Monday, June 11, 2012

June 11: Monday Market Update

MLS numbers courtesy of the VREB via Marko Juras. These numbers are for the Victoria Real Estate Board's reporting area, including Sooke, Shawnigan Lake and the Gulf Islands.

June 2012 month to date (previous partial week in brackets)
Net Unconditional Sales: 193 (45)
New Listings: 441 (112)
Active Listings:  4765 (4696)
Sales to new listings ratio: 44% (40%)

June 2011
Net Unconditional Sales: 618
New Listings: 1465
Active Listings: 5050
Sales to new listings ratio: 42%
Sales to active listings ratio: 12.2% or 8.17 MOI

Great discussion on the last post!  Thanks everyone for contributing so actively and civilly to the discussion.  I follow a lot of blogs but almost all of them are either very inactive with few comments, or busy but lots of noise and fighting in the comments.  Although ostensibly a bear blog, I think there is good information here for everyone interested in real estate.

Again the numbers are close to last year's, with listings lagging a tad.  Marko reports the SFH average at $555k and the condo average at $345k.  The SFH average is very low, but that can change quickly with a couple high end sales. 

98 comments:

Roger said...

In last weeks posts there was a lot of discussion about buying now or waiting a year or two and renting in the interim. There are lots of variables that need to be considered in order to make any calculations. These include the following:

Renting details
- monthly rent, tenant insurance, utility costs (heat, electricity etc.)

Personal financial details
- current savings for down payment
- interim savings while renting
- return on investments (ROI)

Mortgage rates
- term, amortization
- current and predicted rates for next 2 years

Purchase costs
- legal fees, property transfer tax and CMHC insurance

Property cost
- current market value and predicted increase/decrease over next 2 years

Rental suite
- after tax monthly income

IMHO there is too much focus on monthly payments when making large purchases and not enough concern about long term debt. A successful financial plan should seek to increase future net worth (assets - liabilities). Financial calculations to achieve this goal require considerable effort. It is obvious that back of an envelope calculations are prone to error and tedious. I have extensively updated a spreadsheet I posted here a few years ago and hope readers find it interesting. The updated Excel version and sample output pdf file links may be found on the right hand side of this blog in the links section.

Here are the links:

Buy vs.Wait sample output (pdf)

Buy vs.Wait Excel version (.xls)

Buy vs.Wait Open/Libre Office version (.ods)

The accompanying text in the spreadsheet defines how the calculations are made. Readers that wish to make modifications to suit their circumstances are encouraged to do so. I look forward to any constructive questions or comments.

Marko said...

Too many variables and most importantly the market is impossible to time in my opinion. Buy when you are ready and comfortable and buy the right property. As we've seen by examples some people make quite a bit and some people take a beating, all in the same market.

210 Irving bought for $886,000 in 2007 and sold in April, 2012 for $1,160,000.

There are also loads of examples of people buying property in 2007 and taking massive loses.

Difficult to time the market, but you can certainly choose the property you buy.

Roger said...

Marko,

Readers that do not wish to "time the market" can still use the spreadsheet. Those currently looking to buy only need to use the Buy Now section in order to determine how different mortgage interest rates, amortization periods, term duration, down payments and rental suite income interact.

They can also see how much property transfer tax and CMHC insurance they will pay.

Their annual ownership occupancy costs vs. renting can also be calculated.

To my knowledge there is not another spreadsheet or online tool that does all this in one place. That is why I wrote it.

CS said...

"To many variables ..."

Agreed, but examining possible future scenarios provides insight into the potential risks and rewards of real estate investment.

The present indications are that dirt cheap lending rates will continue for years. If that proves to be the case, why would real estate prices fall? Can people just get bored with real estate, disillusioned about the supposed advantage of ownership, disgusted at what people expect to receive for a 1950's OB bung?

Or does more or less constant affordability mean more or less constant prices, as experienced in OB over the last five years, according to average prices provided the other day by Just Jack?

totoro victoria said...

You obviously put a lot of time and effort into this calculator. The only thing I noticed was that you calculate principal payments only as mortgage owing. As I have ten yr term at 3.84 I operate under the assumption that I will have at least the same value in my home as my purchase price in ten yrs. If this is the case, I deduct the principal payment from my cost each month to get to a figure that is more accurate overall. It is an assumption, but i believe it most likely.I wld not feel the same with a five year term.

As far as other feedback, I wld have to use the calculator to see.

totoro victoria said...

If rates stay the same prices seem likely to remain fairly stable - but I suppose there cld be other triggers. Don't think people will be bored with real estate when it comes to a primary residence but investors might not be able to make money.

Leo S said...

Or does more or less constant affordability mean more or less constant prices

Affordability has been anything but constant. 5 years ago you couldn't get anything close to a sub 4% 10 year mortgage.

Just Jack said...

Actually there median prices with a sample size of about 500 sales but never covering a time period that is more than 6 months. The only reason for the numbers to go screaming off is when the city has put in massive infrastructure changes or perhaps a gas station is built or decommissioned beside the property in question. Economic externalities that would be obvious to most people ie new highway.

