Monday, June 4, 2012

Another look at affordability

In the last post, in an effort to understand how prices could look like a bubble going up but then flatten out, I started to look at monthly payments as a first indication of affordability.  Sure enough, when looking at monthly payments we see a symmetrical steep decline after a steep rise.

Of course payments are only half the story when looking at affordability.  If incomes have risen along with mortgage payments, then we don't necessarily have a problem.  So let's dig a little deeper.  

First, the income figures.  I'm using average total family income for all family types (CANSIM 202-0401) which goes from 1976 to 2009.  There is data for only Victoria, but I'm using the BC numbers because the Victoria figures are often based on less than 200 responses, and this makes the average too volatile year to year.  They're not wildly different in any case.

For the years 2010 and 2011, I'm using the year over year change in average weekly earnings (CANSIM 281-0028) to estimate the growth in income, which has basically matched inflation.

Average mortgage lending rates are from the Bank of Canada.  Last time I assumed a constant 25 year amortization, but I wanted to take into account that lending restrictions have been eased over the years, and people are lowering their monthly payments by taking longer amortizations.  The best data on this comes from CAAMP, who list the average original amortization period by year of purchase in their Fall 2011 report.  Data is only grouped into amortization ranges, but based on that I estimate that average amortizations increased about 12% due to CMHC loosening their restrictions.  I can't find any data on average down payments, so I've assumed a fixed 20% (which is very generous, considering Genworth estimates only half that for their mortgage portfolio).

With those assumptions, let's take a look at affordability in terms of the percentage of pre-tax income an average BC family requires to purchase an average Victoria single family home.

Overall, it really doesn't look too concerning.  By crashing interest rates, the government has improved affordability quite dramatically from the high of 2008.  The levels don't really seem to be out of line with the levels of the last 35 years.  Based on that, what could happen going forward?  Let's assume that incomes will continue to match inflation, and interest rates will stay at their current levels.

Possible affordability under scenario 3.

  1. Prices start increasing again.  Interest rates are low, it's a good time to buy, affordability figures aren't that scary, the tech sector is booming, etc.  While anything is possible, that would make this correction quite unusual by being both shorter and shallower than those that have come before.
  2. Prices remain flat like a halibut.  I can certainly see the logic behind this argument given the current affordability levels, but I think it would again be a break from previous corrections.  Why would we stay at this poorer level of affordability instead of continuing to decline?
  3. Affordability corrects back to the levels of the late 90s (payments at around ~33% of income).  The "back to where we started" option.  Possible, but I like the next option better.
  4. Affordability corrects but not quite to the levels of the previous low.  There are many solid arguments to be made that as a city grows and densifies, single family detached homes will become relatively more and more expensive compared to local incomes as more people make do with townhouses and condos.  A rough look at the levels of the last 3 lows would indicate that the next one might occur at 36%.   I look at this as a best realistic case for house prices.  We haven't taken into account that down payments have shrunk substantially, and if interest rates go up all bets are off.  However in the absence of an external trigger, I think this scenario is more or less defensible based on our history.
  5. Crash.  Many things have the potential to trigger a larger correction going forward.  Interest rates, CMHC restrictions, implosion of any number of large world economies, megaquake, etc.  This is always a risk, and one could argue that the possible triggers are piling up every day.  
What would scenario 4 mean for house prices?  Something like this:


Overall it would mean a peak to trough correction of about 15% in real prices.    This is more or less the flat landing scenario.  As soon as interest rates rise even moderately, the picture changes (a 1.5% rise in rates by 2015 in the above graph would knock another $80k off prices).

Thoughts?

241 comments:

1 – 200 of 241   Newer›   Newest»
Marko said...

Monday, June 4, 2012 8:00am

MTD June
2012 2011
Net Unconditional Sales: 45 618
New Listings: 112 1,465
Active Listings: 4,696 5,050

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

patriotz said...

Lengthening amortizations doesn't really improve affordability, it just borrows it from the future. A true increase in affordability at a given price is created only by lower costs (including interest) or higher incomes. Longer amortizations reduce principal payments which are savings.

The result is people are able to buy at a higher price now but are able to buy less later. Particularly if prices go down, because many more people will end up upside down who might otherwise be able to trade up.

This is only a part of the general increase in consumer debt, all of which hurts affordability in the long run.

totoro victoria said...

I think lengthening amortization does increase affordability - which I calculate based on how much I have to pay each month vs. my income.

I don't look at a mortgage in the same light as general consumer debt. I view it as an investment of leveraged dollars. A car depreciates, as do most other types of purchases funded by consumer debt such as clothing or boats or home furnishings.

A house generally appreciates over time. Yes, it may drop in value short term but, long term, prices will climb again if the past is a good predictor of the future.

Given that I have rental income which the mortgage interest can be deducted against this further improves the value of this type of leveraged consumer debt.

CS said...

An interesting analysis, but is looking at the monthly mortgage payments relative to income the right way to assess affordability? On this measure, what is affordable today may prove unaffordable tomorrow. The ratio of mortgage payment to income is, perhaps, better considered a measure of the current risk of default. The future risk of default would then be inversely related to the current interest rate: the lower the current rate the greater the risk of future default, assuming that current buyers are leveraged to the max.

Perhaps it is more useful to look at the principle to be repaid versus life-time disposable income. On that basis, I suspect that housing has rarely been so unaffordable.

totoro victoria said...

It is the right way for me. Not sure if it is for everyone.

There is risk in real estate. The risk is that you have to sell when prices drop or that you have to renew at high rate or that you have a variable rate and the rates shoot up.

The reality is that you can control for some of these risks. You can ensure that you either buy with a huge amount down when interest rates are high (and preferably through a self-directed RRSP mortgage) or buy with a lesser down payment when rates are really low like now and lock in.

Job loss and disability can happen. You can get insurance for the disability. The job loss - you can always rent out your home and move somewhere less expensive if need be until you get a new job. You can rent out a suite if need be.

Prices have appreciated an average of at least 4% per year in the greater Victoria area for the past fifty years. On a $700 000 home that is an average of $30 000 a year tax free gain.

I'm comfortable with this measure of affordability. Principal repaid out of income is the same for me as how much of my monthly income goes to housing. In fact, I would pay as much or more to rent my home than I pay out of pocket for my mortgage - not even deducting the amount that goes to principal or adding any appreciation.

axeman said...

In all, we have about 20% more to go before a bottom is reached. Interest rates will be sluggish at best for the next 10 years. Expect a 2-3 point rise, until the next recession hits, and then a pedulum from low to ultra low rates.

As long as rates stay low, there will be no massive implosion, but Vancouver will see a substantial downturn.

omc said...

I wonder what effect DROPPING interest rates would have on the market. We keep on talking about rising rates, but I have been doing a bit of reading lately that is hinting that the BoC will most likely be going below 1% for the near term. That is how bad the world economy is. The US is highly likely to do another round of quantitative easing and the BoC may have to lower the over night rate to stimulate the economy.

Just Jack said...

Assuming the graph is a reasonable expectation of the next three years.

Does this graph show that the person holding off from buying for the next 3 years will actually be able to pay off their mortgage sooner and at lower portion of their disposable income than someone buying today?

Leo S said...

An interesting analysis, but is looking at the monthly mortgage payments relative to income the right way to assess affordability?

I'd say so. Most affordability measures use this kind of comparison. After all, monthly costs is what people are actually paying, and if they can't afford them, they tend to sell or default.

On this measure, what is affordable today may prove unaffordable tomorrow.

You're right in that just because something is affordable today means nothing about the risk at that level. It just means that if nothing changes it will continue to be affordable. Clearly the risk in the 80s was much lower than today at the same affordability levels, because interest rates then had limited upside but very high potential to drop, whereas now we have the reverse. However that falls into the external triggers category.

Perhaps it is more useful to look at the principle to be repaid versus life-time disposable income.

That's a variant of price to income. While I agree that high price to income indicates higher risk, it could also mean nothing if interest rates don't budge. Yes, it could result in collapse, but if we're in for extended low rates then a high price/income is not in itself a problem.

dasmo said...

They will probably be pushed lower for an extended period of time..."And a period of modestly higher inflation would help reduce that private debt overhang, which would help promote economic recovery, which would in turn raise revenues and help the fiscal situation." inflate the debt away... prices don't need to drop to increase affordability. Asking for a raise can though.

patriotz said...

I think lengthening amortization does increase affordability - which I calculate based on how much I have to pay each month vs. my income.

Sure the payment is lower at time of purchase, but you have to make it longer. Which is what I meant when I said it just borrows affordability from the future.

All reductions in the savings rate (which a longer amortization is a form of) reduce future affordability.

Leo S said...

I wonder what effect DROPPING interest rates would have on the market.

I don't think it would affect a lot. Fixed rates now are much lower than they were when BoC was at 0.5%.
If BoC drops back to 0.5% or even 0% we'll see spreads increase.. There will be some marginal effect, but nothing massive.

I think a bigger factor is the down payments. If we had data on average down payments over time I think the affordability wouldn't look quite so rosy. Also the upcoming OSFI regs will tighten around the edges again. I think those things will have more affect than a drop in BoC rates from current lows to slightly lower.

Leo S said...

prices don't need to drop to increase affordability.

Yes, but inflation now would mean higher rates, and that would collapse the market for sure. Even very moderate rate increases drastically reduce affordability. The only way I see a nominally more or less flat market going forward is in an extended low rate environment and no other negative triggers (like higher unemployment). It's pretty much the best case scenario.

a simple man said...

Cadboro Heights lots once were $650K if I remember correctly - my wife just drove past and they have advertised for $425K now.

And now you can use whatever builder you want whereas before you had to use the developer.

hmmm.

Introvert said...

You can ensure that you either buy with a huge amount down when interest rates are high ... or buy with a lesser down payment when rates are really low like now and lock in.

Even better: have a large down payment and lock in to a really low rate, as I was lucky enough to do. Factor in mortgage interest deductions and the fact that I consistently make extra mortgage payments, and things are downright rosy.

Yes, it's true that prices in Victoria today are still quite high, relative to most other Canadian markets, but I don't foresee this changing.

Victoria will never again be that quaint little seaside city where house prices are pretty average and affordable for most. We've passed a point of no return: our prices are high, and they're going to stay high.

