Monday, March 8, 2010

Getting serious, 20% change ahead


For all the talk from industry types, the government and the CMHC about no bubble, it seems the government and CMHC aren't walking the talk. I can't keep up with all the little announcements that on the surface look like business as usual, but for the mortgage consumer mean massive changes and massively less money available to them to overextend themselves on a home purchase.

Yesterday, you could walk into a mortgage broker's office and get the following:

Income: $85,000
Down payment: $25,000
Other debts: 0
Taxes: $2000

Interest rate used for qualifying: 3.5%
Amortization length: 35 years

Amount qualified for: $510,000

What it gets you: This beauty rotting away in the Swan Lake area.

As of today (or April 19, whichever comes sooner), using the same inputs as above, and following the restrictions, er, common sense guidelines of the CMHC/DoF, you poor lemmings who still want to buy a soon-to-be rapidly-depreciating asset will only be able to get this:

Interest rate used for qualifying: 5.4%
Amortization length: 35 years

Amount qualified for: $410,000 (yes that's a whopping $100K or roughly 20% LESS)

In which case, grease up your nails for this tired old condo sized house.

Yep, the times they have a changed. A twenty percent decline in prices is now just the beginning, not the end of near-term house price devaluation.

74 comments:

Tim Ayres said...

Hi HHV. Thanks for the post, but I'm not sure the situation is as grim - or bright, depending on your point of view ;-) - as you have put it. Qualifying at the 5-year posted rate is only for variable rate mortgages or for fixed-rate mortgages with terms under 5 years. So, in effect, what the Finance Department is trying to do is funnel everyone into a 5-year fixed-rate mortgage, for which buyers can qualify at the discounted rate. See here and then here.

So, this will have little effect on borrowers who take 5-year fixed-rate mortgages.

HouseHuntVictoria said...

Tim,

I trust that the McListers know their stuff. Until I see it confirmed elsewhere I won't question their analysis of the situation. That said, they've identified a loophole which I suspect will be closed before the changes officially kick in.

think said...

Month to date stats for Victoria...

sales 162
new listings 407
total listings 3295

thats a sales/new listings ratio of 39%

oh yeah the trend continues :)

Tim Ayres said...

HHV, the point of the new regulations was not to limit the amount responsible borrowers could borrow, but rather to ensure borrowers do not get lured in by unreasonably low variable-rate mortgages only to have them default when rates rise in the short term. It's not so much a "loophole" as an incentive to borrow responsibly.

Robert Reynolds - GBA said...

One question I haven't seen answered yet. Is the qualifying 5 year term based on the posted rate or on the discounted rate?

Double-Agent said...

Tim Ayres said:

Hi HHV. Thanks for the post, but I'm not sure the situation is as grim - or bright, depending on your point of view ;-) - as you have put it.

I agree that HHV's example was a bit over the top. But as I posted in the last thread this rule change has dire consequences for the buyers that were stretching to the max. This is often the case in Victoria due to our high prices. Ask any Victoria or Vancouver mortgage broker what % of their clients were taking on variable and 3/4 year fixed mortgages in order to get the biggest loan possible.

Detailed example
----------------

Household income 100K - 8.3K per mo.
Est. property taxes 3K - 250 per mo.
Est utilities 1.5K - 125 per mo.
35K down payment
No other debts

Using the CMHC calculator:

At 3.8% maximum loan 534K
- 5 year discounted rate
At 3.6% maximum loan 548K
- 4 year discounted rate
At 3.3% maximum loan 572K
- 3 year discounted rate
At 5.39% posted maximum loan 436K

So with the new rules the maximum mortgage loan is 534K and the rate is 3.8%. If the buyer opts to go variable at 2.25% or under 5 year fixed the maximum loan is 436K instead of 572K with the old rules. In this example the buyer has 38K less shopping money!!

As Tim noted, this effectively will mean FTBs will be forced to take on five year fixed mortgages in Victoria. They will have a higher interest rate and will only be qualified for a smaller loan under the new rules.

Then there are the other changes like 20% down on rental properties and changes to self-employed mortgage rules. End result - fewer buyers this spring and most with less money to spend. Couple that with a surge in listings this spring and guess what happens.

Double-Agent said...

RR said:

One question I haven't seen answered yet. Is the qualifying 5 year term based on the posted rate or on the discounted rate?

This has not been officially answered by the Finance Department. For several weeks the mortgage industry has been waiting for clarification from the government.

The Canadian Mortgage Trends blog has leaked the details but there is still no government confirmation. However, they have been very reliable with details in the past.

Rhino said...

The 5 year fixed is more profitable for the banks. Sounds like the legislation is being written by the financial industry lobbyists as usual. On a related note, if the banks are making these huge profits now why can't they take those 75B in lousy mortgages back from taxpayers?

aston said...

@Rhino: Why would they? They know they're toxic assets. :)

Double-Agent said...

Victoria RE Stats and charts were updated today. Readers should find them interesting.

New Listings Piling On

Historical New & Active Listings

Will I Sell Next Week?

omc said...

I don't know if it is a loop hole, this not knowing if the 5 years are posted or contract. I am wondering if it is another way for the government to manipulate the market dependant on the market. Could be that they would make 5 years qualify posted if things are still abit too hot?

JustWaiting said...

Here is a link to the official Finance Department news release of February 19th.

