Monday, June 18, 2012

June 18: 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 weeks in brackets)
Net Unconditional Sales: 336 (193, 45)
New Listings:  799 (441, 112)
Active Listings:  4862 (4765, 4696)
Sales to new listings ratio: 42% (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

The mirror market of last year continues.  Listings sped up a bit last week so we're now running the same rate as a year ago.  This kind of market produced gentle declines in the past 2 years (~2% a year) so it is still relatively balanced.   OSFI restrictions will give it a bit of a nudge, and certainly won't be good news for anyone in the reno industry, as HELOC room will be reduced considerably.  


omc said...

I agree with LeoS, that this market will cause further gentle declines in price. I wouldn't get too excited about anything more than that though as interest rates aren't going up any time soon AND the Vancouver and Toronto markets are cooling. There is no reason for the gov't to reign in prices with no upward pressure, in fact it is in thier interest to hold them steady.

Pretty much another housing season has past with more of the same. Rent or Buy?; Pretty much depends on your circumstance. A halibut of a RE market. Enjoy your summer everyone. We will now return to the rest of your life already in progress.

Roger said...

5 year vs. 10 year mortgages

A few years ago no one would even consider 10 year mortgage terms because the interest rates were excessive. Recently, the rates for 10 year mortgages have been dropping like a stone. Major lenders are now offering 3.95% and second tier lenders are advertising 3.89%. The most popular mortgage is still the 5 year fixed which is currently available at 3.49%. Which is best option?

There are several factors to consider:
- how long will the property be owned
- early termination penalty fees
- portability of mortgage
- renewal rate for 5 year mortgages

Given that mortgage rates are at record lows it is a safe bet that the renewal rate after 5 years will be higher than current rates. The following chart shows that the 10 year term saves money if the 5 yr. renewal rate is 4.39% or more.

5 Year vs. 10 Year Term Comparison - 500K Mortgage

If 5 year rates jump back to historical levels (around 6%) the monthly payment will jump considerably. The back-to-back 5 year mortgages also have the following drawbacks compared to a 10 year term mortgage
- total payments will be 20K higher
- over 30K more interest will be paid
- the final balance will be 10K higher

Marko said...

SFH Average MTD = 592k
Codno Average MTD = 310k

totoro victoria said...

3.84 for ten years is available through True North. You need to have an accepted offer to apply.

It is an ING mortgage that allows 25% additional payments per year with pretty good terms.

If you break the mortgage early you are subject to the 3month interst or IRD penalty to five years. After five years it is the 3 month interest penalty only.

These mortgages are transferrable.

Roger said...

Should you buy now and lock in with a 10 year mortgage?

Lets say you are looking at purchasing that 550K house I wrote about last week. You know the rock bottom interest rates of 3.95% for a ten year fixed won't last. A reasonable guess might be that if rates change they will jump to 5% next year and 6% the following year. You have saved 75K and plan to save whatever the difference is from buying that place today while you wait.

Your current rent and whether you want to be a landlord (suite rental income) are the critical factors.

Assuming that current rent is $1500 and suite rental income is $1000 (both conservatively low) we get the following break-even results.

No suite click here
Wait 1 Yr. - 3.6% drop
Wait 2 Yr. - 4.3% drop

With suite click here
Wait 1 Yr. - 4.8% drop
Wait 2 Yr. - 7.1% drop

The minimum drop to break-even is 3.6 % and prices will have to decrease even more if the rent or suite income is higher.

When deciding to buy or wait consider the following risks:
- will prices rise, flatten or drop
- what direction are rates heading and what are reasonable assumptions
- is your financial situation stable enough to lock in for 10 years

As Marko said in a post last week "Buy when you are ready and comfortable and buy the right property."

CS said...

"A reasonable guess might be that if rates change they will jump to 5% next year and 6% the following year."

Then again it might be just as reasonable to assume that rates won't jump, or even amble upward, but will stagnate or even slither downward as the global economy sinks into depression.

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

Since we all have the believe that the more you pay for something the better it is, here are some benchmark homes for the different districts showing where you are in the pecking order of life.

Starting with the number one location to live (based on the typical price for home having similar utility to a 1,775 to 2,775 square foot home on a 6,000 to 10,000 square foot non waterfront lot.

$697,500 Oak Bay
$610,816 Victoria
$577,000 Saanich East
$530,000 Saanich West
$501,250 Esquimalt
$490,000 Sidney
$488,000 Langford
$466,000 Colwood
$424,500 Sooke

There you go.

People that live in Oak Bay are 64 percent better looking than people living in Sooke.

Oak Bay people are also 39 percent smarter than those that live in Esquimalt.

People in Oak Bay pay some 14% more for their pot, than someone in Victoria.

And Oak Bay's weather is 42% better than Sidney's.

Just Jack said...

Post Script to the above. If you want to figure out how much rent you should pay for that typical home in each of those areas just divide the price by around 325.

totoro victoria said...

Here is an example of buying a home with a legal two bedroom suite near Oak Bay (using 748 Davie as an example):

$620 000 (negotiate down from $645 000)
$124 000 down payment plus PTT

$496 000 mortgaged at 3.84 for 10 years

Mortgage - $2300/month
Rent - $1200/month

You pay $1100/month plus $400/month cost of home ownership (insurance, taxes, maintenance)

Total cost of ownership: $1500/month for 3 bedroom 1 bathroom home that is fully renovated on a small lot in a good area.

Are there better deals out there? Most definitely, but this gives an example of why it is still affordable to buy right now for those who are okay with a suite and don't have any plans to sell in the near future and would really prefer not to rent.

Leo S said...

Mortgage - $2300/month
Rent - $1200/month

You pay $1100/month

Don't you have to pay taxes on your rental income?

Also, minor nitpick, you will be paying $1500/month for the 3br upper part of a house. Not the same value as a 3br house.

totoro victoria said...

Assuming you have managed to reduce your monthly costs by buying rather than renting, what do you do with the annual savings (assuming you will invest them):

1. Pay down your mortgage, or
2. Contribute to your RRSP, get a tax benefit and pay down your mortgage, or
3. Contribute to your RRSP, get a tax benefit and place it in next year's RRSP and do a self directed RRSP mortgage when you hit $100,000

Here is a calculator to figure part of it out:

But not sure how strategy three works out. I'm going to figure that out someday.

totoro victoria said...

Hi Leo,

You will have to pay taxes on rental income less the mortgage interest and costs including share of taxes, maintenance, insurance associated with the suite.

In my experience, this deduction works out fairly even in the early years when portion is high - here is is $1580/month for interest alone first year not counting other expenses.

It is a three bedroom two bathroom (not one) upper suite and fair market value as a rental is about $1700/month IMO. So, lets say you are saving $200/month by owning not counting appreciation or depreciation.

If you plan to stay put for ten years and only make minimum payments you will owe $388 000 on your mortgage.

I am assuming the house won't be less than now in ten years based on history, not even attributing any appreciation you will have $232 000 in equity - less your original down payment this is $108,000 - or $10,800/year.

This means that you paid $600 a month for accommodation in the end. Much less if there is appreciation.

totoro victoria said...

Ooops - sorry - not $600/month - $60/month.

totoro victoria said...

$60/month not counting the amount you save vs. renting. Given that your mortgage will be stable while rents increase with inflation I would guess this amounts to more than $200/month.

totoro victoria said...

Well, I ran the calculations. It turns out I am better off to pay into the RRSP and take the tax savings and deposit them on the mortgage. When I reach a set amount in my RRSPs I plan to transfer the existing mortgage on the rental property to a self-directed RRSP.

Why? Because I will be able to receive the mortgage/interest payments tax deferred in my RRSP while deducting the cost of the self-directed RRSP from the rental income. This also provides a hedge against mortgage renewal in 2.5 years when I won't know the rates will be. A higher rate will be paid to myself and will be deductible against the rental income.

This saves paying a penalty now to break the mortgage and transfer to a ten year 3.84 mortgage.

I ended up using this site to help me:

Just Jack said...

Most of the time it will always be affordable to buy a home.

Because when it isn't affordable then homes don't sell and prices go down until they become affordable and sell.

But what's not being talked about is risk. The greater the amount of your disposable income that it takes to service the debt and the longer the time to pay back the loan, then the greater the risk from loss of a job, interest rate spikes, increasing expenses, etc, etc.

A lot of people have made a lot of money over the last decade in real estate. They have lots of cash and spending $600,000 on a home may not be risky at all to them.

But they are not the norm.

If you are starting out in life, your not in the same league as these buyers. Your the kid with the bent nickle that wants to get in on the hundred dollar poker table. You have to wait until the next real estate cycle begins before you can buy in.

Just as when we look at the multiple of the average income that it takes to buy a home today and say that's just lunacy. During the coming trough in prices we will look at how low that multiple is and then ask "why aren't people buying?"