Waiting for a good $250,000 home in Oak Bay is like waiting for the Rapture. Good luck, average renter!

a simple man said...

No - I do not expect a $250K home in home in OB ever again. but I do expect to buy a home that sold for $1M a few years ago for $650-$700K in the next few years. Rent is cheap waiting - cheaper than owning, so why not?

Just Jack said...

As the risk of buying real estate fell close to zero, prices increased. And for some buyers, perceived risk fell to zero and these buyers were willing to pay over asking price to get the property.

Now, risk is returning to the marketplace and prices are beginning their decline.

- in the outlying areas,
- properties with the majority of value in the land component, - less desirable inner city properties
-less desirable types of ownership.

Marko said...

"Cadboro Heights lots once were $650K if I remember correctly - my wife just drove past and they have advertised for $425K now.

And now you can use whatever builder you want whereas before you had to use the developer."

a) Strata plan was registered only a few weeks ago.

b) I talked to the developer last year and you could use any builder you want back then.

c) 3720 Arbutus Ridge sold for $555,000 + HST in February, 1/2 acre lot in Wedgewood estates. So $425,000 + HST on these lots is market value give or take.

If you really think they dropped from 650k to 425k because of the market....I don't think so. They went fishing for high prices months in advance of having the strata plan registered. Now they are probably a bit more motivated and realistic.

omc said...

So these are bare land strata. Still not a bad deal when you compare buying a rat shack in OB, knocking it down and paying for all the utilities. I wonder what they are actually asking for them, as the sign says "from $425k".

Leo S said...

Waiting for a good $250,000 home in Oak Bay is like waiting for the Rapture. Good luck, average renter!

Once you've locked on a strawman you really don't let go, eh?

omc said...

Wow, $555k for a 1/2 acre in Wedgwood. Just another example of how incredibly overpriced oak bay has become compared to the rest of the market.

RealR said...

I wonder what effect DROPPING interest rates would have on the market.

The same as they’ve had for a while now, falling prices. The mystery lies in that real rates are NOT dropping. Real rates are nominal rates minus the inflation rate. Real rates are rising at the same time as the nominal rates everyone sees are falling. The reason is inflation is falling more quickly than nominal rates. 2 - 1 = 1, but if inflation goes negative as nominal rates fall by 1, then 1 - (-1) = 2. Voila, real rates rose by 1 while nominal fell. How does one know when inflation is falling fast? The price of everything around you is falling quickly; oil, copper, stocks...

Phil said...

Introvert said: "We've passed a point of no return: our prices are high, and they're going to stay high."

Really? Isn't that what they said in Miami? And Tampa? And Phoenix, Las Vegas, San Diego, Sacramento, etc, etc, etc...

Just Jack said...

I don't know if WE have passed a point of no return, I know Introvert has.

Just Jack said...

Oak Bay prices are the highest that they have ever been, but the rate of appreciation is slowing. A recent sale today at $870,000 was a resale from March 2005 when it sold for $680,000 or a 28% increase.

But, the core districts had an increase from $400,000 to $590,000 over the same time period or about 48%. No wonder listings in Oak Bay are at an all time high, the smart money is trying to get out before the "crunch" happens.

dasmo said...

"As with all things, if money is expensive then it will tend to be in short supply, and if money is cheap it will tend to be in plentiful supply. If money is in short supply [interest rates are high] then prices overall will go down [inflation is low or negative], and if money is in plentiful supply [interest rates are low] then prices overall will go up [inflation is high]."

dasmo said...

I think the plan is to lower rates more to try to inflate the CMHC problem away...

Introvert said...

Really? Isn't that what they said in Miami? And Tampa? And Phoenix, Las Vegas, San Diego, Sacramento, etc, etc, etc...

Thanks, I must have forgotten for a second that Victoria is exactly like every other American market, and that what happened to them is exactly what has to happen to us. Sorry, I don't know why I make things so complicated.

totoro victoria said...

Oh good grief. Who has a crystal ball? There is no crystal ball. There is the deal of the day. The deal is the best deal you can get to after doing your research and assessing your risks and potential returns. Paralysis by over-analysis gets you stuck IMHO.

Will Victoria go the way of Phoenix. I don't believe so. That is okay, I put my money where I feel it best to invest and don't require anyone else to do the same or put them down for not doing so.

Only time will tell :)

Oh, and Phoenix actually looks pretty good right now - except for the US-Canada tax rules for rental properties. Too much hassle for me.

Introvert said...

Oak Bay prices are the highest that they have ever been, but the rate of appreciation is slowing. A recent sale today at $870,000 was a resale from March 2005 when it sold for $680,000 or a 28% increase.

Only a 28% increase? Heavens! How will that family make due? What a harsh lesson in economics! Too bad this family didn't just move to Oak Bay to enjoy its great inherent qualities.

Introvert said...

Once you've locked on a strawman you really don't let go, eh?

The yearning for a reversion to 1993-level house prices is palpable in so many of the comments posted on this blog.

Mindset said...

Funny Leo, was just running similar numbers myself this week out of interest in the same trends. A couple of additional observations:

I ran 3-year intervals from 1991, and have 2006 as the worst year afffordability for payment/income. The government interventions after 2006 reduced monthly payments as a ratio of payment/income by almost 10%.

A couple of additional interesting trends are household debt levels, and CMHC total insured levels. They go nuts after 2006. Some pretty important indicators there I think that are also factors in how much we can afford to pay, and how much more we will be 'allowed' to borrow, even at low interest rates.

HELOC debt has also taken a parabolic curve over the last 5 years.

Affordability on the monthly payment of a home compared to income is one thing, our personal and governments ability to keep the current lending going is another.

a simple man said...

Leo S - thanks for all the work you put into this post - I appreciate it. My bet is on scenario #5.

Leo S said...

The yearning for a reversion to 1993-level house prices is palpable in so many of the comments posted on this blog.

Nice job providing the definition of a strawman argument. A counter to an argument that hasn't been made.

By the way, fat chance that your house will be worth double by next year.
I know you didn't say that, but I can feel you deeply yearning for it between the lines so I'm pretty sure that's how you feel.

Leo S said...

The government interventions after 2006 reduced monthly payments as a ratio of payment/income by almost 10%.

Which factors are you taking into account? Interest rates actually increased from 2006 to 2008 (according to the BoC source I was using) that's why affordability continued to deteriorate on my chart. Were you looking at down payments as well?

Some pretty important indicators there I think that are also factors in how much we can afford to pay, and how much more we will be 'allowed' to borrow, even at low interest rates.

For sure. Any number of curveballs could come down the pipe. CMHC regs are first. I doubt they will have a dramatic effect, but they will certainly again take some buyers out of the market.

HELOC debt has also taken a parabolic curve over the last 5 years.


The growth of household debt is probably the biggest wildcard here. All I'm doing is looking at mortgage payments, but what about everything else? It would be more accurate to look at the change in total debt service ratios over time. I suspect those would look a lot more concerning.

Mindset said...

Hi Leo,

I took the average 5-year and 1-year fixed interest rates for each year (most mortgages are locked in), the average Vic home price for the year, the maximum term (25,40,35,30), and ran a simple monthly payment on the lowest possible amount (people tend to go for lower payments). I then overlaid this payment on the average gross household income for the year to get a % of the payment compered to gross income.

I then worked to locate HELOC debt levels, CMHC lending and household debt figures to add some context.

Fiduciary said...

Even though I hope that prices decline, I like to think that I can see logical arguments on either side of the fence, and Introvert, I think I've supported you in the past on this blog when you made logical points. However, I'm with Leo S on this, you pretty much gave the definition of a straw man there. Very, very few, if any people here are saying we'll see $250K Oak Bay houses.

It's like Rick Santorum says: "It doesn't matter if it's true because it feels true."

Phil said...

Thanks, I must have forgotten for a second that Victoria is exactly like every other American market, and that what happened to them is exactly what has to happen to us. Sorry, I don't know why I make things so complicated.

Hey, no problem. Anywhere cheap credit fueled high prices that were out of whack with rents was due for a correction. It really is that simple.

Leo S said...

I then worked to locate HELOC debt levels, CMHC lending and household debt figures to add some context.

Cool, I'd be interested to see your data.
Source spreadsheet for this article is here

dasmo said...

Or there is scenario #6. The BoC keeps rates low for an extended period in an attempt to stabilize the economy and maintain inflation at a healthy 2% pace. I the back rooms they are actually targeting a gradual ramp to 4% inflation. (The trick is doing this without creating hyper inflation). Then, once inflation has reduced the debt burden for both government and it's private citizens the cycle can begin again. No crash, and the rich get richer.

Bottom line is you can over think it. Life is short. If you can buy and desire to, do it and enjoy mowing that lawn every week and remodeling your kitchen. If you can't, don't and be happy renting and saving your money, going out for dinner and traveling the world. Both have their advantages.

That said, I think it is useful to do this analysis to make an informed choice so I'm not criticizing that at all, nor the debate here. It's useful, honest, and entertaining. I'm just putting adding my Halibut opinion to the mix...

RealR said...

To determine Victoria's scenario, you need only look to Vancouver. It's a classic credit bubble. They always revert to where they started.

Just Jack said...

The HELOC is the big concern. This affects a wider population than just those that over bought on housing in the last few years.

And in my opinion, most court ordered sales are a result of people using their HELOC to subsidize their lives and lifestyles.

This has a potential to make any correction in home prices steeper and deeper than any other previous boom/bust cycles.

Trevor_tni said...
This comment has been removed by the author.
a simple man said...

Victoria prices may be a little high?

As compared to incomes there are not a lot of places that are more expensive.

The future 5-10 years will bear witness to whether a person was smart to buy or not in the past 4 years.

But you have to admit saying that we were waiting for a $250K OB house was a bit baiting.

I appreciate both sides of the coin here, so stick around.

Phil said...

If that were true then rents would be higher. If you look around you can rent a whole house here for half the monthly purchase cost.

And Victoria is nice - if you don't mind cold cloudy days in June!

CS said...

"the back rooms they are actually targeting a gradual ramp to 4% inflation."

Can you provide a source?

