Wednesday, June 16, 2010

Building equity in a falling market

Oxymoron? Are we potential home buyers stupid? Some REALTORS® marketing their properties as investments might think we are, or maybe the problem is them, not us.

I'm seeing more and more listings lately using the terms "investment," "equity" and "why rent?" The market has clearly turned. It's getting tough out there for people trying to make a living in the real estate industry. Sales volumes are down, prices are falling and more people are starting to believe the news when they ask questions and find answers about the Canadian real estate bubble. The Canadian Real Estate Association has stated prices are falling across the country and will be pulled down by overheated markets in the west for the remainder of 2010 and into 2011. TD Economics has agreed, and forecasted greater price depreciation than the CREA.

But some local salespeople don't think we get it. They continue to market properties as investments without disclaimers warning potential buyers of market volatility etc. They continue to suggest renting is throwing money away - incredibly, they push the idea that we can build equity in a market experiencing significant price volatility and overall decline. Especially those salespeople trying to sell condos.


Does that look like a market you can build equity in?

75 comments:

Robert Reynolds - GBA said...

I live in a big converted mansion apartment block in Rockland, earlier this week I got a marketing thingy in the mail from a realtor, "Thinking of making a lifestyle change? Now is the time to buy blah blah blah"

No post mark either, so odds are it was hand delivered.

somewhere said...

A few of our friends (3 couples and 2 singles) are doing the International Student thing. Avg. amount is $850/month, with the requirement of providing a room and three meals/day.

Just another way to float the boat, giving people the ability to over pay for RE.

Dave said...

Now draw the line from November 2009 to May 2010.

think said...

I have done the International Student thing for many years and it is very hard work. It may gross about $800 per month but after you account for all extra money for water and electricity and all the extra food costs (supplying all meals and snacks) and not to mention your time spent socializing, helping with homework, touring them around the city, etc. - you are lucky to clear $400-500/month. And it is intrusive into your personal life so it only suits people that like having permanent house guests. Anybody doing this as a means to make mortgage payments is doomed - you can't do it forever without getting tired of it and needing a break.

think said...

Dave,

Valid point. Just wait until June 2010 and draw the line from November 2009 to June 2010 and the trend will be more obvious. Downhill my friend, downhill...

Leo S said...

Yeah comparing one abnormal month of prices (especially average prices which are very volatile month to month) to today is disingenuous at best.

The strongest thing we can say about that graph is that prices have been essentially flat since July 2009, which is just slightly less than the level that the market peaked at in April 2008.

HouseHuntVictoria said...

Dave, Leo, I highlighted a trend. Three or four months of consistent movement up or down indicates a trend. A trend in any financial chart provides investors with the sense of direction they need to evaluate the short term decisions they will take. Given this chart, and a five month trend, I think it's reasonable to say that sitting tight and waiting for a shift in another direction is a reasonable action. Should June's average price jump from May, the current trend is broken and we can reasonably wait to see if July drops or follows June's movement and forms the potential beginning of a new trend.

Leo S said...

Three or four months of consistent movement up or down indicates a trend.

If the graph indicated anything even remotely corresponding to that statement you would be right.

Since Dec we've had three months of falling prices and two months of rising prices. How exactly is that consistent movement? Back up one more month and we have three months up, three down. When your trend is totally reversed by starting one month earlier, it's a good sign that your trend isn't really worth anything.

The trend since July is flat. There are small up or down movements from month to month, but so far no sustained downward trend. Maybe May is the start of that trend, but there's no way to know for at least another 2 or 3 months.

Animal Spirit said...

Dave - I'm interested in something.

Earlier today a poster also called Dave posted a similar short comment on vancouvercondo.info (see post #48 at: Dave's Other Post, this one 15 minutes earlier
.

Are you deliberately attempting to create uncertainty in people's minds as to what is happening in the RE market? If so, is it covered by your profession's libertarian code of ethics?

Animal Spirit said...

That said, the graph would likely be more informative using the median instead of the average price (average is usually far to variable in a market where there are quite a few high end listings).

