Wednesday, June 27, 2012

Average home prices to fall 10%-15% ish

TD Economics thinks that the Canadian average home price is 10%-15% overvalued and will drop that amount over the next two years. (H/T Just Watching for the link)

Of course, that's the national average, so locations not so over-valued can expect to not fall as much as the cities that are over-valued. Vancouver and Toronto, being the two biggest and most heated markets are expected to lead the way when it comes to price declines.

Victoria, given it's flat values for the past few years, can expect to see pain, but likely not as much as it's big city cousin to the east. For the purposes of this exercise, let's say it falls the maximum predicted average 15%.

Last year's annual average SFH price was $613K and three more digits of ish.

If TD is right, and Victoria falls the 15% the predict could be the national average, that means that in 2014, that $613K and some ish place would be worth $521K ish...

Thanks to Roger's excellent handy dandy buy now or wait tool, we can see what this looks like for some folks who might fit the average buyer profile today:


$116K creates enough ish to make the buy now vs wait decision a bit wait heavy no? 

131 comments:

a simple man said...

if the Canadian average is 15% overvalued, then Victoria is 25%.

koozdra said...

Take prices before the bubble and calculate what they should be according to inflation. If a 600k house was bought for 300k 10 years ago, adjusted for inflation the house should cost 365k. A 40% drop. When prices should return to these levels is the big question.

Leo S said...

That pretty much lines up with the affordability projections. I had $531k in 2014.

a simple man said...

I guess offer on that house now and take 20% off the asking price, utilize the cheap financing now and you will come out with no losses in the short term (3-5 yrs).

Good luck.

Just Jack said...

Your projections are quite reasonable assuming that supply and demand remain consistent with the run up in prices.

What you have projected is the best case scenario. Most everyone would be ecstatic if we could limit a correction to gentle flop in prices over the next two years.

Your analysis is for the general market. Of course condominiums will be worse off than detached houses. As would the outlying areas in relation to the core. But on average for all types of properties in all areas a 10 to 15% reduction would almost go unnoticed by most home owners. Those house owners in Oak Bay would probably still be calling the market flat.

Yet it will be enough to put a brake on new construction in the Westshore. No sense in building a house if by the time you finish it, prices are below your costs.

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

Interestingly, an acquaintance was contemplating buying a condominium a month ago and I suggested that he wait until the new changes are announced.

Today he thanked me and said that he wouldn't buy until I gave him the "green light". He is very happy that he waited and did not buy a pre-construction downtown condo.

This is going to be a major hurt for pre-construction condominiums that want a 15% deposit. And if I only had 5% in the game, I would likely walk unless the developer dropped the price. Better to loose 5% than 15%.

Sure, there is a chance the developer might sue me. But I'd bet the developer will be bankrupt and the complex never built before I go to court.

totoro victoria said...

Well, finally figured out how to use the rent vs. buy calculator. Thanks!

Roger, when you compare end of term do you project out to the same year for each scenario? Ie. if I wait two years and then have a ten year term this would take me to 2014. Do you compare having bought in 2012 with the outcome in 2014 in both cases?

Finally, if you have rental income I think it must be used to reduce cost of ownership when comparing monthly expenses. I don't automatically apply rent to mortgage as I've set out before.

When comparing end game position the rental income could be applied to the mortgage as it could otherwise have been invested - but not when comparing monthly costs.

patriotz said...

Finally, if you have rental income I think it must be used to reduce cost of ownership when comparing monthly expenses.

Rental value is part of the economic return of the property and is the same whether you rent out all of it, part of it, or none of it, and Roger's calculator accounts for this.

totoro victoria said...

patriotz - no complaints about accounting for this as mortgage paydown as long as we are comparing the same years; ie. invest now and picture in 2022 and invest in 2014 and picture in 2022 - not 2024. But maybe I have it wrong?

I think there should be the option to not pay down the mortgage and instead reduce monthly expenses as this is how many folks will proceed. Not sure what the impact overall on the scenarios is as this option is not available.

totoro victoria said...

Also, don't think the economic return is the same because the additional paydown reduces interest - in effect an investment over just spending it.

Leo S said...

What you have projected is the best case scenario.

Agreed. That projection is assuming that interest rates don't go up, unemployment doesn't go up, there are no shocks from a hard landing in China or Europe, and there are no more restrictions in credit availability.

It also assumes that interest rates won't go down much from where they are. If any big shocks happen they would likely go down again, but we are so close to the bottom it won't make a huge difference.

patriotz said...

the additional paydown reduces interest - in effect an investment over just spending it.

Correct a mortgage paydown is an investment the return on which reduces your interest payment. But since the return is not being paid in cash it's also an opportunity cost (as is the return on the down payment). So it doesn't reduce your expenses.

The easiest way to see this is to consider the mortgage to be interest only and all the principal payments to go into a savings account with the same interest rate. Your interest expense is not being reduced, rather the interest on the principal account is being applied against it.

totoro victoria said...

Unless you do not use your rental income (not required principal payments) to pay down your mortgage and instead use your rental income to do other things.

Rent is money in your pocket. What you choose to do with it is up to you. How you compare monthly costs should be a choice I think as not everyone applies rent to the mortgage.

Rent is not an opportunity cost when it is paid into your pocket and subsidizes monthly expenses.

Leo S said...

How you compare monthly costs should be a choice I think as not everyone applies rent to the mortgage.

I don't think it makes a difference. The same could be said of any income you have above what is needed to pay the mortgage. You could use it to pay down the principal faster, or put it in some other investment.

Animal Spirit said...

ok, what bank is going to be doing a 10% cash back for other major purchases? And wanted to know what other purchases I would be interested in? Harris-Decima telephone poll today.