Because its a long way down from those monied buyers of today to what those starter home buyers of tomorrow are willing to risk.

In my opinion, you should never risk more than 30 percent of your home on mortgage payments and expect that loan to be paid off in under 15 years.

Bringing in boarders or renting part of your home is something the widow did next door to make ends meet. It shouldn't be the best or only strategy to buying a home today.

Just Jack said...

As for a self directed RRSP mortgage. You want to give yourself the absolute worst rate and terms possible.


Think like a banker. You want to pour money back into your RRSP at the highest rate permitted. That means you want a high interest rate environment, and that means doing a self directed RRSP is not a good idea today.

So, you want a self directed mortgage at a interest rate at least at 10% (the higher that is permitted the better) paid monthly and for 30 years.

Cast yourself as the fat cat banker with the pimply faced 20 year olds sitting across the desk from you and just screw them over big time.

totoro victoria said...

Maybe Just Jack. Maybe not.

Times have changed and it depends what is important to you. Personalities come in all different sorts.

Renting out suites and having homestay students is actually pretty mainstream these days in Victoria.

I could cash out my real estate and buy one single family home in Oak Bay and have a very affordable mortgage, but I am interested in retiring early. I look for good quality of life now - because there are no guarantees - and retirment with income producing property in 10 years.

My choices are similar to those that the kid with the bent nickel could make in this market if they had limited funds and were willing to look around.

If you are just starting out and single family living is what you want then move up island or somewhere else. You have to do what is important for you. Maybe live in the outlying areas like Sooke.

If you are just starting out and want to live in the city you'd better think creatively and be open to being the widow next door. If you have rental property, you'd better make sure the numbers work.

But that is just me, I'm interested in free time while I'm healthy. That is why I've made the choice to work part-time. I'd rather make money on real estate than by working more.

totoro victoria said...

You don't want to give yourself the worst rate and term Just Jack. It is still YOUR money that is paying the mortgage. There is no magical extra cash created by the RRSP mortgage. If you are paying $1000 a month to yourself instead of $600/month to a bank you still have to come up with the difference.

It is true that RRSP mortgages make more sense when the alternatives are more expensive.

Just Jack said...

And in the low interest rate environment it does not pay to take the RRSP tax rebate and pay off the low interest rate loan.

Put the money in a TFSA and buy investments that will earn you money.

Your crazy to pay off a loan that is basically at near free interest.

totoro victoria said...

I think about risk all the time. Part of my job is risk management.

Manage risk by being aware of it and planning for the worst case scenario and not through some formula.

Expecting not to pay more than 30% of your income for a mortgage with a 15 year term is a recipe to leave Victoria. It is unrealistic in today's market.

Just Jack said...

Think about, totoro, you want to pour as much as you can BACK into the RRSP. The money that's in the RRSP is being invested and is growing. The more you get back and the sooner then the faster the growth.

Think of yourself as the bank that's giving the loan. You want to make the most profit for the bank (which is your RRSP)

totoro victoria said...

Maybe. Maybe not re the RRSPs.

I expect that in 2.5 years when my investment property comes up for renewal rates may be higher.

I'm not a fan of RRSPs. I find that the investment is restrictive and I will be taxed on the income later. Capital gains on houses are not taxed if they are a primary residence.

I am not great at RRSP investments and have lost money before. I'm sure many of you reading these posts have had similar experiences.

When I look at an RRSP mortgage I factor these things:

1. tax deduction I would not otherwise have had
2. guaranteed rate of return - no questions about it - and the ability to reinvest each mortgage payment into something else through something like the TD e-series as part of my long-term plan

If there is another sure-fire no-risk 6% per year (my estimate in 2.5 years for a 10 year mortgage) compounding return for RRSPs front loaded for interest payments it would be good to know this.

totoro victoria said...

Just Jack - the bank wants you to pay the highest rate because they get this money and you pay it.

When you hold your own RRSP you want to be market competitive. If you could have obtained a much cheaper mortgage than the RRSP mortgage strategy is a money loser. You are paying yourself YOUR money.

Leo S said...

The last time an average Victoria family spent only 30% of their income on the average detached house was 1987. I don't think we'll be back there. However right now we're around 40%, and a further decline to 35% seems pretty likely.

As for the RRSP mortgage, it's intriguing, but what do you think about the issue of double taxation? You take your after tax dollars to pay your RRSP mortgage, and then get taxed again to take the money out after retirement. I'm not sure how to calculate the benefits of that strategy VS just paying off your mortgage as fast as possible (my first instinct).

totoro victoria said...

The "buy investments that will earn you money" is subject to significant risk. I view a primary residence as a much much lower risk.

totoro victoria said...

Leo - you have to think about what income you will need in retirement and what other sources of income you will have. Each person will be in a different position potentially.

Me, I am able to live on little. I plan to retire at fifty without a pension. I will have 15-20 years without any CCP or other pension. Only rental income, savings and investments.

The double taxation issue is what has kept me from RRSPs, along with the poor rates of return I previously experienced.

What I know now is that when I have reduced my housing cost to zero, my current goal, I and my partner will only need to make $1500 a month each in today's dollars to have a fairly good lifestyle for us which includes a car, vacation home and lots of free time.

What does this mean? I will need $18,000/year. If I take this all from RRSPs the first ten years this means I will only need $20,000/year in RRSP withdrawals and pay 10% in tax. I can live with that.

At the end of the next fifteen years my mortgages on the properties will be entirely paid down and we will receive $4500/month income per month for as long as we keep them.

If we sell our primary residence to "downsize" we should be able to live comfortably.

Who knows if it will work perfectly. It is just a plan subject to adjustment.

Just Jack said...

Of course its unrealistic in today's market. Re-read the post.

And being aware of risk is a lot different than what you are posting. None of your posts speaks to risk on how to measure it or how to reduce it or even what it is.

Risk management is part of your job, then you should be well versed in how to measure and plan for it. Are you able to objectively run a worse case scenario on real estate? I don't think you can. You're too close to it.

JustWatching said...

totoro victoria,

You can only deduct a fraction of the mortgage interest from your rental income if the property is your principal residence. Mortgage interest is treated the same as all the other deductions (maintenance, taxes, insurance, advertising etc.).

CRA bulletin t4036 - expenses
CRA bulletin t4036 - portion

Personal portion If you rent part of the building where you live, you can claim the amount of your expenses that relate to the rented part of the building. You have to divide the expenses that relate to the whole property between your personal part and the rented part. You can split the expenses using square metres or the number of rooms you are renting in the building, as long as the split is reasonable.

For the 1748 Davies property that ratio would be about 35-40% if it was being used as a personal residence with the lower suite rented out.

Rental income 1500
Less 40% of
mortgage interest 1580
plus taxes, ins. & maint. 400
= 1980*.4= 792
Taxable Rental Income $708

That money would be on top of regular income and would be taxed at the marginal rate and tax paid would range from 180 to 350.

Using your example above means you would be paying 1680-1850 per month to live their instead of 1500.

BTW - Don't even think of not reporting the income. If CRA finds out (audit, upset renter or neighbour) it can get ugly fast. I have had one bad dealing with CRA and I never want to go there again.

totoro victoria said...

Also, Leo, you have to factor in the tax deduction you would not otherwise had on the RRSP so it is not exactly an "after tax" investment.

totoro victoria said...

Just Watching - you are correct. You would have to pay tax on that portion and the Davie street suite is smaller.

In my case that I referred to, I was in the smaller suite and could deduct a larger portion based on floor space, as well as my home office.

As far as CRA, I agree. Who needs the stress of that. Report the income and pay what you need to pay. Factor it into your calculations properly.

Life is too short to have stress that is avoidable.

totoro victoria said...

Maybe I am too close to it, but the way I view it is that you have to live somewhere. It is a significant cost and quality of life issue that can be reduced a lot through ownership over time.

Risk reduction comes with a suite and a long-term mortgage at a low rate for me. I also have disability insurance and a partner with a fairly stable career.

I have showed the calculations. The numbers work. My own numbers work. Not sure what else I can do.

I sometimes worry about earthquakes, but you gotta stop somewhere.

Roger said...

CRA permits holders of self-directed RRSPs to setup a mortgage using the funds in their RRSP. Here are some of the key points involved in doing this:

- mortgage must be administered by a financial entity. For example TD bank can set up a mortgage using funds in a TD Waterhouse self-directed account.

- interest rate charged must be at current market rates. It is possible to have a variable rate but some institutions will only set up fixed rate mortgages.

- there is an initial set up fee which might be around 1K and an annual fee around $300 (those figures are from memory and may be off a bit)

- loan must be CMHC insured regardless of amount or loan ratio. This can be a little as .5% up to several percent depending on ratio of mortgage amount to appraised value.