Note the following:

The adjustments to the mortgage framework will require mortgage insurers to ensure that borrowers qualify for their mortgage amount using the greater of the contract rate or the interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS ratios.

If HHV is correct and the government has decided to use the five year posted rate to qualify all mortgage loans requiring CMHC insurance this will have a big impact on the RE market. Using Double-Agents example the buyer will have 136K less in his pocket.

I guess we will have to wait for official news

Vic said...

I say the more confusing this is for FTB's the better. It's a psychological shift effect we want to see and if I was a FTB and I see so many different interperations I may would be more liable to back off, especially with all the bubble talk.

The fact the MSM are even discussing bubble is the best part. Pre 2008 it wasn't even a topic allowed to be brought up in mixed company less you be stoned and hung from the nearest tree.

It's game over,the RE industry just doesn't want to accept that massive over-valuations can't possibly be sustained with 8 times income. Who the hell is supposed to look at that Swan Lake POS and say " Oh honey, I just love it ! " ? Afraid to say once again, abnormal market conditions never last forever.

Just Jack said...

The government can not make people responsible. Every person is different. This set of rules is not for the borrower -these rules are for the lenders.

The banks want a level playing field among lenders. The suitcase banks can undercut the chartered banks with a lower interest rate because of low overhead (no branches and fewer employees). The suitcase banks cherry pick what type of loans they issue and most will be no risk CMHC guaranteed.

The chartered banks want the suitcase banks to play by the their rules. The first part being that every lender must qualify the borrower at the same rate. The banks understand that when the competitive advantage of the lower interest rate is no longer available to the suitcase banks, a borrower will typically go with the chartered bank because of service.

The added bonus to the lenders is that the high ratio borrowers are not as free to change lenders. In essence the banks are saying we have reached the level of market share that we want. Adding more borrowers is only adding risk to the portfolio and not necessarily increasing profits. Lending is NOT about market value - its about assessing risk.

The only time the banks want to know the market value of a property is when the property is being foreclosed or the client requires an increase in their line of credit.

People are going to lose big time this time around, as they have rolled all of their loans into their home. Which is good for the banks as the loan is CMHC insured, but bad for the home owner. You should NEVER, EVER finance a purchase longer than the anticipated lifetime of the asset. A new car rolled into your mortgage and amortized over 35 years is STUPID, doing the same for a vacation is also STUPID, as is a boat or consolidating debts. AND Buying a 70,80,90 or more year old home and amortizing that over 35 years is also STUPID.


Enough preaching to the choir.

CD said...

If we have 400 new listings this week and 160 sales. Why is the total listings only up by 20 or so from the end of feb? Price changes? Expired listings?

Just Jack said...

Most people in Victoria use mortgage brokers as the broker typically can get a much larger loan for their client. Mostly because they sell the mortgage to a sub prime lender who qualifies the applicant at the lower rate.

Over the last decade most of the major lenders have stopped accepting mortgages from mortgage brokers.

With the new changes, many mortgage brokers are soon to become unnecessary. Also, a lot of the power, real estate agents had had over bankers will be eroded. As the agent may not be able to get a better deal, simply by threatening to walk. Add the possible changes in CREA, the real estate agent may be regulated to a paper pusher giving little added value to their customers. Much like what happened to the real estate lawyers over this last decade.

kunwak said...

If I was financial dictator of Canada, I would not implement regulation that would cause a dramatic drop in house prices. That'd be political suicide.
My impression is that the gov is trying to come up with several small changes to slowly cool off the market. If they cool it off to fast, it would be an economical disaster. So I agree with TimAyres that that 5 yr funnel sounds reasonable. It is also in line with the "self-employed changes", which is another small change to get some people out of the critical mass.
I am guessing that the gov is trying hard to deflate this bubble they will avoid dramatic changes like the plague. If they will be successful with that... who knows.

Double-Agent said...

CD said,

If we have 400 new listings this week and 160 sales. Why is the total listings only up by 20 or so from the end of feb? Price changes? Expired listings?

The difference is due to several factors and many take place around the first of every month:

- At month end many listings expire and are not renewed so active listings drop by 1
- Expired listings may be immediately renewed by the client and appear as new listings; no net change in active but new listings up
- Relisting scam - agents cancel a listing and immediately relist in order to "freshen up" a tired listing. New listing count goes up by 1 but active listings stays the same.
- Some sellers get tired of waiting and cancel so active listings drop
- Houses that sell drop active listing count.

CD said...

So Double-Agent if we have a net increase of 20 listings based on the information you provided. We would not really be in a buyers market (Ratio less than 0.4). Or is this factored into the ratio since it happens all the time and it is still considered a buyers market?

Just Jack said...

And the number of listing is for ALL types in ALL areas.

Which does include: the islands, other parts of BC, businesses for sale, etc.

For example. Today on mls there are actually only 2,155 residential properties for sale in the Westshore, Victoria and Saanich Peninsula, not 3,295.

Victoria itself is a very tiny city with only 67 detached homes for sale. There are 14 other cities in Canada that are larger than Victoria. I believe our CMA population is almost as large as - Surrey.

So, when it comes to desirability based on population numbers we are about equal to the combined areas of Surrey-White Rock. Having been born in White Rock, I find the people are about the same here too.

