Thursday, September 16, 2010
Real estate freefall
It's not very often we get to compliment the local news on a real estate story. Today we can. This was balanced, honest and had enough different viewpoints from a variety of sources to actually be called news. House Hunt Victoria commentator and local REALTOR® Marko Juras is featured, including a plug for his new 70% cash-back to buyers business model and his very realistic advice for would-be homeowners with no money.
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115 comments:
I love that the incoming VREB president keeps up the party line. But it's a bit of a stretch to say last September was the highest sales volume in 20 years, no?
^Spam
HouseHuntVictoria,
To answer your question in the previous thread. Yes, obviously I was contacted because of my participation on this blog. I did discuss the blog with the reporter for a number of minutes. We also discussed some other things; however, you they can only cover so much in a 3-4 minute run on the news.
This blog is becoming well known in the real estate community. A lot of people for some reason think that I actually write the blog, I have received a lot of criticism over it. Some people just can't figure out that I just put in comments, and not that actually content.
not the actual content.....I really need to start proof reading before posting.
ChrisA said:
"DavidL, forecasting is a different exercise than seasonal adjustment.
Stock prices and many other similar time series follow stochastic processes which have the property that changes in these series tomorrow are impossible or extremely difficult to forecast today."
I think that's the problem though. It is extremely common to use whatever realestate statistics people can get their hands on and then claim that buying is a good idea. If one accepts that predicting the real estate time series is impossible or very difficult, conclusions that "now is a good time to buy" are bogus since they have such strong future implications. (Many count on prices increasing in the future when they buy today and this is also commonly implied by the industry)
Marko,
Thanks. If it helps some, I'll stop linking to you when you add valuable content ;-)
Should we take up a fund to buy you a sports jacket for media calls?
Ohhhhh....keep linking....I am not one to shy away from criticism!
As for the market this week, we have added about 45 sales since Monday morning, SFH price still high at over 635k. Keep in mind that very few sales go pending on the weekend, so 15 per business day is still very slow when you average it out.
Marko
Marko;
Thanks for the explanation on the different RE company - I understand your thinking.
Chris;
Great to see you here from VV. Welcome. I appreciated your median price graphs on the VV website. Please don't take my comments as belittling the use of statistics as they are essential in my field of practice - I agree that there are times when eyeballing is sufficient and times when we need to know the p-value. I welcome both approaches. In this market, eyeballing with tell you the same thing that a p-value does, but I love the fact that you have gone through the trouble to do the analysis in SAS, SPSS, Stata or whatever your package of choice is to make it irrefutable (at p<0.05). I also appreciate that different analyses are coming to the same conclusion, which makes our conclusion more robust.
I also appreciate the fact that you are entirety neutral and stand by the numbers and nothing else - really appreciated.
BTW, the house that you mentioned on VV that was delisted - was it on Thompson?
Man, I'm glad the people who just bought my house didn't see this! Conditions cleared last night. I priced aggressively, and managed to sell at asking with 3 offers on the second day. I'm actually pretty happy to be out of the market now.
I do believe things will get much worse over the next few years
Ginna, congrats. It sounds like you got lucky on your timing.
I would keep a close eye on the market if you plan to buy in the future. The last downturn only lasted for a few months before the market came roaring back. I know many a person who thought they sold at the top, only to end up missing out on the bull market.
There's an old adage about real estate... Don't wait to buy real estate. Rather buy real estate and then wait.
@Chris: Real estate unit sales are not like stock prices: they have predictable seasonal components, much like employment statistics. And just employment statistics, if we want to know whether the market is currently bad or good, we need to adjust for seasonality.
You have written your point of view well - but I don't agree.
The real estate market is much like the weather. They both share:
* volumes of historical data
* seasonal variances
* limited ability to forecast
Using the weather example ... predicting trends in weather events one month into the future is barely possible. Predicting specific events within a few days is possible. Using a "seasonal adjustment" to analyze weather data provides little insight as variances in trends are obscured by the adjustment process.
Back to real estate ... what is the purpose of using a "seasonal adjustment" other than to try to explain the current/historical market conditions and predict future market trends. Adjusting the data implicitly suggests that analysis will be performed in order to determine such conclusions. Using a "seasonal adjustment" to analyze real estate data provides little insight as variances in trends are obscured by the adjustment process.
Gina, congrats on the sale. Your instinct is likely correct and we are in for many years of sinking real estate values. The only reason the last downturn was so short was the government dropped the interest rates to 0% and that juiced the market for a couple more years. There is nothing anyone has mentioned that could have that effect now. The party is over.
"I would keep a close eye on the market if you plan to buy in the future. The last downturn only lasted for a few months before the market came roaring back."
I do not agree that things are going to turn around this time. We are in for a few years of crashing and then many slow boring years of nothing in terms of real estate prices! I think a lot of the people that have taken their homes off the market recently are hoping for a magic turn around and are keeping their fingers crossed for the spring. Unfortunately I think they are kidding themselves - the conditions now are very different and the only reason for that "blip" back up in 2009 was due to government intervention and I think they have realised artificially propping up a bubble is only delaying the pain and this market needs to come down. I think the panic will really set in this spring when all the people waiting to list all start flooding the market with even more listings on top of already high inventory and when sales don't pick up!!
I don't understand why the Victoria market appears to have diverged from Vancouver. Year over year prices in Vancouver show strong gains, but Victoria is flat and sales in Victoria remain lower. The economy in Victoria has been fine and unemployment remained very low through the recession.
I wonder how much of the flat market is due to uncertainty with the provincial government and the HST, which hurts Victoria more than anywhere else.
Affordability is still good and interest rates are likely to remain low for quite a number of years, so I still think the market is unlikely to substantially correct. I think we are in for a number of flat years.
Where we disagree is the magnitude of the initial correction.
I am noticing another spike in listings and a lot of substantial price reductions today. Anyone else?
@Dave wrote: Affordability is still good and interest rates are likely to remain low for quite a number of years
I don't know how you are defining affordability, but at no time during the past 100 years has real estate cost as much as it currently does. In Saanich, the average family income is about $78K. Using the "4.5 rule" that lenders typically use to qualify mortgages, this means that the average couple with no debts and a solid credit history could qualify for a maximum of $350K ... which won't buy much at all.
