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.
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:
- 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.
- Take the local media to task for lazy journalism that reads like "advertorials" far too often.
- 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>
- 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?
- 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.
- 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.
- 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.
66 comments:
Great post HHV. Here's a Fed chart released yesterday that backs up your perceived probability of a decade-long Japanese-style real estate melt. Nobel prize winning Krugman posted the chart on his blog link below.
http://krugman.blogs.nytimes.com/2010/10/18/just-call-him-bernanke-sama/
I have never been so wrong for so long in reading the real estate market. And now, I have past the point of no return. There is no going back, buying a home in Victoria while currently affordable is not feasible as a long term investment. There simply is not enough life time left to pay off the mortgage by retirement, unless I rob my stocks and bonds.
The choice is to retire with a paid off home but insignificant savings to provide a steady income stream or rent but be able to retire earlier and travel a bit.
So there will be no commission cheque from me, no house insurance to be paid, property purchase tax, HST, property taxes on my credit card, paying for a new roof or furnace; or paying two or three times the price of the home back to the bank and crossing my fingers that at the next renewal I will dodge the bullet of an interest rate increase and personal bankruptcy.
Instead I will pay my landlord's mortgage or find a nicer place to rent.
Perhaps, if I had no savings, stocks and bonds to lose then it would be easier to ink a deal on a home, but the stakes are too high to gamble with the nest egg at this point.
When I reach retirement, maybe I will buy an old single wide trailer in Florence Lake and sit outside on my rocker in the rain drinking home made hooch and heating up a can of Alpo on a two burner hot plate murmuring "I coulda been a contender - bubble and fizzle was right - rosebud....."
Thanks for that JustJack...i'm still laughing from your last few lines.
For myself, even if Victoria home prices dropped fully in half to be comparable to the cost of renting, I would still choose to rent. I’ve owned & rented for roughly equal years of my adult life, as well as owned, managed and often maintained over 50 rental properties. I fully understand the costs & benefits of both. Many home owners never fully grasp all the costs, both time & money, involved in ownership.
There are at least two ways to look at buying.
First, as an investment, where it is much more cut and dry: right now, property simply doesn't present good value.
Secondly, as a home, which is what I think the questioner is referring to.
My opinion is that if you are going to buy in the current market, treat it as you would a consumer purchase.
Is it wiser to buy or lease a new car? Neither are financially prudent, but neither are wrong if you can afford the luxury. They are simply a consumer purchase like a TV or camera.
Are you willing to pay a premium to own over renting? Have you truly calculated the premium you're paying and can you afford all the extra costs of maintenance, interest hikes, taxes, selling costs, etc?
If so, then go ahead and enjoy - owning your home can be great thing if you can afford it... just don't expect a financial windfall, and don't be surprised that it is actually much more expensive (and much more work) than renting.
It is a personal decision and there isn't really a right or wrong answer. The problem I see is that people are either:
a) buying more than they can afford under the pretense of "an investment" (expecting appreciation aka speculating)
b) buying without understanding the true cost of owning
OR
c) both of the above
Unfortunately, I know people who have spent more time researching a new LCD TV than their home.
Is our market still contracting into the inner city? Is it truly all about "location, location, location."
Judging from the months of inventory in the urban core municipalities, the most difficult place to sell a home is in View Royal at 5.2 months of inventory, followed by Saanich East at 4.4 and Saanich West at 3.9 months. These are middle income neighbourhoods, the mom & pop backbone of our society.
On the easy peazzy lemon squeezzy end of the spectrum to sell a home is Esquimalt! at 2.5 months
and Victoria City at 3 months.
When venturing to the old saxony county of Oak Bay, the months of inventory is now 3.9
So what does this tell you about the market in the inner core districts?
Well absolutely nothing - except, that I get paid by the word.
But compare these with say Sooke at 11.7 months or Langford at 6.2 or Colwood at 5.7 or the Gulf Islands at 14.6 months of inventory. I think you can see what is happening from the outside areas to the inner core districts.
Its pretty obvious now. Everyone wants to live in my neighbourhood, on my street, on my block and preferably in a (12' x 12') garden suite in my back yard.
Which brings up a question about garden suites. Why build a garden suite for $50,000 when you can park a 1962 Chrysler New Yorker in your back yard. A family of three can easily live in one of these and sublet the trunk - and if they don't pay their rent you can just have them towed.
now you have four readers! ;) just kidding, lots of people read your blog.
the key is affordability, however since so much production has moved to China chasing higher profits, Housing has become a greater part of GDP, which brings me to my point:
The Housing Paradox, the higher the monthly morgage servicing, the less money RE buyers have left to cbuy other things (rest of the economy), so interest rates drop to increase affordability and the monthly payment, until rates get as low as they can go.
I now takes 10 times an average family income to afford a house in Vancouver and nearly 8 in Victoria, supply is trending higher already, the next 5 years will be devastating to Canadian Real Estate no matter what: if the economy picks up, inflation will go up and Carney will have to hike interest rates, killing housing, if the economy slumps, rates are already on the floor and high unemployment will kill housing. (as of Oct-2010 we are teethering on this edge but either way the coutcome for housing is bleak)
Why build a garden suite for $50,000 when you can park a 1962 Chrysler New Yorker in your back yard.
