Tuesday, June 14, 2011

Household debt overwhelms

Many people think the US housing bust was triggered by NINJA loans and sub-prime lending. While those products definitely contributed to the hyper-inflation of US household debt from 2002-2006, they were hardly the trigger to the housing collapse. Once the ball started rolling downhill though, sub-prime so-called asset-backed securities had an underlying issue: zero equity.

Looks like Canada has the makings of it's own homegrown household debt issue. Apparently, we're in "dire straights".



From the article:
  • TD Economics warned that "following five years of excessive debt accumulation, Canadian households are finally tapped out."
  • Fifty-seven per cent of indebted respondents said daily living expenses are the main cause for their increasing debt; 
  • The debt-to-income ratio in households reached a record high of 146.9 per cent in the first quarter of 2011, compared to 144 per cent in late 2009.
  • More Canadians are carrying debt into retirement, with one-third of retired households carrying an average debt of $60,000 and 17 per cent carrying $100,000 or more. 
In case you are wondering what happens when a nation becomes indebted, suffers a financial crisis and then tries to grow itself out of the recession using more debt, we can learn from the US, which, as they say, is, well, F&%$!

We did it here too. CMHC = SUB-PRIME. Falling house prices will quickly lead to zero-equity for those who used the low-down, extended amortization schemes pushed hard by mortgage lenders, even today.

90 comments:

a simple man said...

I agree with this argument. I see it all around me in Oak Bay all of the time. People are stretched and stressed.

At least gas just went down a bit.

Dave said...

Re: Investing

Thoughts?

Dave3

Robert Reynolds - HMR Insurance said...

Carrying on from last post

Since we were talking about Dollar Cost Averaging, I wrote a post about it here

Nancy said...

Here is an example, my son's soccer group was going to go over to Vancouver for a game. Approx. $80 per family, gas, ferry etc.

Most people said they could not afford it. Now these are hard working middle class people. I see it all the time. People just can't take it anymore.

We seem to be living hand-to-mouth and we don't buy anything.

Robert Reynolds - HMR Insurance said...

@Dave

Not bad advice, especially the bit about precious metal volatility


current graph of silver

how's that working out for you Silver Surfer?

JustWaiting said...

Nancy said:

Most people said they could not afford it. Now these are hard working middle class people. I see it all the time. People just can't take it anymore.

We seem to be living hand-to-mouth and we don't buy anything.


The Royal Bank is here to help you. You can just use the equity in your house to have the lifestyle you want...

RBC touts lower rates for HELOCS

Royal Bank of Canada, the country’s largest lender, is starting a nationwide marketing campaign touting lower home-equity loan rates than most rivals to gain customers as it combats a slowdown in Canadian consumer lending.

dave said...

@Rhino

interest rate hikes: NOT coming soon to a theater near you

As someone else was mentioning,

real rates = nominal rate - inflation rate

Canada's inflation rate is likely peaking and about to fall faster than bond rates for a while now. Therefore real rates (although presently negative) will rise in the medium term. Nominal rates mean little until you can estimate what inflation is doing. Too bad we couldn't get real-time CPI data. Commodity prices are a fair judge.

Reid said...

This is consistent with what I see. There appears to be so many people, especially those under 40 living way above their means and very loose lending practices is allowing it to happen. Today you can buy a $1 million house with only $50,000 borrowed from a couple’s RRSP’s. The cost of living is rising, so this could get really ugly if house prices start to drop materially. I sense that people view their mortgages as good debt and as long as the value of their house keeps rising it all appears to be paying off. But once they are in negative equity their comfort levels may quickly change and you know the banks will stop lending them more money; then reality bites.

nan said...

@ Rob (from previous post):

It's not about timing the market, it's just about buying something when it's a good deal versus not buying when it isn't.

The chances for long term capital appreciation are far reduced when you buy when valuations are as high as they are now.

That being said, the Fed couldn't inflate their way out of the mess even if they wanted to. 95% of the money supply in the western world (and hence, demand) is based on credit, not cash. What effect will doubling or tripling the supply of cash flowing around have? It will increase cash to 15% of the total "money". Big deal.

Besides, the US Debt ceiling is already maxed - they're already broke and they have to borrow from the Fed before they can buy anything, so I wouldn't count on more "money printing" - Bernanke doesn't know what he's doing and Congress is beginning to see the light.

A 50% credit contraction on the other hand will reduce demand by half, and the government can't control this. If individuals and banks feel that lending is risky when compared to reward, they will either command higher interest rates or not do it. Look at US Real estate. Rates are Zero, and people still won't buy. Why? because all of a sudden there is a real risk of loss.

A decrease in the willingness of individuals and banks to lend will have a far more profound impact on demand (and hence profits) that printing money ever could.

DavidL said...

Reposting from the last topic:

There's lots of debt in the world, and you can bank on governments and consumers continuing to spend more than they can afford. Back in February, I moved a lot of money from low-MER index funds to low-MER bonds.

My favourite: Beutel Goodman Long Term Bond Class D (MUTF_CA:BTG871) Over the past few months, the dividend has dropped from 6.25% to about 5.50%, but the selling value has increased by 4%.

JustWaiting said...

Flaherty and Carney are getting more concerned about the hot housing market in Canada.