Combined with the anecdotal evidence of what is happening in the market, the analysis of price drops is likely correct, however on its own, then graph seems to be showing variability. Give me one more data point on the down side, particulary for median prices and then I'll be convinced:

January 299K
February 285K
March 305.0K
April 305.0K
May 290.0K
June X K

a simple man said...

A trend line is peak or trough to current value. HHV has done it correctly and has incorporated six months of data. The data does not lie. Each month the trend line changes somewhat reflective of the new data point.

Leo S said...

A trend line is peak or trough to current value.

Sorry, that's not right at all. A trend is, well exactly what it sounds like: the trend behind the data.
It's not a game of connect the dots, it's a linear regression on a subset of the data (whether you actually calculate that linear regression or eyeball it is beside the point). When you only have 6 data points, you can't take an outlier and decided to start your trend line there. Generally trend lines for securities are over a period of months, where each data point represents one minute, or one hour, not one month.
As I said before, if your trend is reversed by adding in one data point, it's not a trend (or, more accurately, you don't have enough data to make that determination).

The data does not lie.

Talk about how to lie with statistics. Drawing lines from outliers is about as useful as extrapolating that yesterday morning it was 10degrees, at noon it was 20degrees, therefore in 5 days we will all die a heat death.

Bob leftcoaster said...

Talk about how to lie with statistics. Drawing lines from outliers is about as useful as extrapolating that yesterday morning it was 10degrees, at noon it was 20degrees, therefore in 5 days we will all die a heat death.


Wait, that's what the VREB/CREA/BCREA does!

While the data certainly shows a shift in the market, I agree that we're premature in drawing a trend line. Wait 3 more months and we'll have more data supporting a downward direction and more importantly A STEEPER SLOPE!

As bears, we have pointed out that the last several years of housing sales have made a pricing trend that can't be sustainable. Statistically the data from 2002-present day could all be considered as outliers due to external influences.

Leo S said...

Wait, that's what the VREB/CREA/BCREA does!

Absolutely. They are far worse, since not only do they take one month to be a trend, they then extrapolate that trend to a year down the line and then get the media to reprint it as some sort of expert opinion.

Wait 3 more months and we'll have more data supporting a downward direction and more importantly A STEEPER SLOPE!

Exactly. I have little doubt we're rounding the top of the roller coaster here, I just like arguing semantics. :)

a simple man said...

OK...so, I think around here the common belief is that the real estate market generally peaked in Dec 2009 - that has been our working hypothesis.

A trend line can be from any point in time to any other point in time. As long as you define those points, it is valid.

True, linear trendlines are best approximated using a least squares approach, but without the raw data we cannot perform these analyses (I would be happy to if VREB gave me the raw data to fire into SAS - any takers?).

You don't need copious datapoints to draw a trend line - you can do so with as little as two. Obviously models with more datapoints and a smaller least squares error instill more confidence.

I agree that if you draw a trend line from last summer until now, it is pretty much flat, and that is a valid observation.

Similarly, if you draw a tend line from May 2008 (first datapoint on the graph supplied) to May 2010, your overall trend line would be negative meaning that over the past two years condos lost money as an investment (aside from fees, etc).

Again, in our right or wrong hypothesis, we feel that Dec was the peak and so it is logical that we would start out trendline there.

If you observe what has been happening with condo pricing in Victoria even in the last month it is relatively easy to conclude that there is something seriously different underfoot. You don't need a trendline for that.

June, July and Aug stats will solidify the line.

PS - I hate outliers.

respectfully...

a simple man said...

and Leo S - I appreciate critical thinkers. Thanks for bringing your viewpoints.

Dave said...

IMO, the best way to evaluate the monthly data is to use a running average of somewhere between 3 and 6 months. Doing that, the market has been flat for a couple years now.

Manuel (aka Animal Spirit)... I'm just sharing my opinion. I am not a realtor, nor have I ever been. Nor am I an Irish builder.

HouseHuntVictoria said...

Dave, if you annualize the average sales price data it's actually creeping up slightly higher than estimated inflation rates YOY for the past couple of years. Annualized real estate data, especially the Canada-wide report are more misleading than what you've said I've done to the chart.