Ha, we thought the same thing. I guess it's all about the optics. With a fancy cube home you're environmentally conscious, progressive, and hip. With a motorhome on blocks you're just another redneck.
I live in Abbotsford and I read your blog regularly.
This is a particularly entertaining thread.
I'm very curious to see what happens in Victoria and the Island in general.
Abbotsford and Chilliwack RE is very slow and prices are coming down.
Vancouver is also slow but prices seem to be hanging in there for now.
Should be an interesting 2011 for RE.
My opinion is bearish and I'd advise people to hold off and keep adding to that down payment.
Whenever I'm in the dumps about real estate, I cheer myself up by looking at Bare Mountain.
Hardiplank homes with imported laminate floors, particle board cabinets, granite counter tops and something that kinda looks like stainless steel.
Todays cheer up.
---fractional ownership----
You can buy a 1/4 ownership in a condominium at bear mountain that for three months of the year you can call your own or rent the home out (restrictions do apply)
Why are these such a BAD idea. Simply because you are buying based entirely on the income and expense statements of the suite and the efficacy of the hotel chain, not what is physically there.
The value of the quarter ownership is not one-fourth the price of the condominium. But the capitalized net income of the 3 months that the property can be mostly rented. That requires accounting records. And if the complex is new, there are no records to make an informed decision on, so you gamble and pay the price the developers asks. So things like this happen.
Current listing of second floor Westin suite having 1,411 finished square feet at $79,900. Here the suite is yours for one week a month or have the hotel rent it out for you (at a cost).
Sadly the American who bought the place off the developer paid $140,000 for the suite four years ago. Or another fraction interest listed for $109,500 today, bought five years ago for $346,500.
Fractional interest can be profitable, but you have to understand the hotel industry and be able to read accounting statements. And there are only a few that can do so.
But that's not to say the market is rosy for the strata titled condominiums south of Costco where Marshal Stu Young hangs his stetson and runs court over the developers. They are having problems too.
Like a recent sale at $254,800 that was bought 2 years ago from the developer for $275,000 or my absolutely favorite complex design from the George Jetson cartoon - Reflections. The early bird paid a pre construction price of $320,000 two years ago to the day. Today's price $262,000.
But its not just condo's. Classy Bear Mountain homes that sold in late 2006 for $870,000 now fetch $740,000.
And that's the scoop from Big Box Country. The land of the straw buyer where students and homemakers own million dollar homes - or do they?
Thanks Just Jack for your last post. As usual it was funny, entertaining and very informative.
Your wealth of knowledge always amazes me :-)
Judging from the months of inventory in the urban core municipalities, the most difficult place to sell a home is in View Royal at 5.2 months of inventory, followed by Saanich East at 4.4 and Saanich West at 3.9 months.
It isn't difficult to sell a house anywhere in Greater Victoria. Houses don't sell because the owner is asking too much. What your numbers say is that owners in View Royal are most likely to be asking too much.
BoC Keeps Key Rate Unchanged
Bank-of-Canada-Benchmark-Rate The market widely predicted the Bank of Canada would not raise rates, and it was right. The BoC has left its key lending rate at 1.00%.
In turn, prime rate will remain at 3.00%, making today’s BoC meeting a non-event for mortgage holders in the short-term.
The BoC’s call comes amid languid recent growth and inflation numbers. Here’s a sampling of the Bank’s commentary from its official statement:
* The BoC sees a “weaker-than-projected recovery in the United States.” (No revelations there.)
* The potential exists for “a more protracted and difficult global recovery.”
* “…domestic considerations…are expected to slow consumption and housing activity in Canada.”
* “Inflation in Canada has been slightly below the Bank’s July projection.”
* “The inflation outlook has been revised down and both total CPI and core inflation are now expected to converge to 2% by the end of 2012.” (As long as inflation doesn’t threaten to exceed the Bank’s 2% target for any extended period, that’s generally good news for mortgage rates.)
* The 1% overnight target rate “leaves considerable monetary stimulus in place.”
The Bank also adjusted its growth forecasts as follows:
* 2010 growth cut to 3.0% from 3.5%
* 2011 growth cut to 2.3% from 2.9%
* 2012 growth raised to 2.6% from 2.2%
Translation: Things are worse than the Bank expected.
A key takeaway here is that the BoC sees little inflation threat through 2012. That’s a long ways off. If true, this improves the odds that short-term and variable-rate mortgages will be the lowest-cost options for the next few years. (Remember, however, that the BoC can raise its forecasts just as easily as it lowers them.)
The next and final interest rate meeting of 2010 is on December 7. As of today, most analysts expect no rate move at that meeting either.
TD Bank says the BoC got it wrong on the interest rate non-move. Warns too many Canadians carry too much debt and it's growing because of interest rate policy.
More likely the reason for View Royal being 5.2 months is more to do with the statistical variability over a small sample size. The broader picture is showing that vendors are staying pretty solid in their prices and are willing to wait longer to get close to their asking price.