" (The trick is doing this without creating hyper inflation)"

How does 4% inflation lead to a risk of hyperinflation? You cannot create a hyperinflation without printing a hyper amount of money, which the BoC will not do if they are targetting 4% inflation.

Introvert said...

By the way, fat chance that your house will be worth double by next year.
I know you didn't say that, but I can feel you deeply yearning for it between the lines so I'm pretty sure that's how you feel.


I would be entirely satisfied if my house appreciates at an inflation-adjusted rate of 4%, as has been the case for the last 50 years. Heck, I'd be more than content with a real rate of 2% over the next few decades. I'm not planning for nor expecting my house to double.

Seinfeld's motto: no learning.
My motto: no yearning.

Fiduciary said...

Trevor_tni, I believe what we're doing is the exact opposite of ad hominem arguments. We're calling our what we believe is a logical fallacy he's making in an argument. Ad hominem would be "You're wrong because....You're a stupid head!" No one's saying that. We're saying he made a fallacious argument in attempting to make a point. If you can't call out fallacious arguments, then you can't have a logical discussion.

Well, to be explicit, I suppose that's what I'm saying, I shouldn't speak for others.

Fiduciary said...

Introvert, I'm glad you refer to the 50 year average of 4% real gains. Can I ask what your response is to this argument?

I posit: since the long-term average is 4% real gains, and in recent years the gain has been significantly more than 4% real, therefore in the future it must be either significantly less than 4% real for a short time, or slightly less for a long time, in order to maintain the average at 4% real gains.

I welcome logical debate. :)

patriotz said...

I the back rooms they are actually targeting a gradual ramp to 4% inflation. (The trick is doing this without creating hyper inflation).

No, the trick is doing this without creating a bond market bust. Check out what interest rates were the last time CPI inflation was 4% (hint: two digits).

Also whether or not CPI inflation starts up again we are not going to get wage inflation. Keeping wages down is one of the main agendas of the Harper government, in case you haven't noticed.

patriotz said...

It is impossible for the real price of housing to grow at any sustained positive rate over the long run. If it did housing expenditures would outgrow the entire economy.

Isn't that obvious?

dasmo said...

" Keeping wages down is one of the main agendas of the Harper government, in case you haven't noticed."
Is that why minimum wage went up 7.9% last month?

"Check out what interest rates were the last time CPI inflation was 4%"

Raising interest rates would be the result of policy to fight inflation which they might need to do later on. My point is perhaps they are trying to pump up inflation through lowering the rates. It is another way that debt get's reduced. You guys are the "real dollar" fan's around here not me.

totoro victoria said...

It is entirely possible for the real price of housing to grow at a positive rate. It has been growing in the Victoria area at 4-5% per year for the past fifty years.

I would pay the same per month for a house I rent as the one I own. I have a suite. This brings my ownership costs lower than renting even adding in property tax, insurance and maintenance costs. Even if prices drop in the short term they will, if the past is a good predictor of the future, rise again.

The real key is that the rate of appreciation is on the market value of the home and not just my equity - the power of leverage.

This means that a home that is worth $700 000 has a rate of appreciation of $28 000 to $35 000 tax free each year. If I only put $70 000 down I still receive that return - if I don't have to sell in a down market. I also get the equity repayments to the mortgage.

I have a ten year mortgage. The availability of low interest rates and long terms encourages investment and maintains a higher rate of appreciation. Of course, when rates rise, prices drop - but it evens out eventually.

My view is that residential real estate does indeed rise faster than the CPI depending on the availability of credit, the market you are in (supply and demand), and the economy.

Leo S said...

Raising interest rates would be the result of policy to fight inflation

Not raising rates despite 4% CPI inflation would be a huge break from policy and incredibly unlikely. The Bank of Canada is not concerned about protecting the housing market.

patriotz said...

My view is that residential real estate does indeed rise faster than the CPI

You mean "has risen over the last 50 years".

The wholly atypical rise in the real price of RE over the past 50 years has been driven by two trends:

1. The change from one income households to two incomes (roughly 1962-1982)

2. The unprecedented drop in interest rates and loosening of mortgage standards (1982-date)

Trend 1 is finished and trend 2 will inevitably reverse.

Why is it so hard to understand, as I pointed out, that the real price of RE cannot continue to rise indefinitely?

chris said...

It is entirely possible for the real price of housing to grow at a positive rate. It has been growing in the Victoria area at 4-5% per year for the past fifty years.

If you look at longer time frames (real prices from 1890 to 1998 for instance), housing rises 0.1 % per year. The issue is we first have to give back last decade's departure before we can get back to the 0.1% annual gains. So the only question is, how long does it take to give back the last ten years 250% departure.. .5 years of -12% per year, or 10 years of -6% per year.

totoro victoria said...

I do not believe that the 1890-1940time period provides a relevant comparitor. The world has changed radically since then so, for my purposes, I don't include this period so 4-5% per year seems about right to me.

I also don't believe there will be a reversion to 2002 prices. For those that do, you will make different investment choices and wait for the big crash. It is not a win:lose situation - or a right: wrong situtation. Go for it whatever your choices you live with them.

Fact of the matter is that we all have a time limit. If you accept that real estate follows seven year cycles you probably only have four chances to get in at "the best time".

When do these times match up with income and savings and quality of life factors such as having a family, getting older, risk tolerance... being human is such a drag for waiting out statistical odds :)

In the meantime, I'm going out to do some gardening and then have coffee on the deck and generally enjoy being a homeowner.

totoro victoria said...
This comment has been removed by the author.
Phil said...

generally enjoy being a homeowner.

Well congrats on paying off your home. Most peoples homes belong to the bank and will for the next 3 decades or so.

totoro victoria said...

That is another way to look at it too.

If you are debt averse and believe a crash is coming you won't buy.

I bought - two houses. I have a mortgage - actually two of them. I have rental income that totally pays for one house and reduces the mortgage to below what I would pay for rent for the other.

Do I feel more secure than if I was renting... yep, absolutely.

Would others? Maybe not.

I guess that is the slightly frustrating thing about this forum. We are trying to make sense of something that is not utterly predictable. We have just made sense of it using different informed choices.

You are never going to convince me that my choice to buy was incorrect or dangerous using stats. I'm not going to convince you to change your decision not to buy until the crash. Most we could do is maybe moderate views.

Kind of apropos, just found out the offer on our third house - a legal duplex - was accepted.

Only time will tell, but I'm okay with the risks and having these types of investment gives me a feeling of security for the future. Might make others pretty darn nervous.

Just Jack said...

Definitely no hurry to buy, now that homes are available for under $250,000 and condominiums for under $150,000.

Just a couple years back you could not find a house for sale anywhere for under $350,000.

The spring market is winding down now. We will be into the summer months which typically has a significant drop in sales activity. How sales could drop any lower - I don't know, as we are close to the lowest sales volume in 30 years and that's with a smaller population. But it would not be unrealistic to have the months of inventory double even in the once best neighborhoods.

Of course this would devastate the new housing market and unemployed workers would have to leave for jobs in Alberta, or better yet live on their home equity lines of credit, but that is nothing new to Victoria as our economy has always been one of boom/bust.

The fear of never being able to buy a home has left most prospective purchasers. Now its just a matter of grinding the sellers down in price, terms and other concessions.

But not just yet - maybe wait a little bit longer - after all, there is no hurry.

Introvert said...

Introvert, I'm glad you refer to the 50 year average of 4% real gains. Can I ask what your response is to this argument?

I posit: since the long-term average is 4% real gains, and in recent years the gain has been significantly more than 4% real, therefore in the future it must be either significantly less than 4% real for a short time, or slightly less for a long time, in order to maintain the average at 4% real gains.


My response is: I agree.

And like I said before, I would be pleased with a real appreciation of 2% across the next few decades.

If any city is going to experience solid real appreciation over the long-term, I'm willing to bet it's Victoria. Being the capital, it's always going to have a disproportionate number of stable, well-paying jobs AND it's a unique, aspirational place to live within Canada (it's no one's dream to live in Edmonton).

totoro victoria said...

I agree Introvert.

I expect a drop in house values when interest rates rise and then a less than spectacular gain for the following few years. Might end up with 2% or so average for a bit. That seems realistic given the big rise we have had.

My best guess is that Victoria will likely be fairly stable and unexciting for investors over the next few years.

Just Jack said...

Too bad, that's not happening as our year over year median price for both houses and condominiums continues to fall.

Looks like you guys were one day too late.

nan said...

@ totoro: The only friend I have that has a cash flow Positive property in Vic bought in 2001. If you bought then, bravo, but I would suggest that given your timing, the math that weights on your decision is somewhat different that the math that weighs on those that buy today. There there is nothing inherently wrong with owning real estate, it is like any other investment class, and a part of anyone's diversified portfolio. However, paying too much hinders the roi you might receive had you bought at a more affordable time. If you bought more recently, that seat in the sun on the deck might be costing you 10 years of retirement.

Just Jack said...

As you said, Nan, timing is very important. By waiting you could easily shave off a decade in mortgage payments.

And now that the trend is solidly in favor of lower prices it is entirely likely that you will be mortgage free and spend less of your disposable income on housing than someone who bought a few years back.

Mindset said...

I think you are bang on in highlighting fundamental trends Patriotz.

There seem to be a lot of arguments out there that are based on the belief housing prices have taken off into the stratosphere for some legitimate reason (e.g. an intrinsic housing shortage or booming city growth) and that they will somehow stay high for yet some other unexplainable reason.

We see patterns and we rationalize them. It's standard human behavior for trends that last long enough appear to be a new reality.

Well, until they aren't.

There aren't any trends that I am aware of today that point to an increase in RE again anytime soon. If anything, all trends indicate that the reverse is in the cards.

I don't see an economic collapse or a return to 1999 levels, but a 20-30% correction in Victoria seems probable enough.

WorldtravellerPlus said...

To say that in the long run prices always go up in RE you absolutely 100% correct. I guess the question is whether RE from this point will continue to go up 4-5% a year in the next 10 years. I would argue that alot of demand for housing has been pulled forward by low interest rates, easy credit and a high ownership rate.
As with any asset class there is a good time to buy and a bad time to buy. I believe it is currently a bad time to buy and i'm expecting a correction of 30%. From that point, RE could continue to appreciate from your 4% number. But by any fundamental metric these prices are too high and will either fall or be stagnant for a long period of time.