Roger said...

totoro victoria,

Answers to your questions:

Roger, when you compare end of term do you project out to the same year for each scenario? Ie. if I wait two years and then have a ten year term this would take me to 2014. Do you compare having bought in 2012 with the outcome in 2014 in both cases?

Looks like you have a few typos in your dates.

The methodology used is described in the introductory text (second sheet). In a nutshell all three buying scenarios have the same end date (last sheet). Assuming a 5 year term the outstanding balance for all 3 is computed in 2017. If you select a 10 year term then the amount still owing on each property is calculated for 2022. The difference in balances shows which scenario was better financially.

tv said: I think there should be the option to not pay down the mortgage and instead reduce monthly expenses as this is how many folks will proceed.

This could be done and I encourage you to modify the spreadsheet as you feel appropriate for your purposes. If you do please remove the title page and any my explanatory notes (sheets 1 and 2).

totoro victoria said...

Yes, were some typos for the ten year period in the earlier post - not sure how to correct without deleting so I left it. Put the right numbers in the following post.

The numbers I am getting when I input do not match the online mortgage calculator numbers, but perhaps I am not using something correctly or failing to account for something like interest on the down payment vs. ownership costs?

For example my figures using a 10 year term with 30 year amort:

2012 Purchase price: 710 000
Down payment: 150 000
Mortgage @ 3.79: 560 000
Additional Rent: 24,000 per year to mortgage for ten years
2022 owe: $141,744

2013 Purchase price: 660 000
Down payment: 150 000
Mortgage @ 4.5: 510 000
Additional Rent: 24,000 per year to mortgage for nine years
2022 owe: $190,981

2014 Purchase price: 630 000
Down payment: 150 000
Mortgage @ 5: 480 000
Additional rent: 24,000 to mortgage per year for eight years
2022 owe: $171, 265


Using the same figures the spreadsheet numbers are:

2012 purchase - $164,298 in 2022
2013 purchase - $144,042 in 2022
2014 purchase - $151,348 in 2022

a simple man said...

Court ordered sale on Caddy Bay Rd in Oak Bay.

I have long held that there are a lot of people here just barely holding on.

Just Jack said...

The hounds should pounce on the Caddy Bay home. The asking price is $13,000 under the purchase price in March 2007 and it has a suite too.

Back in 2007, the updates in the home were fresh, so that purchase price would have been premium at that time.

The home in truth, has been listed for sale for 210 days (not the 1 day the agent shows) beginning at $659,000 with several price reductions.

totoro victoria said...

Court ordered sales can happen for many reasons. One of the biggest ones is divorce. A judge may order sale of the family home as part of the division of assets. This does not mean the property is in foreclosure, although this property may be.

To presume that court ordered sales in Victoria are caused by general economic conditions is misleading and not borne out by general market trends at the moment.

Just Jack said...

There are some 38 advertised foreclosures for sale today. They are split pretty evenly between condominiums and detached homes.

Because detached homes outside of an 8 mile radius of downtown Victoria have had slow sales and high listings, there seems to be more advertised foreclosures in the Western Communities. It is unusual to see an advertised foreclosure in the core districts and rare to find one in Oak Bay.

Not that Oak Bay has less home owners in financial trouble than the Western Communities, its just that most home owners are able to sell their home in Oak Bay before the properties falls into foreclosure proceedings.

That we should have an Oak Bay home that has been actively listed through out the busiest season of the year and remains unsold is foretelling of a change in the marketplace.

But here is a question I will throw out to the would be buyers. In a court ordered sale there are no warranties or representations whatsoever from the vendor. Appliances, window coverings or other moveable property would not be included in the sale (the seller has the right to take these with them). Offers can not have any "subject to" clauses and you accept the condition of the property as at the day you buy the home - not what you may seen a month before. The owner could damage the home in that time space and you still have to complete the sale or find yourself in contempt of court.

Knowing all this, and that the property likely has a fair market value of $525,000 under normal market conditions. What would you bid on this property?

totoro victoria said...

Just Jack - is this a foreclosure? It is advertised as "court ordered" and not "foreclosure".

Court ordered sales can happen for a number of reasons, but primarily divorce.

Many properties have been actively marketed in Oak Bay over the past six months and have sold - many very quickly.

That this one was not sold may say more about the property - which is on a very busy road - than the market in Oak Bay.

Just Jack said...

Extremely rare for a judge to order that the home be sold for a divorce, because it isn't necessary to do this at all. A judge just orders that one side has to be paid out for their equity in the home. If one side refuses, then they are in contempt of a court order. And you can be jailed for being in contempt.

Most properties that go into foreclosure are because the owner is no longer making mortgage payments. There are some cases where the mortgager will start foreclosure proceeding even though the payments are being made. That happens when the mortgager is not going to renew at the end of the term. The owner of the home has to pay off the mortgager in full. If for some reason they can't get another bank to finance them, then they go into foreclosure proceedings even though they never missed a payment.

Say you haven't paid your property taxes in two or three years. At renewal time, the bank can say they want those back taxes paid off as a condition to renew. You don't pay them off then foreclosure proceedings begin until you pay off the mortgage to the lender.

Foreclosures, personal bankruptcies, divorces, etc. happen even in the best of times, however the incidence of them increases with worsening general economic conditions. An increase in advertised court ordered sales are a direct result of a weakening real estate market. In the 1980's the foreclosure segment grew to a point, that foreclosures set market values in recession hit areas or by type of property such as condos.

Just Jack said...

We live in BC which has court ordered sales not foreclosures. However, most people are familiar with the word foreclosure which is slightly different.

Luckily in BC, you have protection from the court. In jurisdictions that do not have court ordered sales, it is possible for a shady banker to undersell a home to his nephew because the transaction doesn't go before an impartial body.