In the urban core districts, a balanced market is 4 to 6 months of inventory for stable prices. Maybe that metric stretches to 5 to 7 months or shortens to 3 to 5 months depending on the makeup of the sellers market. If the market is made up of mostly "let's wait and see" sellers then it may stretch out the MOI, if the market is mostly made up of distressed sales it may shorten.
What has been the most interesting thing about this real estate boom has been how technology has allowed more people to question and perform data crunching. Most if not all of the math used in real estate is identical to that used in finance courses. I think that may work against people trying to understand what is going on in real estate. The more you delve into real estate, the more you find it's not a science. And while some marketers wish and a few can conjure it up to that of Art status - real estate is not that as well. Real estate is somewhere in between that of science and art.
No other "investment" has such an emotional attachment. It's a topic in which everyone has an opinion. Where a 19 year old carpenter feels just as well, and can be, informed as an urban economist with 20 years experience. Where myths are mixed with facts and people's perceptions are molded by the main stream media. Where envy, jealousy, fear and greed are the tools of marketers in the ultimate game of "Who Wants to be a Millionaire".
It would appear that housing prices in Victoria are here to stay according to several studies posted on the web today. In fact, up around 5%.
What do those waiting on the sidelines for the "big crash" think about this recent change in the market?
That is, low 5-year fixed rates and an apparant increase of 5% in housing prices.
Still Waiting,
Do you really believe those house price reports to be accurate?
I think there are too many variables to offer any credible prediction of where prices will be in 6 months let alone years from now.
Our market seems "Darwinian" as the less desirable homes in less desirable areas are culled from the herd. Like the property that sold on Shakespeare for $340K, but was originally listed for $420K. The home, at 625 square feet, appealed to few buyers and sold for less than the assessed value of the land only. A scenario repeated for a home on Burnside Road that recently sold for $344K. The home being bought 2 1/2 years ago for $325K. It looks like house flippers have now become burger flippers.
Yet in James Bay, a property on Clarence sold for $855K for a 2,000 square feet home on a 3,375 square feet lot. While on the other side of the park, homes that are a thousand square feet larger on nearly double the lot size have sold for 20K less.
But then I never understood the attraction of James Bay or pierced nipples.
Well. I think those sellers that overpriced their houses trying to cash in are leaving the market. They do not NEED to sell and were merely testing the market. The listings are expiring and they will simply stay in their homes and go on happily with their lives.
In so doing the supply will diminish and once again there will be many buyers looking at less homes for sale.
For all of those waiting on the sidelines, apparantly renting and saving for a downpayment. They may have enough money saved to qualify for a conventional 25-year 5 year-fixed mortgage. At the fixed rates available now, some may surmise that now is the time to purchase a home.
So, potentially less inventory, low fixed rates and everyone having more money saved during their "waiting" period while renting.
I could see house prices fetching 5% more than today's prices...yes.
I agree with Still Waiting: I don't think there will be a big real estate crash in Victoria, where the housing market "corrects" itself and median prices decline by 15% or more. That's just not very likely. Why? Because despite high prices, Victoria will always be a desirable place to live. No one in Canada says, Honey, I'm just dying to move to Kitchener--let's go!
Over the next 35 years, prices will fluctuate, as they do in every real estate market. This means that, yes, prices can and will go down. But I predict those declines will be temporary. What I'm saying is this: take the median price of a SFH today, Oct. 20, 2010, and the median price of a SFH on Oct. 20, 2045; the latter will be higher, perhaps even significantly higher. So, if you can pay off your house during those 35 years, then you've made a return on your investment. Yes, you've also had to pay the bank interest on your loan, but there's no such thing as a free lunch. Plus you've been able to enjoy all the pleasures of home ownership, pleasures which often go unsaid on this blog. Yes, renting has its perks--there's no doubt about it--but so does owning your own home.
What I'm saying is this: take the median price of a SFH today, Oct. 20, 2010, and the median price of a SFH on Oct. 20, 2045; the latter will be higher, perhaps even significantly higher.
That is an empty statement that applies to just about anything, and certainly every real estate market.
Take the price of a Phoenix home in 2005, and even that will almost certainly be higher in 2045. Does that mean 2005 was a good time to buy in Phoenix? (not saying they are anything like Victoria).
Take the price of a gummy bear now and in 40 years. That gummy bear will be worth more in 40 years.
My position is that when even the banks and realtors association say that prices will be flat, and prices are as high as they are currently, you will be better off renting for a while longer.
From a financial basis, the only reason it would make sense to buy right now is if you expect strong price appreciation in the next couple years. Even though real estate is essentially unpredictable, I think everyone can agree that the likelyhood of that is vanishingly small. So we rent.
Funny how stillwaiting and introvert are both brand new accounts with very similar writing styles.
I assure you we are not one in the same. I have no intention of trying to manipulate this blog or trick anybody.
I'm just a new poster that wanted to give my two bits worth.
With respect to Leo's comment regarding "From a financial basis"
We bought a 1,500 sq ft home in 2002 for $250,000. We then sold it in 2007 for $565,000 and bought a 4,000+ sq ft home for $700,000.