Is a self-directed mortgage a good idea?? It depends on your financial goals and personal circumstances. A financial planner can help you evaluate the trade offs. One thing to note is that the mortgage should be over 100K due to the setup and annual fees.

If you are in Victoria you can drop into the Douglas St. branch of TD and they will give you all the details. Other banks may be able to help you as well but as a customer of TD I know for a fact this branch has staff that is familiar with this type of mortgage.

totoro victoria said...

Thanks Roger!

totoro victoria said...

Actually, TD is not offering this product anymore - ended in April this year. Canada Western Trust still offers it.

totoro victoria said...

Other things about the self-directed mortgage:

can be a first or second mortgage which is good because you don't have to have enough in your rrsp for the whole mortgage

set up and fees are deductible expenses against rental income for rental properties

there are two products - non-arms length and arms length

the application process is much more onerous than for a regular mortgage

totoro victoria said...

Leo - you get a tax deduction for the payments you make. The amount is after tax that you contribute but you have to factor in what you get in the end as a result. If you are in the 24% income tax bracket and contribution $10,000 you reduce your taxable income off the top and the principal and investment income in future is tax deferred to a time when you might pay a lower rate. You have to work all the variables - not sure if i have presented it accurately.

Just Jack said...

Sure we can go back to 30% of the average income. Especially now with 30 year amortizations and the higher variable costs of both renting and home ownership. Entirely possible and probably most likely to happen as the cities try to balance their budgets and run up the cost of utilities, electricity, taxes, etc.

As for RRSP's when you take out less than $15,000 then you pay an up front tax of 20%. More than $15,000 then the up front tax is higher.

BUT, at the end of the year when you do your taxes you would get money returned to you, if the $15,000 was your only income. Take out $36,000 (without other income) and you will still be at the minimum tax rate. RRSP's are actually pretty good if you own your own company and can reduce your T4 to a buck and cash in some of your RRSP during lean times. When the business is doing well you ca load up on RRSP's and take the tax break.

For the common Joe, the TFSA should be your first choice. The equity and bond market has a far better long term potential than real estate will have for the next decade or more, just because of the demographics. Unsure of what to invest in, just buy stocks in what all the old farts are going to need for the next decade or more.

So buy Viagra not condoms. Depends not diapers.

The self directed RRSP, around the half way mark, becomes just a flow through anyway. You take out the money pay the tax on it. Then use that money to pay your mortgage back into the RRSP. Yes, you loose money in the shuffle, but what you earn within the RRSP, should compensate for the taxes to be paid.

Also, at 72 you can no longer make contributions to your RRSP. BUT, you can still put money into the RRSP in your self directed mortgage.

totoro victoria said...

Just Watching - just noticed an error - the rental income was only $1200 estimated - not $1500 (too high for a two bed). This means after deductions you would be looking at $400 a month taxable rental income.

Leo S said...

Leo - you get a tax deduction for the payments you make.

Sorry, I deleted my original post.

You get a tax refund when you first put in those RRSP funds (a regular contribution), but when you're paying off your RRSP mortgage you don't get additional refund on those payments. I'm pretty sure that just because it's going into your RRSP doesn't mean you will get a refund. It's completely separate from the regular contributions.

totoro victoria said...

Well, I have not been on this forum for very long so I went to look at the archives to find:

Dec. 2008 Prediction for 2009
"As far as prices go, I expect to see... a 2008-like plunge that will see month-over-month average changes in the negative 2%-2.5%, totalling up to somewhere in the neighbourhood of 18%-24% total annual decline."

Nov. 2009 Prediction
"Prices are rising, interest rates are rising and incomes are falling. I wonder which way the market will head over the next 12 to 24 months? *scratches head*"

Dec. 2010
"Sales are almost double what they were in the early winter months of 2008. And that's why prices aren't plummeting."

Oct. 2011
"Prices are falling, inventory remains excessive for this time of year and sales volumes are low when compared against the decade average for October. Sitting on the sidelines has little downside these days (and arguably much upside)."


totoro victoria said...

Leo - these payments would otherwise go to a mortgage held by a bank.

Just like any other return on investment held by an RRSP the interest on the mortgage (ROI) accumulates without tax until withdrawn. You can then further invest the ROI of the interest and principal in whatever you wish that qualifies for an RRSP investment.

You don't get another deduction, you invest your RRSPs in a mortgage you hold yourself.

Leo S said...

In order to write off expenses from a rental, does the rent have to be market value?

We're looking at places with a suite for my mother in law (she's nice, don't worry). We'd be charging some rent, but well below market value.
So if we write off 1/3 of mortgage interest that will likely be about $400/month. Then add in maintenance, utilities, taxes, etc, and we'd be writing off well over the rent, and making a sizeable loss every year. Is that allowed? Or is there some rule about renting to family or below market rents?

totoro victoria said...

Here is your answer Leo.

Leo S said...

Thanks Totoro

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

CMHC and the real estate board's economists spend millions of dollars on computer programs, programers and analysts.

They don't seem to be doing any better in their predictions than we are.

Just Jack said...

Should you claim Capital Cost Allowance on your building.

For the last 25 years real estate has been increasing in value. That meant that by time you sold the building you would have a substantial profit and a substantial tax bill.

In order reduce that tax bill, most accountants have suggested that you not claim CCA.

But with the changing world, perhaps we might see a decade or two of declining prices, much like Japan has experienced. So, would it be the wiser choice to claim CCA now?

Just Jack said...

Your mother-in-law would also have to claim the difference as a taxable benefit on her taxes too.

Could you not just claim your mother-in-law as a dependent on your taxes? Or does she have lots of money and investments?

And if she has lots of money and investments - is she cute and single?

Leo S said...

And if she has lots of money and investments - is she cute and single?

Haha, I'll make the introductions.. :)

Looks like it's time to run some scenarios past an accountant on this and the RRSP thing.

totoro victoria said...

Just Jack - I posted those headlines not because I believe that anyone was "wrong" to make the statements but because it goes to show that there is only the deal of the day today. That is all that is known FOR SURE despite the best analysis and charts.

You said that I am too close and therefore cannot plan for risk properly. Maybe, I'm open to debate on that.

The problem becomes one of distorted thinking when you are too set in any one position - ie. prices must fall. The data starts to get skewed one way or the other. Distorted thinking includes:

1. Polarlization
2. Filtering for your position
3. Overgeneralization
4. Attribution errors
5. Catastrophizing
6. Pattern discernment
7. Denial

Blah blah blah... ect...

We all do it and that is why it is good to have alternate perspectives to bring some balance. I really appreciate it.

Leo S said...

That is all that is known FOR SURE despite the best analysis and charts.

True. Although I do think I've gotten much more informed over time, and my estimates now are much better than in the past. The first big "aha" moment was when I got the data for the past 50 years on a log scale, which put the price bubble into correct perspective, and the second was switching from looking at prices in a bubble, to affordability in a bubble.

6 months ago it was a mystery to me why prices were still high, and I was starting to think that maybe it really is different here. Now I'm pretty satisfied that there is a good explanation for what has been happening that doesn't rely on unquantifiable factors.

JustWatching said...

totoro victoria,

Let me start off by saying that you are investing in a manner that seems appropriate to you. Best of luck with your investments.

But by investing in multiple real estate deals, using leverage, you have shown readers that you don't have any asset allocation. All your eggs are in the real estate basket. Any financial advisor will emphasize the importance of diversity in a financial portfolio. A balanced portfolio of real estate, fixed income, stocks, gold and cash provides capital protection against unforeseen events and shocks to the economic system. In essence this is a risk management strategy that has been proven many times over.

JustWatching said...

totoro victoria said:

it goes to show that there is only the deal of the day today. That is all that is known FOR SURE despite the best analysis and charts.

You only know if it is a "deal" if you are a short term speculator that flips it overnight. The only thing you know FOR SURE is the purchase price, today's mortgage rates and property taxes. In all other cases you are making the same assumptions and guesses that the rest of us are doing. For example in your previous analysis you have been making predictions about rental conditions, value of the property in 10 years, current and future interest rates, maintenance costs etc.

Many of your assumptions about these factors appear reasonable to me but they are still predictions. I think you just feel comfortable with them and so they appear less risky.

totoro victoria said...

just watching

You are right about that. I have little asset allocation except I own my own corporation 100% which has a market value. I also have some RRSPs invested in other assets. I have the ability to earn a high income if need be.

I agree that every financial advisor would advise against putting all your eggs in one basket. I have also found that my experience with financial advisors was not positive in the past. They got paid by the investments they recommended.

Not sure what i can say about that except my long-term plan does include some diversification. I would like to study this later and know what I'm doing. I'm looking at dividend investments through a TFSA right now following the Derek Foster strategy.

