Friday, November 20, 2009

First-time-buyer delusion

One of the common reasons we hear in the local media, and echoed by our friends and family, of people who buy for the first time in this market, is "I'm tired of living in a dark, dingy, mouldy basement suite."

I always laugh. "Why not move into a Fairfield/James Bay above ground condo/apartment then?"

It seems that the only way out of the rental trap of overpaying for under-cared-for rental suites is to buy them. It's as if owning that mouldy, dark, dingy place somehow makes it ok?

It makes no sense. The average FTBer in this town is either:
  1. Paying Oak Bay waterfront prices for a new condo in Langford on a busy street, or
  2. Over-leveraging to get into a "fixer-upper" 3 bed 2 bath SFH with a basement suite (in "move-in" condition no doubt) that hasn't seen a coat of paint or a new roof in 30 years
Victoria has a serious problem. For a city so gorgeous, with so much wealth tied up in real estate, it has a serious lack for quality properties. And I'm not just talking about the ones on the market either.

Drive through Fernwood/Mount Tolmie on a rainy day. Look at peoples yards and roofs, look where the water is collecting and draining back into homes. Drive through James Bay and look at the 50-year-old concrete condo buildings with moss-infected balconies. Take a drive through the neighbourhoods of Mayfair, Cook St, Hillside and Maplewood and see old homes on big pieces of land. Sure, some of them have been looked after, but many, and I mean many, homes sit under-cared for.

Compare those homes to the ones on the market. Scratch the surface of cosmetic clean-up inspired by the selling comments of realtors in the know and you'll find a myriad of home owning headaches never found on a listing brochure.

The Victoria real estate market is like walking into Future Shop to buy an old-school 13 channel tube TV when you could go almost anywhere else and find a 1080p plasma flat screen for less money. Except our Future Shop is volume selling like it's Boxing Day all year. Go figure.


Vic said...

Great post,so many overleveraged newbies will get a rude awakening on their first reno job when they remove the wallboard to find mold or other nasty leftovers from years past. I have seen old fire remnants on some places over the years,covered up from something no one knew for 30 plus years that you can do nothing about expcept totally rip out. Multiply the reno cost by three on those.

Even some Oak Bay homes are just quick paint jobs with trendy colors and a new set of stairs/deck that gives the appearance of a total reno when you know that place looked like a haunted house the last 40 years. Just went past a whole street filled with them last weekend,they look nice but the odds are most are just a facade.

twentysomething said...

As a FTB..well...actually, as an ALMOST FTB, I feel like this post was directed at me. I've been reading the blog for 3/4 of a year or so. I started around the time I started to pull out of wanting to buy, and I have to say this blog was a big confirmation of why I've decided to hold off for now at least.

I came to Victoria from Ontario about 8 years ago to attend UVic, and I am very fortunate to have found a great job at a stable company in town, with great pay. I love Victoria, and am very active all over the Island evenings and weekends, its just a great lifestyle. In the last 3-4 yeras I've been able to pay off all my student debt. So I was thinking, whats next: obviously real estate. My parents never talked much about investing growing up, but its just one of those "common knowlege" things that real estate is a "good investment". I think that shows how deep the RE industry has thier hooks in everybody that it is just an assumption.

As a FTB everything I experienced is obviously skewed, but I felt my agent was very low pressure, and she was great about pointing out hidden problems with all the houses we saw, so I had alot of confidence in her. I looked actively for about 8 months, getting more and more frustrated by all the crap on the market.

Red flags started to really go off though really, when I stoped thinking about the monthly payments, and realized that this was $600-700k that was being loaned to me, and how much I had busted my ass over 3 years to just pay off the 40k debt from UVic.

When I questioned prices to some more experienced friends, the canned response is something like "you just have to get into the game".