Were we crazy? Perhaps, but when you look at the prices per sq ft in 2007.
$565,000/1,500 = $376.67
vs
$700,000/4,000 = $175
Furthermore, our mortgage did not change much and presently we pay less than $2,000 per month mortgage at 6%. Yes...6%!!!
"From a financial basis" we had absolutely no idea that when we bought it for $250,000, we would end up selling it for $315,000 more than we paid for it 5 years later.
I am not sure how many 4,000 sq ft homes can be rented for under $2,000 per month. Also, is it easy for people to save (or earn) $315,000 over 5 years while they are renting?
I am not trying to incite an argument on this blog, but rather suggest that we all have no idea where prices may go in the future.
We are not Real Estate savvy people. We were just lucky.
Could our house drop in price? Sure it is a possibility. I do however feel confident enough to say that I doubt it will drop by $315,000.
If I got 2 papers handed in with writing like these "two" posters, I would be investigating much further for plagiarism. The poster has a very distinct style, note the use of quotations and things like "so,". One is using ... the other---, but it is the same writing style. Someone with an arts degree probably. I smell a realtor or such trying to deceive.
HHV, can you get me the ip addresses please.
Leo S, you're right: my statement about prices going up in 35 years was empty in that all prices will go up in that time. However, I think Victoria's prices will have gone up more in that time as compared to other markets in Canada, making Victoria a really good investment.
Lots--maybe the majority of folks on this blog--say renting makes the most sense right now; they're waiting to see if prices decline a little more before they jump in. This sounds like a decent strategy, except that maybe prices won't ever decline enough to be enticing. What then? Are these folks content to rent forever? It's really hard to time the market. If you're a renter looking to buy one day, I think now (or soon, at least) is a pretty good time to consider buying a house in Victoria.
Lastly, I think the fact that someone is so quick to speculate on whether I am the same person as Still Waiting speaks to the fact that pro-house-buying views are so rarely found on this blog. What, there are at least two people who think buying a house is smart? This can't be!
Sometimes I think this blog would be more appropriately named House Rent Victoria.
Stillwaiting said: "Well. I think those sellers that overpriced their houses trying to cash in are leaving the market. They do not NEED to sell and were merely testing the market."
I think you are really just talking about one sector of the market that is probably small.
I don't think there are that many people who are willing to test the market so they can go and rent unless they are speculators. If they are speculators then they do need to sell one day to make their money (or minimize their loss). The only other people that aren't really forced to sell will need to buy another place to live and what would be the point of that unless they are down-sizing. Down-sizing represents a drop in demand in $ terms.
Also, BC governmnet (Vic's biggest employer) is downsizing over the coming years, youth (future FTBs) unemployment is very high, early boomers that already live here will be downsizing. I know of a couple who bought a downsized house with no subject to sell their own and now can't sell their bigger $1+ mill house that they need to extract some equity from for their retirement. That is an example of a high-priced house not selling.
Still waiting: "Also, is it easy for people to save (or earn) $315,000 over years while they are renting?"
Save? On what planet?
(or earn)? now you are confusing me.
A Realtor? Really?
OMC, you couldn't be more off.
Perhaps since I am vested in the market and enjoy owning my home you took it as a Realtor trying to influence this blog.
This is not the case.
2 brand new accounts, showing up here at the exact same time. The exact same writing style and the exact same, far fetched view point. I call BS.
Introvert: "So, if you can pay off your house during those 35 years, then you've made a return on your investment."
That's exactly the mentality I was referring to when I said that people are "buying without understanding the true cost of owning".
At today's prices there is a very good chance that after all expenses and opportunity cost are accounted for that you will NOT make a return on your "investment" even if you stay there for 35 years.
On top of additional expenses there is also added risk to owning, not to mention the fact that very few buyers intend to live in the same house for 35 years.
I consider myself in the minority that I am looking for a place to live in for the next 20 years or so. And even in that timeframe I calculate buying right now to be a losing investment (I'm in Kelowna, not Victoria, but the markets have similarities).
What I meant by "earn". Many people talk of throwing away money on interest paid to the bank for their mortgage.
Essentially, the $250,000 grand we spent on our home "earned" us $315,000.
If I were renting, paying say, $1,200 per month. How would I accumulate $315,000 over 5 years?
To calculate, add all the INTEREST payments made to the bank for mortgage payments + the return over 5 years on that amount invested. Could it accumulate to $315,000 over 5 years?
OMC,
I have been reading this blog for many months and have agreed with you on many of the points you have made over that time.
Give it a rest. We are not the same poster and I am not a Realtor.
Just because we seem to agree on some points does not make us the same person.
If HHV can in fact check IP's to confirm this to you, and you trust HHV to do so, I give my permission for him to do so.
But will a home be more expensive as a multiple of your income in 2045. I think not.
The youngest baby boomer will be 80 years old, the oldest 100. The child born today will be buying their first home in 2045. And someone who bought a home in 2010, will still have 35 years left to pay on their mortgage.
A character home in Oak Bay will have half a dozen garden suites in their back yards. Esquimalt will be a destination holiday location. And there will only be a few Bear Mountain condos left to sell.
