Thursday, June 14, 2012

Don't worry, we're insulated



The Bank of Canada is again warning about the eurozone crisis and the shockwave that will be felt when should any of the those uber-large debt bubbles pop. Is it time to batten down your household hatches? Or should we start a letter writing campaign to the VREB and VCoC to get them to run those "we're insulated" reassurance ads again?

61 comments:

Roger said...

Are you a real estate bear?

Well today's analysis is meant for you. Lets say you are looking at purchasing that 550K house I wrote about yesterday. You know the rock bottom interest rates of 3.49% for a five year fixed won't last. A reasonable guess might be that if rates change they will jump to 4.25% next year and 5% the following year.You have saved 75K and plan to save whatever the difference is from buying that place today.

Yesterday TD said it figures Vancouver prices will drop by 15% in 2 years. You know Victoria isn't as crazy as Van so you think 5% a year is reasonable. How much smaller will your mortgage be in 2017 than your coworker who laughs at you and buys today?

Well.... it depends on your rent.

Buy 1 year from now
Rent is 1500 - Lower by 29.6K
2000 - 22.3 K
2500 - 13.8K

Ride the market down for 2 years
Rent is 1500 - Lower by 71.7K
2000 - 49.3K
2500 - 34.7K

For the complete analysis (pdf) click here

totoro victoria - You like longer mortgage terms here is a 10 year term analysis for you :>) click here

Marko - I know you think it is not possible to time the market and analysis is not useful so you can just skip this post :>)

jesse said...

The absolute debt vs income has been given second seat next to prevailing real interest rate drops over the past 20 years. I just hope we know what we're doing... :\

kunwak said...

Roger, out of curiosity, what brought you back? I remember your graphs etc. were always interesting to look at but you stopped making them after buying a house. Are you thinking about another purchase or what?

Roger said...

Kunwak,

Thanks for the comments about my graphs. I never bought a house! I am still a renter and spend the winters in a warmer climate - Arizona and California.

I pop in here from time to time when i think i might have something useful to add to the conversation. With all the debate about rent vs. buy vs. waiting lately I thought it was time to revise the spread sheet calculator in the hope that folks would find it useful in these crazy economic times.

Leo S said...

Roger, did you buy in Arizona?

Come to think of it, that's also where Double Agent said he was going for the winter and never came back to the blog. Must be something down there that eats bears!

Leo S said...

Nice analysis Roger.
Matches up with the numbers we're juggling around. $550k is the max house we are looking at. For that kind of place in good shape I think $2000/month is a realistic rent based on what I've seen.

If prices remain flat (only possible with flat rates), then renting and owning comes out to basically the same thing. Renting the place would carry essentially zero risk, whereas buying now would avoid the hassle of moving again and get the emotional aspects of "ownership" (not sure how much I love fixing things...)

Just Jack said...

I think the level of risk is related to the rate of appreciation of property values. If prospective purchasers believe that there is zero risk in buying real estate - Prices will skyrocket.

Right now prices are receding at the rate of most middle aged men's hairlines. So, I think prospective buyers believe that there is only a slight risk to owning real estate.

So, how do you guard yourself from this slight risk?
-You could lock in for 10 years.
-You could offer less
-?????

Just Jack said...

Say you saved up $50,000 for a down payment on a $500,000 home.

If prices are flat are you willing to risk buying the home?

If prices are declining by 2 or 3 percent are you still willing to buy the home?

How about 5%?
10?
15?

At what point do you say "I'm not willing to risk my down payment on a home?" I think that breaking point is important, because if we ever reach it, then house prices will turtle on us.

totoro victoria said...

Thanks Roger - I have rental income so I think it evens out over two years if prices fall 10%.

Those graphs are helpful.

When does the market turn south? I think it is not so much price drop but rise in interest rates combined with slight decline that could drigger a bigger drop.

totoro victoria said...