@ a simple man
Yes, I'm noticing lots of price reductions over the past few days.
@ Dave wrote:
I wonder how much of the flat market is due to uncertainty with the provincial government and the HST, which hurts Victoria more than anywhere else.
The construction rate in Kelowna has been much higher than Victoria - I'm sure that the HST is "hurting" that market much more. However, there is much confusion about how HST is applied to real estate purchases.
David, I think there is definitely an effect from the HST. I think a lot of buyers entered the market early in the year due to confusion and that we are now feeling that loss. By next spring this should level out.
However, the referendum on the HST will probably cause people to sit and wait again.
Dave,
Allow me to pick on the HST effect for a moment: why is it that people feel there is some sort of outside effect that is causing the current slowdown? Can't it simply be that after an almost decade long buying spree, astronomical debt levels and low household equity that the pool of buyers is simply exhausted?
We've not seen any sustained price increase in 3 years despite lax lending standards and near-zero mortgage rates. The shine is apparently off houses-as-retirement-plans or get rich quick schemes.
For me at least, the HST has a negligible impact on the perceptions on resale housing sales. If someone wanted to make the biggest purchase of their lives, don't you think they'd at least take the time to figure out how the HST impacts their costs rather than throw their hands in the air and give up before they tried?
It's not like it's hard to find the info. And once the info is found and the calculations are made, the $3,000 dollar difference it may add up to on a $500K purchase shouldn't be a barrier. If it is, then these families have no business buying a home in the first place.
HHV, it's hard to gauge whether we are short of buyers or if there are other causes.
I think there are a couple metrics that can be used to consider this. The first is the percent of first time buyers in the market. I think they tend to feed the broader market. The second metric is a survey that measures intent to purchase. I have seen those numbers of Vancouver in the past, but not Victoria.
No question that sales volume is weak right now. We shall see if that holds or if it is a temporary blip.
More Foreclosures in Vancouver, BC, Canada
BC FORECLOSURES
lots of new listings and price reductions on my PCS today as well...
WiseInvestor70, you might want to upgrade your internet connection because it lags by 1.5 years.
@Dave
My point is, this has been an ongoing thing in BC for long time, the last time was saved by the Government intervention. But this time is different and we will see next year, when all the people that hold onto their properties or took them out of the market (OM), will try to unload 'em next spring a major flood of properties, with no buyers willing to take them out of their hands.
oh, and by the way I do have a fast connection here (50 Mbps) , which is one of the things that didn't really like about the Island, could never get a decent speed connection, just up to 15 Mbps.
The HST has KILLED the market!
Bottom line!
If you're a spec builder or realtor you're Doomed!
Thank your Govt!
@mrmike
Let's see if I understand this correctly. If a $3000 HST surcharge on a $500,000 purchase (using HHV's numbers, above) is enough to KILL the market, wouldn't this suggest that the market was already precarious and ready for a correction?
@ Dave wrote: HHV, it's hard to gauge whether we are short of buyers or if there are other causes.
Actually, it is pretty easy to track the amount of potential buyers by examining the volume of pre-approved mortgages from major financial institutions. Bankers I've talked to say that there was a frenzy in March but has become uncharacteristically slow since April. They feel that the changes to how rental income is calculated when determining mortgage loans has been the biggest reason for the slowdown.
It certainly didn't help did it?
Also, people who bought those shanty's in kettle creek had better get used to living there...for like ever!
I've seen trailer parks much more appeasing.
Good luck with the resale on those shacks!
@mrmike
No the HST is not helping sales - particularly expensive new developments. However, shouldn't the HST help future developments as builders will now be able to claim the 7% PST "portion" of the HST spent on building materials, subcontractors, etc. as an input tax credit?
It MUST help the consumers or it wont work.
If no one consumes...it all falls down!
"However, shouldn't the HST help future developments as builders will now be able to claim the 7% PST "portion" of the HST spent on building materials, subcontractors, etc. as an input tax credit?"
I am still trying to figure this out. Sure, there are input tax credits but I don't know if it will help smaller builders.
For example, I want to buy a home in Fernwood that is ready to be torn down for 350k. Great. I spend another 350k to build and I hit the market at 799k + HST. Is it just me, or am I charging HST on the initial 350k tear down as well? Even thought tax inputs lower your costs, you lose it because it applies on the entire price of the home, not just the improvements.
For example, when we had GST
350k for lot, 350k to build, sell for 799k + GST = 839k
Now with HST,
350k for lot, 350k to build, sell for 799k + HST - $26,250 rebate = $869k and apply tax input credits savings and you pretty much have what we had before.
Amazing to see this story on MSM TV. Great work getting on there Marko!
I don't buy the story that HST has killed the market - that is just shifting blame.
I also don't buy Dave's (not Davd #1 or David) polyanna arguments. It would seem that Dave surfaces to fill up the blogs for a few days and then disappears - he was quite active on vancouvercondo.info for the last few days as well. Dave - did the members of your association ask for you to try to spin the argument again?
Yes, I could buy now. Easily. But I'd rather not through a pile of dough away on a downpayment in a steadily declining market. Or lock myself in to being a slave to a too high mortgage for the next 30 years.
Marko - It shouldn't help you - at least not if you do as Gordo is saying big businesses will do and pass along the savings to the consumers (I'm not holding my breath on that one - I'm sure the consumer will only ever see a small portion of the savings that big businesses will enjoy). It will obviously help you if you aren't passing along the savings (or are only passing along a portion). That is of course if you can find any customers for your product at that price point. Ultimately the customer will vote with their wallet.
The assumption (which I still am not convinced will really happen) is that you will lower the selling price to reflect your lower costs.
"The assumption (which I still am not convinced will really happen) is that you will lower the selling price to reflect your lower costs."
Given my example two posts above, how can a builder really lower their price? The costs really aren't lower because what you save in tax input credits you get hit on the land.
Now the home that was 839k with GST is 869k with HST (after rebate), but because the builder is saving on input tax credits he or she can price it at 839k with HST. Same as before?
How can someone lower their selling price if the costs really aren't lower?
