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.

20 comments:

Mark said...

This guy doesn't think so.....laughable!

BNN Don Campbell Interview Transcript – “The Apocalypse Is Not Coming” – ‘Plateau’ As Worse Case Scenario

http://vreaa.wordpress.com/2010/10/30/bnn-don-campbell-interview-transcript-the-apocalypse-is-not-coming-plateau-as-worse-case-scenario/#comments

Fallacies and misconceptions in the above dialogue:

1. That “there isn’t a bubble in Canada”.

2. That areas that are overpriced will “be flat”; will “plateau”.

3. That we are in a “buyer’s market right now”.

4. That housing affordability at ten year average is reason for complacency. [hint: emergency low rates]

5. That there is no risk of “a significant amount of people that are going to be underwater here”.

6. That certain areas (Hamilton; Edmonton; Maple Ridge) and certain property types (the very low end; luxury) are immune from price drops, in fact will do “incredibly well”.

7. That there are going to be some GREAT opportunities in the spring [2011]… Including the ‘middle [mid-range] market’ in Vancouver; and the new resale [flip] condos where HST has been paid (“that’s where the gold is going to be”).

8. That “average prices don’t mean ANYTHING, really.”

9. That anybody knows what’s going to happen in the economy 2 years from now: “2012, 2013, 2014, all of our economic analysis is showing that you’re going to see a 3-5% increase.”

10. That leverage is to be embraced: “You’re going to see a 3-5% increase which, if you put 25% down on a property… it means you’re getting 20% return on your money.”

11. That a decline of 10% could be conceived to be ‘apocalyptic’. (“We’re not looking at anything apocalyptic here, none of these declines of 10% that some of the banks are predicting for example?”)

12. That the thought of a 25% price drop is laughable: “25% though (laughs)…”

13. That “you cannot analyze a housing market by looking at the housing numbers, you can only analyze the future of the housing market looking at the economic fundamentals, which is jobs and in-migration.”

14. That the possibility of a bubble existing is to be made light of.

15. That “the apocalypse is not coming.”

Mindset said...

Funny, I watched the video of Don Campbell yesterday. Is that botox that gives him that crazed expression? He looks like a psychotically happy madman.

In the same manner as Garth Turner (but opposite), the guy has publicly created a bias he needs to justify. He has staked his credibility on it.

Problem for ol Don is, all indications seem to be swinging towards the Garth side of this book-selling bonanza. (...but he should be able to speak in public again in 8-10 years... it's called the real estate cycle for a reason)

Mindset said...

Just for fun, how about a little Craigslist/BC Assessment rent vs buy analysis.

I pulled the numbers for two upper-mid homes based on both cash flow and potential losses with a 15% decrease in housing prices. The comparison is what you would lose by buying a house and then having to sell it, vs renting the same nice home to wait out the market instability.

It's amazing what you can rent these days while you wait this out. Don't believe me, spend a little time on craigs list.

Note: Monthly payment estimates are based on having 200K in your jeans. If you don't have 200K, its even better for renters.

3 bedroom houses examples:

Assessment $1.05M - Rent: $2600 Link - http://victoria.en.craigslist.ca/apa/2027089971.html
- Monthly payment with 200K down / 3.89% rate: $4420 (+ 300/mnth property taxes?) - $4720
- Rent / purchase ratio: 1.8 to 1 in favour of renting
Potential asset loss with 15% price decrease and legal/mls/HST for buy/sell: $157,500 + 65,000 = $222,500 (loss)

Assessment $900K - Rent: $1950 Link - http://victoria.en.craigslist.ca/apa/2026842127.html
- Monthly payment with 200K down / 3.89% rate: $3640 (+ 300/mnth property taxes?) - $3940
- Rent / purchase ratio: 2 to 1 in favour of renting
Potential asset loss with 15% price decrease and legal/mls/HST for buy/sell: $135,000 + 60,000 = $195,000

Including properly taxes, what are you living in as an owner for $19-2600 a month including property taxes?

Oh, and this doesn't just apply to those with caviar dreams of living in a $1m home, I've seen the average rent/own ratio in Victoria listed between 1.7-1.9 to one in in favour of renting in almost every article I've read.

It costs almost twice as much to own than rent without any reno's or repairs considered. And thats before you even consider potential losses.

Of course, feel free to correct my napkin math if I missed anything important.

Mark said...

Both of those listing have been deleted by the author on craigslist.....WTF?????

Phil said...

Realtors probably flagged them!

Mark said...

Flagged them for what???

Mindset said...

Hmmm. So they are.

Maybe relisted or rented? I did this analysis a couple of days ago.

Will have to see if I recorded the street addresses.

Mindset said...