Flaherty, Carney fear household debt impact

The federal government and the Bank of Canada are again sounding the alarm over growing household debt as two new reports suggest the problem is worsening in the face of a weakening economy.

Finance Minister Jim Flaherty tabled a budget implementation bill Tuesday he says will formalize his powers to intervene in Canada's hot housing market to restrain borrowing.

And on Wednesday, Bank of Canada governor Mark Carney is expected to warn Canadians against taking on too heavy a debt burden that they won't be able to afford once interest rates start rising.

Just Jack said...

Is there anyone left that remembers when the condominiums at Tuscany Village went for sale.

That was back in 2006 and the developer got into financial trouble. So, if you bought a condo then - how would you be doing now!


Well one of the suites re-sold this week for $370,000. In February 2008 it was purchased from the developer for $379,900 including GST.

Which brings up a good point. Do you get a "deal" when you are the first to buy into a condo complex?

My opinion, is that you are taking on more risk than when you're buying a pre-owned condominium. Because the complex has no re-sale history. All the sales in the complex are contract sales which may not be at market value. And you have a better chance at a better price if there are more than one seller of the suites, with competition among the sellers.

That's not to say that you can't get a good deal from the developer. But, I would guess that any deal was unintentional on their part by underpricing the suites. And that's just poor business sense on their part.

Just Jack said...

How about the uber rich. The one's that us peasants look up to and follow religiously because they must know what they are doing. After all, how else did they get so fabulously wealthy.

One way to get rich quick is to buy the most expensive property that you can afford.

Such as the property that just sold on Sea Ridge Lane. Five years ago, the home was bought for $1,150,000. Back when a million dollars was like real money.

The home was put back on the market a year later for $1,350,000 and the price was later increased to $1,450,000 in 2009. So far, so good the sellers have a potential windfall of money.

Then nothing..... for almost 550 days on the market.

Until this week, when it sold for $1,150,000.

I'm chalking the "buy the most expensive home you can afford" down to another of the myths my realtor told me.

Just Jack said...

And what's happening on the middle income family front.

If you were to have a poster drawn up to show what a middle income family house looks like and where it is located, you would be looking at a picture of the Gordon Head Box.
Nothing defines the Canadian middle class more than the basement entry home with the potential in-law suite. Forget the maple leaf give me champagne colored stucco and a rear deck big enough to broil a buffalo on.

Well, these bastions of Canadian enterprise, the homes that built the wealth of an entire generation of baby boomers and caged their demon spawn are not appreciating to well anymore.

Like the house that just sold on Bisley for $550K after being updated with floors and bathrooms.
Originally bought October 2007 for $505,000.

So much for the Canadian dream, the party is over and the ones that bought in the last three years are the ones left to clean out the hot tub of Made in China prophylactics. Ironically the source of our next baby boom that might see prices reach there current height again.

Nancy said...

They always say - well if you are going to stay in the house 20 years it is okay. Who knows what will happen in 20 years. We all know too many divorces, illness, job losses. Life tends to throw many curve balls that are often beyond our control so I would never bank on where one will be 20 years from now.

I used to get that all the time. - Live in it for 20 years.

Rhino said...

1237 St David.
List: 800,000
Sold: 727,913

Way to concede 72,100 dollars off the list price and then grind the buyer for 13 bucks haha

pod_x said...

"I used to get that all the time. - Live in it for 20 years. "

I wonder how the Japanese feel about that one.

omc said...

Hey that st David house just beat out he house that sold on MacDonald drive for the most below appraised value by $2k.

Jason said...

I lived in japan and most people i talked to about it look back at the period of speculative real estate buying with chagrin. They more or less describe it as a phenomenom of mass-hysteria brought on by a sense of invincibility in their economy during the late 80's. Today real estate there is viewed as an unfortunate cost of living and certainly not as an investment.

Just to throw out an alternative investing strategy for anyone still expecting massive rate hikes someday soon: When Nafta came there were suddenly Suburbans everywhere in Mexico. Many people who qualified for the debt to buy one considered it to be an investment because the rate of inflation devalued the currency faster than a well-cared for vehicle lost it's value.

I myself might stock my basement full of giant wheels of parmesan. Next to gold it is the most inert substance known to man, it goes up in price every year, and if it doesn't i can always eat it. Luckily i don't live in Oak Bay and wouldn't need to worry about giant rats getting at it first.

omc said...

The market is acting a bit funny these days. House that can be moved into with little or no work are still crazy, but houses that need work above $700k are way down.

352 Gibbs road gets a vote for worst value. A 50s rancher in Henderson for $830k shows that there are still some of those "it just takes one buyer" buyers out there. This one isn't even renovated, at least not since the late 80s. Compare this to 1237 St. David; this one needed lots of work, but look at the lot and location. This on one of the nicest streets in Oak Bay with a largish 8190sqft lot. Assessment is $941k and I believe the property is worth more than the listed land value of $621k. Houses in similar conditions and locations were selling for $900k just 2 years ago.

The other one, which I have already mentioned, is 2660 MacDonald in Queenswood. This is a 70s west coast home in pretty good shape needing mostly updating, but on a 0.88 Acre prime piece of Queenswood. It has an unfortunate layout, but the property alone is assessed at $750k. BC assessment is $972k and it sold for $760k. I think the seller started out at near $1M more than a year ago.