Marko,
You're viewing the HST scenario through a lens that won't apply to most new builds. Many new homes, I'd say the majority, are built on bare land, not tear downs. So bare land would be HST applicable to the developer, so they'd get to claim more of a credit than in your scenario. If they do so, they *should* be able to pass on some savings to buyer. Ultimately the market will decide what this savings is.
Sales volumes in Victoria are way down for two reasons:
First, the government introduced new policy in April that for the first time in decades actual restricts borrowing capacity. This restriction of borrowing capacity especially for first time buyers or those wishing to utilize rental income to increase their mortgage capacity is impacting the pool of buyers that can purchase at today’s prices. IMO it is no coincidence that this change in policy correlates almost perfectly with when sales volumes tanked in Victoria (a place that has a high % of houses with suite income).
Secondly, the media is reporting almost on a daily basis that we are in our could be in a housing bubble in Canada. This message has to be hitting home with potential young buyers who are being told that housing prices will drop. Why would you buy when you read this every day?
So we are seeing way lower sales volumes yet average prices may not drop as much because we have fewer low valued sales.
HST, IMO is having a miminal impact on the market.
So let me get this straight...everyone on this blog thinks HST is good for the housing industry?
Congrats on the TV clip Marko. :)
Mr.4AM
The difference that I see in the last 30 days is that sellers are now accepting offers at lower than what they had purchased the property.
Before, the sellers would have just taken their home off the market. This is a big big shift in psychology.
When you look at the over priced condos in Langford that were being sold by the developers, like Reflections and Latoria Walk, you see the re-sales are now showing a substantial loss. The same with the McMansions in Bear Mountain. I all so suspect that the retirement wave has run its course. A decade ago, one storey retirement ranchers were high in demand, today they are the least desirable. The same with condominiums for 55 years an older, they sell for less than suites without the age restrictions. I also would expect more of the new condominium complexes to be switched to rentals, because the BC Assessments and taxes are far less on a 90 suite rental building as compared to 90 separate strata suites.
"So let me get this straight...everyone on this blog thinks HST is good for the housing industry?"
That is a loaded question that can't even be answered straight on without missing what most people on here have been saying for years. The housing industry is broken. It has been broken for years and began when lending policies were changed to allow people borrow vast amounts of money very easily.
Reid says it very well, the tightening of mortgage lending is the number 2 factor that has hit housing. The number 1 factor is that housing is vastly over priced. The 3rd new factor is that the media is starting to change the perception of real estate. The HST does have an effect on buying and selling, but I'd say it has a bigger effect by being a media story.
Taking a page out of Patriots book, the Buyer sets the price of a house. The HST therefore comes off the sellers end, not the buyers. If they will only pay 500,000$ for a house, no tax, GST, or HST they will only pay out 500,000$. On the other hand the seller walks away with a very different amount.
The funny thing is that some people are mad and the government for putting through the HST because it makes life more expensive for the little guy. I'm steaming mad at the government for changing the rules to allow housing to become the main driver of our economy while basing it on unsustainable debt. It's endangered an incredible amount of young couples who's futures will be far more impacted by their debt than the introduction of a new tax. Lets add to that the ignoring of a leaky condo plague... we all seem to know at least 2 friends affected by this monster.
478 Fraser sold for 200k, pull the average down to 617k!
Mrmike;
I don't think anyone has said that the HST is good for the housing industry.
What most here have said, though, is that RE in Victoria is overpriced whether you look at it from a rent to purchase price ratio, an average wage to average purchase price ratio or some other measure. We also mostly agree that prices will go down further from here and will continue to do so for some time.
Everyone on this blog will **never** all agree. That is what makes it a valid discussion blog.
A Simple Man, housing fundamentals aren't limited to average income and rents, and even those measures can be misleading because it isn't the average household which is buying houses in Victoria.
A critically important factor is the REAL interest rate. The real interest rate is the nominal rate, the rate your bank charges you, minus the rate of inflation. The real interest rates times the price of the house is the biggest component of the opportunity cost of owning a house. Real interest rates have very large effects on house prices, holding incomes and rents constant.
Right now real interest rates are hovering around 1%, or even less, compared to an average over the last forty years of around 4%. That's certainly a big part of the reason prices have gone up so much since around 2002, although I doubt they explain all of the run up in prices.
We should expect to see prices rise and hold at high levels, even given no changes in the distribution of income or of rents, as long as real interest rates remain low. That doesn't mean prices aren't currently overvalued, but it does mean that market fundamentals suggest prices should be considerably higher now than, say, ten years ago, even though we haven't seen big changes in incomes nor rents.
Chris,
Two points:
1. I agree that real interest rates are a very large driver of housing prices. That said, prices can and have dropped in other markets despite low, steady real interest rates.
2. I don't accept your claim that average people aren't buying average homes in Victoria. They are. Many of them have been buying more than one in this town for many years. Locals drive the pries in Victoria. And there are not that many wealthy locals.
HHV, I neither said nor implied that real interest rates are the *only* reason housing prices change.
I didn't say "average people aren't buying average homes," I don't even know how to interpret that statement. Average income is not generally sufficient to summarize the effect of changes in income on change in housing prices, and part of that is because the average house buyer in Victoria is absolutely not someone with average income. The average house buyer (particularly in Victoria) has substantially higher than average income, and for that reason changes in average income do not necessarily tell us much about how housing prices should change with average income.
For example, a mean--preserving spread in the distribution of income, that is, a change in the distribution of income which leaves average income unchanged but makes the relatively rich relatively richer (and the poor relatively poorer), should increase house prices in Victoria. A broad feature of changes in income distribution in Canada over the last three decades is that average incomes have changed little, but the right tail has shifted out. Looking at that change and concluding that since average income hasn't changed so we shouldn't expect housing prices in Victoria to change is mistaken.
Chris;
Thanks for your points - I agree that no measure of housing affordability can accurately capture all of the nuances of the market. Definitely cost to rent and cost to income ratios do play a role, as does market interest rates and real interest rates.
The ratio of average Victorian home cost to average Victorian income is around 8 - affordability is often pegged at 3.
If the average Victorian is not buying real estate in Victoria who is?
If the interest rate truly is the driver of the housing economy, what happened and is happening to the US, where interest rates have been equal to our and are now cheaper? What about Japan and their interest rates and housing slump?
I agree that interest rates play a large role, but they are not in isolation.
