Thursday, March 29, 2012

Mortgage Armageddon


The graphic above first appeared on HHV in 2009. Since then, interest rates (or "Today" on the graphic) shifted left (or down) while the median price did almost exactly as Reid (the maker of the graphic) predicted: rose to around $550K.

In all the time we've been writing and reading about the Victoria market, perhaps the single biggest correlating factor in local prices has been to interest rates. I'm inclined to believe, that above all else, interest rates are driving the Canadian, and the Victoria, real estate market.

BMO Bank of Montreal released a survey recently that suggests more than half of BC households won't be able to manage their current mortgages if rates climb 2%. I know most of you are thinking rates wont climb 2 % anytime soon; and I am inclined to believe that too; the economy just doesn't appear to be headed in the necessary direction to make rate hikes happen anytime soon. But stranger things have happened and there is a strong possibility given all the noise by "people in the know" lately that rates will rise quicker and faster than expected.

What will might happen when rates do rise? Fortunately Reid gave us another graphic (we used here) last year that shows a pretty good picture of what BMO's survey is warning us about:


Again, you'll have to shift your eyes to the left a bit (or just subtract roughly 1% from the numbers at the bottom), but you can see the cause effect relationship between cheap money, high home prices and stagnant incomes.

I know that a fair number of you will suggest Victoria is insulated because:

  • lots of people own their homes outright
  • a few people pay cash for houses here
  • there isn't much turnover in our market anyway
To that I say it matters not a whit. 

Ultimately, what matters is what the people doing the buying at the bottom  tier of the market can afford. Real estate markets are like a game of Jenga. Remove the blocks at the bottom and the whole thing comes tumbling down quickly. 

If the people doing the buying in the $400K-$500K segment today see $100K disappear in their mortgage qualification amount over the next 2 years, we can reasonably expect to see prices reflect that to a degree. I see no reason why prices would be more sticky when they are falling than when they were climbing--in other words, why would the market reflect falling affordability differently than rising affordability? 

117 comments:

MD80 said...

Excellent graphics! For first time buyers, price is so much more important than interest rate. I don't believe affordability can get much worse in terms of monthly payments, which means as interest rates rise prices must come down.

Tell me if I'm crazy but as someone waiting to jump in I'm actually hoping interest rates rise sooner than later to put downward pressure on prices. I'd rather start with a higher rate than carry an artificially-inflated mortgage principle for the next 25 years.

Just Jack said...

If you went back a dozen years, you would not see the direct relationship with interest rates. Because prospective purchasers were not tapped out in income and debt ratios. There were many other factors that affected prices. And the economic profile of prospective purchasers varied considerably which gave the market stability.

But that has changed, now there is very little diversity in the profile of buyers.

But, it isn't the buyers of the last few years that are greatest at risk. Even those that have bought a decade or more ago are at risk because of the the Home Equity line of Credit (HELOC). Because the HELOC could be used without any kind of verification of income after it was initially set up. The HELOC is what a person drowning in debt considers a life saver ring thrown to him. Unfortunately, this life saver is still tied to the sinking ship.

What the graph shouts at me, is that the market is sensitive to any type of shock - not just interest rates. That the marketplace is stressed and even the current stable to slightly decreasing prices are having an affect on overextended home owners. And even the slightest increase in fixed and variable costs are causing people to slip behind in credit payments.

A recent discussion with a national company that handles the securing of properties that have gone into default reported that all of New Brunswick, Edmonton and Victoria are the hot spots in Canada.

"The bigger they are - the harder they fall"

DavidL said...

@Just Jack

Very good point about HELOC's. Also, think about the retirees who were convinced that a getting a reverse mortgage was a good idea. As resale values slide, the remaining equity disappears.

The mortgage that grows
Reverse mortgages can destroy your home's value.

Phil said...

It takes two to tango... Without the CMHC backing the banks would never have allowed prices to go as high as they are. WAY too much risk.

Just Jack said...

Rather than get a reverse mortgage.

Get a regular mortgage and have your kids make the payments. Eventually, your kids will have the inheritance - so make them pay for it today.

omc said...

Simple man has already answered about the house on cranmore (rather well too), but has any one noticed the flood of quality looking listings today? The best of them, 1160 ST. LOUIS oak bay, showed up as no conditions (inside job?). Under $700k for that house on a 1/4 acre in that location is unheard of. I know the house needs work, but wow for one of the best locations you can get. $675k for a 1/4 acre on maynard (caddy bay)with a decent looking 50s family house is something I haven't seen in quite some time too. Things are looking better in this part of the market.

a simple man said...

And a decent house on Dunlevy today. some nice listings.

Leo S said...

After a busy last week sales seem to have calmed down again as well.

Just Jack said...

Over a hundred homes now for sale in Oak Bay. That's about 5 months of inventory.

The median asking price for a house in Oak Bay is around $1,050,000.

That's a big difference for what the median sale price has been over the last year for Oak Bay which rang in at $775,000.

There are currently about 50 properties listed for more than a million dollars in Oak Bay.

In Greater Victoria there were some 190 sales over a million dollars in the last 12 months, but only 60 of them were in Oak Bay.

It seems people who live in Oak Bay have a high estimation of their property's worth. Yet these high Oak Bay prices seems to be causing prospective purchasers to look elsewhere.

Unknown said...