SilverSurfer said...

Robert said: "current graph of silver
how's that working out for you Silver Surfer?"

Not as good as when it was at $49.70! Hehe. Still up 15%-20% on my last purchase though, and nearly 300% from my original purchase. How's your GIC's doing? *smirk* :D

Silver could go much lower in 2nd half of 2011 if we see Greece Default and/or Fed takes his sweet time bringing out some QE3 variant.

I could see it go down to $22 or so, at $18 I'm backing up the truck and doubling down.

Then some flavour of QE3 will come out, after Congress raises the debt ceiling some time in August, and it's back to the moon baby!

But that's not the end of market risk and certainly not volatility - these will just continue to increase. "Market Stability" is only a Fed mandate in theory.

Then next, look for a China hard landing in 2012, and a peak cheap oil price spike above $150 causing another recession by 2013. That is, if Eurozone doesn't trigger a domino collapse before then.

Meanwhile, despite the recent mini-crash in silver triggered by CME raising margins 5 times in 10 days - even after prices had already started declining, the COMEX silver inventories continue to decline - THAT people, is a sign this isn't the end of the price rises. Bubbles don't see inventories continue to be absorbed while prices decline.
COMEX inventories hit 27.9 Million ounces this past week. That's down ~45% in 6 months!! . Another couple of years at this rate and COMEX silver will be gone. Then guess what happens to the price of physical silver?

Meanwhile, expect the Hong Kong silver exchange to open up in Q3 this year, similar to how they just opened a gold exchange to compete with the rigged COMEX and LBMA. BTW, first thing they did when they opened up the gold exchange? They lowered margin requirements. Guess where all the specs are going to start doing their trading in the not too distant future?

Don't lose track of the bigger picture, the only bubble here is fiat paper money. Constant inflation is part of the blueprint of our current global economic system, and it's being accelerated with all this money printing that ultimately results in buying power depreciation. Real inflation in the past 12 months wasn't 1,2 or 3%... it was 5,7 or 10%. Meanwhile, you got how big a raise at work over the same period? Right....

dave said...

Here's a long-term look at inflation (back to 1950s) with yesterday's May number added.

http://dshort.com/inflation/headline-core-CPI.html?CPI-PCE-core-comparison

With food and energy added, the inflation rate actually fell in half in May - from 0.4% in April to 0.2% in May (2.4% annualised). Canada has been even more protected from inflation than the US due to our currency.

Russ said...

Hey Silver Surfer, where did you buy your physical silver?? I bought some gold a while ago from a big 5 bank but the various associated fees seemed outrageous. Whats the best (cheapest) way to get physical PM?

kelly said...

Robert Kavcic of BMO Capital Markets points out, while referencing Carney's speech, that the last time the Canucks suffered heartbreak in game 7 of the Stanley Cup final (1994) was just before red-hot Vancouver house prices tumbled more than 26%.

Naah, history doesn't repeat...I'm going with 46% off this time! If the Canucks won, only 45%..teehee.

SilverSurfer said...

Dave: I think that website had a virus that my antivirus flagged.

What I was hinting at in my post re:*real* inflation is that CPI is precisely NOT a measure of real inflation. I'm quite familiar with the US definition of it, which is highly distorted and doesn't include things like energy costs, housing, food and applies hedonic calculations for non-technology consumption items. In short, it's a totally unreliable method of measuring inflation. As for the Canadian definition of CPI, I'll have to do a bit more reading, but I'm guessing it may not be that far off from our American cousins.

Russ: The largest bullion dealer in Canada is Scotia Mocatta, and buying gold through them is ok; however buying silver is a ridiculous rip due to them charging horrendous shipping and insurance charges. Expect $500 to $1000 in extra shipping/insurance charges for every 1000 oz you buy - I strongly advise against it. 1KG gold bars on the other hand, had less than $50 shipping fees.

Royal bank also sells gold (at lower prices than Scotia Mocatta) but I've had a very hard time buying any silver from them.

TD,CIBC and some credit unions can also sell you physical but ultimately it comes from Scotia or Royal bank, so their prices aren't fantastic either.

The largest coin/bullion store in town is a total rip off... Yes I'm talking about you A.A.A.Stamp Coin Jewllery! Those guys tried really hard to convince me to pay $45 for 1oz silver maple when they were at $30 spot. Walk down the road 1/2 a block and other coin shops were selling it at $33-$36. The problem with the other coin stores is they had next to no inventory.

Long story short, I intially bought a bunch from Scotia, but recently ended up buying the bulk of my stash from Boarder Gold in WhiteRock.

Their prices were the best by far, and no ridiculous silver shipping charges, and you can lock in your price over the phone before showing up in person to pick up the metal.

Obviously, it's not worth the trip if you're buying small quantities, but check them out, I'm quite satisfied with my orders from them.

Good luck! :)

TC-Parrot said...

CTL-C CTL-V CTL-C CTL-V
BCREA, CREA and Coldwell Banker make the news.

The latest article by the copy and paste team at the TC shows how to combine three press releases into one article.