Glandford is like Newton. Vic West is North Surrey near the auto wreckers, Langford is Cloverdale and Sooke is beyond Hope.

JustWaiting said...

Here is what a mortgage broker in Vancouver has to say about the new mortgage rules.

FAQ - Mortgage Rules

The comment about pre-approvals was interesting.

The time that they will actually come into effect is when each individual lender (and insurer) decide to implement the changes (but no later than April 19th). If you have a commitment already from a lender it should be honored regardless of the date of funding. One exception may be a pre-approval which is often just seen as a rate hold and not a full underwrite.

think said...

The stats are done the same now as previously so we are comparing apples with apples. To summarize we are still seeing lots of new listings pile on and only "normal" level of sales. Basically this new trend is continuing. Things look just like 2008 so far.

Double-Agent said...

CD,

One needs to be careful when using the different ratios to determine the state of the market. The ratios typically used include sales/new listings, sales/active listings and Months of Inventory. They should be used for a specific category of housing in order to be effective proxies for market conditions. It is also important to not calculate the ratio for days or weeks but over a minimum of a month of sales. Do not look at a given month in isolation - follow the trend over several months to get a feel for what is happening.

Here is the sales/new listing ratio for Victoria at the end of February:

Residential houses: .47
Residential waterfront: .14
Residential acreage: .26
Townhouses: .55
Condos: .48
Strata Duplex: .35
Residential lots: .56

If the ratio is under .4 conditions favour buyers. Over .6 conditions favour sellers. The middle range of .4 to .6 is a balanced market.

Just Jack said...

Another point to consider when doing your analysis is market exposure.

A standard home may have a median days on market of say 30. So to get a better picture of the sales to new listings ratio you should use a 60 day period. For waterfront, that exposure may be 90 days, so you would use a 180 day period. The added benefit is that you have a larger sample size.

Of course, most of this does get screwed up when the agents practice re-listing the same property under a new ml number. A practice that is NOT allowed in some ML systems.

If this is a common practice in the ml system then the days on market loses its relevance as an indicator. But you have other indicators that are as or more important such as the months of inventory.

Anyhow, as long as your method is consistent over time, then a trend line can be established.

One last point, the number of days on the market is a meaningless statement by itself.
Just because a home sells in one day does not mean that it undersold. All it means is that it sold in one day. Other meaningless statements include that a condo complex was 60 percent sold on the first day. These units could have been pre-sold three months ago, but are only marked as sold on the day that the complex is open to the public. And some of the units may be multiple purchases by agents to get the opportunity to list suites in the building.

JustWaiting said...

Just Jack,

Lots of good stuff in your posts today. Looking forward to more...

think said...

Vancouver numbers for today... just fun to look at :)

Vancouver East & West*
Attached & Detached
as of: 03/08/2010
New Listings – 115
Back On Market Listings – 1
Price Changes – 31
Sold Listings – 19
Vancouver All Areas*
Attached & Detached
as of:03/08/2010
New Listings – 335
Back On Market Listings – 1
Price Changes – 102
Sold Listings – 63

Don't think I've ever seen number of price changes higher than sold! Crazy!

Vic said...

Garth's latest just shows how far this "group insanity" has gone. A crappy semi detached home equivalent to Vic West industrial area is listed at $560,000 and sells for $720,000. What kind of buyer agent manages to sleep at night knowing they just pillaged someones financial future for years to come for the sake of a sale ? I can't wait for the fallout when the lawsuits start flying that buyers were pressured to bid higher and higher.


It takes two to tango and any agent with an ounce of credibility and character would not let their client get into such a situation. I can see the lawyers lining up as we speak.

Double-Agent said...

Think said,

Things look just like 2008 so far.

You may be right...

Take a look at listings and sales in 2008 - click here

In 2008 listings came on fast and buyers moved to the sidelines in late spring. This is what happened to prices - click here

The new mortgage rules that lower mortgage loan limits, limit refinancing and impair self employed mortgages will start biting April 19th.

2010 will seem like deja vu.

Just Janice said...

I agree 2010 will seem like deja vu...but I don't think there's a 1:1 correlation between 'affordability' as governed by mortgage terms and interest rates and house prices. If there were, house prices would be a lot tamer than they presently are.

Housing is an emotional asset - and like anything involving emotions it is subject to mood swings - both on the way up and on the way down.

Just Jack said...

I think we have two things working here. One is affordability and the other is risk.

Income, debt and interest rates make properties affordable for most people today.

A decade of rising prices, has made most prospective purchasers underestimate the risk of buying real estate at low or nearly non existent.

Until, risk returns to the market real estate prices will stay high and possibly could increase.

For the last decade most people have not lost money in real estate, they have been able to leverage the asset and make a fantastic rate of return.

Market value being the net income divided by the rate of return ( or risk of the investment)

When the rate of risk goes to zero, the price goes to infinity.

Or put another way a townhouse that rents for $22,000 a year, expenses (not including mortgage) of $7,000 and has a market value of $500,000. Thus, the marketplace perceives the level of risk at 3 percent.

I suppose its like playing Russian Roulette, except that in real estate you don't die. So in this game. The bet is for financial security and the gun would have 1 bullet and 32 empty chambers. If you hit the wrong chamber then you just destroy your families future.

With these odds most are willing to play. If the odds were 1 in 10, not so many would take the chance.

So,

You've got to ask yourself one question:

Do I feel lucky? Well, do ya punk?