Besides, Victoria will probably look like the city in the movie "Blade Runner" by that time. And Kitchener will be where everyone wants to retire and spend their renminbi.
StillWaiting: "We bought a 1,500 sq ft home in 2002 for $250,000. We then sold it in 2007 for $565,000 and bought a 4,000+ sq ft home for $700,000."
...
"Essentially, the $250,000 grand we spent on our home "earned" us $315,000."
First off, you are comparing 2002 to now, which is completely irrelevant. Taking a small window of time from 2002 to 2007 and assuming that house prices will always appreciate at that rate is more than naive, it's just willfull ignorance.
How much would you make or lose if you sold your 700k house today?
StillWaiting: "To calculate, add all the INTEREST payments made to the bank for mortgage payments + the return over 5 years on that amount invested. Could it accumulate to $315,000 over 5 years?"
Plus add opportunity cost on your down payment and those interest payments. The same for property taxes, maintenance bills, closing costs for the purchase, closing costs for a sale, difference between your principal payments and equivalent rent, etc.
There are a lot more costs to owning a home than just mortgage payments.
It may or may not work out for you financially, but you are obviously another example (like Introvert) of "buying without understanding the true cost of owning".
Still Waiting - other people on here have bought and sold properties in the past and have made money as well (myself included) - I think it just makes more sense to rent right now.
StillWaiting:
Just wanted to note, that I am not trying to attack you personally.
I am simply saying that most people plunge into home ownership without ever understanding the cost. In 2002 that wasn't problem.
Most of those who bought in 2002 were, as you stated: "lucky", not saavy.
Those who did so in 2007 or 2008: not so much.
Those who do so today... probably not either.
Jason,
I totally agree with you about other costs associated with home ownership. It is costly! So are kids!
I am not trying to compare 2002 prices to 2007 prices. You are right, that is ridiculous. I was merely trying to illustrate that we had know idea where prices would be 5 years after we bought.
Despite all the other costs involved, someone was willing to pay $565,000 5 years later for the same house we were willing to pay $250,000 for.
5 years can be a long time in any market, not just the real estate market.
You are probably also right that maybe I could only sell my house for $625,000 today. Again, a drop in price I did not consider when I bought in 2007.
We enjoy owning our home and intend to stay put until our kids have grown and completed post-secondary education. Therefore, for us, the only value that matters to us is the assessment value per the bank when our mortgage renews.
For the common person, earning $315,000 over the last five years is nearly impossible.
Now what are you going to do with it?
Well, you can buy a boat, a BMW, take lots of holidays, help the kids out, phone up your brother in Windsor and call him a loser because he wasn't smart enough to pick a retirement town over a high paying city.
But hey wait, that's not earned money - that's equity. If you use that money, you have to pay that money back with interest.
No worries, sell part of the house for that vacation. Nope, gotta sell the whole thing. Or you could call your brother up ask for a loan - nope you kinda burnt that blue bridge didn't you.
Until you leave the Casino, you haven't earned anything. The problem is that you have only one poker chip to play over and over again for 35 years. If you are maxed out in affordability and the amortization period, the odds are going to get you.
The thing is there are lots of people with one poker chip at the same roulette table who will take a hit the same time as you. And that's not good for prices.
So using your analogy you have gone from earning $315,000 to losing $315,000. Oh wait a minute, I think your brother is calling.
With respect to Leo's comment regarding "From a financial basis
The other key words in that sentence (I should have bolded them) were right now. Of course buying in 2002 was a good move, and I totally agree with you, that if you've ridden the real estate gain up in the last ten years, you shouldn't be selling now (since you likely have lots of equity). Life is about more than money so as long as you're comfortable...
For us, we have just been in a position to buy in the past year or so, so past performance is not relevant to me.
Just Jack,
I totally understand you reasoning.
For us however, we decided to go "all in" and buy a home we will never sell. We will probably give it to our children eventually.
Now that we are done with our "housing chip" for the rest of our lives. We can focus on our "vacation chips", "retirement chips", "health chips", etc...
We like having the security of home ownership and consider the $315,000 we "made" on our previous home, a prepayment of future housing costs for a home we love.
If we sold our home back in 2007 for $565,000 and rented, we would be "still waiting" for a comparable home at today's prices.
We would just be out about $1,500 per month rent for 36 months = $54,000. Of course we would have earned some money on our sale proceeds so you can net that against the rent paid out.
I remember saying when I first started commenting on this blog, I and I still firmly believe it....is that....eventually homes will become "in the family" homes. That is to say the home will never sell. It will remain in the family. The kids of today, i.e. below the age of say 14, will very likely stay with their parents until they get married. The "married" couple will move into the 2ndary suite and will remain until their (one child) reaches school age. By then, the parents of the young couple will move down into the suite and they will move up to the main part of the home. While the young couple work, the grandparents will be caring for the house via the gardening, cleaning, cooking, dropping off and picking up grandkid from school etc. Then when they get too old for this, they will be cared for by their children until it is time for a rest home. This will be a continuing scenario.
"I totally agree with you about other costs associated with home ownership. It is costly! So are kids!"