Just Jack said...

A combination of a busy road and a high asking price. Which may have stemmed from overpaying for the home way back in 2007. While general market values have increased during this time, by overpaying at the onset the owners never benefited from the market increase.

totoro victoria said...

I agree that if the rate of court ordered sales increases a lot this is significant - as has happened in Kelowna.

Pretty sure that that Oak Bay and border areas (Fairfield, Jubilee, Lansdowne slope) are not demonstrating this trend right now.

I agree that combination of initial overpaying, busy road and general condition of home are likely the Cadboro Bay Road home issues, and the low price may generate multiple offers for a quick sale.

totoro victoria said...

As far as court orders for the sale of the family home, they are not rare in the cases that make it to court.

As both parties would have a legal and beneficial interest in the home, it is a joint asset - and often the only major asset.

If there is no agreement on division of the asset or offer of one party to pay out the other, the judge will likely order the asset sold and the proceeds divided.

The cases that make it to court are usually pretty high conflict anyway and any number of orders may be made to settle the matters.

Just Jack said...

There are many different stages of a court ordered sale. At the beginning you can hire your own real estate agent and sell the property, pay off the mortgager and pocket the difference.

The problem begins when your "short" on the sale and there isn't enough money to pay off the mortgage and additional bank charges that have accrued. And those additional bank charges are NOT going to be small. I've seen legal fees charged by a lawyer added to the mortgage as high as $600 per hour. Then, you realize that the equity in your home can be eaten up by the bank and its representatives.

Equity is a funny thing, you have to pay to use it from the bank, while the bank, in certain circumstances, can just take it.

If equity where a spouse, you would be the one paying for dinner, while the waiter got to sleep with them. At least you got a nice dinner out of it.

Just Jack said...

People who are late or miss mortgage payments know no borders. I would guess that statistically the incidents of this happening to someone is no different in Fairfield as in Langford. It's just that in Fairfield or Oak Bay the market hasn't softened like the outlying areas. So it is very unlikely that the bank will get a "conduct of sale".

A conduct of sale is when the bank actually gets title to the property. Your name is taken off the Deed. And the bank sells it.

Just Jack said...

That scenario of divorces advertised as court sales is not likely. Any notation would be specific in saying divorce forces a sale. And the agents are unlikely to do this, as it may affect the price that the property sells for. Most often the agents just pull you off to the side and say that the couple is going through a divorce - nothing in writing. The listing agent during a divorce is employed by the home owner and would not risk loosing the contract by divulging information that may be detrimental to the eventual sale of the property and the client.

When the property is advertised as court ordered or foreclosure they mean the banks want their money. At that point the agent is usually bank appointed.

totoro victoria said...

I think the relevant point is what the year over year stats on court ordered sales are in Victoria and specific sub areas. I dont have this info.

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

totoro victoria,

The reason that you see different results in my spreadsheet compared to the online calculators is that I account for property transfer taxes, CMHC insurance and legal fees and they don't. The online calculators assume all of your down payment goes toward the purchase price and the difference is your initial mortgage balance. This is too simplistic.

Lets say a buyer has 100K cash to put towards buying a 500K house. This is usually referred to as the "downpayment". The online calculator will consider the mortgage to be 400K and calculate monthly payments based on this amount. I have seen some online calculators that factor in CMHC insurance but none that take legal fees and PTT into consideration.

The purchase price of the home is 500K so one might think they are putting 20% down and do not have to pay CMHC insurance. This is incorrect. The BC government wants 8K PTT if they are not first time buyers. The lawyer wants 1K. So whats left to put towards the purchase price is 91K. Therefore the loan is 500K-91K = 409K. The loan to value (LTV) is 409/500 = .82 and CMHC insurance at this ratio is 1.75% or 409*.0175= 7,158. You are allowed to finance the insurance (another sweet deal for the bank). So the final mortgage balance is 416,158.

I have wondered how many people have paid CMHC insurance when they thought they were putting 20% down on the deal. Others have probably been pushed into the next tier of the the insurance and never noticed it in the lawyers statement of adjustments.

Totoro - you might say you always consider that PTT and legal fees are not part of your calculations. But the vast majority of people that buy consider all the cash they have for the deal as the down payment and that is why I do the calcualtions as shown above..

totoro victoria said...

I see. I don't include them for the three scenarios for comparison as I am paying them whether I buy now or later.

The numbers seem very different, and much less favourable to buying now on your calculator, but maybe that is the CMHC insurance fees which are not charged later as you have saved more?

I always receive a statement from the mortgagor which clearly sets out what I am being approved for. The PTT and legal are paid separately and not the responsibility of the lender, nor are funds advanced for this.

I will go back and up the down payment on your calculator as I always put 20% down and don't pay the CMHC fees. Maybe the numbers will be more similar.

totoro victoria said...

Numbers don't match up still. Might be something to do with interest on the down payment and fees for two years. Not sure.

My calculations using the online mortgage calculator show a more favourable scenario for buying earlier with rental income. Maybe I have missed something.

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

Totoro,

More follow on from above. In your calculations you also used the same down payment for 2013 and 2014. This does not take into account the fact that the renter is saving the difference in occupancy cost between renting and owning. The lower the current rent the more for a downpayment later.

If you have not been considering PTT and legal fees as part of your down payment calculations but still want to use my spreadsheet here is a simple workaround. Just add the PTT (2% of purchase price - 2K) and legal fees to the downpayment. Or you could set the first time buyer input to 1 and set the legal fees to 0. If you do just remember that you are paying these out-of-pocket on top of the downpayment.

Roger said...

Totoro,

In the last couple of weeks I have posted several pdf's with examples that included rental income. In many cases, not all, it works out better to buy now even if prices are falling. This is because the renter is missing out on this revenue stream.