Sorry - off topic. What's the best way see new listings in a timely manner? Folks on this blog seem to have access to software via their agent that I don't.

Just Jack said...

Most of us getting to work another two more years before getting full benefits from the government.

What do you want to bet that by the time 2023 rolls around, retirement age will have been boosted to 75 years.

a simple man said...

I have resigned to work until the end, anyway.

Unknown - email Marko and he will set you up.

Leo S said...

I hope I will be in a position to work to the end.. With significantly more vacation, but work nonetheless.

I have a colleague who is nearing 85. He came out of retirement to work 4 days a week at close to 80, on the condition that he be given at least a 5 year contract :)
Doesn't need the money, just wants to keep his mind active. The guy is still doing great stuff. What other 80+ year old can explain wavelet filters to you over breakfast on the ferry?

Leo S said...

Another bonus of getting old at work is you get to explain your health issues in detail to younger, more impressionable people. "So then he sticks this big needle in my eye.... yeah, getting old is not for pussies"

omc said...

Don't know if any of you guys do investments, but if you do you would have noticed that bond yields are dropping. That means mortgages are trending down. The banks are offering 10 year rates for a reason.

Welcome to the new guy (or gal) unknown. We use what is known as a PCS service which is set up through a realtor. I am sure if you email Marko he would set you up. He is busy enough I am sure he won't harass you.

Just Jack said...

Or explaining that although a male urinary catheter may look small it feels like a garden hose.

Marko said...

Unknown, feel free to email me at markojuras@shaw.ca with your criteria and I'll set you up with an account. No obligations whatsoever and I certainly won't randomly bother you as I am incredibly busy this year.

Looks like the $100,000+ I gave back via my cash back program last year is paying off - getting a ton of referrals for buyers. Doing what I can to help affordability :)

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Marko said...

Few more 1+ million sales today. SFH average around 640k now.

mrmike said...

^ Now that is what I like to hear :)

Leo S said...

3555 Calumet. I don't recall ever seeing a house with a suite in reasonable state of repair for under $400k. Obviously set up for multiple offers, will be interesting to see what it goes for.

Marko said...

^Yea, says all offers to be presented after open house.

Rhino said...

re: 3555 Calumet. I had the misfortune of living in that neighborhood at one point. A lot of druggies hang around the apartment buildings down the street on tattersall. The whole area just has a bit of a shady feel to it, but maybe it was just me.

I'm going to say it doesn't go for over asking, but I wouldn't put any money on it :-)

chris said...

Interesting to read what is happening across the Strait.
The Boomer Trigger

After lowering the asking price to $1,888,000, the property sold for $1,428,000. That's $960,000 off the original asking price or 40% lower.
It's still a windfall for the owner. Sure... it's not the $2.4 million he originally insisted upon. But unlike the condo at the Four Seasons Whistler hotel which sold for 50% off the original…

Makes it easy to grasp how average price first goes up as the bubble bursts.

MD80 said...

@Rhino
Ditto that sentiment about that Calumet area. A friend used to live on Bethune and never had good things to say about the neighbourhood and it creeps me out too.
You don't have to go far, though, this house at 3781 Winston MLS#306402 appeals to me and looks like a decent neighbourhood.

Leo S said...

Yeah we have our somewhat interested eye on that one as well. There's a fair number of reasonable places in the $500-550 range at the moment.

christa said...

I have been watching the market in Victoria for the last 2 years and while there appears to have been ~10% correction over the last couple of years, prices and sales now seem to be firming up. Would everyone agree?

I am considering buying in Victoria (live in Vancouver) with the view to move there in the next couple of years. My debate is whether I wait out this market for another 2 years and see where it heads or jump in now while rates are low. Also looks like Vancouver may finally be starting to correct...

a simple man said...

Christa - I would say sell now in Vancouver and rent and then buy here in a couple years. I think the big drop is yet to come here. Others will differ in their opinion, but sales are still exceedingly low and now the market is starting to be flooded by listings.

Marko said...

"I have been watching the market in Victoria for the last 2 years and while there appears to have been ~10% correction over the last couple of years, prices and sales now seem to be firming up. Would everyone agree?"

As someone who was involved in 28 MLS® transactions in 2011 and on pace for 50 this year I would disagree.

When I think of what my clients were buying/selling in 2010/2011 and what my clients are buying/selling this year I would call the market almost completely flat for the last 2 years in terms of price.

There will be a very large spike this month in both average and median; however, this is an anomaly just like the first two months of the year were....we are somewhere in-between.

Rhino said...

The best data in terms of a benchmark for the Victoria market is from teranet, which uses sales pairs. Its not perfect but better than any average or median which fluctuates wildly.

According to that
Jan 2010: 143
Jan 2012: 140

So a 2% correction in nominal terms, in line with Markos observation. In real terms ~5% to use round numbers.

So if you should buy or not really depends on if you believe all this "crazy" bubble talk that has been thoroughly discussed on this blog for a few years now.

I agree completely with simple mans advice, but your mileage may vary.

chris said...

Keep in mind Christa, Victoria is one of the most overvalued cities in the world compared to rents. As you can see from today's The Economist, Canada is the most overvalued country in the world or highest price-to-rents ratio. Vancouver might be close to as overvalued as Victoria but when you consider how much higher rents are in Vancouver, I'm sure Victoria has a higher price-to-rents ratio. If Canada as a whole is 76% overvalued, Victoria is easily more than 100% overvalued. If you can stomach a 50% correction, buy away. If not, rent. Vacancies are climbing. Rents and home prices will not be going up anytime soon.