Leo S said...



There's a couple factor to take into account here.
1. Single family home prices have been appreciating at about 4% after inflation. SFH prices can appreciate as a city densifies and maintain a higher value as you say. Of course, they cannot appreciate at higher than inflation forever. Dwelling prices (that would be including condos) cannot outpace incomes for any significant period without other factors. Those factors in the past have been easy access to credit. Now that's done don't be surprised if dwelling appreciation is 0% after inflation for the next 30 years.
2. Prices can outpace inflation for a while, but not over the really long term. 50 years seems like a lot, but really it's not. Here's 300 years of real estate history in an established world-class city that shows zero price appreciation in the long term. So prices may rise for many decades, and then fall for just as many.

I would pay the same per month for a house I rent as the one I own.

I've mentioned it before and will again. Especially in a flat market the situation can be different for everyone. It's better to own for you, that's great. It's better to rent for others. Depends on your life circumstance, what you're renting, when you plan to sell, if you like to be a landlord or not, etc.
This issue isn't black or white.

This means that a home that is worth $700 000 has a rate of appreciation of $28 000 to $35 000 tax free each year.

I don't see your point. What appreciation? Right now the market is flat to down. So you might as well turn it around and count on a loss of $28000 to $35000 a year. Leverage cuts both ways, hence the importance of what the market is doing.

I have a ten year mortgage.

No one is concerned about you because you don't affect the market. Only the buyers and sellers affect the market. So if rates rise, it will remove sellers and add buyers (those that are up for renewal and can't afford to keep the house). Immediate price pressure. The fact that there are hundreds of thousands of people that can easily afford a big increase in rates makes no difference whatsoever to what the market will do.

Leo S said...

I don't include this period so 4-5% per year seems about right to me.

You better save up for your kids. In 20 years they will need 1.3 million of today's dollars to buy the average shack in Victoria. And your grandkids? They'll be shelling out 2.9 million. That's today's dollars, so they'll still be making only $80,000 a year.

Perfectly normal, perfectly reasonable...

Leo S said...

You are never going to convince me that my choice to buy was incorrect or dangerous using stats.

This is what I don't understand. It seems that some owners on this board feel somehow personally affronted by bear viewpoints. The point is not to prove you wrong, the point is to provide information and counterpoints to what you would hear anywhere else. Don't be offended because it's better for other people to rent than buy. It's very rare that people here judge others for buying unless asked to do so.

What advice do people get when they go home hunting?
Their parents and older peers say: "Go for it, it worked for us!"
The realtor says "Now is the best time to buy!"
The mortgage broker says "You can afford a $600k mortgage!"
The condo developers say "Make 200% return on investment!"
The friendly uncle says "You always want to stretch what you can afford because your income will go up"
The cow says "moo".

Therefore this blog is to provide the other half of the information. What are the risks, what does history tell us, what are the balance of probabilities going forward. That doesn't mean it's guaranteed right, but I think this blog as a whole has a reasonable track record actually. We are far better off financially by renting these past 4 years, and I suspect most first time buyers would be as well.

totoro victoria said...

Cash flow positive properties are hard to find in Victoria. Most likely if you are slightly positive it is because you are renting out two suites in a house. My cash flow positive house is in the Okanagan and the ROI is much higher than here.

Victoria is not an investors dream city. I agree prices are high. I also believe a drop in price will likely be preceded by a rise in interest rates. Not sure it would affect my monthly payment in the end or make the property more affordable for me.

I was just in Hamilton and rental houses near McMaster had much higher ROI than anything around UVic - but I'd have to want to go to Hamilton again.

Also, leverage does indeed cut both ways Leo. That is why a homeowner buying now had better be prepared to wait out a real estate cycle (seven years) if you are investing now. For me, this is worth it given the risk that interest rates may rise.

Leo S said...

Paralysis by over-analysis gets you stuck IMHO.

Agreed on that point.
I do the analysis mostly because I enjoy it. It's like any other hobby. I spent 6 months researching before spending $15k on a used car, so 4 years for a house is nothing :)

totoro victoria said...

I like analysis too but know first hand how it can slow things down.

Leo, your strategy is likely very good. Especially if you have cheap rent and are a saver. Particulary if you are packing money into a self-directed RRSP and can hold your own mortgage when prices drop and interest rates rise.

I'm just not in that boat. I'm using the low interest rates and high leverage and rental income to get me to my end goal. Just a different strategy.

totoro victoria said...

Also, I don't feel affronted by those who choose to wait.

I don't need to convince anyone to buy right now. It would not be a good decision for many.

It is good to have alternate viewpoints. Sometimes there it brings to light useful information.

Leo S said...

I'm using the low interest rates and high leverage and rental income to get me to my end goal. Just a different strategy.

Yup. Makes sense to me. Always good to have new commenters with different perspectives.

Mindset said...

in·tel·li·gence

a : the ability to learn or understand or to deal with new or trying situations

What we are seeing nationally and globally right now are extremely new and trying situations(and that is probably an understatement).

I'm with Leo on the fact that although some wish the RE market would climb forever and others wish it would collapse, this blog isn't about wishes (well, unless you believe in the Secret), it's trying to make some sense out of everything that is going on.

Information is power, and what you thought you knew 5 years ago about any markets probably doesn't matter much today.

We live in some pretty crazy financial times. Amazing times in many ways, but crazy financial times none the less.

This is an important time to be open-minded and to put some real effort into learning, understanding and dealing with the new unfolding realities. Especially if you are making decisions on any investment as large as Victoria RE.

VP said...

From LeoS 300 year index I thought I would show the lifetime pattern I mentioned. An average 50 to 60 years of gains, followed by a couple decades of losses. I also circled how the transition can have a five year oscillation like the last five years. Notice the smaller 1930 run up as stocks were the world bubble of choice then. From Amsterdams example, the decline legs look to be anywhere from 30 to 70 % in real terms.

dasmo said...

That's the problem with only using real dollars. That 300 year chart might equally actually prove my theory that house price spikes are followed by inflationary periods thus revisiting their previous affordability levels (I have not researched this). House prices are not included in real price indexes because usually house prices are what people want to analyse. In the end they are part of the equation so it makes sense they would fall in line but this doesn't necessarily mean nominal dollar crashes. It would be really useful to have 300 year nominal price chart overlaid on top a 300 year household income chart. Then you could see what really happened. Lord knows those canal houses have really bottomed out in Amsterdam

Just Jack said...

As Introvert has said, prices may not ever fall to 1993 levels. Heck, prices might never fall to 2003 price levels either. But what will happen is your home may take a very long time to sell. Real estate will become very illiquid.

Like the recent sale on Galiano Island for a home on 1.38 acres. Originally listed at $309,000. After 802 days on the market (2 years) the property sells for $4,000 more than it was purchased for in July 2005 at $265,000.

Of course, Victoria in not Galiano Island, but neither is Victoria a Vancouver either.

totoro victoria said...

Not sure that real estate will become illiquid. If you can't sell your home this likely means that you have priced too high for the current market... at least that is what I have seen in my lifetime.

I agree that real estate falls first in the recreational areas and this is definitely the case now.

Just Jack said...

No where in that did I say that you could not sell your home. It will just take you longer.

Leo S said...

In the under $550k SFH, last year on this date the median price/assessment was 100%. This year it is 96% after the couple percent drops in assessments this year. Expect more and probably steeper drops this year.

a simple man said...

Overheard two developers talking in OB coffee shop - both leaving Victoria because "there is no money to be made here."

Perhaps the condo developers are making a go of it, but it sounds as if the smaller companies are finding it tougher these days.

Phil said...

Perhaps the price of real estate in Victoria is supported by something other that the madness of the CMHC and emergency low rates, perhaps not. But in all of my five decades in this city I have never seen houses here costing 30% more than Hawaii...
for example

Trevor_tni said...
This comment has been removed by the author.
Trevor_tni said...
This comment has been removed by the author.
Introvert said...

But in all of my five decades in this city I have never seen houses here costing 30% more than Hawaii...

So what's your point?

And ... you've really been comparing Victoria with Hawaii for five decades?

MD80 said...

Wealthy folks own property here as evidenced by the recent listing of James Island for 75M. More arrive every year.

Have considered that the person selling James Island is "leaving"? With the exception of new lots/builds, there is still a seller and buyer for each transaction.

a simple man said...

But will a buyer be found? Like the place in Metchosin that has been on the market for 3+ yrs, starting at about $25M and now more than $10M less?

I am sure there are people who have bought recently will have no problem weathering whatever storm comes along - even if there is a 30-40% correction it will eventually come back up over a few decades and their losses will be only on paper over that time.

However, there are some here that are renting and are simply waiting to buy the biggest purchase of their lives' at a smart time, given our beliefs. I would much rather have to borrow much less for a shorter period of time to preserve my quality of life.

Both can be right.

VP said...

@Phil
“decades in this city I have never seen houses here costing 30% more than Hawaii…”

Wouldn’t the 389k Hawaii house list for over a million here? It is by a golf course, University of Hawaii, stainless/granite and has ocean views. It seems Victoria is about 200% over valued compared to Hawaii.

VP said...

at least we have nicer weather ;

patriotz said...

even if there is a 30-40% correction it will eventually come back up over a few decades and their losses will be only on paper over that time.

No, they are losing money out of pocket every month because they could have rented an equivalent property for less.

kunwak said...

Regulator dials down proposed mortgage rule changes

http://www.theglobeandmail.com/report-on-business/regulator-dials-down-proposed-mortgage-rule-changes/article4236287/

happy renter said...

The TC and Campbell Construction are sure insisting that things are going to be great!:

http://www.timescolonist.com/business/Multi+family+commercial+projects+drive+Greater+Victoria+building+boom/6737786/story.html

a simple man said...

"even if there is a 30-40% correction it will eventually come back up over a few decades and their losses will be only on paper over that time.

No, they are losing money out of pocket every month because they could have rented an equivalent property for less."

I was trying to be diplomatic, but you are right. This is given that the rent:purchase ratio is stable.

totoro victoria said...

If prices drop 20% and interest rates rise 2 points your payment are the same. I pay less than market rent because I have a suite in my home.