And besides averages suck.

Leo S said...

Don't think people will be bored with real estate when it comes to a primary residence but investors might not be able to make money.

A flat market may also affect income. Ben at the economic analyst says that equity take outs add about $5500 to the average household's income. It will be interesting to see if that is reflected in the household income figures when they are updated for the last 2 years. The new HELOC restriction to 65% should also have an affect on that.

Just Jack said...

I think most of the time home prices are affordable. Only when monthly payments change quickly are things unaffordable. But then prices quickly adapt and we are back to being affordable again.

So it kind of silly to say housing is affordable or not affordable because if in were unaffordable it would quickly become affordable or nothing would sell.

lurker said...

Roger,

there is a mistake in your spreadsheet (first time homebuyer, PPT, 1 and 0); otherwise nice looking spreadsheet.

Roger said...

lurker,

Thanks for the bug report. An updated version is now available.

totoro victoria,

In your case you are trying to determine your costs, like interest, and therefore you remove the principal component from your monthly mortgage payment. This works for you but does not work when trying to compare various buy now vs. waiting scenarios.

In my spreadsheet the principal payments are not deducted because they are applied to reduce the mortgage principal. The goal of this spreadsheet is to show how different factors lower the outstanding mortgage principal by the end of the loan term.

patriotz said...

The present indications are that dirt cheap lending rates will continue for years. If that proves to be the case, why would real estate prices fall?

They have already fallen in Victoria and much more so up Island and elsewhere in BC outside of Vancouver.

What makes you think Victoria can avoid the fall that these other markets are taking, when it is competing with them for a very large part of demand (retirement)?

You are also missing the big picture, which is that cheap lending rates are the symptom of a sick economy.

Take a look at Japan, which has had near-zero rates for two decades.

HouseHuntVictoria said...

Roger! Nice to see you around again!

LeoS thanks for the past couple of posts, they've been great.

I take a little break, and this place takes a jump in interaction. Should I view that as a sign?

kunwak said...

welcome back Roger. Hope you enjoy your home.

happy renter said...

Thanks for the spreadsheets, Roger! I really appreciate the work that you put into them.

totoro victoria said...

Yes, Roger, you are right - was looking at rent vs. buy - ie. overall cost and not what your calculator is for which is buy now or later.

Leo - don't think that Heloc counts as income - it is credit - cheap credit. Without it, homeowners will likely spend less which could affect the economy. Home equity feels like money in the bank to many so it is easier to spend...

Leo S said...

Leo - don't think that Heloc counts as income - it is credit - cheap credit.

I guess you're right in that it wouldn't be counted as income. Just another factor that is very difficult to take into account when trying to get a picture of true affordability.

DP said...

B.C. shipbuilding contracts not a done deal yet, as federal budget cuts sink in

dasmo said...

Nice spread sheet Roger, I assume you made the original? It helped me make my buy decision actually. I do notice that with today's rates and a flat market you formula does tend to suggest that buying now is a good plan across many inputs.

patriotz said...

Thank you for the spreadsheet Roger. In particular I'm impressed with the formatting which is much harder for me than the math part. :-)

For sure I will be giving it a few spins the near future.

Roger said...

dasmo,

Yes I made the original version 3 years ago. The new version has these updates:

- mortgage term is now a parameter
- first time buyer option switches property tax calculation on and off
- suite rental income is now included in calculations
- buy now vs. later payment payment algorithm improved

The spreadsheet was constructed using Open Office which is free. There is a great portable version which runs off a USB flash drive or on the cloud. It is available by clicking here

totoro victoria said...

Roger - you could add the home office deduction possibility too I suppose. I have it and it is about $100/month real $ benefit as a tax deduction based on floor space used.

CS said...

@Patriotz
"They have already fallen in Victoria"

Not according to JJ's OB modes, medians or whatever. Or according the Victoria RE Board. Prices being reported up y-on-y in May.

"and much more so up Island"

Yes, I'd noticed that, but why? Why is Victoria, at present, different? Affordability as HHV defines it seems not to be of overriding importance. Why not?

"What makes you think Victoria can avoid the fall that these other markets are taking"

I was asking questions not saying what I think.

"When it [Victoria] is competing with them for a very large part of demand (retirement)? "

Isn't it more instructive to think of the up Island communities competing with and taking sales from Victoria's retirement home market?

"You are also missing the big picture, which is that cheap lending rates are the symptom of a sick economy."

The economy may be sick but you seem to assume that it is going to get sicker. Why? Isn't all for the best in this the best of all possible places to live?

jesse said...

Roger, in Canada PMT doesn't work, use the formula I used in the investment spreadsheet attached here

A minor point. Overall good, though I'm an "earnings" guy myself!

Also I don't know how to incorporate into the spreadsheet, but there is inherent risk in ownership and "long tail" events as well as forced liquidation can cause expenses to get out of control for a few. Think of it as a reverse lottery where most are "lucky" and a handful are not. That needs to be built into the model somehow, in my view, but rarely is. People look at the headline mortgage, taxes, and a smattering of "normal" expenses but ignore the low-probability high-severity items.

