Saturday, October 30, 2010

Over valued

Lots of media and pundit chatter about the over-valued Canadian real estate market lately. Estimates from TD Bank, Scotiabank, RBC, CIBC, Gluskin Sheff and the Economist peg the average Canadian price differential from whatever baseline measurement they're using ranging anywhere from 10% to 30%.

I thought it would be interesting to show what this means (if the market values drop) to the Victoria market using VREB's reported median prices on condos, town homes and single family dwellings. I've taken the liberty to add the monthly mortgage payment based on a 10% down, 35 year amortization at 3.45% interest. I've also added the percentage of gross income these payments represent compared to an annual median household income of $80,000 - which is $6,667, EEK! per month.

Unit Type 09/10 median $ 10% drop 20% drop 30% drop
Condos $290,000 $261,000 $232,000 $203,000
Town house $426,000 $383,400 $340,800 $298,200
SFH $531,000 $477,900 $424,800 $371,700
Condo mortgage $1,067 $949 $830 $748
Condo income % 16% 14% 13% 11%
TH mortgage $1,568 $1,394 $1,220 $1,098
TH income % 24% 21% 18% 16%
SFH mortgage $1,955 $1,738 $1,520 $1,370
SFH income % 29% 26% 23% 21%

Mortgage debt servicing, generally, as a rule, is not to exceed 32% of gross income. Total shelter costs, including taxes, maintenance etc, is not meant to exceed 40% of gross income. The above household income would be taxable in BC at an approximate marginal rate of 32.5%, leaving an average net income of $61,938 or $5,161 monthly. Check out what happens to "affordability" when we factor in taxes and ownership costs* to the % of net income calculations:

Unit Type 09/10 median $ 10% drop 20% drop 30% drop
Condos $290,000 $261,000 $232,000 $203,000
Town house $426,000 $383,400 $340,800 $298,200
SFH $531,000 $477,900 $424,800 $371,700
Condo own costs $1,392 $1,274 $1,155 $1,073
Condo income % 27% 25% 22% 21%
TH own costs $1,943 $1,769 $1,595 $1,473
TH income % 38% 34% 31% 29%
SFH own costs $2,380 $2,163 $1,945 $1,795
SFH income % 46% 42% 38% 35%

What do you think? Any new insights or perspectives? Not accounting for any future changes in interest rates etc, does this look realistic and/or sustainable to you?

* costs are calculated as mortgage + strata/maintenance fee + property taxes for THs and Condos; and mortgage + maintenance costs @ 0.5% + property taxes for SFHs. Strata/maintenance fees/costs and property taxes are approximates.

Friday, October 29, 2010

Open thread

Been a crazy busy week for me. Cat has my tongue, or fingers, or brain, or....

Open thread for you to discuss anything real estate related.

Monday, October 25, 2010

Monday market update

MLS numbers courtesy of the VREB via Marko Juras.

Month to date October 2010 (last week's totals in brackets)
Net Unconditional Sales: 360 (251)
New Listings: 786 (539)
Active Listings: 3,980 (3,963) 

October 2009 totals
Net Unconditional Sales: 742
New Listings: 1,067
Active Listings: 3,219 

New inventory is only slightly outstripping sales (109 sales in the past 7 days versus 247 listings). Active listings are up slightly, although expect the end of month listings dump to bring this number down by a couple of hundred or more. Unless we have a very busy next 6 days, October 2010 numbers will be very close to September 2010 sales volumes. I expect the reported sales to surpass 400, perhaps even reach 450 - which will be celebrated by the usual suspects as "Sales jump by 13%!"

SFD average price is currently $615,112. Marko provides us with these numbers for original list ($683,380), revised prices ($638,634) and final sale prices ($615,112) which suggest vendors are still pricing their units almost 10% above market value when they first hit the market. If you're out there shopping, perhaps this is the kind of discount you should be negotiating.

Sunday, October 24, 2010

CREA ratifies deal with Competition Bureau

H/T to Animal Spirit for the link.