OKAY, its a dumb analogy, its Wednesday and I'm bored and I watch way too many Clint Eastwood movies.

Vic said...

Well said Janice and Jack. What we have here is a mania that has gone on far too long,beyond anyone's imagination. It's "in vogue", "in style", "bragging rights" and so many other peer pressured emotions that cause people to lose their heads. The problem is the industry,bankers and the media don't want it to end.


The question is how high do these so called professionals want/think housing is supposed to go ? 10 times earnings ? 12 ? 15 ? Who the hell is going to qualify ? Oh right, "it's always a good time". BS.

Does any agent worth his salt have the balls to say it in the media ? None. Zero. Nada. That is the problem, the blind are leading the blind over a massive cliff to major poverty. And not one brave soul in the bunch.



"Did I shoot six shots or five ?"

Great actor Jack. Dirty Harry was the best. He called it like he saw it. Too bad the RE industry can't, they can't stop whoring themselves for "the sale".

kunwak said...

No one should be wishing for a crash in real estate either though. If the bubble pops badly, it will have such wide reaching repercussions in our economy that not only over extended house owners will be hit hard, it would hit us all very hard.

So I personally hope that decision makers (I don't have much faith though) will be able to get this under control through a slow long term correction where prices get adjusted though inflation.

Mr.4AM said...

I think the main thing at play here first and foremost, is massive amounts of financial ignorance. Next you can add to that uninvestigated/unsubstanciated optimism about price stability, "I want it all and I want it now" naive attitudes, and a dash of peer pressure from friends/family/realtors and media/realtor misinformation.

I mean come on, after the US/UK/Spain (insert 20+ other countries here) real estate bubble pops in the last 2-3 years 'round the world + "The Great Recession" on 24/7 on TV for the past 2 years, anybody with 1/2 brain should be able to connect the dots and ask some intelligent questions about the wisdom of buying now... yet everywhere I turn, even to people I've explained what's looming ahead in the next 2-4 years just 'decide' to buy anyway.

I can't even call it greed. The dozen+ people I've known in the past 2 or 3 years that have bought didn't decide to buy for profiteering reasons, it was mostly because they just wanted to live in their own house. About 70% of them in their early to mid 30's bought due to marriage and/or new child on the way.

Still, I do think 2010 will be (at long last!) the year RE pricing turns around. There's just too many factors going against the bullish tide now, with government being the first one, even if they are taking their sweet time.

Factors we've all be discussing here lately:

1. Government changing mortgage qualifying rules to 5 yrs on April 19th, 2010.
2. Government introduction of HST July 1st, 2010.
3. Government interest rate increases likely to start in Q3/2010
4. Government End of Tax renovation credit
5. Government hiring freezes + wage freezes and 11% decline in employees (3,500) over the next 3 years.
6. Affordability price ceiling already reached in Vic/Van
7.Olympics are over, bills for way over budget Olympics will come due, construction reduced.
8. Babyboomer factor to accelerate over the next 5 years.
9. Add in the looming sovereign debt scares & crisis between now and 2013 that could crash stock and currency markets...

And one can only conclude that people are just outright out to lunch to even consider buying a house now... yet they do.... until they can't anymore.


Mr.4AM

Vic said...

"And one can only conclude that people are just outright out to lunch to even consider buying a house now... yet they do.... until they can't anymore."


Exactly Mr. 4AM, if all your early 30's friends didn't learn basic math then God help them. A market crash would not be the worst thing.

How does that effect the economy ? A bunch of real estate agents have to find a new career ? Will the government completely shut down ? Will the tech industry fold up and leave town becasue overpriced houses come back to reality ? Opportunities we be abundant for those who weren't idiots and will pick up the slack once the prices truly bottom,not the minor blip like last year.

When the market crashed in the early 80's there were no soup kitchens for homeowners or unrest on the streets or boohoo stories in the paper every day about the poor sucker who paid too much.

Those who didn't get out learned a life long valuable lesson that being the greater fool has it's price.... and they learned to love their overvalued home for a very, very long time.

kunwak said...

"How does that effect the economy ? "

New housing starts are a key factor to our economic growth. Boom and bust have never been and will never be foundation for a healthy economy which society benefits from.

I do hope that the housing prices will correct but I also hope that it will not be in one big bust. I think it will be much healthier to my economic future if we see a slow correction to reasonable prices. The greedy hope for a big burst of the bubble is just as bad as the greedy hope for ever increasing house prices IMO.

Vic said...

"The greedy hope for a big burst of the bubble is just as bad as the greedy hope for ever increasing house prices IMO."


So someone is greedy because they want to see a house priced what it should be ? That a house in Victoria to be the same as Ottawa is greedy ? Bizarre.

House building has never been the biggest industry in Victoria with our limited land space, it's been boom and bust forever. Nothing wrong with a bust to give those who missed out (for various life reasons), a second chance to get to be able to own a home. Sounds more selfish to not want to see more people, or maybe your kids, to benefit versus those who rolled the dice and gambled bigtime.

Vic said...

"The greedy hope for a big burst of the bubble is just as bad as the greedy hope for ever increasing house prices IMO."


So someone is greedy because they want to see a house priced what it should be ? That a house in Victoria to be the same as Ottawa is greedy ? Bizarre.