I simply picked a starting point that is an acceptable peak and shown what the average price of condos have done during the typical busiest listing and selling time of the year. As market observers, we watch the busy spring selling season like hawks because it usually provides us with the best indicators of what the rest of the year will be like.

In Victoria, because the transaction units are such a tiny fraction of the total number of units we can reasonably expect to see wide swings in price from month to month... almost exclusively exaggerated upwards by random sales of units priced disproportionately higher than the majority of units on the market - in other words, when one or two million + $ units sell, it drags the average upwards. If you don't get those sales in a given reporting period, it doesn't suddenly drag the market down, it just doesn't drag it up.

VREB's own reporting is purposely designed to include properties that other associations exclude in order to exaggerate average price inflation.

I still think the time line I've pointed out is indicative of a trend. I see it in my condo PCS which excludes condos priced above $250K. The lack of sales activity and the high number of new listings and downwards price changes (a few are now shifting from $219K to $199K or 20% off asking price) is indicative of a market that has cooled sales-wise and is now declining rapidly. This is the true entry-level FTBer segment of the market. That's why I pay such close attention to it. Without sales in the bottom of the pyramid you won't see a rise in activity higher up the ladder. Expect real estate marketing to reflect this shortly in a vain attempt to pull greater fools into over-priced condos.

Your criticism of my annotation on the VREB graph is noted and somewhat valid - but the premise stays the same: the Victoria condo market is extremely volatile right now, market prices are currently declining and agents who say you can invest in this market and build equity today are wrong if the sales and price trend continues for the rest of this year and into next as even the CREA admits is the case - unless of course they creatively shift their time lines out longer to average out the drops into dips.

Robert Reynolds - GBA said...

Because there has been some criticism of HHV's graph, I have taken the liberty of

fixing it...

HouseHuntVictoria said...

Add David Rosenburg to the growing list of economists recognizing falling prices in markets across the country.

Dave said...

The market isn't volatile. The data is. Big difference.

Alexandrahere said...

As I have said before. It may appear that the "average" or "Median" prices have changed very little in the past few months. However price drops in SFH and Condo's is truly jaw dropping.

The lower end housing that were selling up til end Mar 2010 have all been bought up.

And so it might seem like prices on paper have not changed that much but the fact is the houses that are now being put up for sale are of a much superior quality than the ones in the same price range say four months ago.

Evidence of that has been showing up in the last month especially.
Some examples of the past few days alone are:

1261 Palmer $639 to $529 (- $110K)
2641 Forbes:$579 to $509 (- $70K)

SOLD;
4505 Limerick Ln $900 - $$723 (-$177K)
896 Violet $569K - $487K (-$82K)
929 Rankin $597K - $525K (-$72K)
1929 Leyns ($799 -$$667 (-$132,400)

HHV is entirely correct. Maybe we shouldn't be calling what is happening at this time "a trend". Because what is coming at us at blinding speed is a "BUST." I think this will continue here in Victoria for months to come and perhaps sometime next year we'll experience a leveling and the market will become boring and mundane and the new saying will be the market has "flatlined"

jesse said...

"The market isn't volatile. The data is."

The data ARE the market. A moving average exhibits volatility because there is a a mix of quality and size of properties in the underlying data. The average data for a subset of comparable properties is almost definitely less volatile than the gross average.

Using a moving average for more than a month seems reasonable if you're looking for long-term trends: basically filter the heck out of your high frequency terms at the penalty of a slight phase lag.

caveat emptor said...

Linear least squares trend on Dec 2009 to May 2009 is -338$ per month. Same calculation for Nov 2009 to May 2009 is +623$ per month. In neither case is the trend anywhere close to statistically significant. The human eye looking at data like this overweights the start and end point of the data series and may make the trends look bigger.

Dec 2009 may well have been the peak - certainly a lot of signals point to falling prices ahead. But six months of this very noisy data set does not clearly demonstrate a trend.

Calculations done with excel "linest" function.

Cheers

maniac78 said...

Just a question to the readers out there do any of you put any weight into technical analysis in the stock market?

Trevor said...