Here's what we know:
  • Very little. 
  • No details.
  • CREA says this deal exonerates any claims by the Competition Bureau that previous methods of managing the MLS were anti-competitive.
  • Competition Bureau says consumers will be able to pay for "what they want" on a case by case basis rather than be forced to purchase a suite of services for a set commission rate - although it's unclear how this will be accomplished.
Here's what we don't know:
  • If Victoria REALTORS® will adopt new fee-for-service business models or simply maintain their current commission-based models.
I think we'll see changes, slowly. I think the establishment will fight these changes bitterly. I expect that many consumers will be very confused because of what individual REALTORS® will be telling them regarding their commissions and cooperating brokerage commissions etc. I expect the VREB to be very quiet on this and maintain the status quo in terms of communication:
"Victoria has a diverse and competitive marketplace, it's business as usual here."
If any REALTOR® out there wants to weigh in on this issue on this site, I'll be happy to post blog posts with links on your behalf. Email me, the link is in the right column. Keep in mind, we're advocates for change here, so we'd love to tell readers of HHV how they can get the best deal on real estate services.

October 25 update: CREA and Canadian Competition Bureau deal is ratified.

Full text here
BNN coverage
Comments by Royal LePage
Comments by head of Comp. Bureau

Friday, October 22, 2010

Let's play a little game

Pick an MLS® listing and make an offer that if accepted you'd do the deal today. Provide reasons why if you want, or don't. Just a silly little exercise to spice up the weekend.

No caveats, but this game won't go over well if you make 50% low-ball offers and comments degenerate into a discussion of reality.

Here's mine:

She's ugly as sin, but that's where I'd like to start to make her ours.

Original list price: $579,000
Current list price: $539,000
2010 BC-assessed value: $446,000

House square footage: 2560 finished, 273 unfinished
Lot size: 9000 square feet
Built in 1963, has 2-bed suite with separate laundry and meter

I'd do the deal at: $450,000, slightly more than 16% below the current listing price. Why I'd do it?
  • it's a project to make it right for my wife and I
  • the location, while not perfect, would likely work fine for the duration of our home-owning lives
  • the suite income at that purchase price will be more than half the mortgage costs*
  • the mortgage cost, without accounting for suite income, based on 20% down, 21 year amortization at today's 5-year non-discounted posted rate (5.29%) is manageable ($2,289/month) given our current incomes 
  • the actual mortgage product we'd use (closed variable at 3%* @ $1800/month) would allow us to make an extra $400 per month principal payment while maintaining other savings allowing us to reduce the mortgage to 16 years
The house isn't a dream home, she's not perfect and we can find all kinds of reasons why we'd never buy her at today's price, but if we could do that deal and she passes inspection, we'd very likely pull the trigger.

What deal would you do?

UPDATE: must read in the G&M today The long shadow over Canada's housing market (H/T OMC)

Wednesday, October 20, 2010

Where did the buyers go?

It's no secret a significant number of buyers have left the Victoria real estate market. The usual suspects want you to believe it has to do with uncertainty caused by factors like the HST having brought buyers forward earlier this year or is now making them sit on the sidelines until the referendum is held in just under a year's time. There may be some very limited truth to that, but I think there's a more simpler explanation to be found.

A regular reader and sometimes contributor (Reid) in the past once postulated that the availability of credit was the primary driver of prices. I'm inclined to agree with him.

Sales really began to suck, volume-wise, at around the same time that the Federal Government reigned in CMHC's ability to approve mortgage insurance applications. The single biggest change announced, in my opinion anyway, was the rate at which new applicants would have to qualify: the five-year posted rate. They don't have to take this rate, but the five-year-posted rate, in most cases, is what determines the total amount of money a lender will make available to someone needing an insured mortgage product.

Let's have a look at an example: in this case, it's a mythical Victoria couple, early thirties, one child, if any, looking to buy their first home and wanting to purchase a house, not a condo. They may settle on a town home, albeit reluctantly. They're both working, but still in the early stages of their careers and report earnings that are about average for Victorians: $80,000 per year. Through hard work and sacrifice, they've managed to clear off their student/twenty-something debts and save $20,000 in RRSPs they plan to use for their down payment. They've got decent credit and they're confident their bank would work with them to get them into a home.