Leo S said...

I am considering buying in Victoria (live in Vancouver) with the view to move there in the next couple of years.

I don't see any evidence of prices firming up. They can't at these inventory levels. Maybe if inventory drops significantly.

The chance of missing some sort of housing boat here is very low in the next 2 years. Who knows, anything is possible, but all signs point to flat or downward, so you might as well wait until you actually need the place.

dasmo said...

yep no need to panic but it is a good time for taking your time, finding what you want and negotiating for the price you want without a lot of pressure....

Dave said...

"I have been watching the market in Victoria for the last 2 years and while there appears to have been ~10% correction"

True, Teranet inflation-adjusted prices are down ~10 percent. If you own outright you have lost 10 percent of your real wealth, more if you have mortgage.

Dave said...

To clarify, that's ~10% from the inflation-adjusted top in early 2008. CPI has averaged 2.0%/year or ~8.25% since the top. Added to the nominal decline is very close to a 10% real drop.

dasmo said...

If you own outright you are saving a bundle on rent

chris said...

If you own outright you are saving a bundle on rent

I used to think that until I learned how much it costs the two people I know who are morgtage free. When I added up their property tax, repairs, insurance, maintenance,utilities and gas. We all work close to downtown but they have long commutes. They pay more than I do renting. Granted their homes are bigger and nicer but location is not. Not trying to start an argument as sure there are outright owners living cheaper than my rent.

patriotz said...

"If you own outright you are saving a bundle on rent"

Obviously you have never heard of opportunity cost.

What you could get from the money tied up in the house is a much bigger bundle than what it would cost to rent the same house.

dasmo said...

Being insulting just brings the level of class down around here...over ten years assuming 2% increase in both rent and house value a year, on a $500k house you will have accumulated 110k in equity and saved 197k in rent minus say $60k in taxes and maintenance leaving you 137k of that cash that you could re-invest. That's not including the lower interest rates the bank gives you on your credit cards nor the other intangibles of ownership...

Marko said...

I think the pleasure derived from owning a home exceeds opportunity cost in many cases.

Why would any of 30 people who plunked down over $1,000,000 in April ever buy? All 30 properties are definitely cheaper to rent by a mile.

patriotz said...

"Why would any of 30 people who plunked down over $1,000,000 in April ever buy?"

You already got the answer in the previous post. Because people think prices are going to keep going up indefinitely.

And perhaps you could share your "cash value of pleasure" calculator with us.

Marko said...

"Because people think prices are going to keep going up indefinitely."

^I think this is wishful thinking. The majority of my buyers (and buyers in general) recognize that prices could drop or be flat for a very long time.

If I gave my last 30 buyers a survey I bet that prices going up wouldn't be very high on their list as a reason for purchase. People just aren't buying on speculation anymore.

People buy for a variety of other reasons.

kunwak said...

Dasmo, if you have 500k cash, invest that in some form of portfolio, it's likely that you can cover rent from the dividends/interest/distribution (takes about 4% yield which is kinda reasonable). Capital gains can be ignored I think since they would apply to both portfolio and house (house may have a significant tax advantage if you'd sell). However, you would be ahead with a portfolio, since you can now also invest the full amount you save for rent, since your portfolio does not have maintenance costs. In addition, it's much more liquid and you can exploit strategies such as rebalancing etc. and liquidate portions of it for low cost.

I am pretty certain you come out ahead if you just invest, ownership costs money. Of course this would be different if the price/rent ratio was substantially different.

Asset price matters.

Marko said...

I think you guys are underestimating the value individuals place in owning their own home.

I personally have a Waterhouse account, Questrader account, BNN runs in the background in my office every day and I do a large number of investment transactions per year. I wouldn't consider myself a professional investor but I average solid returns.

No way would I hypothetically sell a paid off home that I reside in to increase my portfolio and in return rent for many many reason. One of the many reasons being a home is hard assest where your portfolio is paper.

kunwak said...

"No way would I hypothetically sell a paid off home that I reside in to increase my portfolio and in return rent for many many reason. One of the many reasons being a home is hard assest where your portfolio is paper."

Fair enough, me neither. At the same time, I am not turning my portfolio into a house b/c asset price matters. For the very reason that it is a hard asset, not liquid at all and lifestyle choices (I don't see myself living here long term). My point is: Yes, it does depend on how you value/not value ownership. However, there are costs associated with ownership that can't be argued away.

I don't get the "hard asset" thing. I personally would also not invest in precious metals et al. But to each their own. As far as I can tell, investing in real estate does currently not make sense, owning a principal residence can make sense if it's for you. It is not, however, a requirement to come out ahead 10 or 20 yrs down the road.

Marko said...

Hard asset that you can live in....I don't get gold either, what do you do with it?

Just Jack said...

I don't think that people who have bought million dollar homes in the last month think prices are going up.

I think they are scared of the economy and want to buy something that can hold its value.

And that's good, because it allows 30 smart people to sell their real estate.

patriotz said...

"I think they are scared of the economy and want to buy something that can hold its value."

Why not buy a GIC then. 100% guarantee it won't go down.