Agreed. It sounds like I am on a similar timeline as you. We bought in 2003 and sold this year looking to upgrade, but decided to rent for the time being. It was a very difficult decision - there is still a social stigma against renting, and most would never considering renting if they can afford to buy.
"You are probably also right that maybe I could only sell my house for $625,000 today. Again, a drop in price I did not consider when I bought in 2007."
Which is fine if you are OK with that loss (both financially and emotionally). Some people would not be in the same boat, but as you said, you enjoy your home and I completely understand that it can easily be worth the extra cost.
I think the problem will be the low equity buyers. The numbers have probably been hashed out a million times here, but for example, a very conservative example of someone who bought that same house for 700k with 10% down (which is not even considered low equity anymore).
They would have shelled out at least:
70k for a downpayment
12k for CMHC
12k for property transfer tax
2k for lawyers and other misc
Mortgage payments on 630k amortized over 35 years at 4.5% would be almost 3k per month.
Property tax?
Maintenance?
Probably adds up to more than the corresponding rent so they are spending more each year than they would renting.
If they sold today for 625k through a realtor they would probably be out another 20-25k to sell, plus more 10-20k for the mortgage penalty (most people completely forget about this, and it can be very high on fixed rate mortgages due to the current low rates).
Their principle remaining would be 588k so they would walk away with almost nothing, down over 90k from their original expenditure + the lost opportunity cost (94k at 4% over 3 years ~ 12k, you seem to be forgetting about this when comparing your rent to mortgage payment. 315k at a conservative 4% would bring in about 1000 per month) + the extra cost over renting.
Some people would just move on, others would be devastated.
Now if they only had 5% down OR if they took out a line of credit at the absolute peak in 2008 to renovate or go to Mexico, they would have been faced with a 30-40k bill and possibly couldn't afford to sell.
When we were looking to rent we were surprised at how many people were in this situation (trying to rent out their homes because they could not afford to sell). I don't know how those scenarios will play out, but they have a major impact on the rental market, and I assume they will have a negative impact on the economy and some will eventually lead to foreclosures as well.
Actually, I suppose that back in 2007 that same scenario could have been 0% down, or even 0% down with 6% cashback!
Yikes.
And just some anecdotal numbers for you. In Kelowna, my wife and I viewed 9 possible houses to rent this summer.
3 of them were owners who had already bought another home. A 4th was a woman who had been speculating and owned 4 properties (all 4 were currently for sale but not selling). A 5th was an investor who had been renting out the property for a couple years and a 6th owner was moving to Victoria for work, but he was going to rent.
Those 6 all wanted to sell, but weren't able to (at their current prices).
Out of those 6, only two of them could possibly make a profit on their sale (based on asking prices and original sale prices). We eventually rented one of those two.
4 of the other 5 were asking exorbitant rent, and 2 went so far as to say they couldn't go any lower because of the mortgage. I noticed that all but one eventually rented out and were taken off of MLS, but the last one has been sitting empty and for sale for 4 months.
It was an eye opener. Maybe not indicative of the whole market, but shocking to talk to some of these people and hear their stories.
Is the same thing happening in Victoria?
If you have bought the home for your child, then you should get them on title as soon as it is legally possible.
Otherwise, the child will be straddled with costs at your death. Of course if you keep telling your kids that when you die, they will have a million dollars, you might want to stand a little farther back from the bus stop when your with them.
Try to think of what it would have sounded like if your father kept saying this to you when you were 10. Especially when he was tucking you in at night. Or the day your boy appropriately replies "can you hurry up on this promise."
As for never selling your home, you might not sell, but people rarely stay in the same home for more than ten years today. Because for the last decade people have owned their garbage cans longer than their homes.
The best or worst of intentions do not always work out the way you want.
For the last three years, in general, people in the city who bought and are now faced with selling are financially worse off than if they had stayed renters as there home has only appreciated 2.7% in that three years. Only those who bought five or more years ago have had any great appreciation of $100,000 or more. And since a big chunk of homes currently listed for sale were bought less than three years ago, there are a lot of people who are not so enamored with real estate today.
Prices peaked for Victoria around April 2008 at about $610,000.
Today the median is $575,000 and you can get a five year rate at 3.4 percent.
Three years ago, the median was $560,000. The interest rate was higher and 48 percent more homes were being sold then than there are today.
So your kids might be thinking that the longer you cast a shadow on this side of the ground, there losing money.
Jason,
Yes, I think the same thing is happening in Victoria. We have some friends that bought a new house and can't sell their previous house for what they "need" so have decided to rent it out until prices go "back up", they cannot afford to do this for very much longer - dangerous game to play - I wouldn't be sleeping much at night. I've heard a bunch of similar stories from others in town too - I think there are a lot of people barely keeping their heads above water just hoping magically that prices will start to go up again soon. They are in denial and it is sad as this spring likely there will be a huge increase in inventory and sales will stay flat leading to more downward pressure on prices. I think that is when the panic will really set in. This housing market is very likely going to stay flat or go down over the next few years - that is the logical path for it to take, fundamentals. And if it walks like a duck...
"We like having the security of home ownership and consider the $315,000 we "made" on our previous home, a prepayment of future housing costs for a home we love."