Victoria in top 10 of Canada's priciest housing


If you can't read the article because you have hit the 20 article paywall limit you can sign up for unlimited online access to all the in-depth articles for only $9.95 a month. Please don't try to defeat the paywall software by clearing the cookies in your browser cache and viewing for free. This isn't fair and the TC needs the money.

a simple man said...

and every new browser has an incognito or private viewing option - select this and read for free.

I am mostly just not reading anymore.

Just Jack said...

A success story for condominiums in downtown Victoria with an 898 square foot skybox selling for $525,000 which was purchased in January 2009 for $405,000. An increase of 30 percent. Despite that an identical sized unit, one floor below, sold in May for $450,000.

Must be the view.

If I were a banker, I would have someone do an unbiased opinion of value on this property before I handed out the bank's money. Or I would get it insured by CMHC and save me the headaches.

If you were lending your own money - what would you do?

The number one reason why our market will crash - nobody cares if the price is inflated.

Not the buyer
Not the seller
Not the realtor
Not the broker
Not the banker
Not the insurance company

SilverSurfer said...

You forgot...

Not the appraiser
Not the CMHC
Not the Provincial Government
Not the Federal Government

Gotta love mortgage securitization and Tax payer backed insurance companies eh?

SilverSurfer said...

BTW, a friend of mine just bought a fixer upper a few days ago at an addmitedly good price as compared to current market values, but she also signed up for a $550K mortgage over 35 years. I tried my best to warn her, but peer pressure was greater than common sense.

You should have seen the Facebook cheering parade that ensued after that home buying er... debt enslavement contractual obligation announcement.

Good Grief!

Leo S said...

Slooooow week for sales so far. Is everyone too busy rioting to go house hunting?

Introvert said...

As someone mentioned earlier, with this very slow economic recovery in Canada and especially in the United States, I'm starting to wonder whether interest rates might stay quite low for the next few years.

I'm around two years into my ultra-low 5-year fixed mortgage rate. If, when I go to renew my mortgage in about three years, rates are still fairly low, I'm really going to take advantage. I might be in the minority, but I'm quite young and paying off my mortgage aggressively. And I think these low mortgage interest rates are just lovely.

Of course, I'm not banking on rates always staying low. I'm putting together a buffer for when the hard times do come.

a simple man said...

Very wise, introvert.

HouseHuntVictoria said...

@TC-Parrot,

The paywall the TC set up is even worse than their "journalism" what a joke that newspaper is.

Robert Reynolds - HMR Insurance said...

@Silver Surfer, glad you go out without loosing your shirt.

I am not in GIC's I've never owned them.

my current investments are roughly
20% - Diversified Opportunity (Balanced Fund)
50% - Fidelity Canadian Opportunity (Natural Resources)
10% - Asia Pacific
10% - Global Health Care
10% - High Yield Bond

SilverSurfer said...

Thanks for sharing those Robert, I might spend a little more time looking at that on the weekend. At a glance though, most of those funds looked like a bloodbath in 2008.

I'm too risk averse at the moment until some QE3 variant is officially announced. Then, everything may go up again for another X months. Only then, would I consider moving back into the stock market in any significant way.

The only thing I might dabble in until that QE3 announcement is a temporary 1/2 day investment in the upcoming Groupon IPO, with hopes it spikes up for a short period like LinkedIN did. We'll see, I still have research to do on that front.

I actually just recently moved ~7% of my portfolio into various Canadian federal and municipal bonds, precisely because I'm expecting further downturn in the markets.

I think the question on a lot of people's minds is what happens after June 30th (end of QE2). Surely the US will raise the debt ceiling by some time in August, so I'm predictin that a QE3 variant will come in around the same time or slightly after. IMO, the bulk of the recent ~6 week slow market downturn is precisely because people are uncertain as to what happens after June 30th.

Good luck!

mrmike said...

first majestic silver corp is a good place to buy physical silver.
http://www.store.firstmajestic.com/products.aspx?cat=4

SilverSurfer said...

MrMike, I kind of disagree, not because their bars aren't nice (youtube them, lots of pretty bars)or the service isn't good, or for that matter because their prices are unreasonable (although they didn't keep up with spot down movements during the recent mini-crash - they remained at $40/oz while spot dipped down to $33).

My main reason not to buy from them is because they are not really considered well recognized bars at most bullion stores.

One should always think of their exit strategy before buying.

I also regret buying some 1000 oz "good delivery" COMEX bars that I acquired when I first got into silver. Now that they are worth 300% more, I can't sell them easily at local bullion stores, even less so if silver climbs even further. I could sell them back to Scotia Bank, but they may want to charge me more ridiculous shipping fees in insured Brinks trucks back to Toronto.

I'd recommend people stick to 1 oz Silver maples from the Canadian Mint, even for large quantities (google "monster boxes"). If silver goes up significantly, it will be easy to sell well recognized 1 oz coins, vs 100 or 1000 oz bars.

Just my 90% Silver Dollar's worth ;-)

Ok, now back to real estate. :)))

pod_x said...

To make an analogy between gold/silver bullion and real estate, or anything you intend to resell at some point, resale-ability should be a primary concern. You may not mind living next to train tracks, or a busy street, or having the master on main floor, or having no bathroom on main floor, but most people do, and it will definitely matter if you need to sell in a bad market. These details may get overlooked in a hot market with bidding wars, but not when buyers aren't under pressure.

Fiduciary said...

