Another sobering discovery that the VREB has made is the MLS HPI. In previous years they would have trumpeted gains in the median price (up a staggering 11% Jan 2013 to 2014!!!!) but now they know this is mostly nonsense because the HPI over the same period is down 1.7%. If you're unlucky enough to live on the peninsula, SFH prices are down just shy of 5%.
Yearly medians are edging up due to sales mix changes, a reduction in the MOI, and the dropping out of last year's very low January numbers.
Looking forward, the sales to new listings ratio gives a clue as to the direction of the market. It has recovered from it's lows lately, and is heading to the levels seen in the late 90s, which is more in line with the flat market scenario rather than the declines we've seen in the last 4 years. Of course all this is depending on continued low rates and no more government meddling (and you know how much they like to meddle).
Looking back at the peak, things are about the same median price wise, with SFH down 8%, condos down 12%. Only townhouses have gone insane in recent months. Clearly the low sales in this category make this measure far too volatile for anything other than entertainment value. Just Jack, care to explain a $100k increase in townhouse medians within a few months?
By the way how's that affordability picture looking these days? If Victoria were governed by more traditional definitions of what constitutes affordable housing, what would the average family be paying? Based on the average income, 20% down, and current 5 year rates, that would be about $470,000. So only about a $100k gap to go.
Edit: LeoM asks: "Has anyone done a Victoria graph similar to the Toronto graph?"
Here is that:
Update: Regraphed in 2013 dollars and with a power trend line as per Koozdra's request.
Or log scale if you wish....
Although a log scale of inflation adjusted house prices sends quite the wrong message...
266 comments:
«Oldest ‹Older 201 – 266 of 266Funny, I just looked at the Greater Fool blog. Today's post links to a website owned by a couple of real estate agents running an "investment workshop" where they claim you'll make a 19-108% return flipping presale condos.
LOLWTF.
The 11% drop so far is just the beginning
Maybe. But if you look at BC Assessment Authority assessments, you see that most houses (i.e., buildings) are already assessed below replacement. In the core, house values are usually only around maybe 20 to 25% of total assessed value.
So what people are paying for, in the core, at least, is mainly location. And many of those paying the highest price for this intangible may not be that interest rate sensitive. Furthermore, as the city grows in population the ratio of high income earners to core properties rises, which will tend to make prices in the core firmer than on the periphery.
On the periphery, there is less scope for decline in land values and resale houses are already generally valued at or below replacement. So a sharp decline in prices from here, would imply a serious economic downturn resulting in sharp reduction in demand, which in turn would collapse the construction industry leading to further economic contraction until the Bank of Canada relents and reduces interest rates to more or less permanent emergency lows.
"But if you look at BC Assessment Authority assessments, you see that most houses (i.e., buildings) are already assessed below replacement."
Land value will plummet.
"By many measures the Canadian and US stock markets are at least as over-valued as the Canadian housing market."
Really? Tell us all about these many measures and please explain how these many measures prove that the North American stock markets are "at least as over-valued as the Canadian housing market".
This should be interesting.
It is only valid to compare the Canadian housing market with the US housing market. The degree to which the Canadian housing market is overvalued is more severe than the overvaluation of the US housing market in 2006 (at peak). More on this soon.
The US housing market crashed.
Canada's housing market will peak soon.
House prices in Victoria have corrected 10-15% since 2010 while prices across the rest of Canada increased by 10-15%.
5-year mortgage rates hit bottom last year and will generally follow an upward path over the next number of years. This will be a source of downward price pressure. There will be other sources of downward price pressure as well. All bubbles burst and Canada's housing bubble will be no exception to this rule.
"..Bank of Canada relents and reduces interest rates to more or less permanent emergency lows."
Even low rates are effective to a certain point. We've been building above household formation for a long time. Now we wait till demand catches up.
This will cause the slow down in housing required for unemployment to rise as you describe.
"Land value will plummet."
Land prices always decline as major housing bubbles go through their inevitable deep price corrections.
This chart is a beauty. Land prices in crowded, overpopulated Japan crashed in a major way after the Japanese housing bubble burst in 1991 (there are many more examples). Land prices in Victoria and the rest of Canada will experience a deep correction as well.
Leo_S, your fear is not about having a guarnteed place to live when you're 70. Your fear is about dying alone.
The house is just a metaphor symbolising family and friends. A gathering place of love, laughter and the giggles of grand-children scurrying around the kitchen.
Something that will still be standing while your body decomposes in some 6 foot deep ditch or long after your ashes have been thown willy nilly like garden waste to the winds.
But after the house is sold and the loot is divvied up among your spawn. Noone will remember that this was Leo-S's place. Instead your beneficiaries will look upon the new wide screen plasma TV with surround sound. The Urn of your mortal remains having been moved from the mantle to the closet to make room for the TV.
And on the home these words appear:
"My name is Leo_S, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal house, boundless and bare
The lone and level yards stretch far away.
A little Shelley on Valentines Day for you. XOXO
JustJack:
Spanky, I don't know about Vancouver and Calgary perhaps you could enlighten us.