What I can say is that I have limited funds and real estate is hands-on and I can:

get a tax exemption on capital gains
manage my leases and get income
manage my rentals and get income
move and rent it out if i need to
stay invested for a long period to ride out cycles
think outside the box for greater returns
pay down principal

There are down sides to real estates. Markets that rise tend to fall. If you have to sell down you can lose big. If you have to renew at high rates you can pay a lot.

I have made over $300 000 in real estate tax free with an initial $40,000 investment while having rental income cover my mortgage and going to school full-time.

I cannot say that about anything else I have invested in. In fact, I lost money.

So, while you are correct that I am leveraged and not really diversified, I choose carefully. I have not always done so but have learned over time. Works for me so far but maybe not as I plan.

I am not an example to follow for all of this, only an example of something different.

I like different things to think about.

totoro victoria said...

Yes, you are right. I am assuming that my home will be at least the value it is today ten years from now. I'm comfortable with that assumption but it is not for sure.

Who knows really. Any non-guaranteed return investment has risk.

As far as future interest rates, that I'm not sure about so I'm comfortable with a ten year term. I may be able to pay the mortgage off by then if things go great. I am sure about my mortgage rate for the next ten years if I stay put.

As for "deal" - I did not mean a good deal. The deal of the day is what you can get in today's market. Whether it is a "good deal" - only time will tell.

Property taxes - unlikely to rise above a certain level in established areas with infrastructure and density unless there is a major disaster. I am familiar with the mil rate system and legislation.

Rents. I do assume there will be a university and government here but that could disappear - or the market could become flooded.

I don't believe I am making the same assumptions as predicting a 20% drop - or a rise in value - but maybe its all the same.

CS said...

"If there is another sure-fire no-risk 6% per year (my estimate in 2.5 years for a 10 year mortgage)"

Why are the real estate promoters here continually on about 6% mortgage rates in a couple of years? Are they not merely spreading the "hurry up and buy before you're price out of the market" meme?

It is hard to see a rational case for mortgage rate increases unless credit demand is growing and inflation has gone above the BOC target.

But we know that Canadians are heavily indebted and, to judge by the trajectory of the housing market, they are increasingly wary of increased indebtedness.

Thus, what is most likely in Canada in the next couple of years is rapid debt deleverage, as is occurring in the States where the private sector has been paying down debt at the rate of $1 trillion a year.

Under those circumstances, the BOC will surely aim to keep Canadian interest rates at least as low as those in the States, i.e., at or close to zero in real terms.

With credit collapsing, inflation will be hard to maintain at the target of 2%, so nominal mortgage rates seem more likely to fall than increase.

The idea that current interest rates are abnormally low is incorrect. Throughout much of the last two centuries, rates of 2 to 3% were the norm. What was abnormal was the spike in rates to 18-20% in the 70's. What we've seen in recent years is a return of rates to the normal range.

Animal Spirit said...

so totoro - your basic argument is that since you have made (paper) money, real estate is a good investment.


patriotz said...

The biggest downside of a self-directed RRSP mortgage is loss of liquidity.

The advantage of a self-directed RRSP is that you can hold both fixed income and equities and rebalance them at will. Buy low, sell high.

That is, if there is a big stock market crash such as in 2008 you can sell off some of your bonds (which actually went up, lower interest rates = higher bond prices) and buy stocks at bargain prices.

Do the opposite when stocks get too expensive.

And this rebalancing is tax free (no capital gains in year of sale).

If you tie up the money in a personal mortgage you can't do this.

patriotz said...

The idea that current interest rates are abnormally low is incorrect. Throughout much of the last two centuries, rates of 2 to 3% were the norm.

But you had to put up a big down payment to get a low rate. That's what's abnormal today - the amount of leverage that people can get at low rates, thanks to government mortgage guarantees.

Which is directly behind the abnormal rise in house prices and consumer debt.

And abnormal reverts to normal in the long term.

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

The money that is being put back into the RRSP can be rebalanced between bonds and equities.

Again, a reason why you want to pour that money back into the RRSP at the highest permitted interest rate possible. You want to get that RRSP working for you again.

dasmo said...

through inflation....

Just Jack said...

I suppose you could look at how many man-years it takes to buy a home.

If you bought in 2000, it took less than 15 man-years to buy a home because of falling interest rates and because you were not buying at your maximum debt service ratio, there was the ability to make an extra payment each year.

Today, it will most likely be over 30 man-years to buy that same home. The odds are stacked against you for an interest rate hike that will cause you to extend your mortgage at least once during the next 30 years.

I doubt that the number of man-years to buy a home today has ever been this high in history.

dasmo said...

well in 1872 you could get 160 acres for free...

Just Jack said...

Remember all those retirees coming to Victoria a couple of years back. Well they wanted one-storey no step ranchers. This drove the market prices for these retirement homes higher than homes with higher costs of construction.

But now that the boomer wave has crested, these ranch style homes are becoming the lowest tier of homes. Today you can buy a 25 year old, 1,250 square feet rancher in a subdivision of similar well kept homes in Sooke for $313,000. And with that home you get the bonus of the mildest climate in Canada too!

Just Jack said...

In the early years of Victoria, if you retired from the British Military you were given land depending on your rank. A British Major retiring to Victoria would likely get 160 acres of forest in the colony for his years of service to King and Country. He then had to spend years clearing the land to make it productive.

totoro victoria said...

animal spirit - that is not my basic premise. it was luck that i made money that way in a short period of time. i benefited from the unusual rise in values without ever knowing that would happen. in fact, when i bought in 2001, people were saying there was no way prices would rise higher. i don't believe that will happen again in my lifetime. most likely prices will drop in the near future.

my basic premise is that real estate is hands on - the list of risk management factors i listed (long term, rental income...)

and patriotz - just jack is right - i plan to diversify my RRSP each and every month I receive the mortgage/interest payments back into my self-directed RRSP.

totoro victoria said...

I think it is unreasonable to look at the last two centuries of data on housing/interest rates when our world has changed so radically.

Just my two cents, but i think the world has changed so much that only the last fifty years or so provide any measure of relevancy.

We could; however, look to the meltdown in the states and the uk in real estate. While it appears that Canada's banking system had more restrictions on lending than the US and that the UK economy totally tanked - we have had a crazy run up in prices.

totoro victoria said...

CS - I just used my best guess that rates could be higher. I am not saying hurry up and buy. I am considering whether to transfer my mortgage on a rental property to a ten year term which would incur a penalty to break the mortgage. The alternative would be to wait 2.5 years and see where we are at. If rates are high then transfer to a self-directed RRSP mortgage - if this product is still offered in two years.

totoro victoria said...

Here is a scenario with a significant price drop:

Buy: $600 000
Down Payment: $120 000 plus PTT
Mortgage: $480 000
Rate: five years at 2.99
Payment: $2000/month
Costs: $400/month
Suite Income: $1200/month

Cost: $1200/month plus $100 to taxes on the rental income. Comparable property is $1600/month.

BUT prices decline 20% over five years. At the end of your term your house is only worth $480 000.

You have been making mortgage payments for five years and owe $426 000. If you have to sell you will lose your PTT and $56,000 of your down payment. Add in the $18 000 you would have paid extra in rent and you are down $38,000 plust PTT over renting.

I do believe this could happen over the next five years. That is why a longer term at a slightly higher rate makes me feel more comfortable as I beleive housing prices will recover eventually - and be at least at purchase price ten years later which works out significantly better than renting when accounting for principal payments and rental income - but there are no guarantees.

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

Just my two cents, but i think the world has changed so much that only the last fifty years or so provide any measure of relevancy.

You're right about the world changing but wrong about the implications.

Just to point out the most obvious problem, the generation now reaching adulthood will be the first in the country's history to be worse off than their parents.

If I may be blunt, nobody with any economic or demographic sense today thinks that the last 50 years provide any kind of model going forward, for anything. People in the US thought it did for RE, until it didn't.

totoro victoria said...

patriotz - you are always so very certain about your opinions.

i myself am less certain about everything. it may just be that i don't have the right background or depth of analysis to feel more certain.

what i do bring to the table is practical experience and real life examples. my work involves some land development so i understand some of the variables at play, but i myself am not a developer.

my returns on real estate and investments are not entirely predictable, so I run risk management scenarios and try to manage this. i find that entertaining.

as for my kids having worse prospects. i don't know about that. they will have lower pensions probably and more job changes, but they will also have greater flexibility.

For me, life happiness is a good measure of a better life than purely economic indicators. The studies of what leads to happiness seems to point to financial stability as only one factor and then only to a point. The degree of connectedness with others and general health seem as important.

But I suppose that was not your point. Your point may have been that they will have less money potentially and this will impact the real estate and investment market. Maybe.

As for economic or demographic sense, well, could be taken as a little insulting, but I won't take it personally. I'm doing pretty well with the strategies I have chosen so far.

Most importantly, this is all really really fun for me. I grew up extremely poor, welfare poor, and just feel quite blessed to have the opportunities I do. Gratitude is a good feeling to have.