Robert, aren't you concerned about the high MER's on those funds? 3.4% per year going to a fund manager can eat away at your return significantly over time.

Just Jack said...

The market is getting tighter and tighter as purchasers get pickier and pickier.

The drop in demand has allowed most buyers the ability to pass on real estate that is not quite right. (Except in Fernwood where the nutters are busy buying and renovating anything with carpenter ants and post beetle bugs). In fact, I think hippy hill as declared bed bugs an endangered species in this neighborhood.

Thats why a property along a residential collector road like Richardson in Fairfield sells for only 12 percent more than it did in 2006 and takes 80 days to do that.

Or a townhouse, located in the industrial area of Langford, sells for the same price as it did 2007, despite that the current owner has dumped some cash in upgrades into the home. I guess the sound of metal grinders in the mornings is a distraction.

And the deals are even better if you're a retiree buying into a complex that restricts ages to 55 and over. While most properties in greater Victoria have almost tripled in value since the year 2002. You would only be paying double the price someone paid for a townhome on Ferguson road in Saanichton in 2002.

Yet the move up market for housing still appears strong as people dump their Gordon Head boxes to squeeze into the upper middle and upper income areas on the same salary as last year.

If you don't have a half million mortgage and 25,000 on your credit cards, then you just don't understand what leveraging is. Or maybe you will - when interest rates tick up.

EagerBuyer(Not) said...

Just Jack,

There are a number of good reasons to buy in Gordon Head. The best one is

I'll get back to you.

EagerBuyer(Not) said...

Seen many deals collapse lately?

Fewer First-Timers Get Pre-Approved

Steepest declines were in terms of getting pre-approved for a mortgage (76%, down from 91%), speaking to a mortgage lender before shopping (72%, down from 84%) and arranging for a home inspection (67%, down from 85%).

Are buyers getting dumber as we get to the bottom of the buyer pool?

Pre-purchase activity

Robert Reynolds - HMR Insurance said...

@fiduciary

I know the MER's are high. But I have a few reasons.

1) I am licensed to sell these funds, but not mutual funds or ETF's. I sold these to myself, I very much believe that you should own a product yourself if you are going to sell it to other people.

2) I get a capital guarantee from the insurance company that sells the funds. If in 10 or 15 years (depends on company) the funds are worth less than what I paid in, they refund the difference.

3) I get paid a commission when I sell myself funds, which means I get a lower effective MER.

4) As a business owner, I worry that I could be sued, and creditors could attack my savings. Investments inside a Segregated Fund are treated as Life Insurance, and as such are not subject to creditors.

Another company I use and recommend is Standard Life, they have a low(er) MER series of funds, but the performance hasn't been as good as the equivalent fund from others with higher MER's. This is net return, so even with the lower MER you made less. At the end of the day, I would rather make 10% and pay 3% MER than made 6% and pay 1% MER.

If you are fee sensitive, Segregated Funds are not for you, simple as that.

Waiting said...

@a simple man Did you ever go and see that house on Kinross? I noticed it sold today pretty close to asking.

Fiduciary said...

Thanks for the response Robert. I respect that you're open about your reasons, that's very nice to see.
For me, I'm "fee sensitive" as you say, so seg funds aren't really for me. Your statement "At the end of the day, I would rather make 10% and pay 3% MER than made 6% and pay 1% MER." is very true, but looking at the performance of those funds versus the index, I'd feel safer with an index funds that tracks the index more closely and an MER near 0.5%, as I have with my TD e-Series funds.

Still, different goals for different people, and different solutions for them.

a simple man said...

hi waiting - I did go to the open house last week. The home was quite a bit better than most in that it needed comparatively minor things - you could live in it right away and do things over time - kitchen and especially bathrooms were new. Basement was very bright with huge windows.

Still sold for far too much for the area.

I renewed my lease for the next year - this market is on life support.

nan said...

@ Rob - the up front commission you get is most likely insignificant when compared to what you stand to lose by paying the MER for 30 years.

Over a 30 year period, a 3%difference MER's versus an index fund will result in a doubling (or in your case halving) of the ending portfolio value.

Sorry to be blunt, but math is math.

Trilobite said...

@Nan

Indeed, and it may well be worse. If the index fund returns 10% while the managed fund returns 7% after expenses, then it takes only 25 years for index fund to be at double the level of the managed fund. OUCH!

(despite all the marketing, most managers do not outperform the index consistently over long periods of time so the above is not unrealistic at all)

Marko said...

SFH average so far this month $648,000......

Condos at $324,000......

kunwak said...

I am also indexed all the way. With some ETFs like VTI charging MER of 0.07, it's very difficult to stomach the harsh MERs that mutual funds charge.

Only 5% of fund managers outperform the indexes over the long term. So mutual funds pretty much always loose the race against ETFs.

Anton said...

I think ETFs will force mutual funds to lower their MERs to survive. Vanguard which has very low fees like in their VTI fund mentioned is apparently setting up shop in Canada. This will mean more choices and hopefully the possibility of super low MERs for TSX traded ETFs.

