Tuesday, July 5, 2011

Real estate is local

If you've been reading the news or the real estate blogosphere lately, you'll have undoubtedly noticed a lot of commentary about a Canadian housing bubble. And perhaps you'll be wondering why I have not written about some of these stories yet. It's pretty simple: I don't believe there is a "Canadian residential real estate market" so I don't have much to say about it.

For a market to be functioning it needs two basic things: actors on the supply side and actors on the demand side. Sure there are a few examples of supply-side actors who are active Canada-wide (very few). And perhaps there are examples of a minuscule few demand-side actors who are actively shopping for homes across Canada (though I doubt it). Even if someone drops a comment with anecdotal evidence suggesting their cousin's aunt's mother's daughter's sister is looking for the best luxury house $225,000 can buy from coast to coast to coast, I won't be convinced there's a Canadian housing market.

Why is this important you may ask? Simple. Commentary about a Canada-wide housing bubble is purposefully designed to set-up a provable thesis: there is no Canada-wide housing bubble. And this is true. Same as there was no US housing bubble. No Irish housing bubble. No Spanish housing bubble and no Australian housing bubble. Instead, a bunch of local markets within these nations experienced conditions that led to actors on both sides of the markets speculating: supply side over-built and demand side over-bought; market balance turned to instability when a glut of supply met a dearth of demand and the inevitable lowering of prices began, and in many cases, continues. And the same can, and very likely will, happen within certain Canadian markets.

Here's the thing: economists, nay, "journalists," like to lump these cities into a group called "Ka-na-duh" and ask the question "is it a bubble?" Then the industry mouth pieces and their enablers answer the question with "take Vancouver and Toronto out of the equation and no, Canada is not in a real estate bubble." Even if this is true, which it very likely isn't because there's a lot more cities that are over-valued than just the two largest, so what? It is an entirely useless discussion to homeowners and those who desire to own homes in specific locations.

What should matter is the answer to this question: "is Victoria (or whatever city you insert) in a real estate bubble?" This is a question few local experts are willing to answer despite evidence of many fundamental economic measures pointing to extreme over-valuations. There are few local indicators of a shift away from present conditions, which is reason enough not to stake professional and academic reputations on any claims of future local market conditions. 

Sure, the industry types, who get a free ride from media who don't have the knowledge base, desire or editorial go-ahead to pursue the truth, are more than willing to spout off about "subdued, yet balanced valuation growth." Of course, those trying to sell books or stock market investment products/services are also given ample media opportunities to wax-poetic about housing Armageddon. But none of these positions have proven true, yet, and all of them have some semblance of "motive" that should have your skeptic meter flickering.

Does Victoria have an over-supply problem? When we look at current market conditions it's evident supply is very high and demand is very low. There's anecdotal evidence of falling home prices all over the market, despite the unarguable fact that VREB average reported prices appear stable thus far in 2011, likely skewed by market activity within individual segments -- which is exactly why average reported prices are the favoured market-reporting choice of those collecting money through real estate transactions.

Is Victoria currently over-valued? If we use historical average income/rent versus price numbers to perform any calculations the evidence is fairly solid. Same for Vancouver, Toronto, Ottawa and Montreal. Edmonton and Calgary too, although they're both down from previous peaks, same for Regina, Winnipeg and Saskatoon. Kelowna, sure. How about London? Possibly, but not nearly like Victoria. Or Halifax? Likely the same.

Are the over-valued cities in a "bubble?" The best possible clue may just be all the chatter in the news about the existence of a Canada-wide bubble, averaging numbers has a way of working out like that... 

20 comments:

a simple man said...

Live by the sword, die by the sword.

EagerBuyer(Not) said...
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EagerBuyer(Not) said...

Just got back to town and read the VREB news release. They are comparing sales to last year and implying things are OK. I seem to recall someone posting that 2011 sales have been the lowest in 10 years. Can someone post the sales figures for June from years past???

How about that inventory over 5000. Even VREB says it is the highest in 15 years,

Low sales, high inventory and now we are in the slow summer vacation period. July will be dismal for sellers

Marko said...