The mere fact that incomes are not keeping pace with housing prices says a lot about affordability. It was the combination of low interest rates and lax loan regulations that allowed people to drive the prices up. Now that the lending rules are becoming more conservative and logical there is a decrease in the number of people that can afford really high prices, even though interest rates are still historically low, despite three recent increases in prime.
But, I do agree, that interest rates have an important place in our discussions. I just can't see these prices being sustained.
I just had something suspicious pop up on my PCS - a house came on as new and sold...but it sold back in April (April 16th) and the sold date still says this but I hope it is not some shady way of counting it as a sold property for September to try to boost the dismal sales numbers so far. The address is 1027 Oliver. Has anyone else seen something like this on their PCS with other properties? Marko - are you able to see if this property is being counted toward Sept sales? Or do you know why it would come back on like this? Computer system glitch or shady business practice?
Chris,
I'm convinced we follow the path of Ireland which presently has 'real' rates of 7-8% (August inflation rate of minus 1.2% and a 10 year bond yield closing in on 7%). Since we had a similar run-up in prices, i'm certain bond investors will eventually punish our incredible debt loads as well.
The average income to average price ratio should not be interpreted as literal statement. All it is an economic indicator for comparison purposes.
For example if we assume that the average household income in Victoria is $65,000 and the average home is $650,000 that is not to be taken literally that someone making $65,000 is buying a $650,000 home. If you were to look at only prospective purchasers for homes, you would find the prospective buyer household may have an average income of $95,000. That's why you here some ridiculous statements about China, like the income to price ratio is 50 times there. There are a lot of poor people pulling down the average income. These poor people are NOT prospective purchasers for a $300,000 china condominium and skew the indicator. Of course, Canada will not be as skewed as China as we have a larger group of middle income earners.
Most or almost All, buyers of houses in Victoria are also sellers of condominiums or less expensive homes. A decade of rising prices has had the affect of building up a lot of equity in people's homes. And most of these house buyers will be putting down 20 percent to escape CMHC fees. And rarely do they put down more than 20 percent. Because it only makes economic sense to max out your mortgage with a cheap interest rate.
Given all of the above, you can feed the data into a mortgage calculator and get the maximum price for an average home.
$95,000 X 32% debt ratio = roughly $2,527 per month in payments
4.1 percent mortgage amortized for 30 years is a mortage of $520,000 plus a down payment of $130,000 for a total home price of $650,000. This shows us the price ceiling for the average prospective middle income buyer.
The key is the down payment, as prices roll back, the amount of equity contracts, so a prospective buyer no longer nets $130,000 from the sale of his starter home. So if the down payment drops by $30,000 to $100,000 then the total price, maintaining a 20 percent downpaymet falls to $500,000.
If appreciation rolls back to zero, then prospective buyers can only purchase by saving up the down payment. If they save and use their combined RRSP contribution of $50,000 then the total home price drops to $250,000. The length of the trough in prices being roughly the length of time for a middle income household to save $50,000.
Our market is dependent on continually appreciating values. Without a continuous infusion of "bubble bucks" our market begins to contract. Once the market place starts contracting it has to fall to a level where people's savings provide the down payment.
Chris, if you don't believe that people with average incomes in Victoria are (and have been) buying 500k+ homes then you need to get out there and make some friends.
I know at least a dozen young couples/families who have combined incomes less than 80k who have purchased 500k+ homes over the last few years. Some have DP help from family buy many are 5 percenters. Just saying.
"If the average Victorian is not buying real estate in Victoria who is?" The average home owner has, unsurprisingly, above average income. That doesn't mean that people with average income never buy houses. It means that the probability of owning a home is higher in the right tail of the distribution of income than in the left tail.
Suppose we hold mean income fixed but increase the dispersion of income around the mean. We make poor people poorer, but they tend not to buy houses anyways, so demand doesn't shift much through this mechanism. But we also make richer people richer still, and that may drive up house prices. The actual distribution of income in Canada has experienced something that looks much like that shift over the last few decades. That implies that the ratio of house prices to average income should have increased, even ignoring other changes in the housing market, and even if we assume that the housing market is always in equilibrium. This mechanism is likely to be particularly important in particularly expensive housing markets, such as Victoria.
Pegging "affordability" to ratios of house prices to income is naive, even ignoring the distributional considerations above, because income is not the only determinant of house prices. For example, a house at a given price becomes more affordable as the real interest rate falls. Work a simple numerical example: ignoring expected appreciated or depreciation and some details, a house which rents for R dollars per year should sell for about
H = R / ( r + m ),
where r is the real interest rate and m is maintenance costs, property taxes, and the like. m hasn't changed much over the last decade, r has. What happens to H if you decrease r from 0.05 to 0.01, holding m and R constant? (Incidentally, Just Jack, your numerical example implicitly assumes that the real, not nominal, interest rate is 4.1%. It's actually about 1%.)
The best econometric evidence from the U.S. suggests that the semi-elasticity of house prices to the real interest rate is about -0.08, that is, a one percentage point decrease in real interest rates causes about an 8% increase in house prices. So this effect alone suggests roughly a 30% increase in real house prices in Canada over the last decade or so, assuming about the same relation holds in Canada. That means in turn that even ignoring all other considerations, we would expect price to rent ratios and price to income ratios to be substantially higher than they were a decade ago even if we assume the housing market is always in equilibrium.
"I agree that interest rates play a large role, but they are not in isolation." Again, I never said nor implied that the real interest rate is the SOLE cause of house prices. That means in turn that pointing out examples where prices move but interest rates do not, or vice versa, is not evidence against the claim.
thanks Chris - I understand what you are saying regarding the average income earner in Victoria and the average homeowner in Victoria - they are not the same group, although they are also not mutually exclusive. I agree that the right-tail phenomenon exists...but I would think it too exists in every city where the 3x average income rule is applied.
When I wander around downtown I wonder how anyone working in the stores, serving in the restaurants or working in a lower paying job could ever afford a home here? The answer is they can't, and that is sad.
I never meant to imply that you thought that interest was a sole driver, and I am sorry if it came out that way. We can agree that it is complex and difficult to predict exactly.
I would tend to think that the majority of the evidence points towards a decreasing market in Victoria. Especially when we look in the trenches lately, with excessive dropped prices and off-market listings coupled with generationally-low sales numbers.