I also think there is a general attitude among FTB's - I know I had it for a while - that I was special, and had a unique plan: I would have a multi bedroom basement suite and be able to actually make money/month. Just out of UVic I know what the demand for housing is, and what students will pay for what quality, and happen to have lots of firends who can renovate/and can myself, so I was certain that I could pull that off. Now I think I realize more that this is pretty much everybody's plan.

It's also hard, talking to friends who are all my age, about RE. Everybody feels like a house is a necessity. And that Victoria is special, I know you guys have covered that before on multiple occasions, but those feelings are still very much out there, both in active FTB and the new up and comming ones just getting thier hands on the funds. I don't even comment anymore about people who say they are looking to buy, as it just leads to heated debate.

So I'm still in Victoria, renting, happily. I am not hoping for a market crash - but instead, for some correction to this insanity. To many friends are heading in to the market right now that I can conciously wish for that to happen to them. Personally though, with debts paid off I suppose its time to speak to a financial advisor about what to do in the meantime.

Skeptic said...


Great post. It was nice to see a potential FTB that has clarity and is capable of independent thinking. I see that you are enjoying life while you are young and not sitting at home repairing your "investment".

Park that cash in a TFSA for emergencies or future down payment. Stuff what you can in an RRSP for the future. In a few years you will have a nice nest egg and there will be some great buying opportunities.

Mr.4AM said...

Nice post HHV and also thanks for sharing twenty something. The only thing I can add on is that in the same way you did your

homework and came to your conclusions and decision not to buy Real Estate, use as much (if not more) discernment in whom you

trust to manage your financial investments until you are ready to buy your first home, and afterwards too.

Having recently gone through this a few short years ago, I, just like most "young" people and in fact most people out there,

naively thought that it was ok to just hand your hard earned money to a "trusted" financial advisor and have them invest your

money so they can "make your money work for you". (Oh yes, these guys have *almost* as many cliches as realtors).

I still clearly remember my first meeting with my financial advisor, where we spoke for almost 2 hours, he gathered all my

financial data, and retirement expectations (rather humble by the way) at the end of which I came to the question of: How is

it possible that I make significantly more than the average person, yet can't afford to retire at a reasonable age with

inflation adjusted investments earnings? My thoughts then immediately went to all my co-workers and friends who earned less

than me. And then I asked him point blank, "how is this possible? What is the average person doing to make this possible?".

At which point I got a half blank stare confirmation of "I know, it's not easy", but I was not satisfied with this "answer".

Then I thought about my friends' situations and I remembered most of them have never met with a financial advisor to do

retirement planning.

I went along with his advice at the time and invested in a bunch of mutual funds that for a few years did reasonably well,

(and what didn't during the market boom times?) meanwhile I personally decided to investigate alternatives and that's what got me interested in real estate. I still remember the day of epiphany when I naively realized that in order to get rich, you had to "maximize your debt" (i.e. buy a house with 2 or 3 suites & rent them out). Of course, I barely knew about historic real estate trends, the previous housing bubbles & severe price corrections.

But I'm digressing. One day I realized that the average financial adviser at a financial branch was a service person to average people, who gave average advice & thus provided average results, and on top of that, I was making more money than them including the fact that they were "expert" investors... My point being, what do these people REALLY know that will help me win this investment game? The answer is not a whole lot, and the canned answers I heard these people give during the recent stock market meltdown confirmed for me, they really don't have much of a clue once things sway from the 'norm'.

Continued in next post...

Mr.4AM said...