Prior to April 17, 2010, this couple, let's call them the Smiths, could walk into their bank and make application for a mortgage. They'd likely have their mortgage account manager show them something like this:

They could get a bit more money if they took a variable rate mortgage, but with fixed rates at ridiculously low levels, they're willing to trade a bit on the interest side for the peace of mind of a low fixed rate for the first five years of their home-owning lives.

The Smiths head out shopping. They're underwhelmed to say the least. They knew houses were expensive in Victoria, but they thought they'd be able to find something small in a quiet neighbourhood close to a school for Sally or Steve. Instead the best they could find was this 1500 square foot home on a busy street:

Their REALTOR® cautioned them: although the market was changing, the impending mortgage insurance rule changes would mean they may not be able to find a house like this in their new price range if they waited too long. The Smiths, not completely comfortable with a buying decision at the time, chose to wait and seek a better property. After three, then four months of waiting, seeking and disappointment, their mortgage pre-approval lapsed so they had to head back to their mortgage account manager to find out they now qualify for this, if they use anything less than a five-year fixed rate term (see update below):

Even though they can still lock-in a fixed rate over a shorter term or use a variable rate for less than 3.5%, the Smiths will see almost $100,000 of mortgage disappear off their qualification if they make that decision. And now they're doubly disappointed because when they go out shopping, this 1300 square foot home with the busiest highway in the city at the end of its driveway is literally all they can find:

And so they give up over the short-term. They've been renting a decent condo apartment down in the Cook Street Village neighbourhood for a couple of years at just over $1000 per month so they decide to stay put for the time being. The Smiths agree to keep working with the REALTOR® to find a home, knowing that slowly prices are starting to come down and maybe in a year's time they'll have saved another $10,000 and gained another $5,000 in income and perhaps a few more $460,000 homes like they saw in April 2010 will be closer to $400,000 in late 2011. 

Their REALTOR® keeps sending them links to homes, mostly new condos in the Westshore he thinks may peak their interest, but every time the Smiths crunch the numbers they keep saying to themselves, "why would we pay an extra $800 to a $1000 per month to essentially live in a place like we already do but out in Langford instead of within a 15 minute walk to our jobs?"  

UPDATE: Tim Ayres, local REALTOR® points out in the comments that the Smiths would still be able to qualify for their original mortgage amount if they took out a five-year term fixed rate mortgage. In cases where the Smiths want to use a variable rate, or less than 5 years as the term, the second scenario would apply.  

Tuesday, October 19, 2010

Magnum Opus

Believe it or not, from time to time, one of the three readers of House Hunt Victoria sends us an e-mail with a question that leaves me grappling with implications for a week at least.

Recently, I received this question:
It seems to me that the central question at its heart is whether it is wiser to buy or to rent a house in Greater Victoria. If you boiled down all your blog entries to form one succinct main point, what would it be?
Now this is no way reflective of the questioner, but man-alive I was left scratching my head at how to even begin answering this question. Not one to overlook a challenge, I decided to give it a shot. I will apologize in advance to the questioner because I think I will not only answer the question, I'll over answer the question leaving more questions than answers in result. Confused yet? Me too.

The first rule of House Hunt Victoria is we don't talk about House Hunt Victoria. Just kidding. But a good Fight Club reference opportunity should never be passed over, right? Truth be told, even the brain trust behind House Hunt Victoria doesn't really know what's going on from day to day, and that's because it's always changing. Keeping up with this blog is a time consuming task. Call it a passion project though, because it doesn't feel like work. I've always said the day it feels like work will be the day I take a break from it. We've been going for over three years now and not a single post has been work to write, though I'm sure that many a post has been work to read. 

I wish I could simply answer the rent versus buy question and be done with this. But it's not that simple and I don't want my writing to be confused with advice giving.

My wife and I choose to rent because we have never owned a home, don't want to have a mortgage of $400,000 or more and don't like the properties we see, right now, in the price range we're comfortable with financially. We get better value and quality of life out of renting right now, but we don't want to rent forever. We think home ownership is an important part of long term financial planning. We're patient, and like to think of ourselves as financially prudent, but we recognize that our circumstances can't and shouldn't be universally applied to everyone around us.