Thinking that RE won't go down when other assets do is just a variation on "RE always goes up", only in relative rather than absolute terms.

Since this has not been the case in the past, it's also a variation on "this time it's different".

Leo S said...

There's no point in arguing about what motivations others might have to buy or rent. The only variables that matter are your own.

I don't get gold either, what do you do with it?

What do you do with any investment? Make money of course. Gold is no different (not that I own any).

Leo S said...

Drove by Winston place.. Pretty nice. One could be tempted...

dasmo said...

I agree investing in real estate does currently not make sense in victoria. Stocks are a much easier investment, as you said they have no maintenance costs and are not also liabilities as a house can be. However, Investing in a home is one of the best investments you can make.

Just Jack said...

Investing in a home is the best investment that you will ever make?????

Which supposes that you have SOLD.

Otherwise, all you have is equity. Equity is not money. You have to convert equity into debt in order to use it. But, you don't need a house in order to borrow money?

Or a more precise statement would be that a home is the best investment you can make for your beneficiaries.

I really don't know why more kids aren't "offing" their parents. It's a lot easier than working for a living. A little brake work on Dad's 1968 Ranchero and ba-da-boom your off to Europe for the summer.

Or how about all those vintage RONCO lawn darts your mom bought on ebay, to re-live her childhood. Shall we say a tragic accident when she was trying to get them down from the top shelf of the closet?

dasmo said...

What are you going to do with all your cash money?

a simple man said...

What are you going to do with all your cash money?

Live instead of own.

kunwak said...

"Otherwise, all you have is equity. Equity is not money. You have to convert equity into debt in order to use it."

As far as investment loans goes, a HELOC is not a bad option for leverage I would say (although I don't use one).

dasmo said...

True, try borrowing 100k at 3% from the bank without owning something to back it up.

Leo S said...

I'm sure most people here have seen this, but I find it's the best rent vs buy calculator out there.

New York Times - Is it better to buy or rent?

Very nice that you can adjust the parameters on the fly and see the result. You'll want to look into the advanced settings to adjust them to your situation.
Then you look at the yearly difference in cost and decide whether the more expensive option is worth that to you.

Might even be useful to have it in the resources section of the site?

pod_x said...

"True, try borrowing 100k at 3% from the bank without owning something to back it up."

To take $100k out of your house you need to first put $100k in. To do so, you must have saved it first. Then you pay the bank for the privilege of taking it out. So you have $100k either way, whether you put it into a house or not.

Is this some attempt at a "forced savings" argument?

dasmo said...

if you are renting a house and spending $1500 / month over 6 years you will have spent $111,000 in rent (if they increase it by 2% a year).
Because you got that 2.99% rate on your 400K mortgage after 6 years you will have spent 108K on your mortgage and will have built up $54k in principe (this assumes no increase in house values over 6 years so not talking about equity building up that way). Over twelve years assuming your rate averages at 4.5% then you will have paid 138k in principle. 15 years 186k. the longer you are in the better off you are...

The DP said...

It baffles me that people discredit the motivation for owning a home, and are so negative to those who are interested in it. It seems to me that homes are a pretty fun investment. Would people feel better thinking of them as discretionary spending? Cars are terrible investments, and still require maintenance and cost money. Boats are worse. Rvs - forget it (and RVs > $100,000 are really quite common these days).

Yes, to maximize their value, homes take maintenance (time/money), but compare them, say, to a security investment (stock, bond, ETF, Mutual Fund, RRSP, etc.), and it's clear home ownership is such a different experience. (Is everyone here looking for investment properties? I think not.) Some of the externalities associated with home ownership are negative, and more like discretionary spending items (like a car or boat); but others are highly positive (like how an owned home can define your lifestyle - have an organic vegetatble garden in your yard, put in new windows to cut energy consumption and reduce outside noise, build a 500 ft^2 bathroom if you want one, a big workshop, etc.).

On a side note, I remember a discussion with some musician friends of mine recently. One of them was claiming that investing in fine guitars was the most enjoyable investment he'd ever dealt with; he'd made more money with some more traditional investments, and less money with others, but guitars were the most fun investments he'd ever had (look up the prices of a 1950's Gibson Les Paul if you doubt that instruments are very real investments). Something like an old guitar obviously has many risks associated with it (over 50% of its value is defined by condition, etc.). Houses, I think, are similar in many ways. You can do well with them, as investments, or poorly, but owning a house is obviously about much more than the investment value alone, just like owning an investment-grade guitar is not just about rate of return.

Sure there are risks associated with home ownership, just like there are risks associated with any investment. There are far worse risks (like, almost certain depreciation or loss) associated with most discretionary spending items. All decisions in life have some risk associated with them. And investments with a potential return greater than the inflation rate tend to have highly non-negligible risk. Many of our risk-related decisions in life are made for non-financial reasons, and that seems to be ok.

(It amused me greatly, for instance, to learn that Garth Turner is a motorcycle rider. I read recently in the BC provincial 'Rider's Guide' that in Canada, motorcyclists have a 16 times greater (that's 1600%) chance of being killed than automobile drivers, and accidents (mainly vehicular accidents) are still the leading cause of death among several age groups (google the StatsCan tables on cause of death if interested). So while Garth regularly spews venom at people with high risk tolerance in real estate, he seems to be ok with taking on lifestyle and transportation choices for himself statistically much more likely to result in death. Personally, I'd rather lose my house than my life, but I agree that motorbikes look like a lot of fun.)