What can be done? Ensure the own calculation is enough positive to compensate for the risk an owner is undertaking, but the acknowledgement there is hidden risk in there should be highlighted as a line item.

Great spreadsheet, though, it blows the doors off most others I've seen.

dasmo said...

"Why is Victoria, at present,different" than up island? Because there are jobs here and the weather is better than up island, there is an urban center with culture, events and good coffee and restaurants. New retirees are not looking in Victoria it's too expensive...new Microsoft and Zynga employees are looking in Victoria.

Just Jack said...

Here's what I posted before:

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.


So how did you read that prices were NOT coming down?

Leo S said...

Yes, I'd noticed that, but why? Why is Victoria, at present, different? Affordability as HHV defines it seems not to be of overriding importance. Why not?

I completely disagree. Affordability is of critical importance. In fact, I've changed my entire perspective in that I think the bubble is/was in affordability rather than house prices. Given how prices have behaved (up then almost flat), it's very difficult to make the argument that prices themselves were in a bubble. Bubbles don't end in a plateau. Real estate is unique in that it is almost exclusively purchased with leverage, so the monthly payments are far more important than the price.

Of course that means that the correction is already well underway and if the low interest rate and favourable credit conditions continue, may not have much further to go. Risk is elevated of course.

It also means that waiting to buy these past few years has been worth it (for us at least) even though prices have been flat. In 2008 5 year mortgages were still going for 5.5%, whereas now they are below 3%.

axeman said...

You just need to look at listings to see prices coming down, and there is no end in site.

I could not wait any longer, the time was right, the interest rate is low, payments affordable, and locked for 5 years.

I now have 2200 Sq Ft, which is costing me 1750/Month. My rent would be $2000 on the same place. We were in a 3 BDR (4 people) and going crazy, now we are happy.

Prices will keep dropping, no doubt, but how much and how long?

Low interest rates will keep the decline slow, I think similar to the 1994-2000 time frame.. but this summer and fall, expect more pain for sellers. I do expect at least another 10% reduction from here, or more.

Why did I buy? Simple... It was the right thing to do, for me and my family.

CS said...

"So how did you read that prices were NOT coming down?"

Linear regression. It's a horizontal line!

Just Jack said...

As you said Leo_S, its the affordability that is important and not the price. A big shift in banking occurred when CMHC began insuring mortgages not based on the properties worth, but on the ability of the home buyer to pay the mortgage. As CMHC has said, they are insuring the ability of the person to pay- not the home. The value of the collateral was meaningless.

That really screwed up market prices because it no longer was the price of the home that was important, but how much can you max out in financing. If you were willing to finance at a 40% debt ratio over someone else at a 38% ratio - you got the home.

That put the part time tree planter/drug dealer on par with people who saved up for a bigger deposit on a home. It became ludicrous to save for a home - just go out and buy the damn thing because everyone qualified now for bigger mortgages. The tips a waiter got, could get them another $100,000 in financing. You got a suite rented for a $1,000 a month, you now can pay $200,000 more for that same property.

So what's happening now. We have a lot more choices and time to buy. That means we can look at that house on a few acres in Metchosin for $425,000 and think that's a better deal than that Fernwood starter. And when people are given time to think, this financial method of home buying falls to pieces. We've gone through a period where people have been pushed into buying with teaser rates, hard selling agents, accommodating and creative financing and a government agency that was there only to push a product.

Like the card reader at the grocery store reads your "approved" now becomes a social statement of one's worth. The more debt you accumulate the more your worth as a person.

Buy now - your approved.

CS said...

"Affordability is of critical importance"

Affordability is surely not unimportant, but if it is so critical, why are prices allegedly falling in Victoria, while according to HHV's last post, affordability is rising (i.e., mortgage payments are falling relative to family income)?

CS said...

@JJ

"That put the part time tree planter/drug dealer on par with people who saved up for a bigger deposit on a home. "

A tree planter can gross $10,000 in a month, a drug dealer more, surely. So they are probably the ones with the big down payments.

But when you say, "now. We have a lot more choices and time to buy," you introduce a non-financial, sociological factor in the determination of prices, which is what I was suggesting earlier.

People are, perhaps, now beginning to seriously question whether is worth devoting ten, twenty or thirty years of disposable income to own a Fernwood starter.

Just Jack said...

You don't have enough data points to do a reliable linear regression.

Just Jack said...

Drug dealers don't save. They don't know if there will be a tomorrow for them.

Just Jack said...

I don't know if those buyers ever questioned 10, 20 or 30 years into the future. A house or a condominium was just a rung on the property ladder. A good portion of the homes up for sale today, have been bought in the last five years.

That's not long term thinking.

Just Jack said...

The value of the collateral was not meaningless but was of a much lower consideration on whether the mortgage was approved. With the heavy reliance on the persons income.