House building has never been the biggest industry in Victoria with our limited land space, it's been boom and bust forever. Nothing wrong with a bust to give those who missed out (for various life reasons), a second chance to get to be able to own a home. Sounds more selfish to not want to see more people, or maybe your kids, to benefit versus those who rolled the dice and gambled bigtime.

Vic said...

"The greedy hope for a big burst of the bubble is just as bad as the greedy hope for ever increasing house prices IMO."


So someone is greedy because they want to see a house priced what it should be ? That a house in Victoria to be the same as Ottawa is greedy ? Bizarre.

House building has never been the biggest industry in Victoria with our limited land space, it's been boom and bust forever. Nothing wrong with a bust to give those who missed out (for various life reasons), a second chance to get to be able to own a home. Sounds more selfish to not want to see more people, or maybe your kids, to benefit versus those who rolled the dice and gambled bigtime.

Just Janice said...

Kunwak -

I would argue that it is far more damaging to an economy to have an asset bubble in the first place, and to maintain it for the sake of a 'long-correction'. A long-correction prolongs the pain and muddles the appropriate signals and delays the transitions to a more sustainable and healthy economy. A sudden correction enables people to make choices that return the economy to the state it should be in (this might include declaring bankruptcy). It's not to our advantage to have so many resources dedicated to construction, renovation, and real estate transactions. Those are resources the could be better used elsewheres and in the absence of this boom would have been used elsewhere. The transition isn't likely to be 'painless' but it is neccessary and if it's sudden it's likely to garner more help than if it's a gradual erosion. A good example is that inflation has been gradual over the last 20 years (generally less than 3 percent per year) as a result many people have foregone wage increases as the perception has been that it wasn't really needed (remember all those years of 0-0-0 contracts). As a result real wages have declined. Contrast that with a situation where people actual percieve their own personal situation deteriorating. Under those circumstances they actually demand change and make progress.

A long correction might be a far worse situation that is far less affordable overall. I'm not wishing for people to get hurt, I'm wishing for the overall damage to be minimized and not mortgaged to the next generation.

kunwak said...

Just Janice, you have some good points for sure. Which way it will play out and what is more beneficial is pretty hard to predict though (it's such a complex system, nobody really knows). I agree that it would have been nice to not have the bubble in the first place but, alas, we have it and it's gotta be dealt with somehow. Bursting it in one big bang would not be healthy in my opinion. There can be good things to be learned from a bust but a slower correction would likely cost us less.

As to the economic importance of housing starts: It's an important factor around the globe and has nothing to do with a bubble. Without the money that housing starts get back into the economy, the economy wouldn't be working so well. People gotta spend their money somehow. So building a house or buying appliances etc for a bought house is important in a consuming society.

Vic: The greed in hoping for a big bust is in wanting to buy an asset at a very low price. That's greed. That simple. I'd rather not see many of my friends that bought recently go under water. I'd rather wait a few more years.

JustWaiting said...

Statistics Canada released this report today..

New Housing Price Index

The New Housing Price Index rose 0.4% in January, registering the same month-over-month growth rate for the third consecutive month.

But in Victoria...

Year-over-year declines were also reported in Victoria (-7.3%) and Vancouver (-1.0%).

What happened in paradise??

.

Mark said...

Kunwak are you on crack???

Vic: The greed in hoping for a big bust is in wanting to buy an asset at a very low price. That's greed. That simple. I'd rather not see many of my friends that bought recently go under water. I'd rather wait a few more years.

At a very low price??? If this market corrects 30 - 40% the home prices in Victoria will still not be at "a very low price"

A 500k crack shack in a shite area will still be almost 400k with a 30% reduction! and 330k with a 40% correction! You feeling me yet?

That is still almost 7 X an average families income level in sleepy town dude! And this is no a nice house either.

This market needs a bust just to get to semi normal. I can't believe people like you.

Ultimately I really don't give a crap as I am out of here as soon as my pension kicks in but reading useless drivel like your post is laughable.

A correction is needed and it is healthy. No one wishes ill will on anyone else here but reality needs to set in for all those idiots that overextended themselves to come back down to earth.

Personally will not shed a tear for anyone who dove into the deep end of this pool without checking to see if there was any water. I certainly won't feel for the real estate agents, mortgage brokers and developers that lose their jobs/shirts either.

Bring on the BUST I say!

Robert Reynolds - GBA said...

Greed and Fear. The only emotions that matter in a market.

HouseHuntVictoria said...

Kunwak,

Canada in 1982 was a sharp quick correction that only required 5 years of recovery.

The US market is your definition of a slow correction: 4 years now and still headed south.

I'll take fast, sharp, swift and immediately painful over a long protracted horizontal any day. The 1990s in BC were flat. Out migration, unemployment, bankruptcies and bloated welfare roles were the norm. Flat markets in many ways are far more damaging to communities, families and the greater economy than bust cycles are.

As for "feeling for those who have recently bought" I understand you, but anyone who recently bought had to be either ignorant or blind not to recognize the housing bubble. Self-responsibility and all that...

Just Janice said...