Caveat:
For those who are waiting for 30-50% off Victoria house prices you might want to also consider that you may be able to buy the TSX for less than 14000
There is a connection between BC real estate (Vancouver) and the TSX. And when the big fish Vancouver jumps (7+% y-o-y for January), it will soon create ripples across the Strait of Georgia.
Really? Tell us all about these many measures and please explain how these many measures prove that the North American stock markets are "at least as over-valued as the Canadian housing market"
Info - I'm not out to convince anyone that the stock markets are overvalued, so if you want to believe that the TSX and SP500 are screaming buys at current levels that is no skin off my back.
For starters how overvalued is the Canadian housing market? I have seen claims ranging from 10% to 70%.
Some measures that indicate the US stock market could be similarly overvalued :
the Shiller PE, currently at over 25 vs a long run average of 16.5.
Tobin's q also in the ballpark of 50% above historical means.
Ratio of market cap to gdp also well above historical norms
SP500 dividend yield below historic norms.
Then consider that movements in the TSX over the last 20 years have 85% correlation with the SP500.
Further as you point out frequently, interest rates are at historical lows and thus more likely to rise than fall. Rising interest rates, if and when they happen, will increase the attractiveness of fixed income relative to dividend paying stocks.
Finally if a Canadian housing crash does happen, don't you think it might have a tiny impact on the Canadian financial sector (36% of the TSX)?
None of the metrics I have shown can possibly predict an immediate crash in the US or Canadian stock market. And that isn't really the point. The point is that if you invest at above average valuations it is reasonable to expect below average long term returns.
It is only valid to compare the Canadian housing market with the US housing market.
I must respectfully disagree. I think it makes good sense to compare the relative attractiveness of different asset classes.
That said I have always maintained that "principal residence" is about more than just investment merit. When I bought my current house I had no expectation that it would be a "good" investment. That my previous house turned out to be a spectacularly good investment was just luck.
Here's a very relevant quote referring to some of the same market valuation measures I cited.
"these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years. But they can play a role in framing longer-term expectations of investment returns. At present market overvaluation continues to suggest a cautious long-term outlook and guarded expectations. However, at the today's low annualized inflation rate and the extremely poor return on fixed income investments (Treasuries, CDs, etc.) the appeal of equities, despite overvaluation risk, is not surprising."
For a younger person putting a modest amount into equity ETFs every month the current overvaluation is not so extreme that they should stop doing that IMHO. But really that young person should be rooting for a stock market slump as that will give them the opportunity to buy more of the market at a better price.
The point is that if you invest at above average valuations it is reasonable to expect below average long term returns.
The concept of average valuations implies that asset values always return to some long-term mean, within the span of the typical investor's investing life-span.
But the historical evidence does not altogether support that idea. For instance, Leo S's graphs show a five-fold increase in real house prices in the last 45 years. No normal or long-term average evident there.
It appears that we are now experiencing the consequences of the globalization project launched with the 1994 Gatt agreement that put the West in direct competition with the cheap brains and labor of the Rest.
The only way we seem able to compete is by a continual currency devaluation achieved through money printing. This in turn means cheap money, low interest rates and high asset prices.
I agree that I would like that too but what kind of premium are you willing to pay for that?
Depends. As a student or a single young guy, basically zero. As a 75 year old? A few hundred a month.
The goal would be that at 75 I really don't care much anymore about what is the cheaper option and the difference is inconsequential. If I have to worry about rent vs buying a condo at 75 I've done some things wrong.
And when the big fish Vancouver jumps (7+% y-o-y for January), it will soon create ripples across the Strait of Georgia.
Funny how those ripples haven't arrived here for the last 6 years.
CS said:
buildings are already assessed below replacement.
--------
So what?
The price for a SFH is just the highest fantasy price that meets the equilibrium balance between buyers and sellers.
The fantasy price can be one-half replacement or triple replacement; just simple supply and demand; Economics 101
When there are almost zero buyers then prices fall fast to unsustainable lows; conversely, and when there is a bidding war then prices sky-rocket to unsustainable highs.
Building costs and land prices mean nothing during a crash or a boom. Only during a long term balanced (stagnant) market do building costs and land prices have meaning.
" Blogger kunwak said...
LeoS, I don't get why you fit a linear model, I think it should be a power law.
February 9, 2014 at 5:57 PM"
Incorrect. Statistical trends should not be fit with models that do not correspond to the nature of the data.
House prices don't increase like bacteria as much as the average Canadian would wish it to be true. The majority of houses are bought with money made from people like you and I who grit it out 9 to 5 in a job. As long as those salaries continue to advance +/- linearly with inflation, there is no way in the world they'll ever increase according to a power law.
Leo would you do me a favor, take that power function you fit and estimate for me what the price of a house will be in 5, 10 and 15 years and let us know.
I bet the amounts will a) be staggering b) show why house price increases should never be fit with a power law. Over the long haul, the increases are in the single digits and linear.