The person may have overpaid by $50,000 on the property, but because their earnings were so good, the loan would be approved. But that meant the next house listed on the street would now be priced $50,000 higher. Because that must be market value -because that's what it sold for. No, that's what that one person could afford - not what the home was worth. But the last sale on the street set the benchmark for the next home to be listed.

And prices just spiraled up.

Just Jack said...

Maybe someone can research this one.

But when you look up any boom in prices it has always been followed by a bust. It's a boom/bust cycle.

I have never heard of a boom/soft landing cycle.

Does anyone know of one?

jesse said...

I know it may seem crazy but affordability is of less concern if prices are dropping. In the case of parts of the US, even when prices were demonstrably falling year-on-year, buyers shied away because they refused to buy an asset that appeared to be worth lower next year than current. That didn't mean they were greedy; just prudent that if they needed to sell their balance sheets would take a big hit.

In the US now inventory is dropping fast and there is competition for units again. The bottom is in, and buyers are returning, sellers gaining enough confidence to hold instead of exit, and prices look to be measurably ticking up in some markets. All this with affordability better than it's been in a generation, which was true 2 years ago as well yet buyers weren't coming out.

So yes affordability matters but the whole "I am going to lose equity buying now" is a rational reason that affordability isn't the only thing that matters. I don't think Victoria (or Vancouver where I am) is at that point yet but this is a nonlinear response; if price drops take hold it will look insane that affordability is the primary driver. JMHO

Leo S said...

Affordability is surely not unimportant, but if it is so critical, why are prices allegedly falling in Victoria, while according to HHV's last post, affordability is rising

Well my theory is that affordability was in a bubble and is now correcting. Payments peaked in 2008 at almost 52% of pre-tax income, which is very high and clearly was not sustainable. Interest rates saved house prices and affordability is improving because rates are going lower. Prices are possibly declining, but very slowly if at all. I would still call them approximately flat.

Just likes bubbles don't correct by going sideways, they also don't stop at the mean, they overshoot. That's what affordability is doing now, it is overshooting.

The drastic improvement in affordability without an increase in house prices shows that the levels of (un)affordability we reached in 2008 were unsustainable.
The predictions and thesis of this blog were correct, but the way it played out was different that most people expected. Most people expected house prices to drop to fix the affordability problem, instead interest rates went down.

patriotz said...

why are prices allegedly falling in Victoria, while according to HHV's last post, affordability is rising (i.e., mortgage payments are falling relative to family income)?

The reason why prices fall - anywhere - is not enough buyers at the current market price.

If too much demand has been borrowed from the future (increase in ownership rate and debt) demand will eventually drop off without any change in affordability.

Affordability increased almost all the way through the US bust. And almost all the way though the Victoria/Vancouver bust of the early 80's. And has increased all the way through the undeniable current bust up Island and in the Okanagan.

This is self-evident, so why do I need to point it out?

Just Jack said...

The increased affordability and lower interest rates of today have not stimulated demand. The volume of sales is low in relation to the last two decades. The government has had to guarantee hundreds of billions of dollars so that are market didn't turtle. All they have done is deferred the inevitable.

At one time, rising prices were stimulating the economy. People would go and buy a new car, boat, vacation on their lines of credit. Now, higher prices are a drag on the economy and BC is a net looser of population at the same time unemployment and vacancy rates continue to rise.

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

Jesse,

I checked your spreadsheet against mine and get the same mortgage payments to the penny.

You are correct that in Canada mortgages compound semi-annually unlike the US which compounds monthly.

PMT does work for Canada but you have to set it up correctly. The trick is to use the following equation for the interest rate variable in PMT:

=((1+mortgage rate/compound_period)^(compound_period/periods_per_year))-1

=((1+mortgage rate/2)^(2/12))-1

You didn't see this being done in my spreadsheet because it is in row 13 which is not visible unless you "unhide" it.

Thank you for your other comments. Some interesting ideas..

CS said...

"You don't have enough data points to do a reliable linear regression."

In which case you don't have enough data points for a curvilinear regression demonstrating a peak followed by a decline.

"The reason why prices fall - anywhere - is not enough buyers at the current market price."

That's not an argument, its a tautology.

CS said...

"Now, higher prices are a drag on the economy"

We reached peak credit.

But why? Because most real incomes are flat or declining.

And why are real incomes flat or declining?

Because Our biggest customer is in a depression and won't buy our wood, or visit BC on vacation, etc.

And why is our biggest customer in a depression? Because several tens of millions of decently paying jobs have been lost through out-sourcing and off-shoring.

No strong recovery seems likely until N. America regains competitiveness with Asia, Mexico and the rest of the Third World. Incomes may have a long way yet to fall.

CS said...

Re: absence of long-term thinking.

If prices really are falling, some prospective buyers are perhaps having a Minsky moment, what Krugman refers to as a Wile E. Coyote moment, when complacency about taking on insane amounts of debt for the privilege of owning a starter home in Fernwood suddenly looks, well, insane.

totoro victoria said...