I've been thinking about Heloc. I was at Predator Ridge outside of Vernon last week. They are trying new product to stimulate some sort of sales as the recreational market is no longer there. They are selling 1/12 fractional interests in duplexes that give you four weeks a year. It is all dependent on HELOC payments because you can't finance them. If prices drop, recreational/fractional properties will likely nosedive imo.

Roger said...

Leo S,

We didn't buy in the U.S. I don't want to own a property that I only use a few months a year.

totoro victoria said...

Roger,I looked at buying in Arizona and backed out after reviewing the tax rules and rental restrictions and need to hire someone to do all the work. The low prices did not justify the headaches for me.

Roger said...

Just Jack,

You raise some interesting points.

A few years ago the market was driven by fear and greed:

- fear of being priced out forever if one didn't buy soon

- greedy sellers and agents squeezing the buyers.

- greedy banks handing out mortgages to anyone that could fog a mirror.

Today you have to be living under a rock if you haven't heard the market is cooling. Opinions vary on how much - flat to -10% off peak. No one is expecting big upward price changes like 2000-2007.

So in the absence of sales pressure and the easy money off the table there are fewer buyers around. Even record low interest rates can't drive sales back to the levels seen in 2000-2007.

What happens when rates go back up?

Just Jack said...

What about the people that are buying?

They have to be the Mother of all Bulls. They are intelligent people in well paying fields, but real estate is their crack cocaine. They're addicted to buying.

Is there any fireman or cop out there - that doesn't own at least 3 houses and is building a fourth!

totoro victoria said...

Did you just call me an addicted mother bull?

Introvert said...

After years of humming and hawing, my aunt (five years retired) has decided to sell her (fully paid-off) house in Calgary (for around $600K) and move to Victoria.

I think she'll rent here for a little while, until she determines which neighbourhoods and locations suit her.

In a year or so, I anticipate my mom will also move here, no doubt to be closer to her dear son, Introvert.

patriotz said...

It is all dependent on HELOC payments because you can't finance them.

That's assuming that anyone with the $60K or so in cash wouldn't be interested in buying.

I think that's right.

JustWatching said...

HHV,

Here is an article that follows the theme of your post.

"Being inside a bubble creates an interesting atmosphere. To a certain degree logical voices from outside of the bubble need to speak up to recognize what is rather obvious yet lost for many within the bubble."

This time it is not different

JustWatching said...

How much rent should you pay for a house while you wait for the market to correct?

Check out this discussion on KIV

Looks like 2K max. gets you a pretty nice place.

Just Jack said...

So how do you short real estate? If a big correction is coming, that should also mean that one could profit from this decline.

What stocks would you buy?
-certainly not home depot

How about stocks that involve credit counseling?

Something will take the place of real estate. Probably in the stock market. Is there another dot com possibility. How about tech stocks that make smart phone apps?

How about Viagra. Your real estate and stocks may be down, but that doesn't mean you have to be!

Just Jack said...

The size of the home (bedrooms) and location affect the rent.

If your renting the ENTIRE home then $1.00 to $1.50 a square foot. And/or looking at the location rent for a home could be the value of the property divided by 300 to 350.

Its not perfect, but it's a place to start - then look at craigslist, etc.

CS said...

"how do you short real estate?"

You can short the US market by selling Case Schiller index futures on the Chicago Mercantile Exchange. But I know of no opportunity to do this with Canadian RE.

I suppose you could invest in Pfizer who make Viagra. Demand may increase as RE goes down, although right now there seems no sign of OB real estate flagging. Valdez Place sold, presumably near the asking price of $3.3 mil before the ad appeared in REV.

Rhino said...

Big dump of listings in my PCS account today. Most inventory I have ever had in this account in over 4 years.

this correction looks to be getting teeth from my observations...

Just Jack said...

Maybe Oak Bay is just flacid.

Oak Bay probably has the most diverse types/styles of housing than other districts. That's one of the reasons why it is so difficult to see if prices are coming down or not.

Certainly, the median prices over the last three years show a downward trend. And there are some re-sales (case-shiller) that support that downward trend as well.

But no one district is immune to the affects of its neighbors. Oak Bay may be the last to fall, but it too will fall.