However purchasing a house with a rental suite is not for everyone. No matter what the return I would never considering owning this type of property. In fact if the house has a suite I don't even look at it. Not even interested in owning a suited house and leaving it empty or for guests.

a simple man said...

Call it what you want - divorce, foreclosure, busy rd, whatever. But a court ordered sale in Oak Bay is rare. And I would not say that houses here are selling rapidly. many are absolutely languishing, some are selling quickly. price reductions and below-asking sales are the normal (one above asking yesterday???).

On the ground in Oak Bay a lot of people are in financial stress. Obviously not those on Beach Dr, but for the normal folk.

totoro victoria said...

Yes, no issue with not wanting a suite. Lots of folks don't.

Just an issue with how to match the calculator with my calculations and trying to understand if I have missed something

Thx

Just Jack said...

In the last year there have only been 3 advertised court sales in Oak Bay. The most expensive selling at 4.5 million.

In contrast, Langford had 17 with the most expensive selling at $580,000.

At this point some of us would jump to the conclusion that the more affluent neighborhoods have less financial problems. But then Sooke only had 4 court ordered sales too.

In total, Greater Victoria had 78 advertised court ordered sales in the last 12 months. The year before there were 33 and the year before that there was 36, then 12, then only 5 in 2007.

totoro victoria said...

That seems like a big jump.

Just Jack said...

Remember that there have been some 5,000 sales in Greater Victoria over the last 12 months. That's only around 1.5% of the market.

So, right now property foreclosures are not having an affect on the general market when only 1 out of every 75 homes are court sales.

Areas that have been hit hard, like Kelowna have seen their foreclosure rate increase by ten fold over the last year. So its still good times for Victoria real estate. Well maybe not good, but certainly okay times.

EagerBuyer(Not) said...

Looks like the door to 30 year mortgages is slamming shut!

Some Lenders Implement New Rules Early

I imagine some agents will be busy this long weekend as eager buyers try to sign before the deadline.

EagerBuyer(Not) said...

Totoro victoria - Some mortgage experts say short term is the way to go - not 10 year term at high rate.

Persistent Low Rates May Drive Short-Term Mortgages

totoro victoria said...

Thanks. It might be better to go with the cheaper short term rates but I just don't want the risk. Stress is something I look to avoid and a ten year at 3.79 is peace of mind. Maybe not the best investment decision tho.

patriotz said...

You have to make an apples to apples comparison of buy versus wait when there is suite income with the buy.

What I'm saying is if you want a proper comparison, the guy who waits to buy has to be renting part of a house and paying the appropriate rent for that, just as the owner who rents out a suite occupies part of a house.

Assuming a price/rent of 200 for a house with a suite the outcome tips in favour of wait with about a 5% price decline in 2 years.

totoro victoria said...

patriotz - not by my calculations. if you show the numbers in both examples it would be easier to understand i think.

patriotz said...

Using all default values in the spreadsheet, except $1500 rent, $1250
suite income, it tips to wait with a price decline from $550K to $510K over 2 years which is 7%. So yes maybe not just a 5% decline.

Just Jack said...

The months of inventory continues to climb in Victoria City. Now with 169 homes for sale in just Victoria City, inventory has topped 5 months.

The core districts clock in with 879 detached homes for sale and 175 sold in the last 30 days. That's 5 months of inventory at a median price of $590,000 with the average market exposure of 40 days to find a buyer. That's down from $625,000 for the same time period one year ago. But stable for the periods of one and two months ago, when the typical home sold for $589,900 and $593,000 respectively.

In summary, detached housing for the urban core areas is stable to slightly decreasing while the month of inventory continues to climb. The market for detached homes in these areas are considered to be balanced and very slightly in favor of buyers. Sellers having to offer very little in the way of concessions in price or terms.

Just Jack said...

Condominiums in the core districts show some 822 for sale and 121 sold for 6.8 months of inventory. The median price being $276,000 with an average market exposure of 56 days.

That's down from $310,000 for this time last year. The median for one and two months ago showed median prices at $272,500 and $285,000 respectively.

In summary, the market for condominiums in the urban core is in favor of buyers with prices slightly declining. Buyers have become more bearish with most sellers having to make concessions in price and/or terms to affect a sale.

And the weather for tomorrow will be ...

totoro victoria said...

Buy now 2012: 550 000 3.49 Mortgage is 1950/month

Buy later 2014: 510 000 5.40
Mortgage is 2122/month

Mortgage remaining in 2017 assuming pay down the extra 1250 to mortgage each month:

Buy 2012: 254 000
Buy 2014: 279 000

You have also paid $6092 more in mortgage payments to 2017 if you buy later.

Something is off with the calculator or with me.

I have not factored in the first two years of own/rent difference so this may be were some of the remaining difference is as it is about $24,000 more expensive to own than rent ($1000/month) over this period of time plus any interest on your down payment.

By my calculations you are still ahead if you buy now rather than waiting and prices drop 7% in two years.

Leo S said...

The key is in the rate projections. You are assuming That prices will come down 7% in 2 years while interest rates go up by 50%.
Rates are impossible to predict, but I don't see this as very likely. I'm thinking a 7% decline is realistic if rates don't rise based oafter affordability picture. If rates go up by almost 2% then I highly doubt the correction will be so small.

totoro victoria said...

Yes, just used those figures because patriotz indicated these were the ones he was going on based on Roger's graphs.

I agree prices could drop more than 7% if rates rise 2%.

If... when... all I know for sure is now.

patriotz said...

If interest rates stay at 3.49% my example tips towards wait at a drop of only 3.6%. This is because the person who buys now gets no advantage from locking in rates over the person who buys later.

totoro victoria said...