@ maniac78: Technical analysis has been proven to have no predictive value, so no. Same thing here - the presence of a trend (whatever that might be) is in no way indicative of future supply and demand. For instance, if there were a smattering of terrorist attacks around the world and none on the West Coast, one might argue that the West Coast is safer than other places. BC would probably end up with an increased growth in population. A downward trend would not capture any relevant details about future events, unlike looking at rent/buy ratios, income/buy ratios, debt as % of GDP, etc.

bullbear said...

Trevor said "Technical analysis has been proven to have no predictive value" ..tell that to millions of daytraders and fund managers who invest trillions each year based on technical analysis.

"the presence of a trend (whatever that might be) is in no way indicative of future supply and demand." ..please tell me you're trying to be funny.

Marko said...

Interesting to note that when prices were down (Nov 08 - Feb 09) sales were lowest in 20 years.

Alexandrahere said...

Give us the facts people; just the facts. Don't get caught up in the wordiness of it all. Reality says: Do not buy a house/condo right now. As the prices are falling out of the sky.

Wait, watch, be humored and be patient for your time to own is coming.

Just believe in one who is experienced and only wants the best for you.

Trevor said...

Daytraders are just gamblers, not investors. If you win 10 hands in a row, does that affect the odds of winning your 11th? Of course not, you were just lucky - each hand wins or loses on its own merits. Technical analysis of past performance has been mathematically proven NOT to be indicative of future performance, and if you pay an investment advisor who says otherwise, I suggest you get another investment advisor. Over the long term, 90% of them can't beat the index after fees anyways - buy index funds.

You know...I think BP was looking pretty good until six weeks ago...do you think investors are now willing to pay more for that stock because it was increasing in value before the spill? Of course not - it is worth what it is worth today based on todays information. The past is not prologue and never will be. If it was we'd all be bandwagon jumping millionaires.

Leo S said...

Just a question to the readers out there do any of you put any weight into technical analysis in the stock market?

Given the stellar trading records of the big banks, who rely heavily on automated high frequency trading (based on complex technical analysis of the data), I would say yes, there must be some value to it.

However I don't believe the simple kindergarden analysis you read about has any value to the average joe (head and shoulders type stuff).

Animal Spirit said...

Thanks Dave. I really need to get rid of my split personality on vibrantvictoria.com.

My interest is that I would like to purchase a good house for my family in Victoria. While I can technically 'afford' one with today's interest rates, it isn't anywhere close to my personal or family's best interest to buy our largest asset at historical peak prices. Being a numbers wonk, I can see through a lot of the shell and handwaving arguments used by the RE industry marketers.

The unfortunately part is a lot of people have bought on emotion and will be hurt when prices come down. I'm not willing to give a higher benefit to owning a house than betting against the high probability that house prices will fall significantly. My family and our future are more important than what is essentially an ego-driven decision (i.e. owning is societally better than renting).

Just Jack said...

Animal Spirit said "My interest is that I would like to purchase a good house for my family in Victoria. While I can technically 'afford' one with today's interest rates, it isn't anywhere close to my personal or family's best interest to buy our largest asset at historical peak prices. Being a numbers wonk, I can see through a lot of the shell and handwaving arguments used by the RE industry marketers.

The unfortunately part is a lot of people have bought on emotion and will be hurt when prices come down. I'm not willing to give a higher benefit to owning a house than betting against the high probability that house prices will fall significantly. My family and our future are more important than what is essentially an ego-driven decision (i.e. owning is societally better than renting)."

EXACTLY! I completely agree. You've got it right. :-)

S2

Dave said...

Manuel, risk cuts both ways. Nobody knows the short term direction of the market. I think most agree that long term it will be up. Many a bear have been calling peak market prices for greater than 5 years now. Many of those bears acknowledge that a correction will not rewind prices to that time. The risk is stable or rising prices. You should take that into account as well.

So, you can end up with £75 in your pocket, or you can knock a vase over. ;)

bullbear said...