Anyway, I read this blog because I'm hunting for a house in Victoria. The title suggests I'm in the right place. For the writers and commenters who have no interest in home ownership in Victoria and have nothing but bitterness and self-righteousness to contribute, I just wonder why you're here.

Leo S said...

@dasmo This is the problem with simplistic arguments. Plug those numbers into the link I just posted. 0% housing appreciation, 2% rent increase, 1500 rent, 400k house, 20% down, 3% mortgage

Renting is cheaper almost the whole way through. If you keep the place for 30 years (incredibly unlikely, given how small that $400k place would be), you just barely come out ahead when buying.

So in the more likely scenario, where you're about ready to sell after 6 years, you've lost $40,000.

Leo S said...

Anyway, I read this blog because I'm hunting for a house in Victoria. The title suggests I'm in the right place.

Welcome DP. I think you are in one of the right places. Keep in mind though this is a bear-themed blog, so the majority here think that houses right now are not a good investment.

I think everyone understands the emotional components of owning a home, there are many former owners here as well. Some people have owned in the past and appreciated the advantages to owning, and now rent and appreciate the advantages to renting.

Being a first time buyer, I on the one hand think I would enjoy the pride of ownership, but on the other hand am glad I did not have to spend my summers renovating instead of having fun like so many others. Eventually we will buy, so we'll have plenty of time to enjoy hammering around the house.

So while this is a bear blog, there are a variety of opinions here and there is no consensus. Stick around.

dasmo said...

@Leo, it was a simplistic statement that in order to take 100K out of a house you needed to save it in the first place. I was illustrating the numbers on that. IMO there is nothing simple about this debate this is why it goes on and on lol!
Now more than ever it's a long game. It really makes sense with the numbers we are talking about if you can stick with it for about ten years. If you don't have roots popping out the bottom of your shoes right now buying is not a great financial move, no arguments there. If you buy today and need to sell in a couple years I think you will lose that 30k because interest is front end loaded and selling costs money and we will be flat for a while (I think). Using that calculator with these numbers and Victoria's long term growth average of 4% a year it is better to buy after about 9 years...

dasmo said...

I mean if you can stick with the same place for 9 years.

Marko said...

Garth is a genius, just his "timing" is a little off. This is one of my favorite interviews with him:

Uploaded April 2nd, 2009

http://youtu.be/1S7OumrfatY

What a joke this guy is...prices in Vancouver are up 30%+ February 2012 versus March 2009; however, somehow people continue to follow him religiously? Watch the Vancouver market correct 10-15% and everyone will appluad him even thought he won't even be close to baseline.

Love his comment about presale condos at the 2:30 min mark in the video....certainly glad I didn't listen to him when I purchased my presale in 2009.

The DP said...

Leo S. Thanks for the welcome. I've been lurking on and off around here for a year or two, so have gotten a bit of a feel for the tone.

But is it really a bear blog? I would think true bears would be talking about selling quickly in a perceived falling market, techniques for shorting real estate-based investments, etc. I feel like the dominant theme of the blog is finding an entry point into the market. Long-term buy, short-term, sell or hold. Anyway, I wish everyone well, whatever you're all after.

Leo S said...
This comment has been removed by the author.
Leo S said...

I would think true bears would be talking about selling quickly in a perceived falling market

The owners here are either not bears, or are and don't mind some declines. Those that were have already sold. Given that most people only own one house at a time, there's not much discussion to be had about selling. It's not like a bear blog in equities where it's a continual process.

techniques for shorting real estate-based investments,

Well if you have any.... :)

I feel like the dominant theme of the blog is finding an entry point into the market.

Sure. And most seem to think the entry point is further down the line, after a decline. Seems to be bear thinking to me, but I think this is semantics.

Leo S said...

Using that calculator with these numbers and Victoria's long term growth average of 4% a year it is better to buy after about 9 years

Even if 4% growth is sustainable in the long term, we are incredibly unlikely to experience it over the next 10 years.

The Victoria market peaked in 1981 and 1994. In the first it took 10 years for real prices to regain their previous peak. In the second it took 9. So even with a 4% average, there is very little action after a peak.

Let's say we're at or near a peak right now, and let's say there is no crash coming, just more or less flat prices. From 2010 (the peak annual average), that gives us until 2020 until real prices rise past the peak.

Leo S said...

Nominal prices have taken 7 years to recover in both cases.

dasmo said...

f you look at our present graph we have been past the peak and are going into our 3rd year of flat. 4% is the long term average. The last decade was 7.8% part of which was the result of that long flat period. it pushed us back into t's way cheaper to buy than rent zone. Anyway, even if it takes nine years that's another 6 years in and then the growth rate will be in catch up mode to that 4% so if you have a ten year window you are fine...IMO...

Now if you are looking for action housing isn't the place to be. My apple shares are up 3333% since I bought them 15 years ago. RE doesn't touch that.

Leo S said...

Sure, we'll be fine either buying or renting. But buying at the 10 year window is very unlikely to make financial sense. Whether is makes emotional sense is another story. You look at the numbers and decide whether it's worth it to you.

Douggie said...

Hi Team, first time poster long time lurker here.

