tell you what is right for you. Who knows maybe a month after buying you'll get layed off. What most of us, are trying to do is inform one another.

To me its a no brainer - property prices are going to fall - a lot.

To Marko, buying a home is a safe as money in the bank or at least natural gas stock.

Your individual circumstances are leading you to the buy side. So, buy the home and enjoy. Just remember that the cost of buying a home now, is what you're
giving up in the future. And I would think for most of us, on this blog, that cost is way too high.

Given the things that are happening in our economy, the property you buy today, should be considered the last home that you will buy. If this home doesn't meet this standard - think three times before buying.

Animal Spirit said...

Marko - yes, B.C. has huge shale gas supplies, however so too do a number of U.S. states such as Texas and Louisiana. Like any other natural resource, which gas gets extracted comes down to marginal costs. The value in the pipe is basically the same. The company who can extract and deliver the cheapest will produce the most.