For the bears who frequent here, do yourself a favour and step back and relax. You're debating whether a few month trendline is really a trendline! So few of you are looking at the big picture. Two and a half decades of a boomer-fed credit-fuelled asset bubble doesn't revert overnight. Read some Reinhart & Rogoff 'Aftermath of Financial Crises' or McKinsey Global Institute 'Debt & Deleveraging' and chill bears, chill! This is at minimum a 5 year unwind that will take us back to at least 90's pricing. I'm certain most of you will simply transform to being stressed out bulls after 'knife-catching' this next leg down.

Animal Spirit said...

Dave - thanks, but I'll no longer reply to your trolling. It is for a reason, I don't know what it is, though I suspect that you are a senior hand somewhere in the overall RE/mortgage/lending/speculating industry.

patriotz said...

a lot of people have bought on emotion and will be hurt when prices come down.

That's a fallacy - they were hurt the moment they bought, because they paid more than the property was worth. The future market price of the property does not affect the interest, taxes, etc. they have to pay, which exceed rental value.

It's only when the market price falls that the damage becomes obvious to most people, because then there is no greater fool to unload the damage to. But the damage was there from day one.

omc said...

Hey Dave,

A realtor found out I was sitting on the side lines and tried that rising prices with rising interest rates thing on me. I politely pointed out that even if the interest rates only raise 2%, affordability erodes 18%. So in order for the unsupported statement from the realtors that pay raises will cause price increases, I would need a more than 18% raise in the next year.

I am pretty comfortable with the risk that prices could be stable or raise.

Olives said...

"Just a question to the readers out there do any of you put any weight into technical analysis in the stock market?"


Yes

maniac78 said...

Ok very good I guess basically people are saying that charts don't lie. I guess you guys lost a boat load in the big crash! Anyway as for the re market yes it's changed and prices might be coming down but 1990s levels? I don't think so. Unless of course you think rents are also out of whack. I personally don't.

maniac78 said...

BTW Marko is a troll but Dave is just providing a counter argument here.

bullbear said...

maniac78 "Unless of course you think rents are also out of whack."

Wise investors buy 10+% cap rates. To achieve that cap rate on Victoria SFH or condo units at current rents, the current prices would have to fall by roughly 2/3rds. But the real kick-in-the-pants is Victoria rents will keep falling from here just like they have in the rest of the advanced world last few years...putting even more downward pressure on prices.
Hint: US nationwide vacancy rate is now over 10%...and we'll soon realize we're not that different here! (well, except that we smoke more pot and probably ingest more hallucinogens)

maniac78 said...

Correct me if I'm wrong but the last time someone built a rental apartment block in Victoria was in the 1990s and it was crappy one on Shelbourne st. I doubt 10% cap rate was achieved when it was built but I'm sure it is now. All the other rental blocks in this town are 1970s vintage. That tells me that the price/rent ratio hasn't made sense for quite some time. So bullbear uber bear why don't you think that prices will go back to what they were in the 1970s? Why would they stop at the 1990s?

HouseHuntVictoria said...

^Maniac,

Probably because rents have risen considerably since the 1970's and moderately since the 1990s.

maniac78 said...

Fair enough. By my calculations a 2 bed condo in this town needs to be around 150k in order for it to make sense to buy it to live in. You can pickup a 2 bed condo for around 200k today so we're talking about a 25% decline from here to get to where it would cost the same to own vs rent a 2 bed condo. If it drops by 2/3rds I will buy 3 and my dog will buy 3.

bullbear said...

maniac78, you might want to recheck your cap rate formula. Or just determine at what rent that 150k condo will cashflow at (don't forget PITI, maintenance, util's, vacancy...and remember rents are going down, taxes & int. rates up) You'll soon realize renting that same 150k condo is muchoo cheaper :)

In response to your previous inquiry... you won’t find any 70’s (or 1890’s) multi owners presently willing to sell for 10% cap...yet, that is. Cap rates (price/rent ratios) made sense in much of the 70’s/80’s. Our family bought multi’s in the 12-15% range back then. There are many other factors for builder-owners (land cost, etc) whether they end up receiving those kind of returns (but i know some who were putting us to shame). Anyway, investors back then knew they had the boomer ‘rental wave’ ahead of them, and as long as they didn’t have to rely heavily on financing, did very well.