I remember Christa's post had a lot of strong arguments against selling to rent, but she's not crazy in the least. It's on a lot of boomers minds, including my parents and in-laws.

http://www.theglobeandmail.com/globe-investor/investment-ideas/lets-talk-investing/video-aging-baby-boomers-jump-on-renting-bandwagon/article2230605/

Mind you like everything else in the Globe it's Torontocentric, and we are all well aware Vic/Van exists well outside of the real estate laws of physics :)

patriotz said...

"Even if 4% growth is sustainable in the long term, we are incredibly unlikely to experience it over the next 10 years."

That is, if short term growth has been greater than historic long term growth, then for long term growth to get back to normal short term growth going forward has to be smaller than historic long term growth.

Otherwise known as reversion to mean, the simple principle that bubble deniers always miss.

Also known as what goes up must come down.

patriotz said...

"There's no point in arguing about what motivations others might have to buy or rent. The only variables that matter are your own."

Other people's motivations matter a lot, because when they change they move the market.

For example, in the US either people's "intangible" benefits of ownership have gone down, or people no longer think that owning a house is a sure way of making money.

You may argue about what people think, but the outcome is indisputable.

kunwak said...

@ Leo:
"@dasmo This is the problem with simplistic arguments. Plug those numbers into the link I just posted. 0% housing appreciation, 2% rent increase, 1500 rent, 400k house, 20% down, 3% mortgage"

If you don't want to be simplistic, I'd suggest you plug in historical averages for house price increases. That would be more of the order of 4%. The market being flat right now is a poor argument for long term purposes.

kunwak said...

@ PodX
"To take $100k out of your house you need to first put $100k in. To do so, you must have saved it first. Then you pay the bank for the privilege of taking it out. So you have $100k either way, whether you put it into a house or not.

Is this some attempt at a "forced savings" argument?"

No. However, my leveraged account is no where near the HELOC rate. I like the idea of leveraging home equity better than leveraging other portfolio equity since house prices move quite slow compared to stocks. You can also get significant tax advantages (deductible interest and low tax rates on qualified dividends). If you have a good interest rate, leverage can work very well and a HELOC has been a good way of getting that. (Disclosure: I don't do it myself)

dasmo said...

RE goes down for long periods History has shown that. This is why I used the average gain of 4%. By my eyes our peak was 2008 so we have been on our flat line for a bit now. Anyway gotta run so here are the Nominal gain numbers for all to see:

1976.1 26.4%
1976.2 31.1%
1976.3 23.0%
1976.4 13.4%
1977.1 4.0%
1977.2 0.5%
1977.3 1.2%
1977.4 1.8%
1978.1 2.7%
1978.2 2.3%
1978.3 1.9%
1978.4 4.6%
1979.1 5.5%
1979.2 10.9%
1979.3 16.8%
1979.4 22.7%
1980.1 35.1%
1980.2 38.7%
1980.3 42.0%
1980.4 51.7%
1981.1 50.7%
1981.2 59.5%
1981.3 69.1%
1981.4 27.4%
1982.1 16.0%
1982.2 -3.2%
1982.3 -19.7%
1982.4 -14.6%
1983.1 -14.3%
1983.2 -11.5%
1983.3 -7.4%
1983.4 -1.2%
1984.1 -2.9%
1984.2 -2.9%
1984.3 -7.3%
1984.4 -14.4%
1985.1 -13.4%
1985.2 -14.2%
1985.3 -9.4%
1985.4 0.5%
1986.1 0.5%
1986.2 5.1%
1986.3 4.5%
1986.4 4.5%
1987.1 4.5%
1987.2 7.6%
1987.3 10.4%
1987.4 12.7%
1988.1 12.7%
1988.2 11.9%
1988.3 14.6%
1988.4 15.9%
1989.1 21.0%
1989.2 20.2%
1989.3 18.5%
1989.4 19.4%
1990.1 23.6%
1990.2 35.0%
1990.3 28.6%
1990.4 23.5%
1991.1 10.1%
1991.2 -0.6%
1991.3 3.5%
1991.4 5.3%
1992.1 10.6%
1992.2 10.0%
1992.3 7.6%
1992.4 8.8%
1993.1 14.9%
1993.2 14.4%
1993.3 24.8%
1993.4 19.6%
1994.1 12.0%
1994.2 10.9%
1994.3 0.3%
1994.4 1.8%
1995.1 0.0%
1995.2 -8.2%
1995.3 -10.5%
1995.4 -11.4%
1996.1 -10.8%
1996.2 -2.9%
1996.3 0.0%
1996.4 2.9%
1997.1 6.2%
1997.2 4.3%
1997.3 5.9%
1997.4 1.9%
1998.1 1.7%
1998.2 0.9%
1998.3 -1.8%
1998.4 -2.8%
1999.1 -5.5%
1999.2 -1.3%
1999.3 -2.2%
1999.4 2.9%
2000.1 2.9%
2000.2 -0.6%
2000.3 1.3%
2000.4 -0.7%
2001.1 0.2%
2001.2 0.2%
2001.3 2.8%
2001.4 5.5%
2002.1 7.0%
2002.2 7.7%
2002.3 7.2%
2002.4 5.4%
2003.1 6.3%
2003.2 7.2%
2003.3 8.6%
2003.4 9.4%
2004.1 10.8%
2004.2 10.6%
2004.3 10.3%
2004.4 9.7%
2005.1 14.9%
2005.2 14.3%
2005.3 19.9%
2005.4 19.4%
2006.1 11.2%
2006.2 14.3%
2006.3 6.8%
2006.4 8.9%
2007.1 8.1%
2007.2 3.8%
2007.3 9.5%
2007.4 11.1%
2008.1 15.0%
2008.2 17.7%
2008.3 8.6%
2008.4 0.4%
2009.1 -3.8%
2009.2 -3.9%
2009.3 -2.3%
2009.4 2.2%
2010.1 2.6%
2010.2 7.6%
2010.3 5.3%
2010.4 4.9%
2011.1 5.0%
2011.2 -4.9%
2011.3 -2.0%
2011.4 -1.7%