Market rent is not necessarily going to be less than a mortgage if prices drop 20%.

Introvert said...

No, they are losing money out of pocket every month because they could have rented an equivalent property for less.

No, renters are losing money out of pocket every month because they could have moved back home with their parents for less.

Leo S said...

the natural beauty of Victoria.

I know you're new here, but that argument is as old as time and has been discussed to death. Every city has some variant of "everyone wants to come here because X and Y".
It's clearly not true. Victoria has good qualities and bad qualities. Overall most people would agree that the weather is nicer than the average city in Canada, but that only goes so far.
Proclaiming that Victoria is the best in the world just shows how narrow your view is.

Wealthy folks own property here as evidenced by the recent listing of James Island for 75M.

Great. That has no effect on prices of the average dwelling.

Totoro Victoria that are pleased with their purchase and look forward to long term appreciation. Are they all wrong??

Why is it so hard to understand that there doesn't have to be one truth for everyone? They could be right, and renters could also be right. Everyone has a different circumstance, everyone is in a different place in life, and everyone has different priorities.

Leo S said...

@kunwak. The rule they took out was:
In one of the most significant changes from the proposals it originally issued in March, it has backed off a rule that would have forced banks to insist borrowers re-qualify when their mortgages come up for renewal.

Not surprising. That rule was obviously insane from the get go. I strongly suspect they put it in only to deflect attention from the rest of the changes, knowing full well they would retract it later and claim a compromise.

Leo S said...

If prices drop 20% and interest rates rise 2 points your payment are the same.

But your risk is reduced substantially. That's the important part.

I pay less than market rent because I have a suite in my home.

You have to compare apples to apples though. If you're renting out a basement suite you can't compare your remaining mortgage costs to renting a whole home. You don't have a home anymore, you just have a main level suite, so that's the rent you compare to.
Not saying you're not still ahead of renting with your mortgage, but the suite income doesn't come for free. You're sacrificing something over someone renting an equivalent house.

CS said...

@totoro

"The Internet has allowed more people in Canada and around the world to see the natural beauty of Victoria. They can read the TC online, check out the Webcams around the city and see the weather reports."

Yeah, so they all know we're have winter temperatures this June!

Mindset said...
This comment has been removed by the author.
Mindset said...

Trevor ini said - This blog has a lot of discussion about world events, real estate stats, interest rates, rent vs. buy etc. Sometimes too much information can lead to paralysis by analysis

We live in a system. It's all interconnected. Are you saying that interest rates, debt levels, gobal instability, rent/own ratios, market inventory and economic prosperity are not relevant to the forecasting of future RE prices?

Perhaps a good way to avoid all the bothersome thinking is to just go along with the majority opinion, which is that the RE party is over in BC and the ability to make money on RE is a thing of the past.

I think your point is the exact opposite of good advice there Trev. If the past few years haven't been a good time to apply some extra due diligence on major investments, I can't think of a time that has.

nan said...

"Victoria's natural beauty" can be had for the price of rent. This is one of the few things that you can unequivocally state has not affected the valu people place on actually living here. Victoria has always been expensive, but it hasn't gotten any more beautiful( infact in my opinion, Victoria is much uglier than it was 15 years ago)

patriotz said...

if prices drop 20% and interest rates rise 2 points your payment are the same.

For new buyers. For people who've already bought, like you, payments will go up when they have to renew their mortgages. Especially for people who bought recently with low down payments and long amortizations. That group might not include you, but remember that market prices are determined by those who are doing the buying and selling - or foreclosing.

AandJ said...

Home rentals — the new American Dream?

"We put our soul into that house," says Steve Jacobson, 37.

Then, home prices tanked more than 50%. Steve, a software quality assurance engineer, suffered pay cuts. In 2010, foreclosure claimed the home and their $100,000 down payment.

The Jacobsons didn't lose their desire to live in a single-family home, however. They now rent one, like many other former homeowners displaced by foreclosure.


http://www.usatoday.com/money/economy/housing/story/2012-06-05/are-home-rentals-the-new-american-dream/55402648/1

patriotz said...

Now, the couple rent a smaller home. Their next-door neighbors, whom Pierce doesn't know by name, can peer into her backyard from their second story.

Oh, the horror. But at least they don't have someone living in their basement.

a simple man said...

St Anne sold! I could not believe my eyes as I passed it this morning. Fourth owners in two years?

However, the last owners, who bought last dec for $760K just sold for $700K. Plus property transfer tax ($13,200) plus lawyers fees on both sides (~$3000), plus mortgage interest, taxes, ect. Conservative cost for 7 months of ownership = $60,000 (loss) + $13,200 + $3000 = $76,200. Divided over seven months that is close to $11,000 per month.

I think they could have rented for cheaper.

No longer is RE a sure thing in Victoria.

a simple man said...

oh, and realtor fees.

totoro victoria said...

"You have to compare apples to apples though."

Sorry, was not clear. I was comparing apples to apples. My accommodation costs are less expensive than a four bedroom two bathroom main and upper rental on the Oak Bay border that has a suite rented to someone else.

My net monthly costs are $1400/month or so (including maintenance, insurance and property taxes).

I do not believe I could rent the equivalent suite for less than $2000/month, assuming I could find one that had four bedrooms, two bathrooms, and accepted a dog.

For people who need less home and don't have a dog the availability might increase and come at a much lower cost. Oak Bay is a hard rental market for a family with pets.

totoro victoria said...

"For new buyers. For people who've already bought, like you, payments will go up when they have to renew their mortgages."

My mortgage is locked in for 10 years at below 4%. This is part of why buying might make more sense right now for some folks. IMO a five year term is too risky for us given the price of houses.

When I go to renew, my mortgage will be less than $400 000 if I don't make any extra payments as I plan to do. If I make the extra payments as planned, my mortgage will be $240,000.

I plan to sell this property in ten years and retire. Even if my home is worth what it is worth today - which is extremely unlikely, I should have $200,000 to$360,000 tax free.

If homes have an average of 2% per year appreciation (much below historical averages but maybe realistic given the run up over the past ten years) I will have an additional approx $150,000 tax free gain.

Given that my cost of accommodation is less than renting, this seems to make sense for us.

happy renter said...

Interesting piece in today's Globe:

Housing market jitters keep lid on Genworth's share price:

http://www.theglobeandmail.com/globe-investor/investment-ideas/housing-market-jitters-keep-lid-on-genworths-share-price/article4237452/

patriotz said...

This is part of why buying might make more sense right now for some folks.

If interest rates go up later - which means a fall in prices as you've noted - buying now makes no sense for anyone.

The numbers do not work regardless of down payment or amortization. Locking in for 10 years is not enough. If buying is cheaper than renting at time of purchase and you can lock in the rate for the full amortization - like in the US - yes that does work.

In particular the larger the down payment you have the greater payoff to you if you buy after interest rates have gone up.

Just Jack said...

Looking at demographics, if you are planning to sell in 10 years, which you have to or else get whopping big penalty on your mortgage, you will be selling in a far worse market.

Right now, half the population of Oak Bay is over 52.4 years and almost 28 per cent of population is over 65 years. (census Canada). That's a lot of Estate Sales coming your way in 10 years from now.

And while your generation may appreciate "character" style homes. The next generation of buyers is being raised with modern conveniences in modern homes. Buying a home that is 75 to over a hundred years old is not their nostalgia -its yours.

Certainly Oak Bay holds a premium, because of the preferences of today's buyers. But that premium will continue to diminish over time. Perhaps one of the many reasons why Oak Bay has held its premium over the decades has been that there have not been any attractive alternatives. That has changed, as their are many high quality new developments close to the downtown core with the features that the home owner of today and tomorrow demand.

The trend for Oak Bay may continue into the future as one where more and more of the homes are just considered lot value.

When buying a home for re-sale purposes (which you said you where) think of the person who will be buying your property in the next 10 years. That's easy, just go down to the high school. Those are your buyers in 10 years.

Renter said...

Introverted said:
"No, renters are losing money out of pocket every month because they could have moved back home with their parents for less."

Alas, no. Not without giving up my career and whole life. Given that they don't live in Victoria, but in a rural community in northern BC, I'd say I'd be paying a lot more than rent if I had to move back to the farm.

a simple man said...

OB lot value may take a bit of a hit with the new development protests taking place seemingly endlessly now.

Will make potential buyers think twice to have a mob of angry people with signs welcoming you to the neighbourhood.

It is a bit of a different world behind the tweed curtain.

a simple man said...

If prices drop 20% and interest rates rise 2 points your payment are the same. I pay less than market rent because I have a suite in my home..

But what if, after "the crash", I can then pay cash (current savings plus the saving accumulated from renting) and have to take on no mortgage?

totoro victoria said...

"But what if, after "the crash", I can then pay cash (current savings plus the saving accumulated from renting) and have to take on no mortgage?"

That would be pretty great. If you can pay cash when prices drop you should def wait because the low interest rates are not to your advantage. I couldn't pay cash even after a 20% drop so I'm in the leverage/interest rate/rental income strategy.

totoro victoria said...

My house is 1958, so in 10 years it will be 44 years old. Still have some life in it as it has been renovated. I'm pretty sure Oak Bay will still be a desirable area in 10 years when I plan to sell.

I don't want something that is 1912 - I don't appreciate the character enough to take on the work.

totoro victoria said...

Sorry - wrong age calculation - will be 64 - if only time was calculated like that :)

totoro victoria said...

patriotz - the only thing I am certain of is that I know the market today. The "ifs" re. housing price drop percentage and interest rate rise are ifs. Right now if I buy I calculate I will be $200 000 better off than renting if prices are the same as they are today with no appreciation. Even if they drop 20% from today's values that still means I'm $80,000better off.

There is only the deal of the day when you are ready to buy. Life is time limited.

Introvert said...

Looking at demographics, if you are planning to sell in 10 years, which you have to or else get whopping big penalty on your mortgage, you will be selling in a far worse market.

What the market will be like in 10 years cannot be determined, no matter how much census data and preference-predictions you throw in.

When buying a home for re-sale purposes (which you said you where) think of the person who will be buying your property in the next 10 years. That's easy, just go down to the high school.

Yes, there you'll find the principal and vice principals, who will be your buyers.