Next I found myself talking to an "Investment Advisor" who basically said I was lucky he was taking on my account because most of his clients are all million+ investors. After a few hours of chatting with this guy, who claimed he was very interested in "getting to know me" what I was about, my goals etc but who spoke more about his life and how his clients loved him, and how he felt priveledged to help them with their investments and achieve their retirement goals (blah blah blah) than to listen to mine. I did come to the conclusion that yes indeed this guy was more financially savvy than your average branch financial advisor, but I also realized that the level of bullshit and sales spin had increased to match and so I ended up with an even bigger sense of mistrust in having this charming stranger manage my finances. Fast forward to 8 months later, and after making some profits on investments that I nearly had to force him to make for me while he got a decent commission, I decided to pull out, but man was he hard to let go of. This was right around the time of just after the first couple of "unexpected" market dips where the TSX had just walked off a cliff from its 14,500 highs. You should have seen this guy, showing me all kinds of historic charts and research papers from Goldman Sachs and JP morgan etc in how the "smart" investors all make money by investing more during the market dips and how over time you will make a fortune because the markets always come back up (I still recall having flash-backs during that meeting to the .COM bubble days and how the Nasdaq never recovered even 50% from its 5,000 highs, 7 years later... this guy is full of *hit I thought). In hindsight, his philosophy was mostly correct, but his timing was horrible!

But what really made me walk off, was when this guy supposedly and *proudly* confessed that he had just advised both his parents and his wife's parents to use their HELOCs and DOUBLE DOWN with margin in the TSX and that he was giving me the same advice that he gave his own family. Man what a guilt trip! Thank god I didn't fall for that, because later the TSX ended up making 7,500 lows! Imagine being 50-60+ leveraging most of the liquidity in your real estate into a continuously declining stock market set of investments WITH leverage! Talk about retirement suicide!

Anyway, this is a long winded way of saying, do your own homework and trust no one with your money, unless they have years of a proven success record that INCLUDE recession years, and even then don't be afraid to ask hard questions, and make tough decisions against what most people are doing. Since these experiences, I've found myself searching the web and finding analysts whom BEFORE the down turns in real estate and stock markets were correctly advising people on how to adequately prepare for these scenarios.

Good luck!

Art Vandelay said...

Victoria has a serious problem. For a city so gorgeous, with so much wealth tied up in real estate, it has a serious lack for quality properties.

I thought I was the only one, having come from Alberta. It surprises me to this day that in a city this beautiful the housing stock is - generally speaking - such a pile of mouldy crap.

Skeptic said...

Vancouver Sun published a balanced article on real estate today.

Homes are a place to live first, a source of wealth second

The increase in home sales and prices is clearly outpacing the rate of economic recovery. Even the most bullish forecasts put growth of gross domestic product at no more than 3.5 per cent next year and the threat of a double-dip recession has not been ruled out.

The central bank has pledged to keep its overnight rate at the current 0.25 per cent until July 2010, but an uptick in inflation could force its hand earlier.

Interest rates are expected to increase after that date, assuming the recovery gathers momentum and the consumer price index approaches the central bank's target of two per cent. Highly-leveraged borrowers may find themselves with larger monthly payments than they can handle.

All that being said, home ownership can be satisfying and financially rewarding. But would-be buyers should enter the market with eyes wide open and view their purchase first as a place to live, and only second as a store of wealth.

omc said...

You guys aren't the only ones questioning the value of the structures themselves. I call oak bay and fairfield "nice neighbourhouds of horrible houses".

I went to see one house and it was just awfull. I drove by 1 hour before we were to see it and the windows were all open. I could see from the street that part of the roof was actually collapsing. The roof was so bad it would have been leaking for a long time. I picked out rot and extensive damage under a cheap paint job. All of this in under 2 minutes. I would call this house a push down. We went inside and the mold was so bad that we had to leave as our sinuses were reacting.

Some idiot bought it for $820k! And it is on a busy street. Mls # 268968 It was owned by an interior designer, so it was staged to death. Someone fell in love with the furniture, or the single pain windows?

Anonymous said...

Here is a video of the latest interview with Garth Turner. Please post on other blogs and forums.

What does Garth recommend if you are buying now? "Pray a lot"

How will the real estate boom end -- and how will it affect you?

Anonymous said...

Someone is in over their head on Craigslist


Marko said...