Buy now 2012: 550 000 3.49 Mortgage is 1950/month

Buy later 2014: 510 000 3.49
Mortgage is 1750/month

Mortgage remaining in 2017 assuming pay down the extra 1250 to mortgage each month:

Buy 2012: 254 000
Buy 2014: 274 973

You have paid $7200 less in mortgage payments to 2017 if you buy later.

Total: $13 773 better off to have bough earlier NOT counting rent/own for first two years which, if cheaper by $1000/month means that you are approx $10 000 better off to wait.

totoro victoria said...

WHEN IS IT BETTER TO RENT
Your rent is lower than average—and you expect it to stay that way.
You plan on moving in a few years.
You're in a super-expensive housing market.
You can get better-than-average returns from whatever you're investing your cash into.
The house you would buy is a lot larger than what you would rent.

http://michaelbluejay.com/house/rentvsbuy.html

totoro victoria said...

Here's a very handy rule of thumb I came up with: Just multiply your monthly rent by 240. If you can buy a house for less than that, then buying is usually better in the long-term.

(although this does not account for rental income)

http://michaelbluejay.com/house/rentvsbuy.html

a simple man said...

well, then I should continue to rent in Oak Bay for a long, long time.

Leo S said...

@totoro I don't really understand why your numbers are coming out opposite to roger's spreadsheet.. Very confusing.

Just Jack said...

Nice rule of thumb.

In Victoria most homes are selling between 300 to 350 times monthly rent. That would mean house values would have to fall between 20 to 30 percent before buying was more favorable over renting.

PS Once I was chastised for using that phrase. It came from the time where it was permissible to beat your wife with a stick as long as it was no thicker than your thumb.

Al + TOH said...

totoro,

By "Just multiply your monthly rent by 240. If you can buy a house for less than that, then buying is usually better in the long-term.", I assume that the quality and the size are similar between the rental and buy units referred on the site?

If so, another way to look at the number could be:

If a house rent valve is less than its selling price divided by 240, then it is not be a good investment to buy (for a real estate investor)?

Good luck finding such houses in Victoria or lots other areas in Canada now.

patriotz said...

Just multiply your monthly rent by 240. If you can buy a house for less than that, then buying is usually better in the long-term.

I don't accept that at all, even with today's low interest rates you're breaking even around 200, as I've noted above.

In no North American market has a price/rent of over 200 been sustainable long term.

The historical norm for price/rent is 150 - the US has just come back to it - and it's for a reason.

Leo S said...

I don't think the interest rates can be ignored like that. The US is nearing 150 only because they have significantly overshot. None of the pricier cities will stay there for long, if they're even close to that now.

totoro victoria said...

It is not my rule of thumb. I put the link to the website that this is from - which is in the states.

I should have clarified - for information and comparison only. The rule of thumb does not match Victoria's prices/rents. Not sure if it ever will.

totoro victoria said...

Leo - yes, I am confused too.

totoro victoria said...

I see that I should have put quotes around the quotes to make it clear they were not my words. Please pretend there are quotes and look at the info on the website link.

totoro victoria said...

And yes, I'm still buying right now. A duplex. Live in one and rent out the other.

I don't think the rent to cost ratio works at all in this scenario. My rule is it has to make sense on a monthly cost basis - which it does.

Just Jack said...

It was close to that during the recession in the 1990's. For Victoria to fall to that level would require a similar economic recession. A Gordon Head box (without a suite) rented for $1500 a month and sold for $225,000.

Maybe the politicians have finally figured out to manage our economies so that we will never have another recession?

patriotz said...

The US is nearing 150 only because they have significantly overshot.

The numbers say otherwise

A lot of people seem to think that current real US prices are low by historical norms. This is simply not true.

Just Jack said...

I stole this from Vancouverpeak.com

The analysis is for Vancouver, but it applies equally to Victoria




The housing market in a nutshell



The catalysts:

Interest rates were steadily brought to current record lows
Credit lending practices were steadily loosened

The result?

Prices in Vancouver tripled, while incomes & rents barely budged. (Most provinces, heck countries, saw soaring prices)
Record high leverage & valuation ratios
Record low rental yields
Animal spirits: overconfidence and greed
Record % homeownership levels
Massive over building
Record high number of realtors, mortgage brokers, construction workers
Record high % of GDP from real estate

Current state of the market: the inevitable tipping point?

10-yr low sales activity ratios
Pushing 20K inventory & 10 MOI marks
Lots of negative media reports. Euphoria slowly dying

Headwinds for the bulls:

Extremely unaffordable housing
Floored Interest Rates
Tightening mortgage rules
Hard stop in new CMHC lending
Animal spirits: loss aversion, fear

Leo S said...

A lot of people seem to think that current real US prices are low by historical norms. This is simply not true.

What is true is that affordability is incredibly good right now. Prices are back down to pre-bubble, but taking into account affordability they are overshot.

Real house prices in the US are back to the level of about 1990 (there was a little bump there). But back then people were paying 10% on 30 year terms. Now they are paying under 4%. That is overshooting.

happy renter said...

Can anyone tell me what 707 - 845 Yates sold for?

dasmo said...

Well not entirely equal:

"Prices in Vancouver tripled, while incomes & rents barely budged."
Here prices doubled.

"Massive over building"
I don't see that here.

"Record high % of GDP from real estate"
Not by my sources in Victoria.

the Vancouver market is waaaayyy crazier than here. It makes it look affordable in Victoria. It's one of the reasons Microsoft opened their game studio here and not in Van. Rent is extremely affordable here (and is a no-brainer over buying right now financially speaking), and a home is barely reachable. In Van, rent is expensive and a home is unobtainable...

totoro victoria said...