@Chris
I respect that you are trying to understand the dynamics of who is buying in the Victoria real estate market. Unfortunately, trying to extrapolate the situation by looking at the current numbers does not yield an accurate picture of who is buying and the debt that is being incurred.
Let me describe a few things from the very average neighbourhood where I live in Victoria:
[1] Many homeowners who purchased their condo/townhouse/house before the recent "boom" paid much less that the current resale price. For example, I purchased my house in 2002 for $217K. This price seems unbelievably low by "todays standards", but was about 3.5 times the average family income eight years ago. (The average income has barely changed.)
[2] My ex-next-door-neighbour sold her house (virtually identical to mine) at the end of March 2010 for $525K. She had purchased it about 4 years earlier for $375K, so all in all - she made a tidy profit. Her fiance also had a house that he sold in early March. They pooled together their resources and purchased a new home at Bear Mountain for $850K. Both her and her fiance's incomes are very average, but due to "good timing" they were able to "move up" in the real estate market. However, I wouldn't be surprised if between them they have a mortgage for 500K on their Bear Mountain home.
[3] The fellow who purchased my neighbours' house was helped out by his parents. They wanted to make sure that he could buy a house in Victoria before he was "priced out". Although he has a very average income, in order to meet his mortgage obligations he rents out the downstairs floor of his house to a young couple and lives with two roommates upstairs. (There are 5 people living in the house - 4 who are paying rent.) His parents told me that they were in a rush to help him buy a house as he would not have qualified (due to changes in how rental incomes are calculated) after April 19th 2010.
All these situations are with average people with average incomes. The difference is that I have only $90K left on my mortgage while both my ex-neighbour and new neighbour owe about $500K. I will finish paying my mortgage in 3 years while they will be paying for the next 30+ years.
My ongoing concern is that these people will soon find themselves in a negative equity situation and hampered by many years of debt. This is going to have a profound effect on the local and national economy as mortgage holders are obliged to pay a large portion of their net income into debt repayment rather that purchasing goods and services. I'm sure you can appreciate the cascade effect that this could have to the economy ... which is the exact situation that we are currently seeing in the US.
911 Linden Ave
Just dropped $100,000
911 is about right.
I will finish paying my mortgage in 3 years while they will be paying for the next 30+ years.
Why don't you sell your house, bank your $400K+ equity and buy back in after the armageddon (I mean correction)?
DavidL, I have no idea why you think your anecdotes contradict anything said, nor why you're fixated on the notion that I'm extrapolating anything.
@Chris wrote: The average home owner has, unsurprisingly, above average income.
My anecdotes are about average home owners with average incomes and thus contradicts your opening statement (quoted above). Anything else that I can clarify?
@BnF wrote: Why don't you sell your house, bank your $400K+ equity and buy back in after the armageddon (I mean correction)?
The amount of my mortgage is similar to that which I would pay on rent. In just over three years: the property taxes, insurance and house repairs/upgrades will then be about $12K/year. A 2400 sq. ft. house for $1000/month is a sweet deal in any market.
The amount of my mortgage is similar to that which I would pay on rent. In just over three years: the property taxes, insurance and house repairs/upgrades will then be about $12K/year. A 2400 sq. ft. house for $1000/month is a sweet deal in any market.
If you really believe the market is headed for a major correction you would cash out and buy a bigger, nicer house in a couple of years for the same money instead of riding the market down.
If David listened to the advice of most bloggers he would have sold his home five years ago. But now he will be mortgage free in three years. Why should he care what the market does? Why try to time something that may or may not happen?
^ Maybe David wants to be a multi-millionaire. A paid off house isn't enough for him. he wants more....MORE!
I am having a flood of new listings coming onto my PCS - my total listings have been climbing for the last few weeks - this time of year inventory should be shrinking not growing - at this rate we are in for a major crash even bigger than I had previously thought - things are really picking up speed - I am seeing tons of new listings and they are coming on at way lower asking prices - they are making the listings that have been sitting for the past few months look like a joke! We really are in freefall now!!
DavidL, I explained the meaning of my remark several times. Your anecdotes do not in any sense overturn that remark. Your anecdotes are, for that matter, utterly irrelevant.
@BnF wrote: If you really believe the market is headed for a major correction you would cash out and buy a bigger, nicer house in a couple of years for the same money instead of riding the market down..
You are probably right. If I followed everything that Garth Turner says, I would have sold months ago. ;-) But it's not all about money ... it is nice to build roots in a friendly neighbourhood and have a stable place for kids to grow up.
@a simple man wrote: When I wander around downtown I wonder how anyone working in the stores, serving in the restaurants or working in a lower paying job could ever afford a home here? The answer is they can't, and that is sad.
I totally agree. Unfortunately many people working in the service industry will always have a hard time making ends meet and home ownership will remain out of reach. However, this has always been the case over the past 25+ years.
@Chris, there is evidence to suggest that it's the change in interest rates, not the real value, that is the biggest determinant of price changes. I don't buy that "real rates" are negative. There is chronic unemployment and wage growth is anaemic and likely zero sans stimulus. That is hardly a recipe for inflation.
Also while rates are low, it is a valid point that the upwards price shock due to lower rates is reciprocal. It's not a ratchet.
Chris - there would seem to a prime consideration in your long discussion which may be astoundingly wrong:
"But we also make richer people richer still, and that may drive up house prices. The actual distribution of income in Canada has experienced something that looks much like that shift over the last few decades. That implies that the ratio of house prices to average income should have increased, even ignoring other changes in the housing market, and even if we assume that the housing market is always in equilibrium. "
Is there any factual basis for this assumption? There are a number of other assumptions that are made in your missive, all of which could be strenuously questioned.
While it somewhat simple to create a model to demonstrate that there is rationale for current conditions (which of course there is, hindsight it 20-20), I challenge you to demonstrate if your model would have held with the statistically improbable event that occurred in the U.S.- i.e. house prices actually go down. That is what blew up the financial system in the U.S. - extreme reliance on econometric models that were unfortunately based on the assumption that house prices always go up.
Prices are too high. It is that simple. I don't care about either an advanced statistical or arm-waving rationalization as to why this is expected. It is a simple as prices are too high.