Kunwak -
I'd rather see that money spent on eating better or supporting the rest of the local economy. Every dollar eaten up in a mortgage payment is a dollar that cannot be put away for retirement, a dollar that cannot be spent in a restuarant or given to a charity, a dollar that cannot put your kids through school. Every dollar eaten up takes a dollar away from other investments that might have had just as large of an impact on the economy as a dollar spent in housing and construction. Anything above what is justified by population growth and household formation is a glut waiting to happen - not to mention what will happen when there is household 'dissolution' at a rate greater than formation (last I checked, we all had to check out at some point). Also remember that every person who chooses to be employed in construction or real estate is a person who is not employed somewhere else in the economy (education, health care, information technology, manufacturing, etc.).

Your desire not to see your friends underwater is admirable - however there is a very real need for a dramatic correction in order to minimize the long-run damage to everyone. There are owners who should not be owners right now and conversely there are renters who should be owners but aren't all because the market is seriously messed up. If your friends were to become seriously underwater - what is the worse that would happen? They would declare bankruptcy. They would learn to live within their means. They would patch up their credit scores and they would move on. Chances are they would be far more cautious going forward and might make better choices.

In terms of those who would lose their jobs in construction and real estate - they are unlikely to remain unemployed. They too would move on and retrain - potentially adding even more 'real' goods and services to the economy than they do now.

Instead you'd rather see many folks who have been prudent, and have lived within they're means continue to delay buying an asset at a price that is fair and reflective of underlying fundamentals (local income and rental rates). Instead you'd rather have people amassing money for a downpayment and mortgage payments rather than being able to put money aside for retirement or their children's education. All for the sake of saving those who bought within the last 5 years, you'd sacrifice the financial future of everyone else for the next 10-15 years.

Its unsustainable and dumb to 'keep the bubble' propped up for the sake of 'saving' those who bought in the last five years or those employed in construction and real estate. They can and will save themselves.

Mark said...

Just Janice that was a lot more diplomatic than my reply but the message is the same :o)

I am sooooooooo sick of these people and their misplaced empathy. The people they should be feeling for is the next generation that will inherit this greed driven unregulated mess!

I will not be satisfied until I see 40% to the downside and even then like I said I can't wait to leave.

Drugs, beggars, drive by shootings, stabbings and a province that is quickly becoming a have not province is not my idea of an ideal place to live.

Now to pay such a premium to live here on top of all that really is quite confusing?????????

Robert Reynolds - GBA said...

I am getting impatient, I want this thing to pop and crash already.

I've been waiting since August 2007.

Avg Condo price Aug 2007: $298,478
Median Condo price Aug 2007: $275,000

Avg Condo price Feb 2010: $304,163
median Condo price Feb 2010: $285,000

Avg Price Change 1.9%
Median Price Change 3.6%



Avg SFH Price Aug 2007: $576,632
Median SFH Price Aug 2007: $515,000

Avg SFH Price Feb 2010: $620,833
Median SFH Price Feb 2010: $560,950

Avg Price Change 7.6%
Median Price Change 8.9%


I was in the condo market back when I started looking, I am only reassured by the fact that, had I bought, I would be "slightly" better off asset wise, but down SUBSTANTIALLY from interest, property taxes, strata fees, opportunity cost, etc.

Robert Reynolds - GBA said...

Totally off topic but I'm in a ranting kind of mood...

I've been looking at buying a new car. WTF are cars STILL 30% more expensive in Canada than in the USA? The dollar is basically at par. COME ON JEEZ!

JustWaiting said...

Canadian Business Magazine article:

Why buying a house is a bad investment

.

Just Janice said...

Robert -
Why are houses in Canada 50% more expensive than in the USA? Didn't you get the memo from Flaherty & co. "It's different here.".

FYI all sorts of other stuff still has a lot of price disparity - the stroller I want is $560 here - it's $460 in the USA. Most books and magazines also seem to have a price disparity.

Of course, the manufacturers have done a fair bit of work to keep things from 'level out'...they protect their markets. For example I can't seem to order the stroller I want online and have it shipped to Canada. Many auto manufacturers won't stand behind their warranty for cars imported into Canada from the US. It might be worth looking into what is involved in importing a vehicle that is a couple of years old though...

It sucks, particularly as NAFTA was supposed to bring free trade.

maniac78 said...

So I can buy a house in langford for just over 500k, nice nearly new with a fairly small yard but definetely a good place to call home. Now just using a stupid formula of 500k * 3.6% I get $18000 a year in interest. Divide that by 12 and you get $1500. Property tax on a place like that after a homeowner's grant is like $160 per month which brings us to $1660. I dare anyone here to find an equivalent rental property for cheaper than that.

HouseHuntVictoria said...

And one again, someone shows up with half an argument for home ownership.

Add in all of the other costs, including opportunity costs, then let's compare to equivalent rents.

maniac78 said...

There is no opportunity cost involved in my calculation since it does not include any downpayment at all. Yes true maintenance might cost another $100 or so a month but it's still cheaper than renting an equivalent place plus you get all the benefits of homeownership. I've looked at rentals lately and boy most of them are total dumps or are really expensive or have basement suites.

Just Janice said...

Maniac78 - redo your calculation at 5.5% and ask yourself if you're ready for that kind of rent increase in the future. Also, you will have to be paying some of the principle off (we don't do interest only mortgages in Canada) and figure in what you think might happen in terms of price appreciation or depreciation to figure it out.