I am with you on that Leo. I find myself rethinking the decision not to buy in the states. Wondering if there is a way to make it make life sense as well as economic sense...

Life sense.. for me this means the non-financial part - it has to not add significant stress and needs to bring quality of life values.

A primary residence usually fits life sense. A rental or investment property is harder to make work this way unless you plan to use is frequently for business and family.

Just Jack said...

If Vancouver goes - so does Victoria

Just Jack said...

Your arguing about the magnitude not the reasons.

Do we have to match a city that is eight times our size before prices correct?

DavidL said...

I expect that this will be affecting real estate ...

Are bankrupt seniors harbingers of things to come?
Canadians over the age of 65 now have the highest insolvency and bankruptcy rates in the country, according to the latest family finances report by the Vanier Institute for the Family.

The non-profit charity's 2011/2012 report found that seniors were 17 times more likely to become insolvent in 2010 than they were just 20 years before.

Al + TOH said...

wrt to buy in the states:

We bought a 2BR/1.5BA condo in Arizona in Jan, foreclosure but in very good shape (paid about half price than the previous owner, 28% less than a similar unit just sold in May). There is no lawyer fee non state transfer tax, just a few hundred to the escrow company.

Since our son is there for a Ph.D program, that was why we bought then, as it is much cheaper and bigger than renting for him, and we are quite sure that we wouldn't loose money when we sell in 3 or 4 year's time.

Although we do go there for a month or two in the winter, we wouldn't buy any property for vacation purpose alone, probably better rent than own for just a couple months each year.

Of course you could buy in US for investment purpose (not ours though), either to just hold it until market shots back up and sell for a gain, or as a rental unit to get income, or both. But the best time in good areas (for gain) might have just passed; and there are lots rules/issues with rental. It doesn't matter a suite in your house or a unit a few thousand km away, rental is not for everyone, even when someone else (as required by US law) manages for you.

totoro victoria said...

Yes, you have pointed out some of the holdbacks for me from buying in the US. Having to hire someone to do all repairs and manage the property and the fact that the market may have just turned.

I'm not a big time real estate investor. I enjoy it when a property is cash flow positive and provides other values.

You have your son there and prices are low so it makes a lot of sense for you. For me, I can't think of a great reason to be in the US a lot as much as I try. I'd probably be as happy travelling around in a camper van through the states.

My property in the Okanagan works very well for me because it is both cash flow positive, low maintenance, and provides a place to stay for business and a family vacation spot in winter and summer... for free essentially.

My property in Victoria is only marginally cash flow positive because it has a suite. We are retaining half the big back yard as gardens and use the carport as boat and trailer storage so this is added value. Someone else is paying down the mortgage and I guess that will pay off in the long term.

I also own some very inexpensive recreational property in the gulf islands which I had big plans for - which have changed. I won't lose money at this point but selling it is a hassle. I wouldn't buy undeveloped land again. I'm not a homesteader after all.

I think one way I would consider buying in the states right now would be as a 1/4 owner with three other investors. A self-made time share. This would allow for sharing of costs and extremely low capital requirement.

CS said...

Had a realtor's flier yesterday. Said some prices were down 15%, "as in Vancouver."

If prices are really now falling, all the affordability criteria become irrelevant. The low end of the market, currently the hottest, will surely collapse as first-time buyers realize that owning real-estate could leave them broke.

At that point, downward momentum will surely accelerate and take the market below the long-term trend.

The US market took six years from peak to current "bottom" (?), despite "emergency" low interest rates, which suggests we could see a drop of 40 to 60% from the peak in 2010 to a trough in '15 or '16.

DavidL said...

@CS wrote: ... which suggests we could see a drop of 40 to 60% from the peak in 2010 to a trough in '15 or '16.

I expect by the end of 2014, SFH will have dropped about 30% from spring 2010 prices. Stagnation in prices will follow for 4+ years. I'm still standing by my detailed prediction on this blog from almost two years ago.

Roger said...

Leo S said @totoro I don't really understand why your numbers are coming out opposite to roger's spreadsheet.. Very confusing

Leo I have put considerable effort into checking all the calculations in the calculator. in particular the mortgage calculations have been double-checked against several on-line calculators. This one from TD bank gives the same numbers to the dollar and includes the ability to include extra monthly payments. The documentation for the calculator is also extensive and all the formulas and tables are there for anyone to read.

When I developed the spreadsheet the intention was to see if it was better to buy now or to wait one or two years. The user can enter a number of inputs and see the results. Based on reader feedback suite income and first time buyer options were added to the latest version.

The spreadsheet makes an apples-to-apples comparison based on the following conditions:
- renter saves the difference from buying now and renting. This is the difference in occupancy costs between the two options as shown in a detailed sheet.
- the downpayment is first used to pay PTT and legal fees and the remainder is put against the purchase price.
- CMHC insurance, if required, is calculated based on the LTV which is tiered (see my previous post)
- interest is earned on the downpayment while waiting
- suite income is applied as an extra monthly payment not used to offset the mortgage payment.
- additional monthly payments are applied so in all three cases the total mortgage payments are the same.

At a particular date in the future (2012 + mortgage term) all three options are compared. The lowest mortgage balance is the "winner". This is an apples-to-apples comparison because in all three cases the buyer started with the same initial savings, paid the same amount to live somewhere (buy or wait renting) and eventually was the owner of the property.

So where is the misunderstanding?
I think it happens when people try to use this spreadsheet output to compare how they are doing things with their own real estate purchases and investments. Or it can occur if one tries to replicate the calculations without taking all factors into account.

The beauty of spreadsheets vs. fixed programs or online calculators is that all the equations and calculations are available for viewing and can be changed if desired. However, like any computer program it takes time to understand how everything works.

JustWatching said...

Buying property in the US can be bad news for several reasons.