Just Jack said...

Just in case someone is thinking of buying a condominium here are some rough numbers you should consider in making your offer.

Of the 465 strata condominiums for sale just in the City of Victoria.

17 are bachelors - averaging 430 square feet and sell for around $463 per square foot.

140 are one-bedrooms- averaging 672 square feet and sell for about $391 per square foot

294 are two-bedrooms - averaging 1,054 square feet and sell around $301 per square foot.

14 are three-bedrooms - averaging 1,484 square feet and sell around $396 per square foot.

a simple man said...

Totoro - thanks for all of your insightful comments and your stance on the owning side - I do appreciate them.

patriotz said...

the only thing I am certain of is that I know the market today.

That's all I'm certain of myself. And in today's market I know that for me renting is a lot cheaper than buying.

But I don't have a dog.

You see, you're really not telling us about the market. You're telling us about how renting won't work for you because you have a dog. Now that's fine, but it doesn't relate to the buy/sell argument in itself.

happy renter said...

Thanks for the numbers, Just Jack. Seeing those makes me realize what a price difference there is between the "average" Victoria condo and the brand new ones downtown. A new 1 bedroom downtown fetches about $440/sqft, I think.

Introvert said...

Oh, the horror. But at least they don't have someone living in their basement.

The profit margin on my basement rental is huge. Not only that, but the effort-to-revenue ratio is unbeatable.

What is the average profit margin of a restaurant? Probably in the neighbourhood of 0-6%. And how much effort do you think restaurateurs put in?

Start with a well-maintained suite. Choose tenants very carefully. It isn't rocket science.

Just Jack said...

Well Introvert, your entire retirement plan is based solely on the believe that demographics have no impact on future demand.

That's just burying your head in the sand.

That even with the ultra low interest rates of today you still need a suite to make your payments just screams that you are way over your head in debt.

Face it, Introvert - you screwed up and for the next ten years your going to have to worry every time that suite goes vacant that you're just a payment away from being forever a renter while CMHC garnishes your wages for most of the rest of your life.

a simple man said...

Can anyone recommend a great, independent mechanic in town that services Japanese imports? Sorry to ask here, but my last "trusted" service place really let me down and finding a new one is really tricky.

Leo S said...

LeoS said: It's very rare that people here judge others for buying unless asked to do so.

JustJack:Face it, Introvert - you screwed up

Well shit, way to prove me wrong!

By the way, I also appreciate your contributions totoro. I think you might be quite optimistic on 2% average at 10 years, but more on this later.

patriotz said...

The profit margin on my basement rental is huge.

Well then tell us what the gross rents and expenses are as per your T776.

Or are we just supposed to take your word for it?

Just Jack said...

Here are the median prices for the first 5 months of each of the last five years for Oak Bay

2012 -$740,000
2011 -$753,400
2010 -$812,750
2009 -$659,500
2008 -$770,000

You may want to revise that 2% nominal growth rate in prices downward to say -2% a year.

Compare Oak Bay to the last five years in Langford/Colwood

2012-$471,250
2011-$480,000
2010-$525,000
2009-$471,475
2008-$487,675

No perceptible difference in how these two distinct markets are ebbing and flowing on a percentage basis. Both areas are back to pre 2008 pricing and are close to 10 percent off peak 2010 prices. Of course 10 percent off $812,000 is a lot more that 10 percent off $525,000.

That just means if you had rented in Oak Bay three years ago for $2,000 a month you would be further ahead of someone that had bought.

But anyone reading this blog three years ago would have known that then and would have been able to make an informed decision.

Leo S said...

Or are we just supposed to take your word for it?

What does it matter?

Just Jack said...

Oh yeah, spoke with the landlord today when he came by to drop off the cheque for the new fridge we bought last week. He's having a new deck put onto the back of the home and we'll have new hardwood floors put in the bedrooms this summer.

Gawd, how I hate renting for half the cost of what a mortgage would be on this home. Especially since I get to write off 20 percent of the rent for business. And not have to worry about how this write off would reduce any capital gains if I owned the property.

Anyway have to water the garden and walk the dogs.

Mindset said...

Oh yeah, spoke with the landlord today when he came by to drop off the cheque for the new fridge we bought last week. He's having a new deck put onto the back of the home and we'll have new hardwood floors put in the bedrooms this summer.

Not to point out the obvious, but pretty sure you don't have a standard rental there Jack....

I think that 1998 monthly rents and 1998 purchase prices have both gone the way of the dodo. Kudos to anyone in the current market in either position, but probably not very relevant to 2012 decisions.

Add in your benevolant landlord that likes upgrading flooring in a rental and reimbursing you for new appliances? You Just hit the Jackpot.

Watching and waiting said...

Simpleman:Glanford Auto -had my catalytic converter replaced there on my accord for half of what the stealership wanted. They will give you a loaner or drive/pick you up from work too.

Mindset said...
This comment has been removed by the author.
Mindset said...

Introvert said: What the market will be like in 10 years cannot be determined, no matter how much census data and preference-predictions you throw in.

Correct me if I'm wrong, but haven't you been throwing out long-term positive forecasts like electronics superstore flyers?

Apologies, maybe I am confusing you with Retrovert, the poster stuck in nostalgia over the last decade of house price trends like they are still relevant to today.

patriotz said...

What does it matter?

Doesn't really, it's just that any time someone claims to have something huge I feel like asking them to show it.

a simple man said...

Watching and waiting - thanks a lot.

a simple man said...

patriotz - never go to a frat party.

Trevor_tni said...
This comment has been removed by the author.
Introvert said...

Face it, Introvert - you screwed up ...

What happened to the mild-mannered Just Jack?

Well then tell us what the gross rents and expenses are as per your T776.

This might be a first on this blog: show us your tax returns!

... it's just that any time someone claims to have something huge I feel like asking them to show it.

I hope you're talking about money.

I seem to recall that you said there was no problem with paying your mortgage even if the suite was vacant. In effect the rental income was gravy.

Yes, one time my suite went vacant for three months while I waited for suitable tenants.

The $1,200 a month is gravy as I don't need it to be able to pay for life's expenses. But it's nice to have, and I miss it when it's gone.

Why not post a few numbers to show the naysayers that you made an astute purchase??

Some degree of reciprocity would be appreciated. For example, I know next to nothing of Just Jack's financial situation. Same with that of patriotz. And a few others who make pithy pronouncements yet rarely disclose anything personal that could be critiqued.

Just Jack said...

I apologize for sinking to that level, sometimes it's hard taking the high road.

To me, Introvert is a metaphor of the real estate industry. The only solution is to arm yourself with knowledge and not to fall prey to self serving taunts. Dust meaningless comments off or ignore them entirely.

Introvert - you make me want to be a better person and not to wallow in a pit of ignorance.

Now - how HUGE is it!

Leo S said...

BTW - One of the posters on HHV that is criticizing you could be the renter in your basement suite :>)

Ewww renters. I'm surprised you would even want something like that in your basement :)

As for posting numbers... As entertaining as it is to have a competition to see who is most financially well endowed ("I could pay my renter to stay and still afford the mortgage!"), it doesn't really impact any of the issues.
The market is not affected by people who can afford their mortgage and stay in their homes, only by those who can't (and I suspect they aren't too keen to talk about it on a forum).

patriotz said...

Same with that of patriotz.

All the numbers regarding my residence

And we're not asking to see your income tax return, just to tell us how you get that "huge" rental income.

Introvert said...

And we're not asking to see your income tax return, just to tell us how you get that "huge" rental income.

I never said my rental income was "huge" but rather my profit margin on the rental was "huge." That is, the costs of the suite are relatively low compared to the income that it earns.

I also said that "the effort-to-revenue ratio is unbeatable." Which it is. Or at least it feels that way to me.

JustWatching said...

I think there is a sockpuppet in our midst.

Just Jack said...

The Effort on Return is inversely related to the Return on Investment.

The return on your investment is most likely less than 2% before debt servicing which stands to reason as it is an easy way to make some spending cash. You could do the same by renting out your truck to help people move on the week ends. Of course that means you have a loss of use and enjoyment much as anyone who rents a part of their home to strangers does.

A renter can do the same as well, by renting out the spare room in their rental unit too but without the start up costs, repairs, replacements, mortgage payments and taxes.

dasmo said...

except your rental agreement prohibits you from renting out rooms or having anyone else live in your place without your landlords approval...

Just Jack said...

Seriously - what are you going to do about it?

Evict me? Or just roll over and play dead and take your rent each month.

Oh, its the principle of the thing and you want to teach me a lesson. Let's go to arbitration and see who wins, the rich landlord or the poor tenant that needs to make ends meet by getting a room mate.

Leo S said...

except your rental agreement prohibits you from renting out rooms or having anyone else live in your place without your landlords approval...

Most places will allow roommates (essentially the same thing as renting out part of your rental) and many allow subletting.

patriotz said...

I also said that "the effort-to-revenue ratio is unbeatable." Which it is.

Which it isn't. Much less effort holding a stock portfolio. And it never parties when I'm trying to sleep.

Or at least it feels that way to me.

Yes I think we're looking at a major perceptual disconnect here.

a simple man said...

My effort in sharing my house with strangers would be immense.

I would rather consult a couple of extra hours a week to not have people I don't really know living in my house.

Introvert said...

Much less effort holding a stock portfolio.

Probably true. (I would be terrible at picking stocks. What's more, I'm philosophically opposed to the stock market.)

And it never parties when I'm trying to sleep.

(Sigh.) I will repeat: I haven't yet had tenants who have disturbed the quiet enjoyment of my home, because I choose them very carefully. I'm certain other landlords have issues, but I don't seem to.

My effort in sharing my house with strangers would be immense. I would rather consult a couple of extra hours a week to not have people I don't really know living in my house.

Fair enough. Never said it works for everyone. All I know is, it seems to be working for me.

-----

Have a nice weekend, everyone.

a simple man said...

Introvert - isn't that what makes the world so terrific - the diversity?

A great weekend to you as well.

DP said...

Ouch! News story said
BC unemployment rate jumped from 6.2 to 7.4 in May.
AB & SK both fell from 4.9 to 4.5! Oh well, the NDP will start turning things around for BC. Unfortunatley we have to wait next year.

dasmo said...