And again, all i can say for sure is prices will 'at least' return to 90’s levels – from there, it’s more difficult to predict until we’re closer to mid decade. Very few people understand the ‘sea change’ that’s upon us – some call it Kondratieff winter, boomer peak spending, Minsky moment, 25-year credit bubble burst, Elliot wave peak, aftermath of a global banking cris...the first one since the great depression (with of course real estate being the ‘fuse’ asset this time, where 1930 it was equities). Call it what you want, but 99 out of 100 people i talk to not only don’t understand the term ‘financial crisis’, but have no clue of the implications. The latest global banking crisis is following the exact same path as every other one in the last two centuries. Govt’s always leverage up to the max with the transfer of debt in the first 2 years, then the deleveraging begins both privately and publicly. Average peak-to-trough for real estate is 6 years. Be prepared to outdo the average this time as RE was the focal asset. Canada, being the bubbliest of advanced nations (who relies on the US for more than 3/4 of it’s exports), will NOT escape.
Sorry, for babbling everyone :)

bullbear said...

funny on your last comment...i was talking to a realtor last weekend that told me her dad bought 3 properties in the States as prices were falling...now he's panicking and trying to sell all 3 for way less than he paid as the market keeps falling.

maniac78 said...

You're dismissing the fact that the government's plan to deal with the boomer wave could succeed. The plan is to re-populate the country on immigration alone and so far it is working. Also, birth rates are unexpectedly climbing because people in their 30s are now realizing they do want children after all (me being one of them). Your scenario could happen but so far it's looking like immigration will save the day.

bullbear said...

...not the immigration card :) I'll wager an Empress afternoon tea that Canada's population will be lower by 2020. The boomers will be croaking by then and the wealthy will be long gone. The word from our corporate lawyer upon my inquiry into offshore trusts last year, is the shift has already begun(a branch of his firm deals with immigration/emigration). Trust me on one thing, wealthy Canadians will at very least emigrate their money, if not themselves, to what will be the few growing, free-enterprise, developing nations, than watch their liveliness be taxed to death. Gov'ts are already out of fiscal & monetary ammunition to deal with anything else. And Carney & Bernanke know full well that if they pour any more fuel on the fire, bond investors will punish us harder than Greece and Spain.
Just being realistic, have a good weekend :)

bullbear said...

Sorry Maniac78, but i was just heading out and your "government's plan" caught my eye at the top of my screen. You have to admit that's probably one of the funniest oxymorons ever strung together...anyway, maybe i'm losing it, but my stomach hurts from laughing so hard. 'Til next week's coninuation of our debate ;)

Dave said...

OMC, RE: interest rate increases....

Over what period of time did five year fixed interest rates fall 2%? Why would you expect five year rates to go up 2% within the period of one year?

I think the likely scenario is for long rates to remain relatively flat with only moderate increases over a moderate period of time. Let's say long rates go up 2% over a five year period and that your math is correct about an 18% cut into affordability. Your wages only have to go up 3% per year to keep up. And in the meantime, you are building equity and are five years closer to paying it off.

Just Jack said...

The problem with the price to rent ratio is that while you're comparing fruit you are not comparing apples to apples.

As an example, A 22 suite apartment building on Belmont Avenue had a gross income of 14,500 per month and sold at $2,500,000.

Thats a price rent ratio of 172.
And the price per suite is approximately $113,500.

But you can't buy a single suite in the building, like you can buy a condominium. A single condominium cost you almost twice the amount or roughly $210,000 for the same era and quality or a price rent ratio of $300.

The price to rent ratio is useful for rental apartment blocks, not individual condominiums.

HouseHuntVictoria said...

Dave,

Wages aren't increasing. Report out this week had them flat from 2008 in real dollars. That's a 6% decrease relative to estimated inflation. Inflation adjusted wages haven't gone up since the early 1980s.

omc said...

Dave,

The bank of canada says to expect a prime rate increase of about 2.5% in the next year. It has been all over the news. Your house is only worth what someone else will pay for it, if the next guy has 18% less money....Guess what?