If in 5 years the house is only worth $400,000 but you paid $500,000 for it what position would you be in? Would you still have positive equity? You will have lost $20,000 per year, plus the interest payments, plus the property tax, plus the maintenance. At which point you will have paid $18,000 per year in interest, $1,800 per year in property tax (conservative guess after homeowner grant) and $1,200 per year in maintenance (conservative in my opinion) - so $21,000 per year plus $20,000 per year in depreciation is $41,000 per year. You can get one heck of a great rental in a great neighbourhood for $3,416 per month.

Also, remember to compare apples to apples...don't compare a house in langford to own to a house in fairfield to rent.... Compare a similar house in langford to rent (go to craigslist, used victoria, or any number of the property management companies) to what you're considering owning.

Just Janice said...

Oh and there's always opportunity costs! Whatever you put your money or time into has the cost of what you would have put your money or time into had you not put it where you did.

maniac78 said...

Janice you know as much as I do that you can't rent a new home in Fairfield for anything near $1700 a month. As for apples to apples I am talking about rental homes in Langford. I'm aware of some of the risks you talk about I'm just playing devil's advocate here since most bears around here keep claiming over and over again that renting is cheaper when in fact that is not the case. There are good reasons to not buy for sure given the current market frenzy and downside risk but don't kid yourselves about renting. Sure, renting a dump or a bachelor pad is cheaper than buying a house but most families don't find that kind of lifestyle appealing.

bullbear said...

Maniac78, thought I’d share with you our recent calculation on whether to own or rent in fairfield area again. We wanted to live in a 750-850 square foot condo close to the Empress and Beacon Hill Park (btw, i can`t see how the ratio for renting a SFH would be any different)

OWN – took the average monthly payments of 5 listed for sale condos we viewed. To ensure a proper comparison, we included only the interest portion, present property taxes, condo fees, a nominal extra insurance charge, and a very small monthly special assessment fee for unexpected maintenance issues unable to be covered by the buildings reserve fund. We know 3 couples in the area who recently had special assessments ranging from $12000(brand new) to over $80000(older leaky condo) per couple. We calculated with 5% down & used a still historically low 5% rate on a 5-year fixed term.

Average monthly expense to OWN = $ 2787
(Note: your monthly payments would actually be a little higher since it doesn’t include the principle amount so as to ensure an accurate comparison to renting)

RENT – took the average monthly payments of 6 similar rental condos (all within 1-2 blocks of the OWN choices with comparable views).

Average monthly expense to RENT = $ 892

I can honestly say, we’ve never faced an easier decision of whether to rent from a bank or a landlord. Not only with owning do you put your down payment at risk, but possibly a good chunk of your life savings and future wages (as far as I know mortgages in Canada are recourse). Anyway, we ended up choosing a slightly larger condo than the listed condos, which also has a nicer view than 4 of the listed condos. We will pay $870/month, 6th floor overlooking the park, huge windows, new flooring & appliances, month-to-month tenancy, free heat & hot water, and received half a month free (many landlords are already lowering rents due to rising vacancy rates). The best part is, I’m able to catch a glimpse of a couple of those listed units from my balcony, so as to remind me how our equity would have drained away month after month.

Just Jack said...

The last two months have certainly been unusual for detached home sales. It appears that the sales have been top heavy in the more costly properties in Victoria which has skewed the median and the average prices upwards.

My take on this is that the first time HOUSE owners ability to purchase has been severely eroded by the current high prices with most of the sales activity being in the "move up" house market. This anomaly has skewed the statistically data to show a 20 or 25 percent annual increase in house prices. While condos have only shown a nine percent increase.

However, the low interest rates have encouraged people to jump into the high end housing market.

An anomaly like this signals a major shift in the marketplace.

Basically, your kicking the ladder out from the bottom and the market is about to tumble.

This is the 1980's all over again.

Rhino said...

bullbear,

I think your numbers are kinda out of wack. For 892/month its going to be small and in an old building. That condo would probably be in the 200-250K range if that. There is no way your cost of owning would be $2800 a month.

Just Jack said...

With the current low interest rates, the costs of renting and buying are quite similar. I don't see one as having a distinct advantage over the other.

If your a landlord, it would be good to refinance your property in order to reduce your mortgage costs. This would take some of the pressure off to increase rents in the future. The problem occurs when you have to re-finance at a higher rate, you will not be able to move the rents up quickly.

As a tenant, you have the opportunity to purchase a condominium or buddy up with someone. Which increases the inventory of rentals available.

If I were in the market to buy investment properties say a six suiter or larger, my thoughts would be:

Are the current rents in the building below market?

What are the prospects of increasing rents in the future?

Is the vacancy rate increasing?

In otherwords I'm looking at the income stream in order to see if it can be increased and how stable is the money flow. It doesn't matter if the building is $100,000 or hundred million, if the market fails these simple tests - don't buy.

kunwak said...

Well, I agree that house prices need to correct. They need to substantially correct. I did not and would not buy at such prices since I am renting much cheaper. That is also why I am in no hurry to make a house purchase. It just does not make much sense to me.

I do think that popping a bubble is less desirable than attempting to deflate it in a more controlled manner. However, I am not an expert and never claimed I was. You guys are completely entitled to your own opinion. Just realize that it is an opinion (that can be more educated or less). Nothing more. The system is far to complex to make predictions as to what is better or not. Time will tell I guess.

Just Janice said...