June 2002 - 659
June 2003 - 809
June 2004 - 781
June 2005 - 862
June 2006 - 764
June 2007 - 949
June 2008 - 723
June 2009 - 946
June 2010 - 625
June 2011 - 618

Also one thing to keep in mind is that a lot of units have been added in the last 8 years so sales numbers realtively speaking are worse than the 618 would indicate. Inventory is high - no doubt.

Marko said...

At the start of the year I did not think sales volume this year would be worse than 2010 but at this point unless we see a huge turnaround in the second half it will be the case.

However, I would be shocked to see August and September this year be worse than last (425 and 395 respectively).

Reid said...

As I demonstrated on this blog over two years ago real estate prices in BC for the most part have correlated almost perfectly with the amount of money an average family can borrow for the past twenty years (recently Vancouver has broken away from this and I would say is in a bubble).

If the banks are willing to lend more money to people/families real estate prices rise in this province. Recently banks have been lending 5-6 times earnings (assuming no rental income otherwise the ratio can be even higher) and that number used to be 2.5-3 times earnings. The increase in the borrowing ratio has come from lower interest rates and longer amortizations. So even with the same earnings, the amount one can borrow has doubled (and more than double if you have rental income) and guess what so has housing. Add in real earnings growth and it is no surprise that housing has more than doubled in price.

The fact the amortization lengths have been shortened and qualifying interest rates for CMHC loans are now based on five year mortgage rates will impact the amount many people can borrow. This will have an impact on the market and IMO is one of the key factors in the recent slowdown. If and when interest rates rise it will have a more dramatic impact on the borrowing capacity and therefore the market. This may not happen for a while, so prices may be slower to react than most bears would like, but if discounted mortgage rates hit 5.5% or 6%, then market will see a serious correction.

I spent a lot of time working in the US housing industry in 2004-2006 and there was an incredible amount of speculation. I knew people that owned four and even five houses at a time, most sitting empty. There are subdivisions today that still sit empty. This did created a bubble in many markets. We do not have even close to that level of speculation in BC, so I do not see our situation as a buddle but rather a function of banks lending too much money to average people allowing them to spend way too much on housing.

The Victoria real estate market is far healthier than other places I visit each month in BC, but prices are only dropping slowly in those markets as well, so a big correction is not coming to Victoria this summer or fall. This is why Marko remains bullish – he still has buyers who are interested. I can pretty much guarantee Marko that it will be radically different if discounted interest rates hit 6% (unless of course prices have corrected).

Always buy houses when interest rates are peaking even if carrying costs are higher.

Olives said...

It is a global-wide credit bubble which has affected different assets (ie. real estate, commodities, equities) in various locations to different degrees (some greatly and others to a much lesser extent).

Once the credit starts contracting quickly once again, so should all assets deflate in value - and it won't matter where in the world you are located because the banking system is intertwined.

IMO

Johnny-Dollar said...

With so few sales, the average price and the median can be less than reliable. Another way of looking at prices is by the past transaction of the same property. While the volume of re-sales is a fraction of that used in averages and medians, the data is of highest quality.

The basement entry home in Gordon Head defines the typical Canadian middle income family. This is the heartland of stability and the typical home for the typical home buyer.

And so today such a home sold on San Juan Avenue for $547,500. The home has had some minor updating to the deck and floor coverings and appears to be in good condition.

Almost exactly four years ago, that same home sold for $557,500.

Now for the opinion part.

While sale volumes have dropped, the average price has increased. From what I've seen, its because of some high priced property sales pulling up the average price. When the high price market cools, the average will plummet, say from $629,000 to $550,000. Which will be front page headlines for the MSM. Now, prices did not actually fall this drastically, its just the way the math worked.

When this happened in the USA, it started the record decline in prices we have today. Possibly because it shocked people into accepting that house prices do come down.

Again - this is my opinion. Which is worth exactly what you paid for it.

Johnny-Dollar said...

The biggest argument against the bears is that they have never been right in their predictions. Well, if you had said anytime within the last four years that the market was overpriced.

You were right, as market values have rolled back to 2007 levels.

n.y.k. said...