Nicely done Marko. It's rare to see someone not pushing their own self interest. Kudos.
DavidL Said (about service industry people not being able to afford homes): I totally agree. Unfortunately many people working in the service industry will always have a hard time making ends meet and home ownership will remain out of reach. However, this has always been the case over the past 25+ years
The past 25 years are not relevant. In the past year, Canadian service sector job growth has more than doubled that of the goods-producing sector. There is a new reality, and that is a much higher number of service jobs and rapidly shrinking middle class income.
Ginna: Man, I'm glad the people who just bought my house didn't see this! Conditions cleared last night. I priced aggressively, and managed to sell at asking with 3 offers on the second day. I'm actually pretty happy to be out of the market now.
I know someone who has done very well in his life, held C-level titles in prominent companies, cashed out stock options, etc. He recently sold his big house in North Vancouver (at a very tidy profit) and is renting a great condo in order to keep his cash available for other investments (like potentially soaring global equities markets). There's a reason the rich stay rich.... when they are 65% certain of a good or bad outcome, they don't get hung up on their current perspective, and act quickly and decisively. Sounds like you have a bit of CEO in you there Ginna.....
@Jesse: Please cite. Credit constraints could introduce a role for nominal rates, but it would be surprising if nominal rates were more important than real rates. Note I didn't say that the real rate is negative.
@Animal Spirits: I made two points.
One was that the distribution of income, holding mean income constant, should affect housing prices. The only way that *couldn't* be true is if the housing demand-income gradient were statistically independent of income (loosely, if we give a dollar to a rich person or a poor person, they'll spend exactly the same fraction of it on houses). The conjecture that recent shifts in Canadian income distribution have pushed up house prices in Victora draws on evidence presented by Gyourko et al, National Bureau of Economic Research #12355.
The second point was that real interest rates have big effects on house prices. That's hardly a controversial statement, and there is lots of evidence that that's true. The equation I presented certainly does not assume that housing prices cannot fall, and in fact no econometric model assumes that housing prices cannot fall---I think you are confusing econometric models with algorithms sometimes used in banking (not even the same type of beast). That's in part because it is not "statistically improbable" that housing prices fall---it's quite common that housing prices fall: people would laugh at a piece of econometric work which imposed an assumption that prices cannot fall.
It is actually not quite easy to produce a model which rationalizes current housing prices---most models predict that housing prices should be lower than we currently observe, albeit higher than they were a decade ago. Because, as you say, hindsight is 20/20, in *years to come* we will be able to look back and form pretty solid conclusions over whether we're currently in a bubble. Right now, it's harder to tell, although it's certainly plausible.
Finally, I did not say that houses in Victoria are not overvalued. As I have said several times, I expect housing prices in Victoria to fall, and, again, it certainly plausible that we are currently in a positive bubble---note in this thread, for example, I pointed out that it's unlikely that changes in the interest rate can explain the large run up in prices over the last decade.
If you want to "strenuously question" anything I've said, knock yourself out, but please do respond to what I've actually said---you appear to be quite angry with me over things I never said.
Huge price drop on a home this moring I noticed when searching the matrix for price changes.
Original Price: $548,000
New List Price: $547,900
DavidL: "My ongoing concern is that these people will soon find themselves in a negative equity situation and hampered by many years of debt. This is going to have a profound effect on the local and national economy as mortgage holders are obliged to pay a large portion of their net income into debt repayment rather that purchasing goods and services."
I think you hit the nail on the head. What is worry-some about the recent trend are long term implications of large amounts of debt. This will have strong repercussions for peoples lives into their retirement and is one of the reasons why I think it's financially irresponsible for myself to buy here.
Chris also hit the nail on the head with his explanations. One concern I have with real interest rates is that they change rather quickly, while the leveraging in your mortgage last 30+ yrs for many recent buyers. So while real interest rates can explain some of the price run ups we have seen over the past years, they also indicate the large amount of risk that you assume when you borrow at such low rates.
Another thing: What is the level of homeownership? I heard some numbers that sound unrealistically high (70%). However, if those are true, then the whole "most buyers are in the right tail of the distribution" does not make much sense. I guess what I am thinking is that for a meaningful analysis one needs the income distribution compared to the average house price for that percentile of the distribution. I would think that those ratio numbers would be quite high (perhaps not quite the 8 times).
Chris, there is not doubt that lower interest rates have had a big impact on driving up real estate over the past decade because they have allowed people to simply borrow more money. But it is important to note that the change to allow longer amortization periods and a lax approach to allowing rental income to enhance mortgage borrowing have also been major factors in enhancing borrowing capacity.
When I bought my first house some 20 years ago I had to knock on the doors of many banks and fight hard for weeks to secure a mortage that was 2.75 times my income. This was when houses were about three time average income levels.
Up until this April, a buyer today just visits a mortgage broker who was able to secure up to eight times income for people if the house had decent rental revenue and six times income without any rental revenue.
Recently houses had been selling for about eight times average income. As I have suggested before on here, there is a very high correlation between mortgage borrowing capacity levels and house prices in BC. But mortgage borrowing capacity has been driving up by more than just interest rates.
The changes in April have impacted borrowing capacity for some buyers and this is impacting the market. This is a good thing as we simply cannot continue to allow Canadians to borrow at these insane levels even if it has been supporting the current economy.
It is important to note that if and when interest rates rise back above 6% this market (likely still a few years away) is going to get very messy.
Just Jack:....Please come back...say anything!! Your sense of humour is so very much missed.
Prices are too high. It is that simple. I don't care about either an advanced statistical or arm-waving rationalization as to why this is expected. It is a simple as prices are too high.
Hold your breath until prices come down! I'm sure that will do it.
Just Jack:....Please come back...say anything!! Your sense of humour is so very much missed.
Geez, he was just here yesterday!
Chris - the arm-waving comment was not related to your post - your analyses look well thought out, however given the number of variables (and therefore assumptions) may not track reality as closely as a simple analysis. btw - I stand corrected on econometric vs. banking models. The basic issue that occured globally is that the 'system' priced out the chance of house prices falling and therefore went into shock when they did. Not angry by any means. Quite content instead.
Marko - even though 478 Fraser is a small house on a very small lot in a lower end area of town, how would this sale set a new precedent for lot prices for developers? Or is the lot too small for that?