This isn't bear make believe, this has been all over the news.

omc said...

Dave, are you a realtor?

Inglishmagor said...

I just had to comment of Daves statement that wages only need to increase 3% each year for a mortgage taken today to make sense.

Looking at the great big financial crisis that the entire world outside of Victoria seems to be going through... isn't banking on future wage increases a huge risk?

From 2000 up till now has been a strange time of ample work and almost free money. With the in forestry industry all but gone, what is going to employ everyone after construction and selling real estate tappers out?

Billions and billions of dollars have been borrowed and spread through out the community via the housing boom. The sad part is that every penny of that money has been borrowed by someone in the community who has to work 40 hours a week to service their portion of the debt. For every job lost there is someone still tied to a debt that planed for 3% increase per year.

If only we'd all go back to valuing money based on our own labour. It's only when you understand how many hours of work you will have to preform to own a house in Victoria that you see how pathetic it all is. Not taking into account taxes and interest it would take someone 20,000 hours of work at 20$ an hour to buy a house for $400,000. An average year sees a person work 2,000 hours. Yes, that's 10 years of labour to purchase a house if you bought it in cash. If you borrowed the money it's at least 15 years of labour.

Dave said...

OMC, if a buyer is interest rate sensitive, then they should stick to five year rates. Five year rates are unlikely to rise as fast as prime as the interest rate curve is steep based on the presumption of short rate increases.

HHV, I wasn't aware that people were paid in 'real dollars'. If you want to use inflation adjusted money, then you need to be consistent (e.g. use 'real' interest rates).

Dave said...

Average weekly wages in BC for May 2009 was $790.22. Average weekly wages in BC for May 2010 was $828.89.

Percent change YOY = 4.9%

And yes, that's cherry picking data, but the other months still show positive wage growth. And that's during a 'recession'.

Dave said...

Jack, I don't know any investor that looks at Months of Rent. They look at cap rates, which is really the same thing, but you can more easily compare cap rates to your cost of capital.

In your example, that building had a 7% cap rate. That's pretty damn good when some buildings are going for 4.5%. It is certainly less than your financing costs, so with a little bit down that building would be cash flow positive. Over time, rents will go up with inflation.

omc said...

This is a gov`t town, and you can find out how much many people are going to expect in a year. I don`t know of a single group that has 3% year for the next number of years. It won`t happen. Read the news, the world economy is in very bad shape.

The only reason that anyone would take a fixed over a variable now a days is if they had to use CMHC, and that means they can`t afford the house.

Dave, I know many realtors that are selling in this market. Many investors are dumping also. If you are so bullish as a realtor, I expect you are buying.

Animal Spirit said...

Remember HHV's post a while ago 'CREA puts a fork in it'?

Now, courtesy of the TC and our creative high school students comes a classic:

Vic High for Sale!

So, which of our posters is in high school? Could it be one of Marko's multiple personalities?

HouseHuntVictoria said...

Dave,

I'd love to know where you cherry picked that wage growth data from ;-)

kabloona said...

Animal Spirit, wasn't it Dave who was outed as some sort of "Real Estate Investor" flogging his own website touting advice to "get rich flipping houses like me and you too can live the Left Coast lifestyle whilst riding your mountain bike around the Province" ....?

Maybe it was a different Dave....

Or possibly Dave is one of Marko's many alter-egos....

:-)

jesse said...

"Average weekly wages in BC for May 2009 was $790.22. Average weekly wages in BC for May 2010 was $828.89. "

So that's the average wage of employed workers, or the average wage of the total labour force? Just curious.

jesse said...

"The price to rent ratio is useful for rental apartment blocks, not individual condominiums."

I disagree from a fundamental valuation standpoint. You're stating that an individual condo should have a different yield than an apartment block? Why?

think said...

"Average weekly wages in BC for May 2009 was $790.22. Average weekly wages in BC for May 2010 was $828.89. "
I find this hard to believe and doubt this is true. I don't believe you unless you can name your source. Maybe cherry picking data means make it up! Hmmm good idea! Here we go....

Average weekly wages in BC for May 2009 was $890.22. Average weekly wages in BC for May 2010 was $728.89.

