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.  

19 comments:

Just Janice said...

It looks like you've hit the nail on the head hhv...and soon enough the declining prices will begin to feed on themselves and buyers will be thinking why buy now when next month it will be cheaper?

Jack said...

Don't forget about the massive changes to how suite income is calculated. That has affected quite a number of people as well.

A good analysis of it here:

http://www.mortgagecentrecitywide
.com/blogs/cossl/?p=233

Leo S said...

@Marko (from prev)
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...

Possibly not. But we know that interest rates don't have to rise to cause a decline. The decline in dozens of countries in the past few years has been at the same time as interest rate decreases.

As for desirability of Victoria.. We like it here, but plenty of places are just as nice up island. Parts of Nanaimo actually are quite beautiful, it's just that most people only see the crappy areas on their way through. Qualicum Beach is great. My parents came down to visit and said 15 years ago Victoria was a beautiful small town. Now it's busy and loud. It ain't that quaint little town it used to be.

Timothy said...

Hey HHV,

I wish it were as simple as you put it here. I'm sure the new qualification rules have scared off some prospective buyers, but your understanding of the qualifying rate is not correct.

Buyers can still qualify at the best 5-year rate, ie, 3.45% or somewhere close to it.

Where they have to use the higher 'qualification rate' is if they are taking either:
a) a variable rate mortgage or
b) a fixed rate mortgage with a term of less than 5 years.

http://goo.gl/8DNf

It has been a common misconception, so I am not surprised that you among many others are confused by it.

So maybe that's it - the buyers have been scared off by incorrect information. Combine that with incorrect information about the applicability of HST and I'd bet that accounts for some of our "missing" buyers.

Sales have been fairly brisk this month compared to last, anecdotally. I wouldn't be surprised if October saled eclipse September by a good margin.

Tim Ayres said...

I should note that the above comment is mine, in case you were thrown off by the "Timothy," lol.

-Tim Ayres

Mark said...
This comment has been removed by the author.
Just Jack said...

The home buyers are still here, its the investors that have gone.

Projects like the Olympic Village are stalled because investors perceive real estate as too risky. With little, or no appreciation expected in prices for the next several years there is no point in buying today.

So, I think you're now getting a snap shot of the demand for home ownership over the next decade. And although the Greater Victoria area has grown substantially over the last 25 years, sale volumes for the next few years will be setting new 25 year record lows.

happy renter said...

I just sold a condo in the core and have agreed to rent one that is identical in my building for $150/month less than what my mortgage+strata fee was costing me. On top of that, I'm not paying property taxes this year. This isn't a long term situation for me because I know I won't want to live in the rental condo forever, but I can't tell you how relieved I am to have stepped off of the real estate roller coaster for now. I'll only put away a few thousand bucks this year by renting, but to be honest, that's probably all I would have accumulated in equity anyhow. I am a happy, happy renter!

omc said...

The new mortgage rules only applied to those trying to max out their buying, by buying a house with a suite. Tim should know this, as I am sure it has affected the lower end of the market which is well represented in the west shore. It has nothing to do with mis perception.

The other factors are; extremely poor afford ability and, as Just Jack just said, the lack of investors in the market. There are a lot of investors dumping houses that were obviously used as rentals on the market right now. Best case is no growth for 8 years, what's to invest.

We just had an article linked from this forum a while ago explaining how a falling market acts. This is the bounce time. A realtor was telling me a few days ago that there was a small flurry of deals going through. He said that people were "settling" on houses as they had been waiting and had some sort of a timeline.

HouseHuntVictoria said...

Thanks for the clarification Tim. Appreciated. Glad to see you're still reading from time to time.

Just Jack said...

Summer holidays are over, the kids are back to school and its time to buy a new house.

But its not so easy anymore. It seems that you have to spend a lot more money to get only a marginal increase in the quality of the home. Is it really worth moving from Glanford to Lakehill at a cost of an additional $90,000 and still have the same style and age of house?

If the interest rate on the new mortgage was lower than your current rate - it might be. But the rate isn't much different from when you refinanced last time.

Okay so you nix the idea and you'll buy an investment condominium. So you put down the paper and call up your banker and instead of taking 5% out of your home equity, you now have to take 20% out of the equity of your home. You gasp - and say no way.

Your risk for buying that investment condominium didn't change. What changed was your perception of risk. Because now you are using more of your equity/money than the banks.

You put down the phone and pick up the newspaper and murmur - maybe I'll just wait till prices come down.

jesse said...

"With little, or no appreciation expected in prices for the next several years there is no point in buying today. "

It is instructive to take a look outside the local market. In Vancouver, for example, while sales are slow they are not cratering like Victoria's. Why is this? Talk on the Vancouver RE blogs is noticeably different in many ways from the talk here. I guess we need causality to justify the market's recent behaviour. Maybe it's just as simple as prices are too darn high? The mode by which prices revert will be different in various cities but the real reason for prices falling is the same.

msr said...