Can I live with a big drop in real estate values? Yep. Will I make sure my kids have a better life than mine? Yep, to the degree it is in my power to do so.

totoro victoria said...

Interesting site and articles. Includes the psychological factors that impact RE prices.

Just Jack said...

My neighbor also wants his son to have the benefits that he did not get as a child.

That's why he has chosen to pay off the family home and give it to his son when he dies.

Unfortunately, that's as far as his planning has gone. If he has no long term illness that will suck the equity out of the home, or that his wife should out live him, or that his son does not need money for university or trade school or that the son does not get married and leave Victoria, the son will be 45 years old when my neighbor will likely die.

This is my neighbor's only long term planning.

I did suggest that he get his only son on title when possible, so that the title immediately transfers to the survivor without going through probate. But, he still wants to keep the house in just his name. Jokingly he tells his son that he has to be nice to him, or he won't give him the house. But there will be less and less joke in the statement as time passes.

Greed is not always Good.

totoro victoria said...

I'm not a fan of getting your kids to wait til your dead and then cash in. Inheritance is good, but learning to work for it is better.

My plan is to give the kids the education about investment and assist them by co-signing when they have saved the down payment and are gainfully employed. I have encouraged them to buy early.

The son should be focussing on his own long-term planning - giving a kid a leg up does not mean taking over their financial responsibility.

Just Jack said...

How many of us, have bought a smart phone for someone on their birthday or at Christmas along with a three year plan?

I have always thought that this was a silly gift. Your giving something to them that needs monthly payments. You're giving them debt for Christmas.

So, why would you give your kid a down payment on a house? And most often also have your name on title with them?

You're basically using your children for your own personal gain and too damn lazy to find your own tenants. If your kid, doesn't want to own a home and you manipulate them into buying, this could be just financial child abuse. And every thanksgiving you can get them to tell you how thankful they are to you.

And what happens if the house value drops and they stop making payments because they lost their job? And then go bankrupt. Well I guess that will just add one more dimension to Christmas dinner.

totoro victoria said...

If only I had been financially abused this way as a young adult. I'd have been retired already. Damn.

totoro victoria said...

and i never said i would give them the down payment - i said when they had the down payment and a job i would co-sign... happily... after reviewing the property of course.

Just Jack said...

So, this guy defaults on his mortgage and the banker calls in the co-signer to inform the co-signor that he has to make good on the loan immediately.

In walks this elderly Italian who had co-signed the loan and who had not fully understood what the affect of his co-signing for his friend had meant.

The banker explained, that the bank could seize the co-signors property and garnish his wages. The Italian co-signor said that the bank would be fully paid up tomorrow.

As the co-signor was leaving, he turned to look at the banker and asked

"Eh, this friend of mine, he has life insurance on the loan - right?"

MD80 said...

That is why a longer term at a slightly higher rate makes me feel more comfortable as I beleive housing prices will recover eventually

Eventually, yes. Perhaps prices will flatline for 5 years and then decline sharply when interest rates rise. At renewal in 10 years you will be forced to pay a higher rate and your place will be worth less, wiping out any equity you have put in for 10 years.

I think you're too confident in your strategy and you're blind to the risks of your investment. 10 years is not very long in real estate and I think you bank too much on the notion that a correction and recovery will happen in that time frame. GLTA

Just Jack said...

I would want to have more liquidity with the increased risk.

The banks are offering this 10 year term for the opposite reason. The banks have less risk, if they lock you into a long term. I don't think the banks want to see people bail out of their mortgages as prices come down.

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

"I think it is unreasonable to look at the last two centuries of data on housing/interest rates when our world has changed so radically."

Yeah, this time it's different!

Still no one has offered a plausible scenario to justify the expectation that interest rates are about to rise significantly while everyone is trying to cut debt and central banks are struggling to keep the inflation rate above zero.

totoro victoria said...

MD80 - Historically, real estate has followed a seven year cycle. This time may be different.

You might be right, although I have bought income-generating property and I would still pay to live somewhere.

In this case lets say we are talking about a duplex with an additional suite.

Lets assume that in ten years the market is still down 20% from today not giving anything to inflation, unless your best guess is a worse case scenario than this.


Purchase price: $700 000
Down payment: $140 000
Mortgage amount: $560 000
Mortgage: 3.84 at 10 years
Monthly payment: $2,600/month
Rental income
Suite one: $1300/month
Rental income
Suite two (non
conforming) $1200/month

Monthly mortgage: $100/month plus expenses of $400/month and taxes on rental income of $200/month. Total cost per month $700/month. Comparable rental - $1600/month. Difference per month is $900/month cheaper to buy.

In ten years, the mortgage will be $438,000 and lets say the property is only worth $560 000.

This means my mortgage paydown will be $122,000 plus the savings over renting of $108,000 (which have hopefully been reinvested along the way).

The end result even in a 20% decline scenario over ten years is that I have made $230,000 (without adding investment income on the savings) less an initial investment of $140,000 plus PTT.
Or $80,000 profit over ten years on the initial $140,000 investment.

I can handle that if it comes to it. Although my best guess is that my home will be worth at least as much as it is today in ten years - adding another $140,000 to the bottom line.

In the best case scenario my mortgage will be discharged in ten years when I sell my other property or by regular additional principal payments along the way.

But lets say rates rise to what, 7%? I would be paying $2800/month for the mortgage upon renewal, which should be covered by rental income by then

totoro victoria said...

Who said interest rates are about to rise significantly? I am looking at "what ifs" and trying to plan for this just in case. Ten years provides me with some certainty and 3.84 is a low rate.

If you are going to buy you will need to consider term as part of risk management - or go on the belief that a variable mortgage is always better and interest rates won't rise. I prefer certainty and a higher monthly payment.

Just Jack said...

I think you just did.

"The central banks are struggling to keep the inflation rate zero."

Struggling does not instill me with confidence.

Just Jack said...

If a 7 year cycle exists, it has been distorted by government intervention into a free market system.

Does anyone have an example when the government distorted a market and it did not end badly? Or where there has been a boom in prices followed by a mild landing?

patriotz said...

patriotz - you are always so very certain about your opinions.

Nope, just certain about the facts:

- record high house prices/incomes
- record high house prices/rents
- record high personal debt/incomes
- all of the above as high as or higher than US in 2006
- highest ever % of the population employed. It is certain to decline in future decades.
- interest rates that are at all time lows and cannot go significantly lower.
- chronic BC and federal deficits.
- CMHC reaching debt ceiling.
- RE busts (>10%) in progress everywhere in BC except Vancouver and Victoria
- Victoria RE prices falling since 2010.

My opinion is that it's not a good time to buy RE based on the above. If you think it is, that's your choice.

totoro victoria said...

Two centuries of data... what does that take us back to? An entirely different economy and lending regime. Home ownership in BC two hundred years ago?

In 1836 BC's population was 36,000- half under 30 and men outnumbered women 2:1. The economy was fueled by the gold rush and the fur trade...

Or are we talking about England, or the East coast... or...

Introvert said...

Victoria may well see a big price decline at some point, but--conditions permitting--Victoria would probably bounce back faster and higher than almost any other city in Canada.

Ask yourself why Victoria's prices are currently (and have been for a while) in the top three of Canadian cities. (Why isn't Kitchener in the top three? Halifax? Regina? Quebec City? Hamilton? Winnipeg?) The answer is because people want to live here (apparently more so lately than in decades past--why this is, I do not know). People also want to live in Vancouver and Toronto, by the looks of it. And this makes sense.

In the context of Canada, Victoria is a unique and aspirational place to live. This fact bodes well for those playing the long game in Victoria real estate.

Certainly there are those who, for a variety of circumstances, will lose their shirt. But that doesn't mean that Victoria doesn't have a lot of things going for it that most other places don't have.

patriotz said...

The answer is because people want to live here (apparently more so lately than in decades past--why this is, I do not know).

Apparently not:

In the West, all but two census metropolitan areas have grown at rates above the national average: Winnipeg and Victoria.

Leo S said...

Two centuries of data... what does that take us back to? An entirely different economy and lending regime. Home ownership in BC two hundred years ago?

Who's talking about home ownership data over 200 years in BC? The long term 300 year index was in an established city in Amsterdam. I don't see any reason why the data from there does not apply.

The other reference was to long term interest rates, which has nothing to do with what BC was like 200 years ago.

Just Jack said...

Yet, even with this myth of everyone wanting to live in Victoria, the volume of sales is at one of its lowest levels in two decades, prices continue to slide from peak prices in 2010, and both the unemployment and vacancy rate in Victoria continues to climb.

We have close to 5 months of inventory of houses in the core districts and over 7 months of inventory of condominiums. Prices in the outlying areas of Sooke, Shawnigan and the Gulf Islands have rolled back to 2007 price levels and you can now buy single family homes in the core districts for under $300,000.