The problem I worry about is the lost opportunity cost of having a growing house buying down payment fund in an interest account only paying 1.5% (ING Canada). The 1.5% is also fully taxable. I firmly believe that real estate has finished the run up part of its cycle but I don’t know if it will slowly trend down like in the mid to late nineties or fall steeply like the early eighties. I know the markets are currently getting battered so I guess that makes having cash seem smart but I also like to buy stocks/ETFs when they are on sale. Mortgage rates are quite low so maybe there is some reasonable balance of long term investing and down payment saving. Sorry Silver Surfer, I don’t have the stomach for the precious metals roller coaster though I am glad it has worked out for you.

Gretchen said...

Russ--I have used Border Gold for years. They have the best rates and are good to deal with. Check out their web site. Updated daily with prices.

I call my gold "concentrated real estate" since it only exists as 3 parts per billion on earth (give or take)

JustWaiting said...

When real estate markets start to deteriorate the outer areas are the first to go. Lets take a look at the sales stats for Sooke...

There are 259 single family homes currently for sale. Last month there were 24 sales.

Here is a detailed breakdown by price range.

In the under 500K price range there are 140 SFH listings and 22 May sales. The months-of-inventory (MOI) is 6.4

The high end houses are the first ones to feel the pressure. There are 61 houses for sale between 500K and 750K. Last month there was 1 sale so MOI is 61. Above 750K there are 48 listings and only 1 sale last month giving us an MOI of 48.

High end sellers that need to unload now have no choice but to drop prices. Over the coming months this will generate a ripple down effect into the under 500K market.

JustWaiting said...

A little closer to Victoria is Langford which is another popular choice for FTB's.

Currently there are 240 homes for sale. In May there were 47 sales.

Under 500K there are 87 listings. May sales totaled 24. A strong buyers market with an MOI of 3.6.

From 500K-750K there are 114 listings, May sales of 21 and an MOI of 5.4 (balanced market).

Above 750K there are 39 listings, Only 2 sales in May and an MOI of 19 - strong sellers market.

Alex Depuis said...

Careful Gretchen, they are extracting (printing) a hundred million ounces of that stuff each year for around $500 per ounce. I'm taking a microeconomics course and the text book states price always reverts to the cost of production. It's no different than real estate. Most think real estate and precious metals will continue rising as central banks print money. What they don't understand is far more money and credit is presently being destroyed than created. The easiest way to understand it is; all the lender's assets in this world are debts owed in currency. Why would they want to devalue and destroy the value of their assets? The petty few trillion printed lately is merely a balancing attempt to allow people’s deleveraging process to proceed slowly without too many defaults. Banks despise devaluation of their assets (central banks included), but they also don't like their debtors defaulting.

JustWaiting said...

Here is another example of agents telling half truths to the public.

Tony Joe just published this on his Facebook site

SOLD- a family home in North Oak Bay at $625,000 or 97.6% of list price

The property was MLS 291760 at 2050 Milton and it sold for 625K after 2 months on the market.

The 97.6% figure was calculated using a listing price of 639.9K. However this was the asking price after it was reduced from the listing price of 659K. It really sold for 94.7% of the listing price.

This guy was a former VREB president and you would think he would be above this kind of thing.

JMJ said...
This comment has been removed by the author.
omc said...

It appears that there is a golden rule in real estate stats; be deceiving. Both of these examples would get you fired in any true profession.

JMJ said...
This comment has been removed by the author.
Marko said...

Ahhh...I keep using the wrong account.

There are no golden rules in real estate regarding statistics.

Agents use stats like "my homes sell after x days on market," which can be misleading if the home has been relisted at any point.

Marko

Jason said...

"Why would they want to devalue and destroy the value of their assets?

..but what if a country owes wayyyy the heck more than it is owed (i.e. almost everyone other than china and russia)?

And what is the production cost of a fiat dollar with no underlying asset? Much less that a dollar i'll bet. Your textbook sounds just as grounded in practicality as all mine were.

It sure would be a dream come true if housing prices reverted to the cost of production though. Fingers still crossed ...

Here in vancouver i met a realtor two days ago who mentioned that none of his friends could afford to do anything because they could barely keep up with payments. It's an incredibly common story. He did still assure me that prices would only keep rising however. I can only imagine what a 1 - 2% rise in unemployment would do to this city. If nothing else, the home prices here must be credited with lowering the divorce rate and keeping population rate in check since nobody can afford to disrupt the status quo in their lives.

Marko said...

"It sure would be a dream come true if housing prices reverted to the cost of production though."

Can you please elaborate? Cost of production is not cheap on new homes.

New home prices are near record highs give or take and home starts this year are very poor. This would not be the case if there was a bigger spread between cost of production and sale price.

Just Jack said...

I have doubts that the cost of production theory of value is relevant to most of real estate.

For special purpose buildings, like Navy dry docks or potash mines, the cost of production method less accrued depreciation might be valid as there is no or slight competition in the market place for these assets (without the sale of the (potash) business operation).

But for the typical real estate "junk" its what the market will bear and not what it costs to build that sets the value.

But I would have to ask Tsaur about this one.

Marko said...

I recently listed a home that had some major work done 11 years ago. The owner kept all the invoices.

He paid $2,700 for the roof all in (material, labour, taxes)....the material alone on the roof at whole sale today would be about $2,000 - $2,200 + HST. Dumping fees are a lot higher now plus labour you are look at $5,500 - $6,000.

Even if someone did the labour for free the material and to dump the old roof would exceed $2,700.