@jesse

I haven't been watching recent market stats, but I do remember Vancouver 2008 stats. Some sections of the housing market reached MOI's of 20+.

What could be different this time is that the buy on spec condo 'investors' have been scared out of the market. There could still be plenty of investors, buy long term and hope appreciate covers the monthly shortfall, but the quick flippers have probably moved on by now.

bullbear said...

Totally agree that most of the answer is availability of credit, but another factor is alot of the remaining renters got sucked into the 'recovery trap' earlier this year. 6 of the 7 i know all succumbed between Dec '09 to April of this year. I also know 4 people who added 1 or more speculative investment properties to their portfolio around that time frame. It seems as though many of the 'remaining' renters are somewhat more knowledgable about the real estate market and economy in general.

Jason said...

I think that the suite income may play a larger part than many people think. That same couple you mention didn't like their options in the spring, but with a suite they could have qualified for a house they might have found acceptable. Now they are stuck in a lower price bracket.

The other major factor is that the qualification changes were widely publicized (even if they weren't widely understood). Since then the downside of the market has been much more evident in the mainstream media and I am noticing a shift in general perception around the office and among family and friends.

People who used to question why we would rent are now saying "looks like that could work out well for you". They are hearing snippets about the market dropping 5 or 10% and anyone is much less likely to buy into a falling market. They do however think we should be buying in the winter to take advantage of it.

There was a lot of demand pulled forward due to the mortgage changes and to the HST, but on the flip side, is there demand waiting on the sidelines right now?

If there is, is it enough to swallow up the inventory that is also waiting on the sidelines? Will people really jump back in with both feet if the market pulls back a mere 5-10%?

That market mentality that is hard to gauge through the numbers alone, and personally it has me asking myself: Should we hold out another couple years for the 20-25% price drops that I'm expecting, or can this market really stabalize after only a 10% drop?

Just Jack said...

The month of September saw 96 condominiums sell in the urban municipalities for a median price of $279,500. The month before saw 84 sales and a price of $283,500. The year before there were 144 sales at a median price of $294,500.

During last month, while 96 condos were sold, 240 were listed.

$279,900 at 3.4% would require an income of $42,600 per year to buy the typical condo. Which is about the typical government employees wage.

So why are sale volumes and prices still falling when the typical condominium is so affordable?

Was it because investors constituted 35% (one out of three buyers) of the condo market?

In my opinion, sales have dropped too low to support the current prices. And it is unlikely that a drop in the interest rates would qualify anymore buyers to spark demand.

happy renter said...

The sense that I'm getting (from talk around the water cooler, etc.) is that most people in Victoria are bracing themselves for a stagnant real estate market at best, and a dropping market at worst. But I've only really gotten that sense in the last month or so. I put my condo on the market in July and when I told my colleagues that I was selling, they assumed that I was buying a house or a bigger condo. When I informed them that I was planning on renting, they all seemed concerned that I was having some kind of financial trouble. "Why on earth would you go from buying to renting? Is everything ok?" As soon as I (very gently) said I wanted out of the market for now because I wasn't sure where it was going but I was worried about getting "stuck" in my small condo if prices really dropped, people got defensive. And I mean really defensive. "Oh, the market will be just fine. People get worked up about nothing." "They're not making any more land around here." "Real estate here will only ever go up in value." Classic. But by the time mid-September rolled around, several of my coworkers had read a few more bubble articles in the MSM and actually started telling me that they envied my ability to rent for now and wait things out. Go figure. The tide would at least appear to be turning in Victoria. And, as several posters on this blog have noted, when people *think* that there will be a real estate bubble/crash/flat line, they stop buying and their thoughts then become reality.

Alexandrahere said...

Happy Renter: Have you sold your condo yet? Many people looking at it? Offers? Price changes?

Its nice to know what is being said around the coffee urn these days.

Things certainly aren't looking good this week. So far I am seeing only 7 sales for SFH. And that is in the core areas of Vic,Esq,OB,SE&SW up to $775K.

Ratio wise, condos' are doing slightly better in terms of sales in these areas.

Also loads of new listings and Price Reductions and not as many OMs' as in previous few weeks.

Out of the 29 SFH price changes this week, 17 have been advertised with suites and 2 with "Potential".

The average selling prince so far this week for SFH within the criteria is down as well at $532,571.

I'd say that the buy now or forever rent mind-set of the many is now turning to the grim fact (for them), that there are fundamental changes going on and this will result in a total turn-around in terms of how we perceive home ownership.

happy renter said...

Yes, I sold my condo. Lots and lots of lookers, but only one offer after 3 months on the market. It was a good one, though.