Debt is only "insane" if it relates to a depreciating asset that you cannot afford.

Real estate appreciates over time, although there may be short-term losses.

You have to live somewhere though so I weigh my monthly costs and overall picture in ten years. Buying still works out better for me.

What is a risk is forced liquidation as Jesse pointed out. If you divorce and you bought high and the market is low you might be forced to sell and lose big.

Leo S said...

Real estate appreciates over time, although there may be short-term losses.

The issue is that those short term losses can go on longer than most people stay in a house.

totoro victoria said...

Yes, that is definitely the issue Leo. So don't do that. If you buy be prepared to wait out the losses. You can't control for everything but you can control for many things.

Given transaction costs, you don't want to have to sell unless you see a price increase that compensates you - selling what you bought for puts you behind in PTT paid, any realtor fees, moving costs and potentially a fee to break your mortgage.

CS said...

"Debt is only "insane" if it relates to a depreciating asset that you cannot afford."

When I referred to "insane" debt, I meant "seemingly insane."

The Minsky moment marks a change in attitude from one of confidence or even complacency about debt to one of anxiety or fear.

Whether this is a truly observable social phenomenon I don't know, but many economists think it is.

Just Jack said...

You're too smart for me. You lost me a curvilinear regression. You could be quite right that 2010 will not be peak prices just because we have to wait for more time to elapse. Then in a couple of years we can accurately say that 2010 was peak prices.

But do you really think that prices are going to rebound to and above 2010 prices in the next few years? You see the increasing months of inventory is against you on that one. As long as the months of inventory continues to increase prices can not rebound to 2010 levels.

There are just too many cans of soup on the grocery shelve and not enough buyers. And there are more trucks arriving with more soup each day.

DP said...

Real estate appreciates over time

No, it only matches inflation. There are no real gains over time.

In ``Irrational Exuberance,'' Shiller says the notion that house prices always go up is ``very wrong.'' Shiller uses the Herengracht index in part to assert that there is no long-term positive trend in the real value of homes.

Leo S said...

There are just too many cans of soup on the grocery shelve and not enough buyers. And there are more trucks arriving with more soup each day.

Whoa whoa. Let's not get into that economic mumbo jumbo. Can you put that in layman's terms? :)

As for a decline, it has been a pretty steady gentle slope down since 2010.

Weighted average is the medians weighted by monthly sales.

Leo S said...

Shiller uses the Herengracht index in part to assert that there is no long-term positive trend in the real value of homes.

The big difference between Herengracht and Victoria is that Herengracht was already established when that dataset started. There was no significant densification or growth, it's more or less the same houses.

Victoria has changed quite significantly over the last 50 years and will continue to densify. You can't expect the average SFH to remain at the same price as a city goes from small to medium to large size.

Just Jack said...

Okay, who passed out the economics books! And why didn't I get one.

totoro victoria said...

Minsky moment... like when rates rise near renewal date on the mortgage?

totoro victoria said...

wait a minute, we are using data from the 1600s now?

totoro victoria said...

wait a minute, we are using data from the 1600s now?

DP said...

Herengracht was already established when that dataset started. There was no significant densification or growth, it's more or less the same houses.

The same houses are what make it such a great dataset. It’s similar to why Teranet’s price index is so accurate. If one had real price data from some 1800s houses in Victoria, you too would see there are no real price gains. There may be a tiny fractional gain due to the recent extreme deviation, but that will correct itself in the coming years.

Leo S said...

wait a minute, we are using data from the 1600s now?

Just because something is old, doesn't mean it's not valuable. There is nothing fundamentally different about houses today than 400 years ago.

Also, if you want 350 years of data, you need to look back 350 years.

Leo S said...

If one had real price data from some 1800s houses in Victoria, you too would see there are no real price gains.

Densification increases prices for detached homes. Small towns have lower home values than large ones. Hence it stands to reason that as a small town grows into a large one the real price of its detached homes will grow.

As far as I can tell the Herengracht canal looked much the same 350 years ago. You can't say the same thing about Victoria.

DP said...

Sure, to a point, as long as the city maintains economic vibrancy. Sometimes large towns shrink into small towns, with shrinking real prices. And sometimes small towns grow into fairly large towns with no real price growth, so there are exceptions. Also keep in mind Fort McMurray is much smaller than Victoria, yet pricier. Of course there’s a list of other comparison factors as a city grows like taxes, town utilities, subdivision of large lots… many owners have made nice real gains from nothing other than subdivision of land and strata over the years. I think Victoria’s pendulum may have swung too far in that area (hamster boxes), but we’ll see.

dasmo said...

I might add that houses go for a couple million euros on the Herengracht canal...that might have been 20 guilders in 1600 so in real dollars no gains at all...

totoro victoria said...

So, the real point is that in some places houses rise at the pace of inflation? Canada's inflation rate has historically been 3.5. Houses have risen more than this in Victoria over the past fifty years.

I would be very pleased with an annual gain of 3.5% on my overall home value which was purchased with other people's money ie. a mortgage.