The problem with your math is, you assume prices don't come down. But they will, because we're in a bubble, and Victoria is not different than Florida, or Phoenix, or anywhere else. So effectively what you've done is look at your suddenly increased net worth and used that as a rationalization to go deeper in debt.
Just to flesh out some numbers, assuming you bought with 20% down in 2002, that means you started out with a 200,000 mortgage. Assuming a 25 year term, in 2007, you would presumably have paid back about $25,000, leaving 175,000 on the mortgage.
However, instead of renewing your mortgage you saw that you had "earned" $315,000 fantasy dollars, and so you rushed out and bought a new home for $700,000 and you now owe $310,000 instead of 175,000. When the market reverts to 2002 levels, instead of being ahead what you have paid on the mortgage, you will be back at zero. Because instead of still being in a $250,000 house for which you paid $250,000, you will be in a house you paid $700,000 for, which will be worth $310,000.
If you had sold for $565,000 in 2007 and rented until the market corrected, you could buy that house with cash. Instead, you will have as much equity as you have paid down since 2007.
The last few years have really proven to me that I don't know what's going to happen in the future.
What I do see right now is real estate having a lot of the future potential already priced into it. Meaning a house bought in 2002 was bought as a house. Within a few years housing prices became the cost of the house + what it will be worth in 5 years. This went on long enough that no one is factoring any risk into the equation.
I have no idea what the future will bring, but I think we are just starting to get to price of house + future growth - a little risk. I also think that when the future growth past of the equation shrinks a little the risk side will grow a little kinda feeding on each other.
Not saying this will happen quickly, but I don't believe this market can maintain itself at a stagnant level.
There are not any houses in Victoria I would even consider living in for $565,000 presently.
As to reverting to 2002 prices. I have my doubts.
Also, why would I have only paid back $25,000? Perhaps I made some lump sum payments over the 5 year period?
Again, I never said prices don't come down, they may indeed. I just don't believe they will drop so much to erode the "fake" money we made.
We simply traded equity appreciation with someone else in order to live in a home that better suits our needs.
Still Waiting,
Forgive me, but your personal real estate history is really irrelevant.
We agree that the past 8 years of Victoria market history doesn't mean the next 8 years will play out the same.
You've stated you wouldn't live in any of the homes currently priced at $565,000 (welcome to the club).
Here's the $64,000 question: if you had a modest 10% down payment (which is an immodest $60,000), would you rush out and spend $600K on a house today simply because the bank approved you for a $560,000 mortgage?
You benefited directly from one of the luckiest decades in Victoria real estate history. There are more than a few of you who did. But your circumstances can't be universally applied to people who are in a buying position today who don't currently own.
As I've stated on the main post, there's a great many people who could easily find themselves in a position to buy a home today that makes a great deal of sense for them. But that doesn't mean the people who choose to rent right now are making a poor financial decision.
And despite earlier assertions, this blog and this writer do not advocate forever renting nor renting right now over owning if owning makes more sense for the individual. But for my family, renting makes a great deal more sense than buying today.
HHV,
Absolutely not.
But at today's low fixed rates it makes more sense than it did 6 months ago.
I am just saying that if people are waiting it out for their dream home for $200,000 at a reasonable interest rate in Victoria, I don't think that time will ever come.
I agree that there will be an equilibrium eventually reached. I just don't think the same price/rate combination will be the same as it is in Smithers, Port Alberni or Duncan.
Victoria is a nice place to live and I think many people realize this an are ok with paying a bit of a premium.
I agree that house prices here are too high at the moment.
I would be interested to learn what many on this blog feel would be reasonable price before they bought.
I have nothing against renting.
Choosing the option that is best for you family IS the best option and I totally respect and understand that.
I can tell you I'd much rather end up with the same monthly payments in a few years with the interest rate being higher and the home price being lower. My hard earned down payment would also prefer to be applied to 420k rather than 600k.
No one expects things to go back to 2002.
Blogger Still Waiting said...
I agree that house prices here are too high at the moment.
I would be interested to learn what many on this blog feel would be reasonable price before they bought.
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Personally I am looking for 30% minimum before I wade back in....that would take a 600k home down to 400kish.....still a whack of $$$ but doable without selling my first born, my soul or losing sleep over rising rates.
SW, to answer your question, we'll buy when we find a place we like and know we can live in for a very long time at a price that we think is fair and affordable at the time.
I know that's vague and it is - because our circumstances will change along with the various inputs at the time: price, interest rates, down payments etc.
I also don't know if the criteria will ever be met here, in which case we may choose to continue to rent in Victoria or explore opportunities to live elsewhere. I was raised in Victoria and love it here, but I've lived elsewhere in this country and enjoyed those experiences. I do not believe that Victoria is worth a 50%-80% premium over say Nanaimo or Courtney.
HouseHuntVictoria said...
I was raised in Victoria and love it here, but I've lived elsewhere in this country and enjoyed those experiences. I do not believe that Victoria is worth a 50%-80% premium over say Nanaimo or Courtney.
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wholeheartedly agree....no way is it worth the premium! It is my biggest problem with this whole scam AND the RE scum that drive it.