Eventually, all of the districts will bottom out. Oak Bay will still hold its premium over Fernwood. It's just that Oak Bay has a potential to fall a lot more in total dollars lost.

"The bigger they are - the harder they fall."

I know its tough for a lot of those that own in Oak Bay to accept their home prices will also come down. But it's only bubble bucks that they lost. I doubt that you're going to see retired tech company managers throwing themselves under their riding mowers if prices came down substantially.

Although you could probably build an App for that.

totoro victoria said...

There is more on the market in Oak Bay but prices on nicer places are flat and not down IMO.

I'm very happy to have just bought. My cost of accommodation drops a lot because of the significant rental income and low interest rate.

totoro victoria said...

A lot of the talk about real estate attempts to reason the future based on statistical trends - which is reasonable but not infallible.

Buyers are in different circumstances.

Some are hoping to save a huge amount for a down payment and when interest rates rise they will be better off because they can benefit from the greater equity paydown on lower prices.

Some buyers will have only twenty percent saved if prices drop and are hoping that the drop will not be accompanied by a rise in interest rates because they will simply get the house at a lower price. Interest rates may indeed remain low, but whether prices will drop significantly if they do is a gamble. I don't believe prices will drop without a trigger that ignites buyer fears about affordability.

In my view, if you are in the second category and plan to hold for at least seven years you might as well buy now at guaranteed long-term low rates if you have offsetting rental income. Better a sure thing that puts you in the being better off than renting category immediately.

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

What if you buy with 20% down and the market corrects 20% over two years and you lose your job, or get divorced, or get transferred?

Ugly.

Just Jack said...

Those "triggers" rightly or wrongly are always determined after prices have dropped. Some say that prices fell in the 1970's because of the oil embargo or the US pulling out of Vietnam. The 1980's were interest rates and

Home prices fell in the mid 1990's. Some people assumed this was due to the leaky condo syndrome spilling over into house sales or the NDP government being anti-business and driving business away from BC. Anyway, construction came to almost a halt and people moved away to find work in other provinces.

So what could it be this time?
Oil over a hundred?
Bye bye Afghanistan?
Possible new government?
Dingo got me baby event finally solved?
Apartment Owners demand crack down on illegal suites because the high vacancy rate is loosing them money.

Me, I think its the Dingo

totoro victoria said...

The get divorce situation is the most difficult. I cannot help there.

Do not buy if your marriage is not solid.

This is not a market with good odds for resale in the next couple of years if you have to sell for this reason.

As for job loss. Have six months' in reserve for emergencies when you buy. If you lose your job, rent your house out so you can cover your mortgage and move somewhere cheaper. Take any job you can find if your EI runs out. I believe this situation can be weathered in most cases.

Illness or injury? Make sure you have insurance and be prepared to rent your home out if necessary.

I have put 20% down and my mortgage will be $180/month out of pocket because of rental income AND I have a place to live. Yep, it is possible - unusual, but possible if you are open to multi-family housing and willing to search until you find something that works. Not possible if you want a single family home.

That insulates me from most worst case scenarios except divorce and the need to sell at a loss before the market recovers.

totoro victoria said...

Also, a 20% correction over two years would likely be in response to a rise in interest rates. This would mean that a lower mortgage amount would cost you more each month. It is an inverse equation.

Mindset said...

Although you could probably build an App for that. (throwing yourself under your lawnmower if prices fall in Oak Bay)

Ok that was funny. Thanks for the laugh Jack.

Just Jack said...

Divorce wouldn't be that bad. If you owe more than the house is worth what's to split - debt.

If your house goes up in value, then I would worry about divorce. Those are dollar signs in your spouses eyes - not hearts.

For me, I worship the ground my father walks on.

-Waterfront property in West Vancouver.

totoro victoria said...

No wonder you are not buying a house Just Jack...

Just Jack said...

Rich, good looking and humble.

That's me.

Mindset said...

Totoro said: Interest rates may indeed remain low, but whether prices will drop significantly if they do is a gamble.