The answer is that we no longer have enough people moving to Victoria to support our prices. And the number one reason for that may simply be that our prices are just too darn high for most Canadians to live here.

totoro victoria said...

I can see lots of reasons why historic data from Amsterdam would not apply to British Columbia today. Changes in the banking system, changes in land use patterns, taxation...

Rather than patterns based on centuries of data that may or may not be relevant, I could believe that current demographics are a bigger factor in changes to come.

Leo S said...

Ask yourself why Victoria's prices are currently (and have been for a while) in the top three of Canadian cities.

This explains relative valuations, but it doesn't explain absolute valuations. If there is a nationwide decline of 15% then Victoria will still be higher than Halifax, yet lower than now.

Leo S said...

Rather than patterns based on centuries of data that may or may not be relevant, I could believe that current demographics are a bigger factor in changes to come.

Demographics are another excellent reason why the next 50 years are going to be quite different than the last 50.

Just Jack said...

The biggest mistake you make is assuming that high prices equates to high demand for people to live here.

It doesn't. High prices are related to sustain economic activity. Vancouver and Victoria were the among the highest price cities in Canada, because our economic recovery has been longer than any other province. And that activity has been driven by construction.

Build it - and they will come.
Stop building - and they will go.

totoro victoria said...

I agree that demographics will influence the next fifty years. I'm not looking at the next fifty years, I'm looking to the next ten. I won't be alive in fifty years most likely.

Roger said...

totoro victoria,

I have been following your example buy posts and find that they are not detailed enough to make investment decisions. There are a lot of variables and calculations required in order to get a sound financial analysis.

I don't know if you use spreadsheets as a tool. It is darn near impossible to get correct numbers if you don't use one. "Back of the envelope" calculations could cost someone a bundle because they yield incorrect data and conclusions. I developed an investor tool a few years ago and loaded it with the basic numbers you provided in your 600K house with a suite post. You may find it helpful if you develop your own.

The results are a pdf file click here

Summary - A 600K house with a $1200 month suite financed at 2.99% gives the following results.

Selling price vs. Monthly Occupancy Cost
684K - $0 (live five years for free)
634K - $818
600K - $1368
540K - $2338
480K - $3308

A couple of observations:
- if prices rise you make out like a bandit
- if prices fall and you have to sell it locks in the loss
- if prices fall more than 10% you could have rented for less

If you don't sell after 5 years and can ride out any price declines you will do well financially. This is because your monthly occupancy cost is around $818 and doesn't change until you sell and lock in the gain/loss.

However, life is what we get while we are making plans. The big IF is that the owner can hold on until prices recover. Death of a spouse, job loss, divorce, failing health etc. forces many people to sell at a bad time.

Roger said...

In my previous post I used the values provided by totoro victoria. If I was using my own I would set the vacancy rate to 5% and increase the maintenance/insurance/taxes to 8K annually instead of $4.8K.

DavidL said...

@totoro wrote: Historically, real estate has followed a seven year cycle. This time may be different.

I'm not sure where you are getting your information from ... In my lifetime, the best times to purchase real estate in Victoria have been 1968, 1986, and 2002.

The 1986 and 2002 "best buy" periods coincided with significant drops in the bank rate.

When rates drop, it takes a few years for real estate to have a corresponding "jump up" in valuation.

We'll see how things look in 2018 ... ;-)

totoro victoria said...

Thanks Roger. I do have a spreadsheet that I use for my own but not for the example. It is not that simple - it calculates some things automatically and others are manual. I don't know how to do my own very well with the automatic formatting and calculations.

You are right about vacancy rate - I usually put one month's rent annually for vacancy. I'm comfortable with those maintenance/insurance/taxes figures but my properties are in good condition.

I assume you are using the five year term and not the ten? The ten works out better because of principal repayments.

totoro victoria said...


I read that real estate cycles follow the business cycle of seven years. Might not be accurate.

I think more that the basic premise I took out of it was that if you can stay in for seven years the chances of your house being worth less than now are much lower.

Just Jack said...

Want the lifestyle but not the expense. Well you can live in Oak Bay for under $175,000 today.

Provided that you everyone in your family is over 18 years. A one bedroom strata condominium on Oak Bay Avenue is your for $174,900. No rush to put your offer in, as it has been available for 113 days so far.

Or you can buy a similar sized one-bedroom in the new Oak Bay Hotel for $1,250,000 but you are limited to use the condo a total of 16 weeks a year. Incredibly, there have been 3 sales in the complex.

Roger said...

For comparison purposes I ran the spreadsheet for the same house with no suite income (suite used by grandma for free). A 600K house, sold after 5 years, financed at 2.99% gives the following results.

No suite income
Selling price vs. Monthly Occupancy Cost
684K - $1070
634K - $1878
600K - $2428
540K - $3398
480K - $4368

With $1200 suite income
Selling price vs. Monthly Occupancy Cost
684K - $0
634K - $818
600K - $1368
540K - $2338
480K - $3308

If the owner doesn't sell after 5 years the monthly occupancy cost is $1878 without suite income and $818 with suite income. This slowly decreases until you sell and lock in the gain/loss.

Would you buy or sit on the sidelines??

totoro victoria said...

Roger - does that account for principal repayment?

Roger said...


Principal repayment is not included in this calculation. The occupancy cost is the actual cost to live in the home; non-recoverable expenses minus income. It includes mortgage interest, property taxes, insurance, maintenance and lost interest on the down payment (i.e. opportunity cost) minus the after tax suite income.

Monthly cash flow (not shown) is a different calculation and consists of mortgage payments (interest and principal), property taxes, insurance and maintenance minus after-tax suite income.

In both cases if the utility costs (heat, electricity, gas) are known they should also be added to get total occupancy cost or monthly cash flow. I may put these as inputs in the next revision of my spreadsheet.

Roger said...


If you refer to my spreadsheet printout you can see that the cumulative principal repayment is accounted for in the net gain/loss calculation after the property is sold.

totoro victoria said...

Yes, just confusing because you are referring to sales price without accounting for principal payments. Principal payments can be accurately accounted for as they are set with a fixed mortgage. I think they should properly be applied to monthly cost reduction as they are a form of savings.

Wouldn't principal repayment per month have to be deducted as a recoverable expense? (or at least offset to any loss of value on the home)

I don't count utilities in my calculation as they are expenses for renting or owning.

CS said...

Hey, JustJack,

I didn't say:

"The central banks are struggling to keep the inflation rate zero."

I said "central banks are struggling to keep the inflation rate above zero."

Their preoccupation is with deflation and the creation of a liquidity trap, which is understandable, since in both the US and Europe one can hear a giant sucking sound as manufacturing and tradable services are out-sourced and off-shored, lowering real incomes and driving down aggregate demand.

We've hardly noticed it here because of our strong resource base that serves the developing world, where the jobs are going. But we are still heavily dependent on the US market, so there little to justify the expectation of a boom here any time soon.

So what I want to know is this: what is going to ignite the inflation that will justify a sharp rise in mortgage rates that people are working into their calculation about RE finance.

Also I'd like to know what the absence of an increase in interest rates would signal for the RE market here.

patriotz said...

I think they should properly be applied to monthly cost reduction as they are a form of savings.

Yes they are savings, but..

Wouldn't principal repayment per month have to be deducted as a recoverable expense?

Savings are not an expense. If you put $100 in a GIC is that an expense? If you moved $100 from your chequing account to your savings account is that an expense?

What principal payments do is decrease your debt and increase your paid up capital, upon which there is an opportunity cost as Roger pointed out. Bottom line is that the interest+opportunity cost remains constant.

Introvert said...

Apparently not:

In the West, all but two census metropolitan areas have grown at rates above the national average: Winnipeg and Victoria.

Wrong. There is precious little land available to Greater Victoria to expand; and on what land there is--the West Shore--we see the fastest growing census area in the province (Langford).

Winnipeg is a hell hole.

Just Jack said...

I would have bought that there is not enough fresh water available before we're running out of land argument.

Most of Oak Bay and Victoria is considered land value only. The land in our communities is under utilized. And yet very little of these old homes are ever demolished. If it were true, that land was so precious then the bulldozers would be through out the cities crushing these old war shacks.

What is true, is that the average lot only contributes about $1,200 to $1,500 of the mortgage payment each month. compare that to Hong Kong where they do have a land shortage.

Roger said...

Principal repayments are not a form of savings - they are simply debt reduction. They do build equity which is not the same as savings

Take the case of an interest only loan with no required principal repayments. The monthly non-recoverable cost is the interest on the loan. Now if the borrower elects to make periodic principal repayments this monthly cost will go down slightly because the interest on the loan is smaller due to a reduced outstanding balance.

In an amortized mortgage loan the monthly payment consists of a fixed sum consisting of an interest component and a principal repayment component. As time goes on the interest component will reduce and the principal component will increase with the sum remaining constant.