3.5% on a $600 000 home is $18,300 tax free dollars a year. The payment is $2000/month of which about $800 is a principal payment.

Sooo... when places are rising on average you have a gain of $9600 in principal (against renting) plus a tax free capital gain of $18,300.

I'm okay with that.

patriotz said...

"You can't expect the average SFH to remain at the same price as a city goes from small to medium to large size."

The historical fact in the US is that they have trended around the same real price over the last century.

Also the % of SFH out of total dwellings is higher today in most US metros than a century ago or 50 years ago. US population has tripled over the last century and the urban population has increased much more.

Go back before the current bubble and you'll find the same in Canada.

Introvert said...

Now, ... BC is a net looser [sic] of population...

So sad. I guess this can happen under BC Liberal governments, too.

For so long, I was under the mistaken impression that only the NDP could drive this province into the ground.

Just Jack said...

I bet you would like to see 3.5% a year increase in your home's value. But that hasn't been the case for several years now.

Besides, you would either have to sell your home or take out more debt on your house to use the money.

Which brings up the question.

If you use your home equity to do renovations that increase the aesthetic value or your home - are you better off than not having done them at all?

Leo S said...

I might add that houses go for a couple million euros on the Herengracht canal...that might have been 20 guilders in 1600 so in real dollars no gains at all...

I know you don't like inflation, but your statement is correct as written.
Those 20 guilders 400 years ago would have been just as difficult to earn as those couple million today.

Introvert said...

Sometimes large towns shrink into small towns, with shrinking real prices.

Being the capital, Victoria will always have a relatively high number of well-paying public-sector jobs. Therefore Victoria is extremely unlikely to shrink.

Also keep in mind Fort McMurray is much smaller than Victoria, yet pricier.

Fort McMurray is probably the only example of this. And I ask: when all the oil is extracted (or when we stop extracting it even though it is there), what will happen to Fort McMurray? Further, what will happen to Calgary? Has Calgary not drastically over-built its housing supply based upon the assumption that the jobs will never go away (or at least not for 50-100 years)? What if those jobs go away much sooner than expected?

Victoria will always be the capital of BC, will always have the mildest climate in Canada.

Leo S said...

The historical fact in the US is that they have trended around the same real price over the last century.

Yes, nationally that has been the case. I would expect it to be the same in Canada. Some cities densify and rise in prices, while more low cost suburbs are built elsewhere or small towns come up and about evens out.

I've never seen price data back as far as 1890 for a city like Seattle or San Francisco, but I'm certain it will look very different. Even with less data, like the 60 years in Seattle, it's pretty clear that there is no way they're ever going back to the $150,000 mark for houses.

Leo S said...

Being the capital, Victoria will always have a relatively high number of well-paying public-sector jobs.

Just to be devil's advocate. They thought the same thing in Greece. I know lots of people that work in government and crown corps that remark on how top heavy it is. People with the title of "Director" that don't actually have a single person reporting to them but still collect the salary. Higher level managers that jockey around for well paid positions but don't have the foggiest ideas about what actually gets done in the corporation. In tough times public sentiment can turn quickly against that sort of thing.

I'd say the people working in the oil sands in Calgary are at least as safe. That oil isn't running out anytime soon, and there will never be enough political will to stop it for other reasons.

Leo S said...

So, the real point is that in some places houses rise at the pace of inflation?

Sort of. If your investment time horizon is 400 years, you should be matching inflation.

Of course, there is a huge caveat. It depends on when you buy. In the 100 years from early 1700s to 1800s real prices there collapsed by 70%. The fact that they recovered somewhat 100 years later is probably of little consolation to any individuals.

Just Jack said...

The population of Victoria, like all cities, ebbs and flows with the economy.

Iqaluit, on Baffin Island is the capital city of Nunavet and it also has a mild climate in relation to other parts of the province. In the five years between 2001 to 2006 the population of this capital city increased 18% mostly due to migration from other parts of the province by those desiring a milder climate to spend their retirement and young families looking for employment in construction related industries. This caused a housing boom because so many people now wanted to live in Iqaluit.

totoro victoria said...

As a mere mortal, my investment horizon is ten years; however, I do plan to get my kids started in real estate earlier.

The sooner you make gains, assuming you are stable in your approach, the sooner you have financial freedom.

For those of you who are looking for the right place here are some strategies I use:

1. I don't use a realtor to represent me. They charge a commission to do so and this can impact the final sale price when you are negotiating. I'm comfortable with this but it is not for everyone.

2. I review FSBO daily. My last place I bought after seeing the FSBO ad on craigslist.

3. Word of mouth. I bought my house in the Okanagan after hearing about it at a party from a neighbour. I left the party to see the house and had an accepted offer by midnight.

4. Flyers. When not many places are for sale I have made up flyers explaining what we are looking for and delivered them to specific areas. I did not have any luck witht this approach but would try it again because I believe it could work.

Just Jack said...