"Someone is in over their head on Craigslist"

Don't come to conclusions too quickly. First of all presale deposits at the Aquattro were 5% so their deposit is probably like$40,000. They likely bought at peak market and now the Condo is worth $100,000 less. Why not try to "give away" the $40,000 or just walk away. Developers haven't had much success taking people to court.

Lots of people walked away from Reflections and other presale contracts. Not being able to close and not wanting to close are two completely different things.

However, it could be that these people just can't close, but they would be kind of dumb to close even if they could. Just walk away from the deposit and move on.

Marko said...

PS $769,000 for 1600 sq/ft in Langford in a wood structure building is a joke. That is close to $500 per sq/ft. You can buy for cheaper in The Falls, Shoal Point etc...

Animal Spirit said...

late night flight back from Vancouver last night. A couple of gentlemen - hard working types - were talking about house prices in Victoria. One owned a house, mortgage paid. The other - in his mid-fifties - was saying that there was no way that he was going to buy and permamently indebt himself. They were agreeing with each other that houses were far overpriced in Victoria.


Animal Spirit said...

one also used the term 'slavery' in the conversation.

Skeptic said...

The gang over on the Red Flag Deals forum are having a couple of interesting discussions about Canadian real estate. The whole issue of CMHC backstopping the banks and creating a Canadian version of subprime mortgages makes for an interesting read. Here are the links.

Will the bank call in the mortgage?

Housing market hot, but will it last?

Mr.4AM said...

Good video from Garth, thanks for sharing that. Brief and to the point. I think he's right on. Interesting he doesn't sound anywhere nearly as snarky in video as in his blog.


Skeptic said...

Stats are now available on Canada's mortgage market. You can read the story here.


- 5,400,000: The number of homeowners with mortgages.

- $186 billion: Total estimated new mortgage volume this year (down 14% from 2008).

- 27%: Percentage of mortgage holders that got a new mortgage, switched their mortgage, or refinanced in the past 12 months.

- 20%: The percentage of mortgage holders with less than 20% equity (required mortgage insurance)

- 27%: Chose a variable rate

- 47%: Ratio of new purchasers who got mortgages this year with an amortization over 25 years.

- 22%: Ratio of people who refinanced mortgages this year with an amortization over 25 years.

- 11%: Ratio of people who renewed mortgages this year with an amortization over 25 years.


Skeptic said...

Interesting graphs from that mortgage report:

Mortgage Arrears Rising

Canadian Mortgage Debt

Animal Spirit said...

Skeptic - I've been thinking about that Vancouver Sun editorial. The question in my mind is why was it published.

Editorial boards generally publish something that is: (i) in the general public interest; or (ii) brought to the editorial board by an outside party that wishes to have an opinion published.

Given that the Sun receives signficant advertising income from the housing sector, one can assume that it was likely the second reason. So then, who would bring the topic to the board? Someone who wants people to be more prudent when buying a house and taking on a mortgage. Could have been HHV and Roger, however I doubt they have access to the Editorial Board. Could be the banks, however they seem to still be on the bandwagon. Could it be the realtors? Not likely, they are drinking the magic potion (and serving).

More than likely it was the Bank of Canada, CMHC, or someone else who wants to lower the risk and slowly deflate the bubble.

This would be step #1 from a policy perspective - behavioural economics. Change the opinion of the masses - influence the animal spirit at play.

Don't want to piss off the spirits though.

Skeptic said...

If you think house prices can keep climbing you are not facing reality.

Take a look at the graphs and data in this report.

Mortgage Debt in Canada

In particular the following:

Mortgage Debt Exceeds Income

Ratio of Salaries to Mortgage Debt

On another note: We only have one bear blog left in Victoria. I see that this site is getting a lot of page views but only a few people are taking the time to post. Readers need to contribute or HHV may just decide to shut down the blog leaving bears with no source of contrarion opinion for Victoria real estate.