Is this just about interest rates?

Isn't there a lot more to the current downturn in RE than just interest rates. For example:
- The ability for people to service current debt levels
- A shift from speculative buying to speculative selling
- General consumer confidence in the RE market
- The BC (and Canadian) economy
- Government and banking lending terms and restrictions
- RE Inventories

It is my opinion that all 6 of the above are creating the current downward pressure on RE and will continue to do so even if interest rates hold steady. The proof is all around us. Interest rates aren't moving, but the market is.

IMHO, Interest rates would actually have to continue to decrease for housing prices to hold steady.

Mindset said...

No wonder you are not buying a house Just Jack...

... but can he convince his father to sell, and put his inheritence in a GIC?

totoro victoria said...

Mindset - the ability of debt servicing should be pretty good at the rates right now.

I agree that other factors could influence general consumer confidence. Higher inventory is one but does not have as big of an impact as interest rates.

I don't think there will be further restrictions on terms but might be more restrictions and this could have a bigger impact.

I don't see an immediate cumulative threat to the market that would cause a 20% drop, but I have no crystal ball.

Mindset said...

I don't see an immediate cumulative threat to the market that would cause a 20% drop

I wish I could for everyones sake that is counting on RE values, but I just can't see the market 'flatlining'. Asset bubbles are crazy things when they turn in the opposite direction, and we are living in an era of incredible instability.

Put the two together, and I think flatlining is a best case scenario, not the likely scenario.

How much and when? Hard to say.

I've always seen Victoria as a relatively safe RE market, it didn't appreciate like Vancouver in this last run-up, and only corrected by 25-30% in the last major RE downturn over about a 3 years period (late 80's/early 90's).

Maybe expecting something similar this time is a reasonable point for making decisions?

totoro victoria said...

I don't know. Just know that I am okay with buying right now. You have to weigh the risks: rates, your job, your current rent, how much down payment, rental income or not... and then buy if you are comfortable.

Marko said...

70 new listings today....never seen that many on a Friday.

Mindset said...

I agree Totoro. Be aware of the risks and make an informed decision.

With big life decisions like RE investments I like to start with 'what's the worst that could happen, and if it happened, could I live with it?' It's your life and your money.

Many of your comments and the analysis you have provided seem sound to me, and provide good context for others thinking about making similar decisions.

I just don't think the worst case scenario is a flatlining market. That's best case with everything going on.

Keep up the good posts and providing an investors view into the current market. You have stimulated a tonne of great discussion here.

I think you might even be giving Just Jack a run for his money lately.

Mindset said...

Marko said: 70 new listings today...

Anything interesting about the types of listings that you are seeing?

EagerBuyer(Not) said...

Sales seem to be down this week on my PCS accounts. Anyone else seeing this on their PCS/Matrix accounts??

Phil said...

The single biggest factor on whether or not we get a "crash" will be whether or not the CMHC tightens its requirements. And it looks like that is exactly what is happening now that they won't have their cap raised above 600B.

Banks don't give hairdressers and baristas 300K without a safety net.

Mindset said...

Tripped across an interesting article this AM for those curious about how we have managed so far to avoid the collapse of so many other countries. It's a bit dated (last year), but extensive and interesting.

How Canada Avoided the Recession (2011 article)

Excerpt on one reason why we are where we are today: Under the joint leadership of Prime Minister Jean Chretien and Finance Minister Paul Martin, Canada underwent one of the most fiscally responsible periods in its history.

A point about the risks with debt and low interest rates: The artificially low interest rates induced by its policies have been producing housing bubbles across the country that may potentially cripple the economy when they burst. Their role in the underpricing of risk and the related rise in household debt entails consequences that are equally inauspicious.

Something for that morning coffee for those with analytical minds.

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

Buying a Victoria city condominium is like sex.

It all comes down to age and size.


The median price for both new condominiums and older condominiums is around $275,000.

You can get a new condo, that no one has lived in - but its going to be small, around 550 square feet for that price.