With all the environmental concerns dumping fees will only keep going up.....for the material to go down we would need a global meltdown - if people aren't buying materials in Victoria they just get shipped to China.

As for labour, WCB is cracking down on roofers and safety - which is a good thing - but it decreases productivity so even if the per hour rate goes down it takes longer to get a roof done.

I wouldn't get your hopes up on production costs reverting to what they were 10 years ago.

Dave said...

Home prices will definitely return to the cost of production this time. Particularly as labour becomes highly competitive in times of higher unemployment.

However, the most dramatic effect on new home prices will be from land and building material prices falling as demographics and world economies slow. It’s somewhat similar to what happened in the early eighties with a few amplified differences.

Just Jack said...

But aren't new home prices at the cost of production right now?

In otherwords, the cost of production is equivalent to market value in the open competitive market. Some exceptions may apply - like in new multi-family complexes where there is only one seller for suites with those homes selling at a contract price and not at market value.

And if the cost of labor and materials were to fall, would not the price of new homes fall to that production cost level?

But a 30 year old home, would always be less than the cost of a new home. And would that not be based on the theory of substitution and not cost of production?

If you thought market value was a tough one to grasp. Value in production is a mind f*&k.

a simple man said...

Prestigious Beach Dr property listing:

"Fascinating Foreclosure, don't miss your chance to come see the possibilities for a dream home that you can finish to your taste in one of the best Victoria locations!"

I am pretty sure there is nothing too fascinating about a foreclosure, especially to the person being foreclosed upon.

Foreclosures on Beach Dr? Its getting closer, ever closer.

Marko said...

There have been a number of big foreclosures on Beach Drive in the past.

patriotz said...

"This would not be the case if there was a bigger spread between cost of production and sale price"

But the biggest cost component for a house, land, isn't produced at all. It's already there.

Which means that land prices are determined by what people are willing to pay for a house, minus building costs, minus profit margin.

This isn't just theory. Land costs in places like Las Vegas and Florida have dropped 90%. Did they start making more land?

In any city with an increasing number of households, building costs will put a floor on house prices. If there's no increase, there's no floor - like in Detroit.

And remember the largest component of building costs is labour which gets cheaper as workers get more desperate for work.

Marko said...

"But the biggest cost component for a house, land, isn't produced at all. It's already there."

Only you are forgetting the enormous cost of servicing land in Victoria. This isn't a desert. One tree in Sannich could derail an entire subdivision proposal. Most subdivisions in Victoria require extensive engineer, blasting, servicing costs, etc.

Even if you buy a tear down home in Victoria the city will require new services to the property line. The city charges over 10k to pull a new sewer/storm/water to the property line - plus then you have excavate and connect the services. Let's not mention the Hydro reconnection fee. Your costs to service a previously fully service property are 15k+. Do you see the City of Victoria and BC Hydro cutting their fees? I don't.

I am pretty sure you could buy a fully serviced lot in Arizona for 10k.

There are some structural system difference between Victoria and Arizona that such comparisons are weak in my opinion.

Leo S said...

Only you are forgetting the enormous cost of servicing land in Victoria.

I hardly think we are unique in this.

Your costs to service a previously fully service property are 15k+.

Chump change when you have land values at over half a million.

There are some structural system difference between Victoria and Arizona that such comparisons are weak in my opinion.

The part you're missing is that cities of all types have declined all over the world. Some of them will have very similar situations as us.

Marko said...

"Chump change when you have land values at over half a million."

That is 15k to service a fully serviced lot.....good luck starting from scratch.

Just Jack said...

I would guess that there would be three stages to the real estate cycle.

1) Cost of production less than Market Value

2) Cost of production equivalent to market value

3) Cost of production more than Market value.

From memory, I believe that the number of people per household in Greater Victoria is at its lowest level since the Spanish flu epidemic around 1918 when people were leaving the cities.

For most of the last century the number of people per household has been significantly more. This suggests to me that we may have a potential "glut" of housing if a recession causes people to leave the city or double up in housing. If this is the case, then stage 3 could be a decade or more of near zero house construction.

When I look around my neighborhood and see the vans and trucks in the driveways with construction names painted on them, I have a gut feeling a recession in the housing market will be devastating for Victoria.

Leo S said...

That is 15k to service a fully serviced lot.....good luck starting from scratch.

Compared to the actual lot value it's still small.

No one here is claiming costs will go back to those from 10 years ago. Inflation for one, stricter building codes, environmental fees, etc.
However we are on a huge commodities high, and just because China's controlled economy has high demand now (60% of their GDP is from construction!) doesn't mean it will always be that way. That is not even close to sustainable.

patriotz said...

"I am pretty sure you could buy a fully serviced lot in Arizona for 10k."

Today, could be. In 2006, add a zero.

How come?

Any high priced market has its excuses about how land prices can't come down. But they do.

Just Jack said...

Foreclosures on Beach Dr.?! Is Oak Bay next?

S2

a simple man said...

S2 - worse - it was Beach Dr in Oak Bay. The tweed lost a little luster.

I think that all prices can come down, even the 15K charged by the city. Raw goods, suppliers and labour can all change based on demand. As can land.

Jason said...

"Can you please elaborate? Cost of production is not cheap on new homes."