1. As a non-resident owner you can only do repairs yourself or using Americans. Your brother can't come down and help you fix the roof.

2. When you die the property is subject to probate if not held in joint ownership.

3. In some states like Florida taxes are higher for non-residents

4. You have to file an 8840 with the IRS if you are in the US more than 4 months every year. Google substantial presence test for exact formula.

5. If you rent the property you need to file a full tax return with the IRS.

6. Because of the distance there will be the expense of a US property management company. They will arrange for repairs and you might get ripped of.

7. At any time the US Customs & Border Patrol could deny you entry. Did you know there is a 5 year ban for telling any lie to an officer?

MD80 said...

1670 and 1690 Cedar Ave (MLS 311560 and 311565) keep re-listing at the same time. Same investor trying to exit? Anyone know?

totoro victoria said...

Yes, the difference might be partly in the interest on the down payment - I don't tend to look too much at that because I don't earn that much on the money as it is liquid for the next real estate investment. That will change after this next purchase when I will look to diversify a bit more.

As for the CMHC insurance, I don't pay this as I put 20% down. The PTT I do not deduct from the down payment but pay separately. The down payment is the down payment. It might help Roger if there were separate sections for PTT and CMHC in the graph and they were not automatically calculated without the ability to see them? This is where some of the bigger differences might be.

My number are, in fact, real numbers for real life purchases. I have to track my income and expenditures for income tax purposes and my accountant vets them. I actually keep separate bank accounts and credit cards for each investment property and I only make purchases and payments and deposit separately.

My mortgage numbers match the numbers I calculate using the online mortgage calculater. My expenses match the numbers I have.

In real life I don't usually pay my extra money down on the mortgage as for rental purposes it doesn't really help me to pay off the mortgage faster as I can deduct the interest costs. I prefer to collect the extra money for the next investment - which is what I have done.

totoro victoria said...

Yes, the difference might be partly in the interest on the down payment - I don't tend to look too much at that because I don't earn that much on the money as it is liquid for the next real estate investment. That will change after this next purchase when I will look to diversify a bit more.

As for the CMHC insurance, I don't pay this as I put 20% down. The PTT I do not deduct from the down payment but pay separately. The down payment is the down payment. It might help Roger if there were separate sections for PTT and CMHC in the graph and they were not automatically calculated without the ability to see them? This is where some of the bigger differences might be.

My number are, in fact, real numbers for real life purchases. I have to track my income and expenditures for income tax purposes and my accountant vets them. I actually keep separate bank accounts and credit cards for each investment property and I only make purchases and payments and deposit separately.

My mortgage numbers match the numbers I calculate using the online mortgage calculater. My expenses match the numbers I have.

In real life I don't usually pay my extra money down on the mortgage as for rental purposes it doesn't really help me to pay off the mortgage faster as I can deduct the interest costs. I prefer to collect the extra money for the next investment - which is what I have done.

totoro victoria said...

I use this online calculator:

http://www.ratesupermarket.ca/mortgage/rate_calculator/

I like it because I can project forward ten years and also find out the equity position at any point in the term. Good graph as well.

Roger said...

Totoro victoria said It might help Roger if there were separate sections for PTT and CMHC in the graph and they were not automatically calculated without the ability to see them?

What graph? Are you referring to the sheets in the spreadsheet. There are 5 as shown in this printout

I don't know how I can make it any clearer than this. (mortgage calculator sheet)

Do you know how to use Excel or Open Office spreadsheets? If you click on the CMHC and PTT output cells you get the formulas.

MD80 said...

@totoro
You can see the PTT and CMHC premiums in the MortgageCalculator worksheet. Roger's calculations are actually very transparent in the spreadsheet...much more so than an online calculator. But I guess sometimes ignorance is bliss.

totoro victoria said...

Thx - no, I don't use excel.

Looking at the tabs I see that the difference is in the CMHC and PTT and the interest on the down payment and differential between renting and buying. Taking these into account is where the numbers shift.

DavidL said...

@totoro Thx - no, I don't use excel.

You may want to consider downloading the Excel Viewer (free) from Microsoft:
http://www.microsoft.com/en-us/download/details.aspx?id=10

patriotz said...

The spreadsheet is .ods which is the native format for Open Office so I would recommend that rather than whatever freebee you can get from MS. My OS is Ubuntu which comes with OO.

DavidL said...

I was referring to this Excel document linked on the front page of HHV:
Wait or buy analysis tool (Excel)

The document is available in PDF (read-only), Excel and Open Office formats.

Leo S said...

The open office version is the newest revision. The others are older versions.

Leo S said...

The lower and higher end have been diverging lately. Lower end price/assessment is dropping. Close to 95% today. The higher end is rising, reaching 104%.
Lots of sub-$400,000 sales.

CS said...

"Buying property in the US can be bad news for several reasons."

And if you stay there for more than 90 days a year, do you not become resident for tax purposes?

CS said...

@ David L

Your price projection seems reasonable -- barring the unexpected.

But sharply adjusting markets tend to overshoot, which is why I think the decline could be greater.

patriotz said...

And if you stay there for more than 90 days a year, do you not become resident for tax purposes?

In itself, no, not even if it's every year. From the source:

Substantial Presence Test

As you can see, it's complicated.

Roger said...

Leo S said The open office version is the newest revision. The others are older versions.


Leo - all three (pdf, .ods .xls) were updated and are the same revision level.

The best free spreadsheet software is Libre Office which is the updated version of Open Office.

CS said...

Patriotz,

Thank you for the link to the US tax residency rules.

a simple man said...

New listing on Lincoln sells for $220,000 below assessment.

Marko said...