Let me do the own rent comparison for the home I presently occupy. The BC Assessed value is $890,000. Assuming 35 year term, 5% down and a five year fixed at 3.85% the total payment would be $3652 per month. Over the five years an average of $92.77 per month is lost as opportunity cost on the money that pays down the principle (this money would have been invested at 3% had it not been used to pay down the mortgage). Over the five years an average of $2595 per month is paid in mortgage. I'll estimate property taxes at 5.78 per $1,000 in assessed value (couldn't find victoria's mill rate so used saanich's) - less the home owner grant ($4574.20) - $381.18 per month. The opportunity cost of the down payment is the interest that money could have earned had it been invested (I've assumed 3%) this amounts to $1335 per year - or $111.25 per month. Assuming another $200 per month conservatively for maintenance and the total cost of renting from the bank would be $3380.20 per month over the next five years.

Hmmmm...I think I'll continue to rent for $2200 per month as it would cost me 50% more per month to won....

bullbear said...

Rhino,

I'll admit a couple of the listed units are in the new Falls building, but my numbers are accurate. The crazy thing my wife and i discussed was that even if we could live in either of the two Falls units for $870/mth, we'd still choose the older reno'd rental unit with nicer view (of course Falls has nicer kitchens, but then we always eat out). Anyway, i'm not really bearish on RE - at least 'til we sell our remaining AB properties..lol. However, i'll admit i'm a little on the cheap side...although that served me well while managing our units over the last decade.

Just Jack said...

Quite true Just Janice, but your home is not the typical. The typical home is a $625,000 Gordon Head box rented at $2,200 per month.

The current interest rates have cratered the mortgage cost for owners, while rents have only fallen slightly. So, for this brief period in time, the rent versus ownership cost is very close to one another. Hence, the big jump in sales activity in condominiums.

Tim Ayres said...

Hi gang - I haven't been following the comment thread on this one, so sorry if somebody else has covered this, but the CMT blog has posted the official CMHC announcement regarding the qualifying rate. As they had suspected, it will apply only to variable rate products and fixed rates with terms less than 5 years. Clicky.

Animal Spirit said...

Thanks Tim - this will lead to some good competition from banks and brokers to offer the best possible 5 year contract rate. Could also lead to some gaming of the system if brokers and noteholders don't assume sufficient risk for the products that they sell.

What it is in effect saying is that if one can qualify at the contract rate for five years, then one should be able to hold that mortgage long-term.

Politically this pushes back some reset shock five years (one can only qualify the more risky buyers with 5 year terms) - which is an enternity in politics.

Village said...

PCS listing I get 350k-500k SFH w/ suite has jumped over the last two weeks from just a couple to 14. Not a huge number, but it's been a fairly quick ramp up. A number of the places have been on for a while or I recognize from last year.

WiseInvestor70 said...
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WiseInvestor70 said...

I really feel sorry for people who is still deluded by realtors without scruples. No one makes money besides them and the banks.

Why someone would invest in a market like Victoria where 90% of the properties are in extremely bad shape, rotten, and dirty, when you can get properties like this
California


House was sold brand new in 2005 above $400,000 USD, probably a bargain in that time or at least what a realtor told the previous owner.

Real Estate can take a big dipped quickly, and not what realtors say "Oh Victoria is unique, prices will never go down here" WAKE UP !

Time will tell, and remember that a property is worth what people is willing to pay for it, or what people can afford to pay for it.

Keep your marbles to play the game, until prices are low enough to buy cash. That is how real estate should be bought, no high piles of debt.

bullbear said...

The loonie nearing par should spur on some more sellers...at least it's pushing me to sell my alberta rentals faster.

And JustJack i've noticed the same 'move up' anomaly pushing the price data in AB last 6 months. Certainly a sign we're building a top.

Vic said...

City raising builders fees by double, Liberals gouging the used car buyers (which will only lead to more fudging the numbers), while they actually tried to screw the Vets who saved our asses shows how desperate the governments are getting.


This is just the beginning and reminds me of the late 70's and 80's where we all learned the words "hack and slash" and the tax anything that walks and talks attitdue of the SoCreds which is a carbon copy of Gordo's bunch. A whole new generation who has never lost will now learn the hard way.

JustWaiting said...
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JustWaiting said...

Over on KIV they are having an interesting discussion about variable rate mortgages. The costs to switch to fixed and how payments are calculated is covered.

Mortgages on KIV - click here

On a related note the mortgage brokers over at Canadian Mortgage trends have received word from CMHC that pre-approval letters are NOT valid after April 19th unless they use the new qualification rules.
CMHC & Pre-approval - click here

Some buyers are going to be surprised when they find they can't get that stretched to the max loan they were counting on. Watch your PCS for collapsed offers after April 19.

JustWaiting said...

More on variable rate mortgages...

There are quite a few buyers in Victoria that are happy today with their variable rate mortgage. Ask them what happens when interest rates rise and they will counter back that they will just lock in.

If they are currently holding a 2.25% variable (bank prime) they will probably see rates jump in June.

Bloomber News -click here

What happens when they switch. Depends on the contract they probably didn't bother to read. Some will find they will be offered the posted rate which is now over 5%. Their dilemma - big jump in payments to go fixed or ride the variable rate up and up.

Study your mortgage before you sign it

"You've got the right to lock in, but you are going to want to negotiate that rate and all the bank is obliged to do is give you the posted rate."