As for 911 Linden - that is a nice looking house - anyone know how it is priced compared to assessed?
@Alexandrahere wrote: Just Jack:....Please come back...say anything!! Your sense of humour is so very much missed.
I don't have Just Jack's fine-tuned wit with words, so instead here's a Raeside cartoon from Feb. 10th 2010 that will hopefully lighten-up the discussion:
http://raesidecartoon.com/dbtest/images/8/3028.gif
As for 911 Linden - that is a nice looking house - anyone know how it is priced compared to assessed?
It's a 1903 shithole, assessment is stell less thsn it's newly reduced price. Absurd asking prices (and subsequent price reductiions) don't make the market--actual sale prices do.
Bubble - thanks for the info on the assessment for the Linden house. How much more than assessed is it listing for? It is out of our price range, so my question is out of interest only.
Hi Animal Spirit - 911 Linden is assessed at $868K.
"Marko - even though 478 Fraser is a small house on a very small lot in a lower end area of town, how would this sale set a new precedent for lot prices for developers? Or is the lot too small for that?"
Way way too small to be used for any kind of analysis.
"Has anyone else seen something like this on their PCS with other properties? Marko - are you able to see if this property is being counted toward Sept sales? Or do you know why it would come back on like this? Computer system glitch or shady business practice?"
This property is not being counted for September sales.
You can analyze, theorize and intellectualize all you want about what is, was and will be in terms of the real estate market here in Canada, BC and in particular Victoria.
However the fact is, given the average household income (or was that median household income reported in the times/colonist recently?), in Victoria is almost $78,000 per year. (The eighth highest in Canada) That household can only "afford" between 3- 4-1/2 yrs income to pay for the family home. If the average family home here costs $600,000 then people are paying 7.69 years of their income for the price of their home. Simply put, this is not sustainable. We all know why it has been in the short term i.e. due to government interference and blah, blah, blah, however since around 2005 it has not been a question of IF the market will bust, it has been the question WHEN will it bust.
The answer is: The fall of the current real estate market started in 2008, got lifted back up again by we know who and why and it started spiraling down again in the spring of 2010.
When people believe something to be true.....it is true. People believed, as they have in the past that real estate prices can only go up and they rushed in to get their slice of pie before it was too late. And they ate and licked their lips and even added some ice cream to it. But things change. People now believe (for a number of reasons), that real estate is going to tank and so it will as the herd of cattle have made an abrupt about turn and it is trampling all over the market place, leaving a path of devastation and ruins in its wake for many.
Haha. Marko, I just saw your ad on facebook. Maybe it's because I reposted that real estate cartoon Facebook figured I was interested. Facebook knows all!
Visited 3 open houses yesterday. All were overpriced, as if they were offered for sale in the fall of 2009, by at least $100K. All were sub-standard homes with suites or suite potential, all were in need of repairs or immediate work to make them either livable or rent-able, I'd peg repair work at $20K minimum.
Needless to say we were the only people in the properties for the 20 minutes or so we spent in each.
Comments from REALTORS® included:
"The market is dead. But it's a great time to buy because you can drive the deal."
"My sellers are motivated, but they don't understand the market is falling very fast. We've been chasing the roller coaster down for 6 months now. Last fall we could have sold this place for what we're asking now, not anymore. 10% off minimum."
And I kid you not: "You're lucky, you just missed the rush."
"Haha. Marko, I just saw your ad on facebook. Maybe it's because I reposted that real estate cartoon Facebook figured I was interested. Facebook knows all!"
It is because you are between 25 and 65, you are a university grad or have a university listed under your education, and live within a 25 km radius.
With the statistical/affordability analysis here ranging from in-depth to simplistic, I thought I would offer my own simplistic twist.
With an average household income of$78,000 does that mean the upper 50% of households ( about 80,000 ) have an average $150,000 income? If so, a $600,000 home would easily be within reach in this group.
Also,
Using the $78,000 household average and the 4X income for the price of the "average" family home, does that now mean that the average family home in victoria is no longer a detached house but a 2 bed condo and the detached home is now a premium real estate product that only a higher income earning family should afford.
"That household can only "afford" between 3- 4-1/2 yrs income to pay for the family home."
What is the average for cities in Germany, France, UK, South Korea, and Taiwan? Etc? I do not think we are ever going to get back to 4x below average income for a SFH going foward.
"does that now mean that the average family home in victoria is no longer a detached house but a 2 bed condo and the detached home is now a premium real estate product that only a higher income earning family should afford."
This has been the case in most of the world for decades.
On the bright side, cars are becoming dirt cheap compared to incomes. Just saw the brand new 2011 Jetta starting at $15,800. Very large car for the price of a compact. Looks like an Audi from the back.
Happy Owner,
"does that mean the upper 50% of households ( about 80,000 ) have an average $150,000 income?"
No, it does not. Income distribution is a bell curve. Meaning the majority of households would make between $60,000 to $90,000. Only a couple percent of Victoria’s population would average $150,000. Kind of like IQ score. For instance, 70% of people fall between 85 and 115 IQ. Only about 2% are over 130.
Graphs like this show the pointlessness of house price to income: http://www.globalpropertyguide.com/Europe/Germany/price-gdp-per-cap
What we need to figure out is the average income for home owners relative to the average home price.
Perhaps a reasonably safe assumption (modulo many on this blog) is that given a home ownership rate of 70%, let's take out the 30% of lowest earners and get the median income of the remainder. Not sure if that data is accessible anywhere, but it would be interesting to see what the ratio is then.
Again, there is no magic ratio of average house price to average income which is "correct," or that we should expect house prices to return to should they move away.
Suppose it's 1998 and the real interest rate is 6%. A person with an income of $100k who thinks $30k per year in mortgage payments is affordable could purchase a house worth about $390k with a 25 year term.
Currently real interest rates are about 1%. That same person with the same income using the same criterion for "affordable" can now purchase a house worth about $660k.
Equally affordable houses, yet one is 3.9 times income, and the other is 6.6 times income.
Interest rates are probably the single biggest factor that've changed over the last decade, but -any- change in the economy that affects house prices or income will generally change the average house price to average income ratio---there is no "correct" such ratio.