In reality, there is no central thesis here at HHV. But we do seem to do three things, at least we try to do three things, consistently:
  1. Provide accurate, up-to-date, un-spun statistical information about the Victoria real estate market. We're grateful to the people who give us access to this information.
  2. Take the local media to task for lazy journalism that reads like "advertorials" far too often.
  3. Provide a forum for discussion on real estate related topics, usually applied to the local market with a completely different tone than found elsewhere. Some call that tone "bearish," I prefer to think of it as <sarcasm>bitter, angry, basement-dwelling renter.</sarcasm>
Most of my writing is born out of a few central beliefs:
  1. If you can afford it when interest rates go up (think historical norm levels 6.5%ish), know you can live in it for a long period of time (think 7 years minimum) and will be comfortable seeing its market value drop (who knows, but think 15%ish just to give yourself a starting point of discomfort) then today can be a good day to buy a home. Note that I say "can be" not is. No one but you can decide if it "is" because your circumstances and comfort levels are very different than theirs. Please also note I'm not saying the market value will drop, but don't you owe it to yourself to recognize that it can drop and you should be comfortable with a drop if it happens?
  2. Renting provides an opportunity to get a better product in a better location than buying right now in Victoria. There will always be people who can point to a particular property and say "it's cheaper than rent" but it's usually an incomplete comparison or a product I would never want to find myself living in for a long time. 
  3. Low-down, extended amortization mortgage products are dangerous and bad for people to lock themselves into. The advent of 5% down and 35 year amortizations is bad for our economy, bad for household finances and bad for the taxpayers on the hook for any defaults that occur in this segment. CMHC insured mortgages should be avoided wherever possible, IMO. Unfortunately, for the vast majority of Victoria first time buyers, they are a necessary evil. Proceed with caution.
  4. There are no crystal balls, only probabilities. Beware the commentator who says they know where prices are headed (on either side of the spectrum and including the ones in the mushy middle). We prefer to focus on trends and then look for economic indicators that may or may not point to a trend change. Past performance does not guarantee future performance and anyone who points to past performance as reassurance for wariness should be obligated to use this disclaimer.
Now, just for sh&ts and giggles, I'll post this poll using the questioner's question and advise readers to not use it to guide any buying or renting decisions they may or may not be attempting to make:

Monday, October 18, 2010

Monday market update

MLS numbers courtesy of the VREB via Marko Juras.

Month to date October 2010 
Net Unconditional Sales: 251
New Listings: 539
Active Listings: 3,963 

October 2009 totals
Net Unconditional Sales: 742
New Listings: 1,067
Active Listings: 3,219 

Single family home average price is currently $612,385. New inventory is only slightly outstripping sales, expect the active listings number to fall slightly for the remainder of the year. Affordability is still an issue, although ridiculously low five-year fixed rates are likely responsible for more than a few sales.

I came across this article in the G&M over my morning coffee. You should read it:
even excluding major factors such as taxes and maintenance, homeowners pay about twice what renters pay.

Please note, the decline in mortgage versus rent payments is an interest rate effect, mostly. Declining interest rates will narrow the gap. Rising house prices will widen the gap.

Thursday, October 14, 2010

Times Colonist shifts gears, questions BCREA

Once every blue moon, someone at the Times Colonist gets a realistic piece of journalism past the real estate industry friendly advertorial editors. Cue the scrambling in the news room as phones ring, ears get chewed off and general unhappy client syndrome ensues...

Here's today's story: Real estate market hits soft patch, B.C. sales show modest rebound but Greater Victoria numbers lag.