I'll evict you. Roommates are fine but they need to be on the lease with me not you. subletting is ok with my written permission. A court will side with me because you broke your lease agreement, it's the law. process will take about 3 months to have the police haul you out of MY house and through all your belongings out on the street.

Have great sunny weekend all!

backinVictoria said...

I've seen several ads on craigslist for rental housing that includes a suite that can be rented out at the tenants discretion. Why would a landlord bother dealing with two suites and two sets of tenants, when they can just deal with one?

Landlords will argue that you'd be paying more rent for a property with a suite, and at the same time conveniently forget to acknowledge that they've paid more to have a house with a suite.

Leo S said...

3 months to have the police haul you out of MY house and through all your belongings out on the street.

Have great sunny weekend all!


I like the happy aggressive turn this blog has taken.

I will come to your house at midnight and set your dog on fire. Love you all, have a fantastic weekend!

The DP said...

One thing's for sure - if I had invested my equity back when I sold my place in Calgary last summer, I'd be down significantly.

TSX close on Aug. 22 (closing date of my sale) - 12,338
TSX close on May 6 (closest to my possession date) - 11,861

That's a drop of 3.9% (very similar using nominal or real $).

I'm glad I stayed mostly in cash until I bought my place in May. Now, I'm not saying that markets might not go up from here, but just wanted to counter the 'if you rent you can make all sorts of great return from your savings' perspective. Sure you can, or you can see your hard-earned cash erode. No guarantees.

On average, investors have not done well in stocks or stock based funds or ETFs recently. We talk a lot about the flat or declining RE market in Victoria since 2008; well, it's been pretty darn similar in the markets. I'm sure some of you can tell me how you made thousands in a day by shorting Facebook stocks or whatever, but on average, investors have not done well in the past 5 years. And just as easily, a patient buyer could show us the example of the successful flip, or the steal-of-a-foreclosure s/he made $100k on.

Buying real estate holds risks, just like other investments. Unlike most other investments, owning RE can be really fun and rewarding (and sometimes maddening).

Animal Spirit said...

2012 is shaping up very similar to 2008 - both here and Vancouver. Very high listings and low sales.

From June 2008 to March 2011, the three month rolling sales price in Victoria dropped 11% (before the market was goosed by low interest rates).

If economic supply/demand and elasticity theories apply, then we would be in for similar price drops over the next eight months. If the theories don't apply, then let's create a new one.

Animal Spirit said...

That should of read 'From June 2008 to March 2009, the three month rolling median sales price....'

Too late to be blogging.

patriotz said...

Now, I'm not saying that markets might not go up from here, but just wanted to counter the 'if you rent you can make all sorts of great return from your savings' perspective.

We're getting into strawman territory here. The numbers for buying versus renting are so bad that nobody need do more than to put their savings from renting into a TFSA at PC Financial to come out well ahead. Which is all I would recommend to someone not sophisticated in investing.

The pros and cons of stock market investing are an entirely different issue.

Leo S said...

And just as easily, a patient buyer could show us the example of the successful flip

Not really. Sure in a flat market there is still money to be made by purchasing real estate if you're smart, but it's not easy. In a declining market even if you're smart you're likely to lose money on that foreclosure or reno.

The financial markets have actual mechanisms to benefit from declining markets which the real estate market doesn't. I'm not sophisticated enough to take advantage of those, but they do exist and you can be sure people are making piles of money even during the lacklustre performance in the markets.

dasmo said...

"I will come to your house at midnight and set your dog on fire. Love you all, have a fantastic weekend!"
Gave me a good laugh :-)

totoro victoria said...

Making money is important to me. This is not because it is an end goal, it is a means to an end. For me the end is doing more of what I love while my health and family are with me to enjoy it.

When I look at the the investment market I see opportunity. I also see risk. What I look for is the highest opportunity with the lowest risk that I can find. I am not pefect - it is a learning curve.

What I have learned is that I don't understand the financial markets well and don't like to rely on the advice of others who are making a commission from me. I do understand the real estate market. I know the variables and can control for risk. I view it as an opportunity that is up to me to use well or not.

Here are some real figures from my home in the okanagan:

Purchase price in 2009: $380 000
Amount down: 5% or $19,000
Property transfer tax: forget lets say $7000
Legal: $800
Legal suite with insepcted renovations: $30,000

My total investment is approximately $57,000

My current monthly costs are $2000/month all in (mortgage/property taxes/insurace/maintenance).

My annual rental income last year was net $4000 and I retained a suite to stay in when we visited - which we do regularly for both work and family events. I could have made an additional $9000 net of all costs if I did not retain the suite.

So, bottom line, the home brings $4000/year on a $57,000 investment with market rent equivalent value of $9000 in accommodation I would otherwise have paid for and part of which became a business deduction. The home has a current market appraisal of $420,000.

I will post figures from the new place we are purchasing in Victoria when I know them accurately - which won't be for a while.

Not everything works out well in real estate but there are still ways to make money if you know the market and know what works for you.

As far as renting goes, someone stated that because I have a dog I am outside of the comparison group. Maybe here, but I am a pretty standard family unit with a pet in my kids' cohort. Renting is generally harder with kids and a dog - and more expensive.

Just Jack said...

The average tenancy is two years. The initial lease is most often one year and then reverts to a month to month lease.

So, in not all cases did the tenant break the original lease as it has expired.

RealR said...

I don't understand the financial markets well and don't like to rely on the advice of others who are making a commission from me. I do understand the real estate market.

One will never understand real estate markets without understanding financial markets.

patriotz said...

totoro - the rents you're giving indicate high end but the prices indicate a shack from all I can see in the OK market.

Also I find it hard to believe an appraisal for a higher price (inclusive of suite costs) than in 2009. Again all information I've seen indicates lower prices across the board.

The OK is the most distressed RE market in all of Canada.

Mindset said...

I will post figures from the new place we are purchasing in Victoria when I know them accurately - which won't be for a while.


You have been providing great information Totoro Vic and are abviously making informed choices. Keep up the great posts.

Mindset said...

RealR said: One will never understand real estate markets without understanding financial markets.

Thoughts on the financial markets and how they relate to RE for the people on the blog RealR? Interesting times out there in the financial markets.

DP said...

Best BNN interview I've seen on our housing market (from yesterday, ~7min)

totoro victoria said...

Patriotz - the rents are high end because they are high end in the summer. My property is right near the beach and rented by the week in the summer for about 10 weeks at a very high rate. Winter rentals are low rate. Not making it up - the numbers are real, as are the costs. The house across from mine is waterfront and worth 2 million. I own a nice smallish suited home in good condition on a small lot that is worth 1/4 of the price.

totoro victoria said...

Also, Patriotz, don't forget I put money into putting the legal suite in. I got the market appraisal because I wanted to convert from primary residence to rental and lock in the capital gains. It was def higher than purchase price and was done last summer.

totoro victoria said...

I don't understand the financial markets but do believe I understand the real estate market. I spent a lot of time figuring it out for me. I don't believe that anyone can accurately predict exactly what will happen next. You can only make your best informed guess, keeping in mind controls for the risks to the extent possible.

I have experience with the financial markets and have studied them, and I still don't feel comfortable. I might put more effort into that later when I have accomplished my real estate goals.

I am surprised that people would think you have to be an expert on the financial markets to know a lot about real estate. I don't think you do.

A lot of it comes from life experience, research and and hands-on buying/selling. Knowing all the variables really well and then thinking outside the box is a comfortable place for me.

totoro victoria said...

I don't understand the financial markets but do believe I understand the real estate market. I spent a lot of time figuring it out for me. I don't believe that anyone can accurately predict exactly what will happen next. You can only make your best informed guess, keeping in mind controls for the risks to the extent possible.

I have experience with the financial markets and have studied them, and I still don't feel comfortable. I might put more effort into that later when I have accomplished my real estate goals.

I am surprised that people would think you have to be an expert on the financial markets to know a lot about real estate. I don't think you do.

A lot of it comes from life experience, research and and hands-on buying/selling. Knowing all the variables really well and then thinking outside the box is a comfortable place for me.

Mindset said...

Great video BP. Some stats and info I haven't heard before.

Thanks for sharing.

DP said...

I noticed from the comments some are of the belief that adjusted prices can rise 2-4% annually to infinity. Here's an interesting graph to reconsider.

“…a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (13.7% loss).”

That's -0.5% annually for the last 30 years. This from the largest, most productive, highest gdp /capita country in the world.

DP said...

Welcome

totoro victoria said...

Yes, the US subprime mortgage crisis. Not sure that Canada will be similarly impacted. It seems quite probable that the US markets will go back on the upswing as the economy improves given historical performance.

In any event, you have to live somewhere. If I am paying $2000/month for rental home and much less than that for a home I own and I have a ten year mortgage, I am okay with the risk. My mortgage payments are not just expense, they are partly principal payments.

If you had bought a home in the states in 1979 for $170,000 it would be worth more than that today and would be paid off. If it had a suite you would be earning money each month and that income could have been invested into something else for thirty years each and every month.

Assuming you would have paid a similar amount for an equivalent rental, you would be at zero savings for the same money spent. I'd rather be $170,000 or more better off plus the investment of the suite income even if prices are the same in 10 years a they are now.

If you have no suite and if your rent was a lot less than owning that it might have been better to invest, assuming the investments did not tank or that you did not have to sell when they were down.

Mrs. W. said...

Anyone know what the recent sales on Dallas have gone for?

Cheers,
Just Janice

patriotz said...

If you had bought a home in the states in 1979 for $170,000 it would be worth more than that today and would be paid off.

House prices in the US were lower in 1979, adjusted for inflation, than they are now. Yes lower than now, never mind 6 years ago.

You are touching on another strawman which is the implication that those who are bears today are opposed to buying at any price. We're just opposed to buying at excessive prices.

Praising the merits of buying at yesterday's prices is at best useless (we don't have a time machine) and at worse an attempt to distract from the real issue - today's prices. If you stick to the merits of buying today your input will be respected.

Also, the US subprime mortage crisis was the result of falling prices, not its cause. The reason you hear so many claims that it was the other way is that the US RE industry wants people to believe that the crash was caused by something other than prices which in themselves made no sense.