From Mindet's T-C link last night: "Victoria's real estate market remains balanced". If the lowest June sales in 10 years + highest inventory in 15 years = balanced, what would it take to be imbalanced? How do they define "balance"? I'm serious. When has the VREB gone on the record stating that the market was not balanced and what were the conditions? Has this ever happened?

Also: "If rates go up it makes things less affordable, but there are a lot of people looking around who may buy because rates are going up." I've never understood this. I recently endured what can only be described as a financial intervention by well meaning family members who implored me to purchase local real estate this summer because rates are going up and I can't afford a higher interest rate.

So I asked them why I should panic and borrow now if I can't handle that level of debt at tomorrow's interest rates. If I did this I would be screwed. It might take 5 years, but I would be sitting on a financial time bomb and forced to sell if rates increased by 2016.

Apparently it doesn't occur to people that borrowers who can barely afford a place at record low rates will not be able to afford their mortgage at higher rates.

patriotz said...

I suspect a lot of people simply don't understand that the interest rate on a mortgage goes back to market level at the end of the term.

As to VREB always claiming that the market is balanced, they're right. Every property sold has one buyer and one seller. There really isn't anything more you can say objectively.

Animal Spirit said...

I can say quite objectively that there is a s---load of houses for sale at Bear Mountain, far more than elsewhere in the area. Bike around the streets on the Mountain today and couldn't believe how many good looking houses were sitting new, looking for buyers. Funny thing was it was the houses on the top of Nicklaus Drive that seemed to have the most signs out. Good luck on the one (slightly lower down) with your name on it Marko!

I can also say objectively that 515 Burnside has set a cyclical low value for listing price: $299,000. I don't remember another one in the core areas below 300K in quite a while (even if it is that area of Burnside).

Now to rest my tired legs.

EagerBuyer(Not) said...

Reid,

Banks squeezing buyers a little more today. Reducing their max loan limit and increasing their payments. More pressure on sellers to lower prices.

CIBC, BMO follow other major banks in raising mortgage rates


A five-year fixed rate closed is going up to 5.54%, a 0.15% increase.

Marko said...

"I can pretty much guarantee Marko that it will be radically different if discounted interest rates hit 6% (unless of course prices have corrected."

I can pretty much guarantee my Suncor shares will be $50+ if oil hits $150/barrel.

When are interest rates going to hit 6%?

Marko said...
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patriotz said...

"Bike around the streets on the Mountain today and couldn't believe how many good looking houses were sitting new, looking for buyers"

The houses may be looking for buyers but the owners are evidently only pretending. If you really want to sell a house (or anything else) you ask a price that someone is willing to pay.

There is never a shortage of buyers, just of sellers willing to get real.

Reid said...

EagerBuyer(Not), the "discounted" five year mortgage rate is still at 3.60% today. Anyone paying the posted rate is somewhat stupid. The discounted rate is the rate I refer to in my post. If and when this rate gets to 5.5% to 6% watch out as it will get ugly.

Reid said...

Marko, five year discounted mortgage rates have been at or above 5.5% for 37.5 of the last 40 years. Oil exceeded $150/bl for a few weeks in history. It is only the last 2.5 years we have seen these rates. If that is your only personal experience with with interest rates, maybe it appears reasonable they will stay at these levels for decades.

Carney could not be clearer in his ongoing warnings to Canadians that interest rates are going to increase. I have never seen the Bank of Canada head make such consistent warnings to the Canadian public.

Interest rates are at current levels only because there are serious global economic problems. I am amazed that so many in Canada cannot seem to understand this or believe it is all different here. I hope interest rates will rise as the alternative is not something we want to experience. If interest rates do remain at curent levels for the next 3-5 years I suspect the economic and employment situation will be far worse than today or what will exist if discounted interest rates rise back to 5.5 to 6%.

Alexandrahere said...

Marko: What would a realistic selling price be for MLS 294093 at #202-2340 Oak Bay Ave? It is a 1500 sq ft 2 bed, 2bath co-op condo and hasn't been upgraded. I understand co-ops & leaseholds are hard to sell because of the difficulty getting mortgages. Is a co-op better than a leasehold? I presume a leasehold is just that. When the lease comes up, you no longer own it. But how do the private co-ops really operate? Thanks.

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