Or you can get one that is typically 20 years older with lots of previous owners, but very roomy at around 915 square feet typically for $275,000 also.

"Mrs. Robinson - you're trying to seduce me - aren't you?"

http://www.youtube.com/watch?feature=player_detailpage&v=-3lKbMBab18

Rhino said...

A few notable sales from this week:

1139 MCKENZIE ST (Fairfield)(Not busy street)
Tax Assessed: 552,000
List Price: 569,900
Sold Price: 550,000

219 Superior (James Bay)
Tax Assessed: 606,000
List Price: 538,000
Sold Price: 505,000

1572 ATHLONE DR (Maplewood)
Tax Assessed: 694,000
List Price: 689,000
Sold Price: 612,000


If your in the market and can wait to see how this current slowdown plays out....do so. It looks to be gathering some steam.

If you have to buy, don't be afraid to bid low. Lower than your realtor tells you!

Just Jack said...

To be a successful real estate vulture you have to not only pick your prey, but when and where to make your kill.

There is no need to bid on a property that would appeal to the mass market, as there will always be a bid higher than yours.

You have to pick out the weakling in the listing herd. One that is hobbling at the back of the pack for more than 30 days. Perhaps limping from a job transfer, crippled by a foreclosure, or suffering from old age as in an estate.

Then you have to pick the location where you will strike. One were few other real estate Condors, like yourself, are hunting, because you don't want to share your dinner. This usually means you will have to circle a little farther out than the rest for your blood feast.

Leo S said...

It all comes down to age and size.

Should we come up with creepy rule for buying condos too?

Take your age and divide by two and add 7... Any condo older than that will just make you seem creepy. At that point you might as well buy yourself this van.

a simple man said...

Just back from some open houses in Oak Bay - crickets. Realtors had a look of resignation in their eyes.

It is starting now.

Introvert said...

It is starting now.

How many times have we heard this sentiment expressed on the blog in the last five years?

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

I suspect they will buy quickly once they see how beautiful it is here.

Trevor_tni,

For my circle in Calgary, Victoria seems to be "the place to be."

Vancouver: too expensive and busy.

Qualicum Beach & Parksville: very nice, but a bit too small.

Nanaimo: not quite right.

Courtenay/Comox: great but far away from everything.

Calgary: great place to make money, which you'll need to move to Victoria!

Leo S said...

For my circle in Calgary, Victoria seems to be "the place to be."

And what a coincidence that you live here!

a simple man said...

Victoria is the place to be. But very few can afford it.

Went to more open houses today - saw a few people at them in contrast to yesterday.

Marko said...

Monday, June 18, 2012 8:00am

MTD June
2012 2011
Net Unconditional Sales: 336 618
New Listings: 799 1,465
Active Listings: 4,862 5,050

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

Fiduciary said...

I've lived here all my life, and now that I'm nearing my late twenties and doing well professionally, I'm thinking about when and where to buy. That's why I'm following this blog. However, last summer and what we've had so far of this summer (or lack thereof) have really got me thinking that I might not want to be in Victoria.

Seriously, last year we got what, one, maybe two good weeks of sunshine all summer? Now it's mid June and we had a good solid week in May, plus a few nice days here and there, but no solid stretches of sun. When it's so grey for so much of the year, I need sunshine in summer, and Victoria is really starting to lose its luster for me. Combine that with the high house prices, and other parts of the world are starting to look good.

Anyone else starting to feel the same way?

Note: I'm not too worried about the job market, I'm in IT and am very employable.

Jason Lowe said...

Yes! I grew up here as well and the last few summers have been crappy! I think the thing people forget, or don't know, is that this is one of the best countries to live in. There's only 2 coasts and only 1 with mountains and ocean at our door step. Unless you choose to live in a big city, this place has it all with little hassles compared to large cities.
One day houses will be over a mil here, just like Whistler..

Unknown said...

Fully reno'd OaK Bay house on St Ann sold in fall 2011 for $760 and again in June 2012 for $700K (both MLS)
-down $60K