The cumulative principal that you pay is accounted for in the net gain/loss and equity calculations. The net gain/loss calculation is shown here

Equity is how much of a stake you have in the property prior to its sale. The equity calculation is FMV-ACB+DP+CPP.

FMV - fair market value or what it would sell for to a buyer at a given point in time
ACB - purchase price plus expenses (legal fees, property transfer tax, building inspection)
DP - cash invested to buy property
CPP - cumulative principal payments

In the 600K example initial equity = 600-(600+10+1)+132+0 = 121K

After 1 yr if FMV=600 and CPP=13K equity has increased to 134K

After 2 years if price drops and FMV=585K and CPP=28K equity is still 134K

The point I am making here is that people confuse home equity with savings. If you want to use the equity in your home you have to sell or swap equity for debt. If you swap the equity for debt you will get cash because you signed up for another loan.

Totoro - this was a long answer to your question but I wanted to reply in a manner that I hope is interesting to other readers.

Leo S said...

Wrong. There is precious little land available to Greater Victoria to expand; and on what land there is--the West Shore--we see the fastest growing census area in the province (Langford).

The center of any city is always short on land. You think Toronto has an abundance of lots in the city? No of course not. All growth happens in the suburbs and from some densification. If the demand was there, the feeder cities of Colwood and Langford could have grown a lot more. Also you may have noticed that the population of Sydney and Esquimalt actually decreased between 2006 and 2011. Did the land fall into the ocean?

totoro victoria said...

Thanks for explaining Roger. I'm not an accountant so I think about it a bit differently and clearly not technically correct!

Equity is composed of principal payments, down payment and any appreciation. I don't view these components the same way.

Down payment - my money that I saved and could have otherwise invested so if I don't make a ROI on the property there is a loss really

Appreciation - ROI - windfall equity that you are grateful to get but is not a given (opposite for the evil depreciation)

Principal payments - sure payment of my money to something akin to savings - taken off monthly mortgage payment to compare monthly cost of living to cost when renting

Just how I view it because the house debt is secured debt - secured by the value of the home. Interest is your out-of-pocket monthly cost.

Only time principal payments come into play re. this debt is if your house declines in value. Whether you pay the difference with principal payments or savings it is the same bottom line.

Leo S said...
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VP said...


Langford is part of our "census metro area" (CMA).

We are now one of the slowest growing CMA's (note: includes Langford) in the country.

Patriotz was simply pointing out the falsity of your claim...
people want to live here (apparently more so lately than in decades past

VP said...

To put it into perspective, Edmonton CMA grew over 12.1% over the last 5 years compared to Victoria CMA's growth of only 4.4% (note: includes Langford)

VP said...

Also if people really wanted to live here, I don't think the vacancy rate would have gone from 0% to 5-6% lately.

CEO of Rental Owners and Managers Society of B.C., Al Kemp, Victoria's vacancy rate is likely much higher than 3.5 per cent. He estimates it's between five and six per cent.

patriotz said...

Principal repayments are not a form of savings - they are simply debt reduction.

That is wrong Roger. All debt reduction is savings.

Savings is defined as income - consumption. Suppose I earn $5000 this month and spend $4000 on stuff. My savings for that month is $1000. Whether I put that $1000 in a savings account, pay down $1000 of credit card debt, or pay down $1000 of my mortgage, it's $1000 in savings.

patriotz said...

Clarification - all debt reduction from income (as per my example) is savings.

If you pay off your mortgage by selling the house, or pay off a margin loan by selling the stocks, that's not savings.

Leo S said...

The important part is that principle payments are being taken into account in the spreadsheet.

Marko said...

"Today we see a sale of 431 Ker Ave. Just a couple houses down. It is:
- Bigger. 1800 sq ft
- Newer. 1940
- Quieter. Not a corner lot
- As good or better condition. New roof, electrical, updated bath/kitchen
- Also has a suite rented for the same price."

Having shown 431 Ker this home was anything but good condition, updated bath/kitchen? ha ha. $399,000 is a good price for that home.

totoro victoria said...

Leo and Roger - I agree - that spreadsheet is very comprehensive and does account for principal repayments as part of equity.

My only difference is that I use the principal payment as a monthly deduction when cost of housing is compared to renting. It really is not an expense, it is savings. Whether your house appreciates or depreciates is a different thing altogether.

When you are looking at selling or end of term of the mortgage to calculate your equity I think it is fine to use it as part of the equity calculation.

Just Jack said...

Say you agree to buy a $100 bond and you paydown that bond at $10 a day for 10 days.

After 10 days you now own that bond. Did you make any money during that time through paydown?

You just paid off the debt. Each day you made a payment you increased your equity stake in the bond. You did not make any income.

totoro victoria said...

There is no income - there is an asset worth $100 that can be cashed in. You are not repaying a debt, you are investing in an asset. If the asset holds its value or grows you have ROI on your money. If it depreciates you have a loss.

Consumer debt is different. If you borrow money on your credit card to buy dinner you get to eat but you can't sell the result at the end. You just pay it off later.

Just Jack said...

The last time a similar house with a basement suite sold for under $400,000 on Ker Avenue was back in July of 2007.

Times they are a changing.

Just Jack said...

I'm not disputing that there is an asset that can be cashed in at the end.

But paying back a debt is not savings.

Most people have been conditioned to believe that as soon as you buy a home with a mortgage, you now "own" the property. That's why you are mistaking paydown with savings.

The bank is the one that is investing in an asset. You are just paying off a debt. If the home goes up in value during that time that's the gamble you take.

However, the bank makes money whether the home goes up or down in price - and that's investing.

totoro victoria said...

Principal payments and bond purchases are not debt.

The interest on money borrowed to buy a bond is a debt. The bond itself is not a debt, it is an asset. The secured portion of the loan is not a debt, it is an asset.

The difference is that a house could depreciate, but this is an investment loss which becomes a debt if you have to repay it - however you do this - with accumulated equity or with other money.

Just Jack said...

But you don't own it - yet.

Its not your asset until you make that last payment. The bank has first position on the title.

Miss a payment or two and you will find out who really owns your home.

totoro victoria said...

just jack - you own it and and you are on title.

the principal payments become your asset, not the banks.

the debt portion is a registered charge on title. only the debt portion can be collected against the asset.

if the asset depreciates you could lose your down payment and your principal payments. if the asset appreciates you stand to retain both principal and down payment and the appreciation.

If the bank was the owner they would be responsible for the losses and get to keep the appreciation.

Just Jack said...

Actually, the banks can get you for a lot more than just the amount of the mortgage.

Stop making payments to the bank and the charges will accumulate quickly. Which will reduce your equity (what you call savings) or even eliminate the equity (what you call savings) altogether.

Once you sell your home and pay off the mortgage, what is left over is your equity converted to cash. But until then, the only way to access you equity (what you call savings) is by taking on more debt by increasing your mortgage.

Equity is not the same as money in a savings account. You have to pay someone else (the bank) in order to access it. How can you call something that you have to pay for (with interest) savings? If it were your savings -the bank would be paying you.

This entire discussion goes to the root of the problem with Home Equity Lines of Credit, Joe Average thinks equity is the same as cash. And they use equity just like cash until they no longer can make the minimum payment to the bank. No wonder OSFI is concerned about HELOC'S and wants to reduce home owner's access to them.

Roger said...


I really don't like splitting hairs but since you started here goes...

I said: Principal repayments are not a form of savings - they are simply debt reduction.

You said:
That is wrong Roger. All debt reduction is savings. Savings is defined as income - consumption.

What you defined is saving which is different than savings See Wikipedia saving vs. saving

Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. There is some disagreement about what counts as saving. For example, the part of a person's income that is spent on mortgage loan repayments is not spent on present consumption and is therefore saving by the above definition, even though people do not always think of repaying a loan as saving.

Now savings which is what I was talking about....

"Saving" differs from "savings." The former refers to an increase in one's assets, an increase in net worth, whereas the latter refers to one part of one's assets, usually deposits in savings accounts, or to all of one's assets.

So if you were talking about saving I agree with your statements. What I was talking about was savings which is different. When a person makes their fixed mortgage payments the principal amount is forced saving which builds equity. If they make extra payments they are saving even more. However if they put that money in a bank account they have increased their savings.

What I was trying to get across in my reply to totoro victoria is that making principal repayments is not the same as a savings account. With a savings account you can get the cash at any time. With equity you have to take out another loan in order to get cash. In the US people learned the difference between equity and savings the hard way. In Canada with all our HELOCS this lesson will be taught when interest rates rise, property values and equity drop.

CS said...

James Island is back on the market at $75 million, back just about to the 2001 list price of $70 million.

totoro victoria said...

Any secured transaction includes charges for default. Don't default. Treat credit as a privilege.