I won't quote the article, you can read it over there just fine I'm sure. There's a few notables in there though that should be discussed:
  1. The BCREA reported average price was $485,459. This is "for all types of housing." It's basically meaningless, because the markets shouldn't be blended like that. Essentially they take the sum total of mobile home, condo, town home, single family dwelling, mansion, waterfront property and acreage sales and divide it up by the total number of unit sales. This is different than the VREB reported data, which breaks it down by unit type and is also different than what is commonly reported on HHV. 
  2. At first glance, total listings appear to have fallen off a cliff, being reported at nearly 800 less than what VREB reports, despite using the same sales total. I'm not sure why this is the case, but I can only guess that BCREA is excluding some areas (maybe Sooke, Gulf Islands and Malahat?) as these aren't really Victoria. But why use the sales totals from VREB that includes those areas if you're excluding some of the listings unless your trying to purposely make things appear better than they are? Even given this incorrect calculation, the sales to active listings ratio is still bad, so it's either really bad, or just bad. I'm inclined to think it's really bad.
  3. Muir still makes reference to the dubious theory that things aren't bad this year because they were "phenomenal" last year. To which I give you this... proof positive that last year's sales volume wasn't that phenomenal and this year's sales volume actually is pretty crappy compared to the last decade. Please note, the graph hasn't been updated to reflect September's actual sales volume of 395.

It's refreshing to see an article about the BC market applied to the local data, even though the data wasn't really questioned (it should have been IMO), using accurate statements like "But that does not appear to be the case in Victoria" and "Compared to last September, the Victoria numbers look even worse."

Tuesday, October 12, 2010

Up to date market stats

These are the current VREB reporting area numbers via Marko Juras:

Month-to-date October 2010
Net Unconditional Sales: 161
New Listings: 323
Active Listings: 3,964 

October 2009 Totals
Net Unconditional Sales: 742
New Listings: 1,067
Active Listings: 3,219

If the current trend of 13.4 sales per day continues, total sales volume will be higher in October 2010 than in September 2010, yet still remain below 60% of last year's monthly total. Inventory is also falling, which is typical in the fall months, but remains stubbornly high - almost 20% more than this time last year. Days on market remains within 20% of last year's monthly average (assuming); there is no panic in this market, sellers are being patient as are the few buyers active today.

A must-read over at today:
So the sideways prediction in home prices that homeowners are predicting? WISHFUL THINKING. The downward spiral the bears are predicting? The natural outcome of moral hazard.
If you understand that the government of Canada became the biggest subprime lender in the world, you are right. If you don’t understand this, you are the one we are all going to laugh at.
If you don’t understand that the government of Canada is actively trying to deflate this bubble (praying for a soft landing that never actually happens) you are the village idiot!

Wednesday, October 6, 2010

Let's not get ahead of ourselves

For those of us who believe that residential real estate prices are greatly over valued in Victoria currently, we need to remind ourselves that our desire for price reductions can skew our outlook of actual market changes in the same manner that perception of future gains skewed the outlook of housing when the market was hot.

The market's falling in Victoria. Sales are way down and prices are slowly starting to recede. But this isn't like 2008. And I can't say with certainty that it will continue to play out like 2008 did, with a substantial correction over a short period of time.

Here's why:

These are the numbers for SFH purchases in September 2010 and 2009 excluding waterfront and acreages:

At first glance, these numbers likely look terrible with REALTORS® making just over half of what they did in September 2009. But look closer:
  • there's only 6.7 months of inventory - just barely into buyers market territory
  • Days on Market is just over a week longer - hardly cause for concern for most home sellers
  • Average prices are roughly the same - not enough to make people trying to sell feel like they're losing money, yet
Now take a look at the 2010 and 2009 year-to-date comparisons:

These numbers are more mixed:
  • Unit sales are down 20% and falling fast
  • Over half of all listings put on the market remain unsold
  • Yet prices are up 9% year over year 
  • And the homes that sell are still selling 16% faster than they did last year
It's important to recognize that people are still buying homes for a lot of money in this city. And I'm not talking about the million dollar or even $750,000 plus homes here. Over 43% of homes that sold in Victoria last month were priced between $400,000 and $550,000 - this is the bread and butter single family home market in this city. Using monthly payment metrics at current interest rates, these homes are "affordable," especially if they have suites, which many of them do. Comparing them to average household incomes ($80Kish) these homes are between 5 and 6.8 times annual incomes - very high in the big scheme of things - but it's also unlikely that the majority of people who are buying these homes are earning those incomes, especially after the changes to suite income mortgage calculations.