I will echo your thoughts on that Leo_S. Those cities that have young families spend more of their income in their communities than retirement cities. That keeps the economy diversified and vibrant. Cities that lack diversification in employment are likely to have longer lasting down cycles.

Our biggest industry is government and that has been overly centralized in one or two of the 13 municipalities that make up our region.

Its like planting only one crop of potatoes to feed your family over the winter. What happens if the potato crop fails?

patriotz said...

Even with less data, like the 60 years in Seattle, it's pretty clear that there is no way they're ever going back to the $150,000 mark for houses.

I have already noted that 1 income households were the norm at that time, and 2 income households are the norm today. So yes in urban centres with well paying jobs we can expect higher real prices today. But how much higher?

What I find entertaining about that chart is that it's 3 years old and prices have fallen about 15% nominal and 20% real since, taking them down to 2000 levels (about $300K real).

In 2007 the usual suspects were claiming, of course, that Seattle would not go down at all, with arguments that you would recognize on this forum today.

totoro victoria said...

who is posting that prices won't fall? haven't noticed anyone but maybe that is in posts a ways back.

what i notice is that people are postulating reasons why victoria is not falling as fast as they had expected. i myself expected prices to have fallen more already. i attribute this to really low interest rates. given this effect, prices appear more stable right now, subject to a triggering factor for a drop.

i notice that prices are down in outlying areas and up island and recreational. the only markets i really follow closely is OB and a specific part of the Okanagan.

OB is down for less than ideal properties, really nice homes in the $600,000-$800,000 bracket seem as expensive as two years ago.

As for the part of the Okanagan I know about, prices are down quite a bit on condos and a little down on houses over the past two-three years.

patriotz said...

I'm saying that the arguments are the same as those that were made in Seattle.

Since it's now obvious that prices in Victoria have fallen, instead of claims that prices can't fall we're now getting claims that prices won't fall further without some negative event. From you for example.

Such claims are tautological, since there's always some negative economic event in the world that one can point to ex post facto.

totoro victoria said...

Just giving my best guess based on a question that was put out there by someone else, which I stated was simply my best guess. I don't have a crystal ball and prefer to make decisions today based on what it is going to cost me today.

A ten year mortgage provides the security I need to enter the market high based on much lower than rent living costs. If prices fall I'm okay with that, I will ride it out for the full ten years.

I'm forty and want to retire at fifty. I expect to be able to sell one rental house and pay down the mortgage on the one I'm staying in in ten years using the principal payments alone if that is all there is.

In the home I am staying in I will have rental income which I project to be $2500/month at that point. I will keep my Okanagan home as well which will be mostly paid off in ten years and bring an income of $24,000 a year.

Anyone with credit and down payment money could do this... now.

dasmo said...

"Our biggest industry is government" Sure but our biggest private industry is tech generating 2.9 billion in dollars to the area. It's also "catching on" as tech hubs tend to do. This is why Zynga is returning. we have a little game hub going. One of the reasons is there is talent here and it's waaaay more affordable than Van with easier travel to SanFran and Seattle. Our economy is diverse and growing. That is one reason I love it here. We are not an oil town or a car town or a government town or a military town. We are a government, tech, tourism, military, financial, construction, manufacturing town....

DP said...

I wouldn’t count on the 8 Zynga employees keeping there job.
Zynga use declines causing record loss
Micorsoft xbox’ers on Wharf St might be safer.

DP said...

We are a government, tech, tourism, military, financial, construction, manufacturing town.…

Gov is cutting, military shipping contracts likely cut, tourism is ailing, fin & const - we know where they’re headed, and manufacturing? We are a manufacturing town?

totoro victoria said...

http://www.timescolonist.com/business/Renters+gaining+upper+hand+Victoria/6774611/story.html

Just Jack said...

The rising costs to a landlord make it necessary for them to raise their rental rates. But at the cost of a higher vacancy rate.

Most tenancies last two years. So, on average you can expect one to two months every two years of the suite being vacant. Of course, that's an average. In Sooke that may be 3 months and in Oak Bay only 1 month.

The problem is that a higher vacancy rate makes it difficult to pass all of the increased costs onto the tenant. This can make some landlords bleed red ink, especially as the mortgage keeps increasing as they use their HELOC's for repairs and to subsidize their lifestyles.

As I mentioned before, house prices continued to fall in the 1980's despite falling interest rates. Those that were active landlord's during that time have said it was their rental homes going vacant that forced them to sell at a loss. They could not afford to lower their rents, thus the home stayed vacant until the bank sold it for them.

Right now, about half the detached houses that are advertised court ordered sales have basement suites and are mostly located in the Western Communities.

So, if you have a home with a basement suite in Oak Bay you are indeed luckier than most.

Just Jack said...
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Roger said...

The spreadsheet that I posted earlier was intended to be used as a tool to help a buyer decide if they should buy now or wait a year or two. A number of posters have commented that buying now might be the best option even if prices fall because interest rates will be rising. I have run a number of breakeven scenarios to see when this might be true.