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

Just came back from visiting 5 OH this afternoon - for research only right now.

We were mostly looking at houses in Victoria and SE Saanich priced between 500 and 600k. We also looked at the major fixer-upper on Clawthorpe that's asking $475. Ridiculous - so much work there. No closets in any of the bedrooms.

Some other lookers out too, but not too many. One agent mentioned that her sellers were motivated and she was serving mini cupcakes. Another asked for feedback on the house and the price and when I mentioned that I thought we would be seeing better deals later, he mentioned the low # of sales in June and the high # of listings - refreshing.

Dave said...

Think, here is the link to the weekly wage data.

http://tinyurl.com/2emo52v

think said...

Well Dave the website does exist and the numbers are as you posted but what you have done is a perfect example of exploiting and spinning stats to simply try to support your point. For example, in Jan 2010 I could claim wages are dropping as Jan 2010 the average was 812.32 down from 815.03 in Dec 2009. So when you called it "cherry picking" you were right on - really you just wanted to back up your point with worthless numbers. Our economy is NOT booming and we are not seeing wages growing significantly in the next many years - if you believe otherwise you are delusional. A government with emergency low interest rates and massive stimulus packages to keep us afloat and record growing debt loads does not lead to lots of wage increases and booming years ahead. Come on, use some common sense here. What a joke.
You obviously have a major chip on your shoulder about the fact that Victoria's housing market is crashing and you are grasping at straws to try to justify why owning is a good idea. BUYING A HOUSE RIGHT NOW IS DOWNRIGHT STUPID!!!! We are in a downturning housing market right now - this is a fact - only question is how much are you going to lose on that "investment" you bought. And your wage increases aren't going to make up the difference! Reality is we are likely going to drop 15-30% in house prices in the next 6-12 months. Its simple supply and demand - there is too much inventory and no buyers, so prices drop. Duh.

While checking out some other sites I came across this site: http://www.livingin-canada.com/work-salaries-wages-canada.html and this quote from the start of the page made me almost fall over laughing... "If you're moving to Canada from the UK, Europe or USA, you're likely to find Canadian wages are a bit lower than you are used to. This is often compensated for by lower house prices in Canada."

Dave said...

Think, I was upfront that the most recent data was bullish. I was even honest to call it 'cherry picking' although I only wanted to show the most recent month.

In any case, the first five months of 2010 have shown an increase of 2.5% over the first five months of 2009. Most people also get more than inflation considering that they move up the corporate hierarchy with progressively more experience.

Most people should be growing their salary by more than 18% over a five year period.

jesse said...

From the bcstats website: "Average actual number of hours worked per week, main job, is calculated by dividing total hours by the total number of employed persons."

There you go: they don't include UNEMPLOYED persons in their calculations. Sure average wages are increasing but that has a lot to do with high youth unemployment. What matters for housing is 1) what total wages are doing -- and they're down from a year ago due to higher unemployment -- and 2) what average wages of a specific job are doing, not the average wages of a specific person.

The "I'm getting raises so I can afford future rate hikes" argument is absurd.

Trevor said...

Not only does the info ignore changes in the unemployment rate, but all those metrics are Canada wide. There is much more industry back East would have been more likely to benefit from US stimulus. Maybe Canada wide wages went up, but I bet disaggregated data would show BC wages declining over the same period.

omc said...

As someone who is involved in directly employing people, I know wages are not going up in Victoria. You should have seen the responses from the last add we posted. There is little opportunity in this town and I think that the 3% per year is incredibly optimistic. I know I won't be getting near that, or my wife. We are both on the very highly skilled and on the highly paid end of things.

In the next year we shall see at least a 2% rise in rates, in the next 5 years it will be more. each percentage of rate rise is a 9% errosion of affordability. I love how the banks show the exact same data as us and predict a downturn, but the realtors grab obscurities to show the opposite.

I have never seen so many realtors flogging their own houses, and investors for that matter. I will ask you again; are you buying in this market? Also are you selling any of your own properties.

Dave said...

OMC, I assume the questions are for me. Short answer... yes and yes.