Don't get me wrong, things are ugly in our market, but the inputs still look fairly stable: employment is steady, incomes are steady and interest rates are steady. In my opinion, what's happening in our market is people are getting better quality homes for the same money as a year ago. This is next to impossible to quantify in data, but if it's true and the trend continues we'll start to see more homes selling for less as the upper end of the market pushes down. But it's going to take more time than six months to reflect in the numbers and I don't see it as cause for a wave of panic selling, yet. 

Tuesday, October 5, 2010

The rental market

If you thought the market for Victoria rentals was tight, think again.

It's not. If landlords need to rent a unit, the price is likely being reduced. It's not uncommon to find listings on Craigslist and UsedVictoria with lines like: "available immediately" and "flexible move in dates" meaning the place is empty now and if you'll only agree to lease it for a year, we'll let you move in slowly this month until you vacate your present place.

It's a buyers' market in the rental pool and if you're a renter searching for a new place to call home for the next year or so, you should be negotiating that rent down. Heck, if you're a renter not currently under lease, you can likely negotiate your rent down under threat of moving on.

We rented our current house in July of this year. I had coffee with our landlord the other day and she asked me how we were enjoying the house. I told it her it has great character but it's tired and could really use an empty month of maintenance work to get it into better shape. She tried to strike a deal with me to get me to do the work for "free" if she paid for materials. I laughed out loud... damn near spat my coffee on my pants.

I said to her, "Why would I want to do that? My time is valuable and the labour part of the work will be your most costly expense. Are you offering to drop my rent?"

She said, "You're already getting a great deal. You're paying less than the previous tenants were."

I said, "This is your only rental property isn't it?"


"So you're probably not aware what's happening in the rental market so much then right?"

"I always look at what's online whenever I need to rent the place and make sure I'm in the right ballpark. That was back in July, it's only October now."

"Things are coming down," I said.


"We look fairly frequently and I need to tell you I'm tempted to start looking to see if we can find the same kind of place for less money or find more place for the same money."

"Really?" she asked. "I don't know how that's possible, I'm not making anything on the house each month off you. You only pay the hydro bill. I pay property tax, city water and garbage. You've got it pretty good."

"Seriously. There's lots out there and people are dropping their prices. We're tempted."

"Are you giving me notice then?"

"Not yet. But please don't confuse your costs on the house with what the rental rates should be. If we do decide to move, I won't make any decisions without talking to you first. If you want us to stay, we may be able to come to an agreement. But I won't sign a lease."

We started talking about other things. It was a friendly conversation and I think I caught her off guard. I like my landlord, we haven't had to deal with any real issues with the house but we never planned to stay in it too long and told her so when we agreed to move in. We negotiated on the rent and she took seven per cent off her original asking rent even though we refused to sign a one year lease. We verbally agreed to 6 months at $1400 per month and we'll respect that verbal agreement.

I have people close to me who are snowbirds. Each winter they head to warmth and usually try to rent their house out for four months or so. They recognize that most people don't want a short term furnished rental so they usually price it about 60 per cent of what a long term unfurnished place would rent for and be very picky with their tenants. This year, after two months of searching and nearing four weeks to departure they've given up hope. I got a call over the weekend offering us to move in, rent free, just pay the utilities and make sure the house is looked after. Four or 5 months of rent-free living will add over $5,600 to our down payment fund. We're tempted.

Friday, October 1, 2010

September sales continue falling trend

Month-End Market Statistics courtesy of the VREB via Marko Juras. Now updated with prices.

September 2010
Net Unconditional Sales: 395
New Listings: 1,211
Active Listings: 4,323
Average SFH Price: $599,825
Median SFH Price: $531,000

September 2009 
Net Unconditional Sales: 776
New Listings: 1,129 
Active Listings: 3,419
Average Price: $619,936
Median Price: $550,000

Month over month changes
Net Unconditional Sales: -8%
New Listings: +21% 
Active Listings: -1%
Average Price: + 2%
Median Price: - 3.2%

Year over year changes
Net Unconditional Sales: -49%
New Listings: +7%
Active Listings: +21%
Average Price: -3.3%
Median Price: -3.5%

There was a definite surge in sales in the final two weeks of the month. Will the surge continue? There's also been a consistent surge of new listings keeping inventory stubbornly high.

Current market-wide months of inventory stands at 10.9%.