Vic is cool but not worth the money. IF I could, I would be gone tomorrow. Regrettably I have ties here. As soon as that changes it's adios!
Personally I wouldn't miss the noise, traffic, and attitude that Vic has become.
Those are not unreasonable expectations in my view. I personally think we could potentially see about $125,000 come off present prices. Worst case scenario, best case scenario, depending on which side of the fence you are on.
HHV,
We are very similar.
We bought when we found a place we liked and knew we could live in for a very long time at a price that we thought was fair and affordable at the time.
It really is that simple.
$600K
$500K
$400K
$300K
$200K
Who knows where the market will stabilize. Trying to guess where the bottom will be is asking where demand will be in 2, 3, 5 or 25 years from now.
Last month 121 houses were bought in the municipalities of Victoria, View Royal, Oak Bay, Esquimalt, Saanich and Victoria. The year before it was 218. What if that number dropped to 60.
There are close to a 250,000 people living in the core municipalities and a little over a hundred thousand homes and condominiums. What happens to prices when only 60 homes a month sell? What happens if it drops to 30?
Would you be willing to buy a second home and rent it out? Then what are you going to use as a down payment when your equity has been wiped out? Are you willing to buy a rental house when prices are falling?
What price would you offer on a home under a court order to be sold, knowing that you will be the only bidder?
I guess you have to ask yourself how likely is it that the number of homes sold could drop from 121 to 60?
Mark, way to trash Victoria!
Often, when people really want something they can't have, they denigrate it.
The grass is always greener!
High prices don't make a better city. Somewhere along the way we lost what was important. When did we take the pictures of our kids out of our wallet and replace it with a picture of our house? When does a thing mean so much that some people will destroy their future in order to possess it.
Its just an illusion. A distortion of what is valued in our society. Where it is more important to be perceived as wealthy than to be wealthy. Its the return of Wall Street's Gordon Gekko, where "Greed, for the lack of a better word, is good."
And we all know how that ended.
Introvert
You can believe this if you want or not BUT I can afford to pay cash for an average home in Vic. I'm talking average here, not a Mcmansion for 800k.
Would I? Hell no! I have my money working for me and I pay rent equivalent to about half of what the mortgage payment (+ taxes, maintenance and insurance) would be on our house.
I'm a numbers guy and when the numbers don't ass up they don't add up. Why would I throw away the investment potential of say 200k (equivalent to the down payment) on a house that I feel will come down in value by 30 - 40% with a year or two???
As far as trashing Victoria....dude it really ain't that great. Go travel, see what else is out there and you will see what I mean. Vic has become a little city with big city problems (afore mentioned). I used to like it A Lot! Now not so much.
Seems to me the people that think Vic is all that and a bag od chips have never traveled internationally or even south of the border. The born and raised thing gets old for me......step out of the bubble and you will see what I mean.
Like I said, as soon as I can adios to sleepy town! see you on the beach bud :)
I came across an estate sale today, 900k, no mortgage, only 2 kids. These lucky people are walking away with a huge sum of money, plus if they have their own home already and a decent job ~ a 1 million dollar home is certainly affordable for them.
What does someone do with such a large inheritance? Do you really plunk that kind of cash into the stock market? At the end of the day real estate is much less risk.
Secondly, this got me thinking, with smaller families aren't we going to see more wealth be preserved at the top?
Most estate sales I see have 3-4 receivers, what happens when this starts being more like 2-3, and eventually 1-2?
"I can tell you I'd much rather end up with the same monthly payments in a few years with the interest rate being higher and the home price being lower. My hard earned down payment would also prefer to be applied to 420k rather than 600k."
I have been pondering this as well - and I don't think we are going to see interest rates rise as much as people anticipate.
Inflation is low and in my personal opinion will continue to be low unless we see a large war or equivalent (lack of oil supply). Most products and goods are imported into Canada and there is certainly no shortage of goods other than Iphone 4s. Also labour is being outsourced to China for dirt cheap; I don't think this will put upward pressure on inflation in Canada.
Secondly, I don't see countries out there running to spend huge amounts of money on infrastructure....overall, other than China I personally just don't see huge demand for money from countries. The only country needing lots of cash is China, but they aren't even borrowing, infact they are lending to other countries.
Are interest rates really going to rise in the next 5 years to make it worth while to wait versus rent? I don't know, but I am leaning towards not...
Marko:
"What does someone do with such a large inheritance? Do you really plunk that kind of cash into the stock market? At the end of the day real estate is much less risk."
That is a very financially naive statement.
Investing it doesn't mean it has to be put into individual stocks. And conventional investing could be more volatile, but not necessarily more risky.
A balanced portfolio could include some real estate, but plunking it all soley into real estate is actually MUCH more risk, especially for an amateur real estate investor.
Paying off a mortgage could make sense depending on the situation, but buying a bigger house, a condo, or a vacation property like many amateur real estate "investors" would do makes very little financial sense.
"No one expects things to go back to 2002."
Over the long term, real estate prices track inflation. Therefor a return to 2002 prices in 2002 dollars is a near certainty.
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