a simple man said...

Hi Marko - anxiously awaiting the numbers for the month.

Rhino said...

Yes Marko, you have made pavlovian dogs out of us, and we are now salivating

Marko said...

Our production of the March sales statistics is behind schedule today due to a knock-on effect of our Map Area project in March. We'll post them here as soon as they are available.

Apologies for the delay.

Marko said...
This comment has been removed by the author.
Leo S said...

That would be more of the order of 4%. The market being flat right now is a poor argument for long term purposes.

We're talking a 10 year window. Look at the history. At what point have we had 4% appreciation from a market peak in 10 years? never.

dasmo said...

1982.2 -3.2%
1982.3 -19.7%
1982.4 -14.6%
1983.1 -14.3%
1983.2 -11.5%
1983.3 -7.4%
1983.4 -1.2%
1984.1 -2.9%
1984.2 -2.9%
1984.3 -7.3%
1984.4 -14.4%
1985.1 -13.4%
1985.2 -14.2%
1985.3 -9.4%
-136.4%
1985.4 0.5%
1986.1 0.5%
1986.2 5.1%
1986.3 4.5%
1986.4 4.5%
1987.1 4.5%
1987.2 7.6%
1987.3 10.4%
1987.4 12.7%
1988.1 12.7%
1988.2 11.9%
1988.3 14.6%
1988.4 15.9%
1989.1 21.0%
1989.2 20.2%
1989.3 18.5%
1989.4 19.4%
1990.1 23.6%
1990.2 35.0%
1990.3 28.6%
1990.4 23.5%
1991.1 10.1%
1991.2 -0.6%
1991.3 3.5%
1991.4 5.3%
1992.1 10.6%
1992.2 10.0%
334.1%

chris said...

If price were to stay flat for 7 years I still save $137,762 by renting using the NYTimes calculator. Yet my base scenario is for price to decline 5% per year for the next 7 years. So almost $3000 per month less than if I bought the identical unit down the hall.

kunwak said...

"If price were to stay flat for 7 years I still save $137,762 by renting using the NYTimes calculator. Yet my base scenario is for price to decline 5% per year for the next 7 years. So almost $3000 per month less than if I bought the identical unit down the hall."

Just be sure to remember that you are making some strong assumptions about something intrinsically unpredictable (house prices are unpredictable like a random walk). So I think it is more prudent to use long term averages in the calculator, in which case you may not be as far ahead as you think you will.

Leo S said...

I think a graph would help in this case :)

here's my old one

Imgur has been acting up today so it might not load.

a simple man said...

but, when have we ever been in the financial situation that Canadians now face?

Higher than ever debt to income ratios?
Ridiculously high purchase to rent ratios?
Crazy high purchase:income ratios?
Worldwide economic uncertainly almost weekly.
Banks and the govt warning us that there are financial troubles ahead in housing?
Most BC folk are not saving money, mostly the reverse?

We are headed for trouble.

Leo S said...

house prices are unpredictable like a random walk

Sort of. There is conflicting evidence about this. Some authors have shown a random component to house prices in the shorter terms. However over the long term there is very strong evidence of reversion to means. Both from case shiller data and from the much longer term herengracht canal data.

So while house prices are unpredictable, you can estimate probabilities of movement based on fundamentals. Yes, prices could randomly walk higher in the next years, but not without some unprecedented event (like big immigration for example)

kunwak said...

Leo, are you fitting linear models to growth data? I think your Y axis should be on log space (log transform on your data to justify a straight line fit).

kunwak said...

"So while house prices are unpredictable, you can estimate probabilities of movement based on fundamentals. Yes, prices could randomly walk higher in the next years, but not without some unprecedented event (like big immigration for example)"

I would tend to agree. But would also caution that many people thought things are way out of whack many years ago. Predictions are difficult to make and largely worthless. It may be good to consider that when you use the calculator. The whole rent vs buy calculation is based on assumptions which are very difficult to justify IMO, that's all.

That said, I don't intend to buy here but still find the market situation and it's potential long-term implications fascinating.

Leo S said...

I'm using an exponential fit. I have the same graph on a log scale which is clearer. Can post tonight.

And I totally agree about difficulty of estimating and the lack of success in the past.

dasmo said...

@ Leo can you use nominal values to remove inflation out of the equation? that distorts the figures.

Just Jack said...

It's not whether home ownership is a good or bad investment, that can be very subjective. It's the efficacy of the management that is the issue.