What we need to figure out is the average income for home owners relative to the average home price.
No you don't. What matters is that you always use the same metric for historical comparisons. That is, if price/(median of all incomes) is out of whack with historical norms, so will be price/(median homeowners' incomes).
No you don't. What matters is that you always use the same metric for historical comparisons.
Except that metric has a confounding factor of income distribution so it isn't a very good metric at all.
Leo S,
Please elaborate on your last point.
@Chris, Here is the paper I was reading:
House Prices, Interest Rates, and the Mortgage Market Meltdown
While real rates certainly have an effect in the short term, as they should, it is unclear what happens to asset prices if real rates stay low for a prolonged period of time. In extreme we can imagine a condition where rates stay low for decades (a la Japan). If rates did stay low for a prolonged period, it would signal low wage growth and economic malaise. For an asset class whose valuations factor in and depend on wage growth I would expect a reckoning under such conditions.
Patriotz, as you should be well aware, price to income ratios are not the relevant metric for housing values. Rather, total monthly costs as measured by affordability has proven to be a much better and more highly correlated measure.
Month-to-Date Market Statistics
Posted by
Sep 20 2010
Monday, September 20, 2010 8:30am:
MTD September
2010 2009
Net Unconditional Sales: 185 776
New Listings: 779 1,129
Active Listings: 4,214 3,419
Househunt, if you choose to repost the stats on the front page with my link, can you put after the link "courtesy of the VREB" or possibly at the end of your article.
Thanks, Marko
Price changes for the week = 189
SFD Month to Date
Averages...
Price Original = $643,469
Price List = $630,605
Price Sold $606,730
I am going to start following the spread between price original, listed, and sold.
Jesse, thank you for the cite, that is an interesting paper, but I don't see where they make anything resembling a claim that the nominal rate is more important than the real rate. I don't see where they even consider that possibility---all of the analysis, as is usual in the literature, focuses on the real rate (for that matter, all prices they consider are in inflation-adjusted terms, also standard practice). For example, they begin the conclusion by summarizing,
"Throughout much of the paper we have argued that real interest rates have an
important impact on housing and real estate prices. Evidence in favor of this
hypothesis comes from an examination of global housing and commercial real
estate markets, as well as statistical analysis of the user cost model in explaining
the relative movement of the price-rent ratio in United States metropolitan areas."
When they just say "interest rate," in context (and from examination of the equations), they mean "real interest rate."
I think it already has been clarified. The P/I ratio sort of works here because the income distribution is fairly stable (I assume). That link shows it doesn't work at all for developing nations. As their middle class expands the P/I will drop precipitously but that makes no difference to home buyers (in fact actual affordability would likely decline).
Let's look at sales by some other metric.
In the last 30 days there have been 23 home sales and 57 condo/townhome sales in the city of Victoria. The city of Victoria has a total stock of 10,500 homes and 10,500 strata homes. The population is 80,000 house lusting soles.
So, 0.22 percent of total homes sold last month
And 0.55 of total condominiums and townhomes sold in the last 30 days.
Or 1 person out of 1000 bought a home last month.
Okay, thats sounds bad - how about we expand and include the core municipalities which do not include the Westshore or the Peninsula or Sidney.
The last 30 days saw 106 homes and 130 strata homes sell. There are 50,500 homes and 25,500 strata homes in the core districts and a population of 250,000.
Again thats 0.2 percent of the home stock and 0.5% of the strata home inventory that sold last month. Or roughly 1 out of 1,000 inhabitants bought last month in the core districts.
Okay, let's go BIGGER and include the Westshore and Peninsula along with the core.
169 home sales
189 strata home sales
number of homes is 76,000
number of strata homes is 24,000
population 360,000
0.2 of the total stock of homes sold last month. 0.8 percent of strata homes sold. Again about 1 out of every 1,000 soles bought the dream last month.
So about 1 out of 1,000 people bought property last month which is about the same amount of people with mental disorders. So if you just bought last month you now have something in common with the guy downtown who is talking to himself without the aid of a phone.
o
Nice DavidL and Just Jack...we have some fun back on the blog.
I'm out all day so here are my stats. Looks like September will add up to be the worst month yet in terms of sales for the year 2010.
Week of 13 -19 Sept 2010
SFH: Saanich East, Saanich West, Oak Bay, Esquimalt, Victoria and Vic West.
Min. 2 bedrooms and 2 baths priced from $375K - $775K.
SOLD: 9
NEW: 35
P/C: 31
OM: 16
Average sale price within this criteria: $577,555.
Condo's (Apartments & Townhouses)
Areas: Victoria: Most Areas
Oak Bay: All
Esquimalt:All
Saanich E:Most
Saanich W: Gorge, Tillicum & Interurban.
Min 2 bedrooms. Priced from $260K-$625K
SOLD: 6 Apts & one Townhouse
NEW: 23
P/C: 24
OM: 11
Apartment condos sold for an average of $324K within this criteria.
The one townhouse sold for $399K.
"I don't see where they make anything resembling a claim that the nominal rate is more important than the real rate"
The only conjecture I forwarded is that the time derivative of interest rates can have a large effect on price changes. While real rates have an effect we shouldn't ignore that the change in rates may be equally if not more significant.
Canadian markets rallied when real rates changed. Was it the change or the end destination that caused prices to rise? What will happen to prices in, say, 20 years if real rates remain low?
It's also worth remembering how real rates are defined.
Jesse, I don't mean to belabor the point, but your claim was, "there is evidence to suggest that it's the change in interest rates, not the real value, that is the biggest determinant of price changes." That isn't conjecture, and that isn't what the paper you cited found.
From the article, "This elasticity suggests that changes in interest rates have played a major role in the recent United States housing boom (and bust)."
There are more data and citations in the report indicating the many factors contributing to house prices. Interest rate changes appears to be one of them, along with real rates.
Jesse, that quote refers to the elasticity of house prices to user costs, and user costs are calculated using REAL interest rates. They use a slightly more complicated version of the equation I gave above to calculate user costs.
There is nothing in this study, or anywhere else as far as I'm aware, suggesting that nominal rates matter at all, much less that nominal rates are more important than real rates.
You will wish to put abroad things that appearance you accept pets, and yield the pictures so that your apartment attending ample and large.
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