Pretty self explanatory i would think. Obviously the cost of the land is the big omission in my response to Alex' lesson on economics, but like i said marko, it would be a 'dream' come true.

Seriously however, what is the production value on an older house? Servicing, labour and environmental assessments, materials, landscaping, bribes, waste, etc etc included, what is the real cost to reproduce a stucco crapbox like 1422 Fairfield? It's hypothetical of course, but clearly it would be nowhere near $650k.

Nancy said...

Coach just opened up in Mayfair Mall. $300 and plus handbags.

Place was full with young people buying these handbags.

I didn't know people had so much disposable income in this city. I didn't even know that a Coach could open up in this city.

Just sayin!

Just Jack said...

They got credit cards don't they? :-)

I never thought I would see Coach in Victoria. What's next? Tiffany. Maybe Donald Trump?

S2

a simple man said...

Having a coach handbag is the veneer of wealth.

a simple man said...

Hi Marko/JustWaiting - any stats for the past week?

Alexandrahere said...

Well its Monday again...here are my stats for June 13 - June 19.

SFH: Min 2 beds & 2 baths, priced between $375K & $775K in the areas of Victoria, Oak Bay, Esquimalt, Saanich East & Saanich West.

New: 54
Sold: 22
P/C: 41
OM: 7

Avg Selling Price: $601k
Med.Selling Price: $607K

In the almost a year that I have been tracking in these areas within this criteria, this week tied with the week of Jan 24th for the 2nd highest avg price of 601K. The highest being the week of Feb 14th at 603K.

Exactly 50% of the homes sold within my criteria had disclosed 2ndary suites. Wow that's a big increase. 8 of the 22 sales were below BC assessment. Also noted is a big increase in new listings.

Condos & townhouses:

Min 2 beds & 2 baths priced between 250K & 580K in most areas of Victoria (not downtown) and Saanich East, all areas of Esquimalt and Oak Bay & Gorge, Tillicum & Interurban areas of Saanich West.

New: 22
Sold: 6 condos & 3 townhomes
Avg selling price condos: $314K
Med selling price condos: $316K

Avg selling price townhomes: $518K
Med selling price townhomes: $515K

2 of the condos went for below assessment as well as one out of the 3 townhouses.

omc said...

any one noticed 2260 Central in south Oak Bay? The house was originally bought by some flippers when the oldie passed on. They have had this house on the market for well over a year, maybe even two. I think they started out in the mid/high $700k range and then rented it out till market conditions improved. Guess what; market conditions didn't improve. After the flipper expenses, I wonder if they are going to lose some money.

Some much higher quality listings starting to make their way to market too, like the new listing on Killarney.

JMJ said...

Monday, June 20, 2011 8:00am:

MTD June
2011 2010
Net Unconditional Sales: 368 625
New Listings: 912 1,503
Active Listings: 4,803 4,730

Please Note

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

Just Jack said...

A property on Haultain in Fernwood has recently sold. Which is nothing really amazing in itself, except that this house has almost been continuously on the market for the last 11 years or the entire upswing in prices. It's a nice example of how our prices have increased over the last decade.


$220,200 sold May 26, 2000
$450,000 sold June 6, 2006
$535,000 sold June 28 2007
$550,000 sold April 20, 2011

Market prices are up 2.5 times since the start of this market.

With the biggest increase of two fold happening in the first 6 years of the cycle.

The largest one year gain was 19 percent in value between 2006 and 2007

And since 2007, prices have waffled with prices marginally increasing over the last four years by some 3 percent.

If you bought in 2006 or earlier, your ahead of the game in real estate unless you have dipped into your home equity.

If you bought after 2007. You have paid a lot more in mortgage payments and taxes than you would have in rent. If you went high ratio with a long amortization, you have yet to make an impact in the remaining balance of your mortgage. Then there are the repairs and maintenance.

So for the last four years, renting has been the better economic choice.

a simple man said...

Thanks JMJ/Marko;

So a relatively strong week in sales (143), but a stronger week in new listings (322), resulting in an increase of 61 houses to the total listings. Sales:new listings = 0.444.

I suspect the strong sales have everything to do with families wanting to be in their new homes before school starts.

JustWaiting said...

simple man,

I suspect the strong sales last week was a burst of activity before the summer slowdown. Here is a graph of weekly sales that HHV posted last September. You can clearly see the sales taper off after mid-June.

Click here for 2010 weekly sales

For those interested in stats here is the breakdown of last weeks activity.

Here are the stats for the period June 14 - June 20:

- 237 Price changes
- 143 Pending sales
- 66 Canceled listings
- 52 Expired listings
- 322 New listings
- 13 Back on Market
- 4803 Active Listings

For the period June 6 - June 13:

- 270 Price changes
- 128 Pending sales
- 63 Canceled listings
- 57 Expired listings
- 322 New listings
- 12 Back on Market
- 4,742 Active Listings

For the period May 29 - June 5:

- 259 Price changes
- 128 Pending sales
- 73 Canceled listings
- 163 Expired listings
- 362 New listings
- 17 Back on Market
- 4,651 Active Listings

MC said...

So I am being quite particular in trying to find a house to rent (I am looking for a place to settle for awhile that I am comfortable in). Is there a general drop in rental prices in the fall and winter around here, after the student rush has taken place in August?