Anonymous said...

noob goldberg on Calculated Risk wrote the following story: link

I tried to explain to my mother-in-law that the price of a home is dictated by a combination of principle plus interest charges, and that in low interest-rate periods the result is simply higher principle: i.e., higher home prices. During periods of high interest rates, the purchase price of a home is less, because the total monthly debt maintenance--principle plus interest--is much higher. When interest rates are at 15-20%, it represents a period where home purchase prices would be at their lowest, and risk for appreciating interest rates would similarly be low. In effect, the least risky period to purchase a home. The opposite, during period of low interest rates, is also true.

Which makes the current environment the riskiest period in history to purchase a home. But all I got back from her was a blank stare.

omc said...

Kind of reminds me about talking to my mother in law when she tells us to buy, buy, buy. She only gets her information from the TC, so she doesn't realize the risks. Many people of that generation can't seem to grasp the unaffordability of this market. If you show how much a person at the same job they used to have earns now a days, they just get mad.

Marko said...

"HHV may just decide to shut down the blog leaving bears with no source of contrarian opinion for Victoria real estate."

- Anyone who doesn't agree with a 30% correction gets slammed pretty hard on this blog, why would anyone stick around? (Mind you some people have had pretty stupid contrarian opinions)

- Too many "buy gold" members. Ruins in the blog.

- People seem to "know" as to where real estate and the stock market are going. Everyone has extremely good rational as to where they "know" the market is headed; however, I don't recall anyone buying an old place in Jan for $330,000 and reselling now for $400,000?

- This blog would be tremendously helped by someone who bought in 2003 or prior and is selling now because the feel the market is overvalued.

Bob leftcoaster said...

I don't understand how you people can be so patient. It seems like a never ending flurry of parroted CMHC, VREB, and CREA press releases. It's frustrating to sit though main stream media stories and then friends and family treating you like some idiot for not wanting to buy a house.

I don't debate very well and it leaves me biting my tongue very often when talking face to face about real estate. I guess that's why I enjoy the HHV postings and discussions. It's refreshing to hear others who share your general viewpoint.

HouseHuntVictoria said...


The "sold at the peak guy" was Roger. He's taking a well-deserved break or has left us for good; I'm not sure which.

I disagree with the 30% remarks. Sure, some commentators seem to think that's where we are headed (I'm not one of them BTW), but lots don't make predictions at all.

There's room for all view points. I for one am glad yours is around.

Mr.4AM said...

Marko said: "This blog would be tremendously helped by someone who bought in 2003 or prior and is selling now because the feel the market is overvalued"

I bought in 2004 & sold in 2008 for that precise reason. Should I have waited longer to sell? I felt the risk was too high, but I underestimated government insanity... er.. I mean stimulus (debt) intervention, ridiculous low interest rates and turning a blind eye to what will slap us in the face eventually. Still I have no regrets.

Since then guess where I invested my money so as to continue to stay ahead of the continuing increasing real estate prices (or from my perspective, DECREASING real estate values)?

I still don't get what people don't get about it? I mean seriously, how many charts do you have to see, before people accept the reality that cash is trash, that stocks are way over valued and that real estate will be trending downwards in 2011+?

These days, everything financial is interconnected. To look at asset type A without considering the macro-economics that implicate its current, past and future value, is risky business.

Also for the record, PM's are nowhere near a bubble now or even in the next couple of years. So long as government insanity prevails, PM's will keep going up. Sadly, or rightly so, the same can't be said for real estate prices.


Just Jack said...

A big fear of mine is that HHV will buy before we do and close this site down. I need this site to keep me sane through all the insanity.

I don't post much but I read all the time. I'm still patiently waiting. I think we'll be the last hold outs. :-)

Miss your posts Roger.


c said...

Did Roger really sell at peak?

He may have thought he was at the time, but I feel he spent the last couple of years (on this blog) watching in disbelief as prices continued to rise, and the predicted correction/crash never materialized.

There may have been many good motives for him to get out--but if one of the chief reasons was an attempt to time the market and maximize financial return, I expect he missed the mark....which probably accounts for a lot of his posted frustration over the years.