This is the search I used to find 3 bedroom homes for rent on Craigs list:
http://victoria.en.craigslist.ca/search/hhh?query=&srchType=A&minAsk=2000&maxAsk=3000&bedrooms=3

Maybe a more stable source is Used Vic:
http://www.usedvictoria.com/classifieds/house-rentals

And if they show the address, this is where you can look up the assessment value:
http://evaluebc.bcassessment.ca/Search.aspx

And here is where you can estimate the mortgage (current rates):
http://www.tdcanadatrust.com/docs/mortCalc/MortgageCalculator.jsp

Should be pretty straight forward to crank the numbers on a couple of different listings.

Here is some fresh rental examples (no address though):

http://victoria.en.craigslist.ca/apa/2026849015.html

http://victoria.en.craigslist.ca/apa/2029055253.html

Or from used Vic...
How about a million dollar home right on the water that includes utilities (hot tub and air conditioning) for $2850? Utilities and property taxes on this one have to be $600/month.

http://www.usedvictoria.com/classified-ad/Waterfront-Living---Including-utilities-_13441142

Mindset said...

Ok... got two more. But have to call it a day after this. Lets hope the rental listing stays put long enough for a few people to review the actual links. I've included the addresses in case they dont.

Beautiful Character Home - Oak Bay
Assessment $736,000 - Rent: $1800 Link - http://victoria.en.craigslist.ca/apa/1986834244.html
- Address: 2408 San Carlos Place
- Monthly payment with 200K down / 3.89% rate: $2787 (+ 300/mnth property taxes?) - $3087
- Rent / purchase ratio: 1.7 to 1 in favour of renting
Potential asset loss with 15% price decrease and legal/mls/HST for buy/sell: $110,400 + 60,000 = $170,400 (loss)

Ocean View Family Home N Saanich
Assessment $975,000 - Rent: $2200Link - http://victoria.en.craigslist.ca/apa/2032178471.html
- Address: 11288 Chalet Rd
- Monthly payment with 200K down / 3.89% rate: $4030 (+ 300/mnth property taxes?) - $4330
- Rent / purchase ratio: 2.0 to 1 in favour of renting
Potential asset loss with 15% price decrease and legal/mls/HST for buy/sell: $146,250 + 65,000 = $211,250 (loss)

Again, without 200K in your jeans, the deal is even better for renters.

kabloona said...

Mindset, thanks for all the data-mining....

Now go take a break....

:-)

Don Campbell, what can I say? That's what passes for a real-estate "expert" in this neck of the woods, I suppose.....

Alexandrahere said...

Robert Reynolds GBA: Can you tell me when someone gets severance pay after a lay off, is there anyway they can defer some of the income tax until at least the following year? I know at one time you could put $2000 per year of employment into RRSP's but I believe that ended in 1996?

They just bought a house about three years ago, and know they have a fairly large mortgage.

Mr.4AM said...
This comment has been removed by the author.
Mr.4AM said...

Let the realty fees price wars begin!

Got love competition. The gates have barely opened and already some guy's comission is already "only" 0.5% of the sale (aprox $2K on $400K house) - which he points out is still about 4 times more than a lawyer charges for a typical real estate transaction.

The more we wait the more we save. It looks like they're starting to get creative out there. My guess is that there's going to be a 4 to 6 month trial period of numerous strategies (read & fully understand your contracts before signing!), and then there'll be some kind of shakeout & consolidation of strategies with those left standing that came up with some common sense sustainable win-win ideas in the first place that appeals to the masses.

Mr.4AM

nan said...

Yay - MSM to the rescue!

http://www.vancouversun.com/business/Condominium+market+Canada+heating/3757559/story.html

Marko said...

Month-End Market Statistics
Posted by
Nov 01 2010
Monday November 1, 2010 8:00am:

Oct Oct
2010 2009
Net Unconditional Sales: 467 742
New Listings: 976 1,067
Active Listings: 4,046 3,219

Please Note

Left Column: stats for the entire month from this year
Right Column: stats for the entire month from last year

Marko said...

Averages for the month are going to be very high - look for the VREB public release later today.

PainInThe said...

A 30% drop, just like in the US, is woefully conservative.

A midline estimate would be 45%, with at least 50% from peak a distinct possibility.

Barring a dollar collapse, which is likely, and then figuring in for inflation and possibly hyper-inflation, 60% adjusted for inflation might not be out of the question.

About said...

PainInThe

Could you add some analysis to back-up your rather bleak and bearish predictions?

Phil said...

Prices do have to drop 50% to fall back inline with rents. The market will force it to happen eventually.
How long it will take and what it will do to the economy is anyone's guess.

PainInThe said...

"Could you add some analysis to back-up your rather bleak and bearish predictions?"

Be HAPPY to.

Las Vegas.