And the Canadian RE industry wants people to think that the different mortgage financing regime will avert a US-style bust, and it seems you have accepted this view. It hasn't in the past, and it hasn't today in areas which are currently experiencing a bust. Such as the Okanagan, up Island, or Whistler.

The DP said...

We're getting into strawman territory here. The numbers for buying versus renting are so bad that nobody need do more than to put their savings from renting into a TFSA at PC Financial to come out well ahead. Which is all I would recommend to someone not sophisticated in investing.

The straw man for me is the idea that rent vs buy is overwhelmingly tilted towards rent. I was renting a room in a shared house for $665/ mth. Current mortgage payments (22 yr amort.) for my 1500 ft^2 house are $1170 per month. Of course, taxes, insurance and upkeep are on top of that, but I also get to keep the principal. House rentals, when you can find them, are often on par with these costs (about $1750/mo total).

How are my payments so low? Because my wife and I put 50% down. We're not loaded, we just have equity from a previous house (in which I rented out rooms for 4 years, boarding house-student style, happily leveraging the investment into a rapid repayment schedule - similar to Totoro). As I mentioned, that cash had to come from somewhere, and in our case (as in many people's cases in similar situations), the money was sitting in a number of investments. These investments have mostly been losing money for the past year.

So in my case, paying $1750/mo on rent for a house vs $1750 on payments only would make sense if prices were clearly declining rapidly. That is not obvious to me at this time (though I agree that it looks like prices have dropped 5-10% since 2010).

Having just gotten married, and looking to move yet again (from separate shared housing into a place together), there were many intangibles suggesting that it was the right time to buy rather than sit on cash making 2%/year and lock into another rental lease that may or may not work out.

patriotz said...

How are my payments so low? Because my wife and I put 50% down.

Well if I wanted to I could buy with 100% down (seriously). I wouldn't have any mortgage payments at all.

Ever hear of opportunity cost?

Please think your arguments over a bit better.

totoro victoria said...

patriotz - I'm not sure that my perspective is useful for you as you have your own but I think I have demonstrated my position using today's figures as I have purchased today and put my figures out there.

I have actually purchased in Victoria again too and will put those figures out there as well.

My best guess and risk assessment based on my knowledge shows that buying now works for me and my family, and that I will be significantly better off in ten years by doing so.

My purpose is not to convince you or anyone else, just to provide one person's real life experience. I appreciate information before making a decision and it is good to have multiple perspectives.

totoro victoria said...

Also, house prices are only ONE part of the equation.

Rent vs. buy is the other.

When you buy you have to add your tax/insurance/maintenance costs to the monthly mortgage. You have to deduct principal repayment from this. You then have to deduct rent income if you have any. After this, compare this cost with what it would have cost to rent.

If you stay invested for, as in my case, 10 years, the chances of the market value in ten years being lower than 10 years ago are very very low - even without adjusting for inflation.

This is the fallacy: your primary residence is not like any other financial investment because accommodation is part of the cost of living. RRSP's don't come with a place to lie your head that you would otherwise have to rent. This must be factored into the ROI for a primary investment IMHO.

Leo S said...

that buying now works for me and my family, and that I will be significantly better off in ten years by doing so.

It all depends on rates. If they stay low I think you'll do alright. It might decline a bit more, but nominal values won't go anywhere quick.

If rates rise to normal levels (what is normal?), then all bets are off. It's entirely unlike any kind of experience we have data for in Victoria. A real crash will take much longer to recover from. We're 6 years into the US crash and are just starting to perhaps approach a bottom. In 2016 nominal prices will still be far below the peak.

totoro victoria said...

I have a ten year mortgage. The rate at coast capital just fell to 3.95 for ten years.

If we look ahead to 2022, I expect my house to be worth more than it is today. Not everyone may agree.

Just Jack said...

Buying anything under 6 suites, doesn't make any sense today, if you just look at the income.

However, for some people they are looking for a "safe" place to park their money. Much like the mainland Chinese were doing, until recently, in Vancouver.

Because so many people have been doing this flight to secure their wealth, it makes real estate appear to be safe and secure against other types of investments.

Is that sustainable?
Of course not.
What it does is make any correction bigger.


One of the things that I am noticing in the outlying neighborhoods is while rent prices have not changed significantly with the drop in prices, the vacancy rate has shot up dramatically. With some home owners taking 3 months to find a tenant.

This is what happened in the 1980's. Even when interest rates were falling home prices continued to drop. So why so many foreclosures back then? Because the owner could no longer find tenants, and reducing the rent was not an option as they personally could not come up with the shortfall in the mortgage.

And that's your risk, having personally to bank roll an empty building for months and months until you call it quits.

But you'll have plenty of warning. The first will be a sharp increase in the unemployment rate.

There is a time to buy rental properties and there is a time to sell.

It's time to sell, bank the cash and wait for the next cycle to begin.

Leo S said...

I have a ten year mortgage. The rate at coast capital just fell to 3.95 for ten years.

I'm talking about affordability and the affect on house prices, not your mortgage payment. Rates at 7.5% (the average in the last 20 years) would cause affordability to deteriorate drastically and with it house prices.
I don't think it will happen, but it is a much bigger risk now than it was in other times of poor affordability.

totoro victoria said...

Leo.. if rates rise to 7.5% and prices fall 20% my monthly mortgage payment for the same home (legal duplex) I just bought would be $3,100/month.

My mortgage for the new home at the lower rate and 20% higher price is now just under $2700/month.

For me, it is likely more affordable (monthly cost) to buy high at a low rate than wait for a crash and pay less for the home. There is always risk but a long-term low rate mortgage helps with this.

Why is it better for me? Because I need financing for 80% of the purchase price. This is a common scenario.

totoro victoria said...

Leo.. if rates rise to 7.5% and prices fall 20% my monthly mortgage payment for the same home (legal duplex) I just bought would be $3,100/month.

My mortgage for the new home at the lower rate and 20% higher price is now just under $2700/month.

For me, it is likely more affordable (monthly cost) to buy high at a low rate than wait for a crash and pay less for the home. There is always risk but a long-term low rate mortgage helps with this.

Why is it better for me? Because I need financing for 80% of the purchase price. This is a common scenario.

Leo S said...

Leo.. if rates rise to 7.5% and prices fall 20% my monthly mortgage payment for the same home (legal duplex) I just bought would be $3,100/month.

You're misunderstanding. I'm not talking about your mortgage payment or whether it's better for you to buy now or wait. I'm sure you're doing what's right for you.

I'm thinking of the other buyers. Rates rise to 7.5% and another enterprising real estate investor is looking to buy a similar duplex. He can afford the same as you can.
As you say, even after a 20% drop in prices the payments would still be $400/month more than now, so he won't be buying that place and prices continue to drop.
How far would the price of that place have to drop to keep affordability the same at 7.5% vs 4% interest rate? 31%

That's the danger of the low rate environment. It doesn't really have to move that much to trigger a collapse.

totoro victoria said...

Yes, I think that is correct Leo. Not sure how far prices will fall -or when.

The price drop has been predicted for at least the past five years. Hard thing to time.

Leo S said...

The price drop has been predicted for at least the past five years.

It was before my time, but it's been far longer than that.. People have been crying wolf for a decade.

Impossible to predict. However it is nice to at least find plausible explanations for the market's behaviour in retrospect. I've found that explanation in the affordability story, so currently I feel I have some reasonably good estimate of what might happen in various scenarios.

Once we need more space, I will redo the rent/buy calculations under those various scenarios and see what we're comfortable with and if it makes sense to buy or rent a house.

Mindset said...

The price drop has been predicted for at least the past five years. Hard thing to time.

What was hard to time were the government interventions (which were regrettable IMO, there was a chance for a softer landing a few years ago). Let’s look at two of the key interventions over the past decade that resulted in our high housing prices and then look at just the coming year.

Interest Rates:

1995-2012: Trend of continual decrease in interest rates, either BOC rates, or the lending rates/terms of banks. (e.g. the new 10 year lock in at 3.75% that Totoro mentioned).

2012-2013: Rates may stay flat at best, but are likely to go up (either through reverse in direction by BOC or risks/impacts to banking profitability driving spreads in their lending rates. Keep in mind, even flat rates is a significant trend change here).

Lending Rules and Mortgage Availability:

2007-2012: Incredible unseen year-over-year increases in CMHC insurance of mortgages. CMHC has been buying pooled mortgages and reselling them to investors as bonds, reducing down payments, extending amortizations, loosening HELOC rules, etc.). In the last 4 years alone, CMHC insured more mortgages than their entire previous 62 years of existence, and were critical in driving RE volumes into the stratosphere Check out this CMHC GDP Graph.

2012-2013: CMHC is inches from its 600 billion lending cap, has tightened lending rules twice, is restricting HELOC's, and has implemented new OSFI oversight. Genworth has some room, but is not likely to play it loose with their shareholder money like our government has with taxpayer money, so I would not expect any high risk lending there to change the trend.

To keep this balanced, perhaps the bulls out there can throw some positive next year trends on the table that would result in stable or increasing RE prices in just the coming year?

totoro victoria said...

I'm not a "bull" in that I believe real estate will drop in value, but I'm not sure that the drop will happen in the next year.

Low interest rates are a powerful incentive to keep buyers interested - or perhaps the threat of the loss of the current low rates is.

I would expect that if low interest rates continue there will not be a significant drop in prices, nor a significant gain, in the coming year.

Given the run up in prices, it is not consistent with historical trends that this would continue indefinitely.

I expect rising interest rates would be the trigger for the price drop - which correlates with monthly payment limitations, but I suppose a major earthquake or really significant rise in unemployment locally might have this impact too.

patriotz said...

"This is the fallacy: your primary residence is not like any other financial investment because accommodation is part of the cost of living... This must be factored into the ROI for a primary investment IMHO."

The whole point of buy/rent comparisons which you will see from me or other posters is to compare the rental value of the owner-occupied home with the cost of ownership. Or similarly to compare the return based on that rental value to other investments.

The real fallacy is thinking that owner-occupied housing is always a superior investment irrespective of the numbers because you can live in it as opposed to an RRSP or whatever. That's sheer nonsense.

«Oldest ‹Older   1 – 200 of 241   Newer› Newest»