I've always hoped Roger would tell us more about the experience--was it worth the hassle of selling and re-entering life as a renter etc? Is he ever haunted by the idea that getting back into a house will end up costing him more than if he had just held tight?

Bitterbear said...

I'll inject anything even marginally intelligent to keep HHV going. This is my therapy, pretty cheap therapy at that!

There are people on this blog far more intelligent than I am with regards to housing and financial matters, so I'll limit my comments to my own perceptions.

What I see happening out there is a psychological shift. People in my office are speaking quietly of their financial burdens and stresses. I'm hearing about job losses and cuts, people trying to return to work before they are ready in order to keep their jobs, people having to rent out rooms in their houses, people cutting expenses, foregoing holidays and other luxury items, Christmas depression in November etc.

On a professional level, governments have slashed mental health services to the point where I do not think we will recover and I no longer feel I can provide the quality of service my profession requires of me. Whole programs have disappeared to the point where there are no longer support services to whom I can refer patients. So where does that leave my patients? With a diagnosis and no way to get it treated. Colleagues of mine with Ph.D.'s have lost their jobs, many others are simply going where they can practice better patient care.

People often present to me with undifferentiated anxiety and part of my job is to help them change. Change often requires a moment of agonizing clarity, of raw insight devoid of any delusion or defensiveness.

Translated to the macrocosm, I see this starting. More people are feeling not just disillusioned but deceived and defrauded by the media, by banks, by brokers and agents, by politicians, friends and family. There is a collective undercurrent of anger developing among those of my generation (sandwich and GenXers)that is manifesting in a '60's style rebellion against consumerism, capitalism and big government.

People in my office are talking with wistful longing about simple living, reducing consumption, victory gardens and raising chickens. Buying second hand is a concept transformed from shameful to socially responsible. Off-the-curb shopping and dumpster diving are becoming "hip".

Interesting times, indeed. How this plays out on a grand scale will be interesting. I wonder what sociologists will say about it in a hundred year's time. Perhaps we'll see a social polarization between owners and renters, the haves and the have nots, consumers and recyclers, who knows? Maybe my generation will be described as idealists born of the greasy ashes of fattened materialists. (we won't be known for our poetry anyway!)

I see a sort of fundamentalist religion with a right wing capitalist twist taking root vs the largely silent atheist or agnostic social drop outs, living in rented digs and cultivating community gardens on boulevards. Politically, I see room for a watered down Canadian version of Barak Obama (I don't think Elizabeth May will be it). I see the media becoming tools of the government to an even larger degree with "underground" presses inciting social revolution. From a psychological financial perspective (psychofinancial perspective?) I see distrust of the banking system on a massive scale and people buying tangible assets like bullion, metals and gemstones that they bury in coffee cans in the backyard. Bartering will become an artform, homelessness a rite of passage and pensions a pipe dream. Shedding the collective fat will be painful but cathartic.

OK enough said.

Mr.4AM said...


That was so exceptionally well written (for a blog post anyway), that I had to double check by dumping a few of your sentences in google to make sure it wasn't somebody else's wise words you were 'borrowing'. I'm glad to report, it's all you :)

Thanks for sharing what you are seeing and hearing in your circles. You must be a bit older than me, because pretty much all my friends in their mid thirties are now fully (financially) committed to their super-debt boxes.

In my circle, most are still ignorant of what's really going on under the MSM carpet of dillusion. They still ask me when I'm going to buy every other time I see them. Recently one of them finally reached his ah-hah moment in regards to the yellow metal, but most still haven't clued in, and likely won't until it hits them personally.

That said, some of them who work in government did express some concern over the recent (300) lay offs.

At work, there's 2 or 3 guys who do know what's going on, but when you place that against a few dozen others wearing blind folds or hiding behind the flimsy shield of hope and misplaced optimism, it paints a picture to me that this hasn't even really hit home to most in my (thirty something's) age group.


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