In the event of mortgage default you have two months' to rectify the mortgage and there is room to negotiate. You have the opportunity to sell your home yourself and pay off the debt and time is given to do so.

Foreclosure is a long and expensive process. If you do not choose to sell your home yourself and do not pay your debts I do not think it is fair for the bank to be left with these charges.

Equity can be tied up in all sorts of things: bonds, real estate, gold, silver. Some of them have redemption terms and penalties. This system is there to manage risk and without it we would not have the same types of investment opportunities or the ability to leverage.

The average Joe should not treat appreciation as cash unless they intend to cash out. The average Joe may wish to treat down payment and principal payments as redeemable interests if they have more that 20% of the value of the home in this portion of the equity and would like a low interest loan.

totoro victoria said...

Roger - that definition is a bit confusing because the term "saving" is also defined as "all of ones assets" whereas "saving" is an "increase in ones asset".

Making liquidity is a better measure for what you are referring to.

Roger said...

totoro victoria,

You said My only difference is that I use the principal payment as a monthly deduction when cost of housing is compared to renting. It really is not an expense, it is savings

If you re-read my post you will see that there is not much difference from your way of looking at things with the exception of your definition of savings. I accounted for the principal repayments when calculating how much it cost to live their every month in the occupancy cost calculation.

The occupancy cost is the actual cost to live in the home; non-recoverable expenses minus income. It includes mortgage interest, property taxes, insurance, maintenance and lost interest on the down payment (i.e. opportunity cost) minus the after tax suite income.

Monthly cash flow (not shown in spreadsheet) is is how much money you have to spend every month. It is a different calculation and consists of mortgage payments (interest & principal), property taxes, insurance and maintenance minus after-tax suite income.

If you make extra principal re-payments every month it increases your monthly cash flow but your occupancy cost will remain the same. If you increase the amortization from 25 years to 30 years your mortgage interest will stay the same but your payments will be lower. Your occupancy cost will stay the same but your monthly cash flow will decrease.

As I mentioned to patriotz the principal repayments are a form of saving and they increase your equity not your savings. If you put the extra money into a bank account instead you would increase your savings.

totoro victoria said...

Thanks for clarifying that Roger - I would agree.

Just Jack said...

You would think you could get 75 people in Oak Bay to pool their money and buy the island with their lines of credit. At less than the cost of a 1972 built condominium per hectare (2.47 acres) of land or two-thirds the cost of a new blue bridge.

Just Jack said...

Part of the bundle of rights that you have with real estate is the right to sell your home.

Did you know that the bank may not permit you to sell your home.

You would think that if you owned your home, the bank could not stop the sale. Something to think about if you owe more on the mortgage plus discharge costs than what you can net on the sale of the home.

Leo S said...
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Roger said...

totoro victoria,

No I was not referring to liquidity which is different altogether. I think it is important that we all use financial terms as they are commonly defined.

You said: that definition is a bit confusing because the term "saving" is also defined as "all of ones assets" whereas "saving" is an "increase in ones asset".

The definition in Wikipedia is quite clear.

"Saving" differs from "savings." The former (saving) refers to an increase in one's assets, an increase in net worth, whereas the latter (savings) refers to one part of one's assets, usually deposits in savings accounts, or to all of one's assets.

Equity is defined here as the value of an ownership interest in property. Home equity is the difference between the market value and unpaid mortgage balance on a home

If I don't spend all my income this month and pay down my mortgage or buy a GIC I am saving money and have increased my net worth. If I pay down my mortgage I increase my home equity. If I buy the GIC I increase my savings.

If I have a home equity line of credit (HELOC) and I draw $1000 from it and buy a GIC I lower my home equity, increase my savings and increase my outstanding debt. My net worth stays the same. These transactions cannot be viewed as saving money; in fact I would probably be spending money due to the interest differential between the HELOC and the GIC.

patriotz said...

The former (saving) refers to an increase in one's assets, an increase in net worth

This is wrong. If the market price of my house or stocks goes up that's not saving. That's asset appreciation.

Saving means spending less than you earn.

JustWatching said...

Just Jack,

Interesting comment.

How does a homeowner that is "underwater" on their home get out from underneath this albatross.

It ain't pretty as this BC real estate lawyer explains in his blog.

Options for Sellers of Distressed Property

The worst scenario for the owner is where the property carries CMHC insurance. In this case the bank has little motivation to do anything to help the owner because in the case of default the bank gets paid the loss by CMHC. CMHC then goes after the former owner for the money.

Owners often assume the property is not covered by CMHC insurance if they didn't pay for it. If the LTV is less than 80% the bank may have taken out and paid for the insurance without the buyer being aware of it. HELOCS were sometimes insured this way until Flaherty put a stop to it.

Just Jack said...

Cracks in the wall are forming as some properties in Fairfield are now slipping back to 2007 levels.

Half duplex homes, are usually the next, after condominiums, for people to loose interest in, as the market contracts and there are more choices to buy. Such as the sale on Linden of a side by side half duplex that just sold for $625,000 which is $18,000 less than it previously sold for in February 2007.

Haven't found any cracks in Oak Bay prices, but I don't expect to at this time. Firstly there are very very few half duplexes in Oak Bay and with slightly less than 4.5 months of inventory there is very little pressure for sellers to make any major concessions on price or terms.

And now you really know what the phrase location, location, location really means.

Oak Bay houses were the first to increase in price and they will be the last to decrease.

totoro victoria said...

How do you get out from underwater?

Pay for it, or declare bankruptcy if you owe far more than you can afford to pay back.

Bankruptcy laws were brought into place to ensure that people were not saddled with unreasonable debt and that there was a reasonable limit on what lenders would lend knowing that bankruptcy protection was available.

Leo S said...

Bankruptcy laws were brought into place to ensure that people were not saddled with unreasonable debt and that there was a reasonable limit on what lenders would lend knowing that bankruptcy protection was available.

And a very sensible system it was. Until CMHC allowed banks to offload 90% of the risk and had no more incentive to be prudent.

Just Jack said...

The collection arm of CMHC is the CRA. They can garnish your wages.

If your going to go the bankruptcy route, then you are going to have to owe a lot of money. Being $50,000 or a hundred thousand in default may not be enough.

Best to take all of your 13 credit cards and max out the $30,000 limit on each of them, then proposition your boss's daughter and put animal porn as your computer wallpaper at work. That should get you fired - unless you work in high tech.

Just Jack said...

If for some crazy reason, house prices were to come down a hundred thousand dollars - would that cause people in basement suites to vacate and buy?

For some of the starter homes in Saanich West and Sidney a drop of $100K would allow basement renters to buy a home at around the same monthly cost as renting.

But that would seriously screw around with the vacancy rate for suites. Could Saanich West and Sidney home owners afford to wait 3 months to find a renter?

patriotz said...

If for some crazy reason, house prices were to come down a hundred thousand dollars

Like this reason? Well maybe not $100K right away, but it's a start:

The government announced Wednesday it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent.

Leo S said...

The government announced Wednesday it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent.

WHOA! Was not expecting that at all!. So this comes at the same time as the OSFI restrictions. Wow. Things are getting interesting.

Introvert said...

All right. Tell me, please:

1. Why is the average and median price of a SFH in Greater Victoria substantially higher than every other Canadian metropolitan area save for Vancouver and Toronto?

2. Why doesn't the typical home in Saskatoon cost anywhere near $550K? Saskatoon is experiencing far greater economic prosperity than Victoria.

Love to hear your answers to both questions.

Leo S said...

Some things to ponder about a drop in amortizations from 30 to 25 years.

Monthly payments increase by about 12.5%

Max purchase price would be reduced by about 9%.

40% of home buyers in the last year chose an amortization higher than 25 years. That's all home buyers, the percentage for first time buyers is significantly higher.

There's a stat somewhere about what percentage of first time buyers would not have been able to buy at less than 30 year amort, but I can't find it right now.

Leo S said...

Love to hear your answers to both questions.

Those questions have been asked and answered dozens of times. Prices are high because demand/supply is higher relative to most other cities.

That says nothing about the potential of prices to go up or down. It just means that Victoria is likely to retain a premium over other cities. So if other cities go down prices in Victoria will go down (otherwise that premium would have to increase, and I don't see any good argument that Victoria is getting nicer relative to other cities).

mrmike said...

Might just get people off the fence, hurry up and buy.

Leo S said...

Updated affordability graph with amortizations returning to the levels of pre-2000s and the addition of nominal prices for those who don't like inflation.

This is still assuming zero increase in interest rates, and no other external triggers.

Just Jack said...

If the past is any prediction of the future, there should be a flurry of buying before the new regulations are implemented. The flurry of buyers should raise prices. Followed by a dearth of sales and a substantial price drop after the regulations are in place.

Why the government did not say when this will be implemented is odd. It's like they're intentionally spooking the herd towards the cliff.