Sunday July 1, 2012 11:15am:

June June

2012 2011

Net Unconditional Sales:

637 618

New Listings:

1,449 1,465

Active Listings:

5,189 5,050

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

Doug Neal said...

US Tax.

Don't forget that if you are technically a US Citizen but haven't been filing US returns (maybe born in US but lived your whole life in Canada), and you start dabbling in US real estate, you could face HUGE fines (tens/hundreds of thousands $).

But if you are technically a US citizen, then FATCA might find you in a few years anyway.

Lots of info on this on the net. Here's one link
http://blog.outragedcanadian.ca/

patriotz said...

"New listing on Lincoln sells for $220,000 below assessment."

You mean 2840? Assessed at $1,069,000 listed at $895,000 and sold at $849,000 if it is.

Over $1mil sales are looking like an endangered species.

a simple man said...

yes - that is the house on Lincoln. we actually contemplated buying it, subdividing the lot into 8000 and 10,000 sq ft lots and building two new, appropriately-sized houses and selling one.

However, just seemed like too much risk in an unknown market.

CS said...

Re: Subdivision of 1840 Lincoln

"we ... subdividing the lot into 8000 and 10,000 sq ft"

That would have been nice, but the lot is zoned RS2, minimum lot size 23,958 square feet.

a simple man said...

ahhh, yes --never got that far in our deliberations to deeply investigate, I guess. The current lot size of 18,000 must have been grandfathered in then.

Marko said...

Next to impossible to get a "deal" on anything that has subdivide potential in an attractive location. The values are so huge today that the owners/sellers have most likely looked into it and if not once it hits MLS it is exposed to 100s of people many very experienced in rezoning and subdividing.

When I listed three homes on Shelbourne earlier this year we had three offers the first day on market and about 10 builders/developers called.

Leo S said...

When I listed three homes on Shelbourne earlier this year we had three offers the first day on market and about 10 builders/developers called.

But they still went for a combined $57,000 under asking.

Marko said...

So if we had priced them at 350k each and they went for 150k combined over asking does that change anything?

My point is information flows so freely in this day and age that "deals" are very difficult to come by.

a simple man said...

I would say an Oak Bay house assessed at $1.069 million selling for $220,000 less is a deal.

Leo S said...

So if we had priced them at 350k each and they went for 150k combined over asking does that change anything?

No. Just adding some perspective to this multiple offer scenario.

Marko said...

^just to add to the perspective the tear downs on Shelbourne, on 40' wide lots, went for 400k.

Marko said...

400k each that is...

Leo S said...

It's like a funhouse mirror there's so much perspective!

DavidL said...

Anyone know how much 1051 Baldwin Place recently sold for? (Thanks!)

yogurt said...

My PCS says 1051 Baldwin Place sold for $694,800 after 19 DOM.

JustWatching said...

Still waiting for VREB stats. VIREB released theirs a few minutes ago. Are they balanced and stable?

June stats

Sales are collapsing in the Cowichan Valley. Prices are low

DavidL said...

Thanks, yogurt.

Leo S said...

VREB seems to take longer now that they've fancied up their stats reports.

a simple man said...

VREB Median prices for SFH Greater Victoria only:

June 2012: $530K
May 2012: $560K
June 2011: $570K

DavidL said...

VREB has published the June stats (and spin):
http://www.vreb.org/mls_statistics/current_statistics.html

Most notably, the average price for single family dwellings in Greater Victoria fell from $628K in June 2011 to $591K in June 2012 (5.9% drop,) while the median price fell from $569 in June 2011 to $530K in June 2012 (6.9% drop).

a simple man said...

and wait until after July 9th.

Roger said...

Looks like VREB is trying to find something nice to say about last month's MLS activity.

"For our market, an average month is 500 sales," says Carol Crabb, President of the Victoria Real Estate Board. "Volume during the last three months has been well ahead of that number."

I don't think it matches reality...

June sales since 2000

Active listings hit all time high

Sales are well below twelve year average and active listings are well above average.

New mortgage rules go into effect this weekend. Stayed tuned for further announcements this summer.

a simple man said...

Roger - I read that statistic as well and thought it was a weasel number. Certainly the average month for the year is likely around 500 sales, but not for the average June. But that is not what she said.

The devil is in the details.

And this is the president of the group buyers trust with the largest purchase of their lives'?

Wendyriffic said...

Roger, your spread sheets are amazing. Don't take a thing out of them!

patriotz said...

"For our city, an average month has 10 days of sunshine" says Sam Salmon, President of the Victoria Tourist Board. "Days of sunshine during the last three months have been well ahead of that number."

golapi khatun said...

Wellcome to Exkash.com | Cashout E-curreny to Bank Account Directly.
There is no doubt about the fact that the Internet is the best place to sell your perfect money for local cash, the reason being that there are thousands of prospective buyers who are willing to pay any amount to get your Perfect money funds therefore you can capitalize on this to make a significant gain by selling to them. Perfect money is quite scarce for many interested buyers and buying from third parties can cost some fortune, however you can sell at discounted rates to prospective buyers directly from your Perfect money account.
The best place to sell your Perfect money for local cash is exkash.com, this website has a huge market place where interested buyers can easily locate you and then you can set your own prices and negotiate with the buyers online. Once you have completed pricing negotiation with interested buyers, Exkash.com will then help you collect the funds in your Perfect money account where you can proceed to request for bank transfer.
okpay to bank
Cashout perfect money to bank account
Perfectmoney Debit card
Egopay to bank
Bitcoin to Bank account
Bitcoin Debit card

Monty Brice said...

Thanks a lot for the post.as I was looking for the topic Foreclosure Homes For Sales , It was very informative and I liked the fact that, all the details were efficiently stacked into one piece of writing. I am sure that you will come up with such relevant posts in the future as well. I anticipate your next post.