Most home owners are their worst managers of the home as an investment. They leave hundreds of thousands of dollars of equity doing nothing. Or use the equity to buy depreciating assets like cars, boats, etc. Or not diversify their wealth by using the home equity for home improvements. Or worse rob the equity for vacations.

If you hired someone to manage your investment like most people who call their homes an investment - you'd fire most of them, sue others and some you would want put in jail.

chris said...

That's the neatest thing Kunwak. I don't have to be that careful with my assumptions because even if price miraculously remains flat, I still come out miles ahead of the owner down the hall. $1640 ahead per month to be exact. Meanwhile if I catch an urge to own, I get a place in the US for 50,000 and spend a few months each winter.

Leo S said...

Sorry kunwak you are right I posted the wrong data.

Here is the one I meant.

kunwak said...

Leo, that makes more sense and illustrates my point. The next leg in that graph could be something like you saw in the 70ies. I happen to think not but I realize that prediction is not worth much b/c predicting that curve is very hard. A linear model on log transformed data is also very limiting and the time series you have is extremely short given the scale of variations from the mean.

Long story short, predicting how much you save by renting is largely worthless/imagination.

Who knows, the long term trend could shift. There is no requirement for any such parameters to not change as a function of time, which complicated things even further.

patriotz said...

"But would also caution that many people thought things are way out of whack many years ago."

Given that nominal prices in Victoria are the same today as four years ago and in real terms lower, prices were more out of whack then than they are today.

If you mean people were saying prices were out of whack 10 years ago, lay off the straw man.

DP said...

“The next leg in that graph could be something like you saw in the 70ies.”

We indeed can rule out a replay of the 70ies with demo graphics. The 70ies saw the BabyBoomers enter household formation, now they are nearing exit.

Leo S said...

If anything, a 4% after inflation increase is unsustainable and will not continue forever. The only reason it has gone on this long is credit expansion and demographics. All those things are starting to reverse.

dasmo said...

Nevermind I did it myself.

Nominal Victoria House values showing ten years from peak through valley

Leo you are right in the 80's it was 3.78% a year compound growth from peak through valley over ten years
Late 90's it was 1.95% a year compound growth from peak through valley over ten years.

dasmo said...

and I forgot to add Victoria's SFH value average compound growth over 36 years has been 7.18%

Leo S said...

can you use nominal values to remove inflation out of the equation? that distorts the figures

Compensating for inflation is the correct way to track asset prices. It doesn't "distort" the figures, it corrects them.

A can of coke used to cost a dime, does that mean coke is a a good investment?

dasmo said...

It does distort them when we are talking about growth rates. It's the straight facts with nominal values. To adjust your example to inflation it would read:
"A can of coke used to cost a dollar, does that mean coke is a a good investment?"

dasmo said...

And Coke is a good investment. It's up 78.9% since I bought them a few years ago ;-)

MD80 said...

I agree, compensating for inflation is the correct way to track asset prices. ie. Saying your house went up 5% in one year may sound like a decent investment if you don't mention that inflation was 8% that year. Then it actually lost 3% of it's real value (NOT a good investment)

Leo S said...

"A can of coke used to cost a dollar, does that mean coke is a a good investment?"

Correct. And that makes it clear that buying cans of coke is not a good investment. Looking at nominal values, that is not clear at all.

Phillip said...

Here's dasmo's chart in real dollars
1980’s lost approx 40%, 90’s lost 30%.

patriotz said...

"The 70ies saw the BabyBoomers enter household formation, now they are nearing exit."

Also for the very first time it was the norm for the woman in such households to work.

The growth in 2-income households was a very significant factor in the growth of house prices, a factor which has obviously reached its limit.

dasmo said...

Inflation spiked to 13.5% in the 80's. So I might have an investment returning the mythical 10% and over that period it looks terrible because inflation adjusted, it's losing money. It a good method in general to measure performance because at the very least you want your money to keep up with inflation...I get it. It's still a distortion of the actual facts of what happened.

Just Jack said...

And it took the largest group of spenders in history to cause prices to increase at that 7.8% annual rate.

Now that they have stopped buying and are becoming sellers of real estate should we expect prices to decline?

We are already seeing this happen in complexes that have age restrictions of 55 and older. These condominiums and town homes sell for significantly less than similar suites without age restrictions.

How about all those recreational properties that were supposed to be in demand. Nope, those properties are comming down in price faster than the urban centers.

Leo S said...

So I might have an investment returning the mythical 10% and over that period it looks terrible because inflation adjusted, it's losing money

You could get a GIC for 15% in the early 80s. So yes, if your investment was returning 10% it was terrible.

It's still a distortion of the actual facts of what happened

Seems like an odd perspective. Adjusting for inflation is the correct and accepted way to do it.
Nominal data is highly misleading when you have one period of 10% inflation versus another period of 1%. Now that distorts the facts.

Anyway, I don't actually think it changes the story much. If you want nominal data then price recovers a couple years sooner. Either way that means price recovery is likely to be another 5 years off at least.

Marko said...

Monday April 2, 2012 3:30pm:

March March

2012 2011

Net Unconditional Sales:

570 622

New Listings:

1,385 1,501

Active Listings:

4,274 4,100

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

a simple man said...

hmmmm. Slower sales than last year (was disaster year for sales volume.

Higher listing volume than last year at this time.

Yup. It is going to get ugly.

I am putting my marker down - this is the start of the slide.

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