For the purposes of analysis I assumed that the purchase price was 550K and that the buyer had 75K as a down payment. A 25 year amortization with a 5 year fixed rate of 3.49% (Coast Capital) was used in order to buy now. The parameters that were varied were mortgage rates (3.49% - 5%), rent ($1600-$2500) and suite income ($1000). The results are in these pdf files which are easy to scroll through in page mode. The percentages after the file name show the range of price change necessary before waiting is the best option.

Flat interest rates + 2.5% to -1.7%
Flat interest rates with suite -1.9% to -5.9%
Slow rising rates 0.3% to -3.7%
Slow rising rates with suite -2.1% to -7.8%
Fast rising rates -0.8 to -4.7%
Fast rising rates with suite -2.8% to -8.8%

Under all cases tested waiting was the better option if prices fell by at least 4.9% in one year or 8.8% over two years. If a buyer is not interested in having a rental suite then prices only have to drop by 3% and 4.7% respectively before waiting is a better option.

Higher rents and fast rising mortgage rates have a significant impact. Suite income has a bigger effect because it is money lost while waiting. Those looking to be landlords might consider buying now especially if they decide to take a ten year term.

JustWatching said...

OSFI must be tightening the screws on the banks.

Banks go on appraisal alert in a volatile housing market

No wonder we see deals falling through due to financing. This will make it difficult for high loan-to-value owners to switch lenders when their mortgage comes up for renewal

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

"1. I don't use a realtor to represent me. They charge a commission to do so and this can impact the final sale price when you are negotiating. I'm comfortable with this but it is not for everyone."

Are you referring to private listings?

Marko said...

"1. I don't use a realtor to represent me. They charge a commission to do so and this can impact the final sale price when you are negotiating. I'm comfortable with this but it is not for everyone."

Are you referring to private listings?

kunwak said...

dasmo said: "I might add that houses go for a couple million euros on the Herengracht canal...that might have been 20 guilders in 1600 so in real dollars no gains at all..."

How does that make any sense. Sure they may have sold for 20 Gulden back then but only the very wealthy person would have had those 20 Gulden to buy that house. The same class of people bought those home then and now. That is why real dollars matter.

dasmo said...

"The same class of people bought those home then and now. That is why real dollars matter." Only if "real dollars" rose in a perfectly smooth and synced manner. They don't. Index parameters change, house prices will lag inflation, neighbourhoods gentrify or go bad etc. If you go over 350 years they will probably correlate because in the end one catches up to the other to equalize "affordability". We are working with roughly a 40 year window so that changes things. One might have been able to buy that 2 million euro canal house before the euro for a song comparatively...

RealR said...

To understand where house prices go next, all you really need to know is where raw materials (a home's building blocks) are going. Sure there are other minor factors, but this is the kingpin.

I can hear someone shouting it's "easy credit!". Easy credit lifts the price of land & raw materials, so there's no need to look further. To boot, us westerners make most of our income either directly or indirectly from raw materials.

The nice thing is wood, copper, glass, gypsum, steel, cement, energy and land all move together. The other nice thing is these building blocks follow a regular price pattern.

Here's another view.

totoro victoria said...

"1. I don't use a realtor to represent me. They charge a commission to do so and this can impact the final sale price when you are negotiating. I'm comfortable with this but it is not for everyone."

Are you referring to private listings?"

I'm referring to being a buyer. I don't use a realtor to represent me as I am comfortable searching myself.

In one case I bought a home in which the listing realtor reduced their commission (as there was no other realtor to split the commission with) to reduce the cost to the seller in order to make the sale.

In two cases I purchased privately listed homes in which there were no commissions paid by the owner or I. This, I believe, resulted in an increase in money to the buyer and a decrease in price for me.

In one other case the seller reduced their price as they worked out a deal with their realtor on the commission but I'm not sure exactly what their arrangement was.

I'm not saying that there is not value in having a realtor, just that I am comfortable with the purchase process.

Robert Reynolds - HMR Insurance said...

Bank of Canada warns European crisis could have substantial impact on Canada

"The central bank's said Thursday that Canadian households generally have too much of their net worth tied to real estate values, which it says are overvalued."

http://www.winnipegfreepress.com/canada/bank-of-canada-warns-european-crisis-could-have-substantial-impact-on-canada-159048335.html

Robert Reynolds - HMR Insurance said...

From the article I posted above

"As well, the diminished prospects for economic growth likely lead to a continuation of rock-bottom interest rates in Canada, which would further erode the positions of life insurance companies, pension plans and boost household borrowing."

Insurance companies are making record profits (manulife made $1.2B in the first quarter of 2012) but they are terrified of prolonged low interest rates. Yesterday Manulife increased their long term insurance product rates for what I count as the fourth time in the last year or so. I just received an email this morning informing me that RBC Insurance is suspending the sale of all long term insurance products. (term 100, universal life, Term to 75 critical illness etc.)

These companies are so scared they are closing their doors, and claiming "no one home but us chickens."

also ROGER WELCOME BACK!

Roger said...
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