Sorry one last teeny tiny favor...compare the power law estimates to the ones you'd get with the linear one.
The difference will be huge.
House prices don't increase like bacteria as much as the average Canadian would wish it to be true.
Actually all prices increase like bacteria, i.e. exponentially.
It's just that the exponent for prices is a lot smaller, except when you have hyperinflation.
@TJ
The power law is correct. If you expect prices to increase 1% a year then they increase exponentially.
You could liken home prices to the growth of bacteria. They grow and grow until they consume too many resources. Then the environment starts getting toxic. Then they start the cataclysmic die off.
buildings are already assessed below replacement.
--------
So what?
I thought I'd made that clear. When prices fall below replacement cost the demand for new construction is apt to decline sharply.
Further as you point out frequently, interest rates are at historical lows and thus more likely to rise than fall.
This is true of the last half century but not of the last century and a half.
Moreover, you may believe interest rates are more likely to rise than to fall, but the European Central Bank is considering negative rates.
The assumption that there is some normal state of affairs to which we must inevitably return seems to me to be wrong. That doesn't mean I know where we are going, it just means we should probably consider all possibilities not just that of retracing our steps.
Marko has a hate-on for Garth and thus tends to exaggerate a "little"
I respect Garth as a business person. He has probably made a small fortune selling books, seminars, and financial services by consistently making inaccurate predictions about the real estate market. Have to hand it to him.
I just find it interesting how many religious followers he has after all the years of consistently inaccurate predictions.
And it is very unlikely that you'll be able to find a deal today like Marko did.
I found it in 2009 (834), found it in 2011 (Bayview Promontory) and I'll find it in 2014 (Era). For example, the Era will have 1 bedroom units in the 215-220k range that will rent for $1,100 to $1,150 give or take.
Investing in real estate is a terrible idea for the average consumer.
I don't disagree with this at all. I have seen some horrible real estate investment moves.
For me personally my TSFA and RSPS are maxed out and I know where the best returns are on rental condos so it doesn't make me an average consumer. Certainly not subsidizing any renters here.
Rent the condo from the landlord that loses money every year from depreciation.
Somehow I doubt condos are going to depreciate to zero.
Land prices always decline as major housing bubbles go through their inevitable deep price corrections.
Land prices in the core at 2010 peak levels. I spent more than a year looking for my building lot and ended up outside of the core at the end of the day.
Every move up in the interest rates is a cut to your profit. A doubling would wipe out your profit margin completely.
IF interest rates double I'll be cash flow neutral, big deal?
In the meantime while I wait for rates to double I'll continue to leverage my rental properties (interest tax deductible) to generate cash flow to pay off my principal residence mortgage (not tax deductible).
"Somehow I doubt condos are going to depreciate to zero. "
Zero, probably not, 150 though??
Yea, but the drop is impossible to predict; however, the principal pay down every year is quite predictable.
"Back in my day" condos used to be for living. Now they are an investment vehicle. Interesting times ahead.
Somehow I doubt condos are going to depreciate to zero.
All condos depreciate to zero because the land value is negligible. Takes a while, but it's inevitable.
By the time they depreciate to zero the land value as per unit entitlement will exceed the original purchase price.
I wouldn't say the the land value below the old condo buildings in Fairfield is negligible as the zoning is in place to replace them with another building.
The land-to-building ratio of a condo is often higher than that for houses as they are often situated on some of the highest priced land.
True, but the problem is you only own a small portion of the land as an individual condo owner.
To clarify, the land-to-strata ratio is often higher. An example:
500K house: land component 375K, building component 125K
500K condo: land component 400K, building component 100K
As often is the case the land component attached to the individual condo unit is worth more than the house lot. Condo buildings are often situated on very high $ per hectare land.
David, how did you determine the strata lot value of the condo?
I wonder what it would take for the "soft landing" meme to crack?
Every crash starts with a soft landing.
I was looking at my sisters. The land component for her unit was 410 and the building component was very near 100. I don't know accurate it is but it's near the Empress so the land it sits on I don't know how many million per hectare it would be valued.
I take it you are looking at BC Assessment? That doesn't mean anything.
For new condo developments, how much of the cost is in the land and how much is in the structure? No way is it 4:1 land:structure.
So, we're moving again.
here's just another reason why I hate this city. I put three TV's on the corner with a FREE sign. When rain threatened, I skipped out to Can. Tire to buy a cheap tarp. I covered the TVs with the tarp and put the FREE sign on top. Twenty minutes later, someone took the tarp.
"Twenty minutes later, someone took the tarp."
Haha, only in this city do people care so much about stuff they are giving away for free.
re tarp.
Yup might as well send three perfectly good TVs to a landfill somewhere.
Hmmm, the free sign was on top of the tarp.
S2
I find the combination of putting something out on the street and then also advertising it on usedvictoria, craigslist, and kijiji is fairly effective in moving it quickly.
Old TVs are tough to move though...
"Old TVs are tough to move though..."
If your TV isn't a flat screen then skip the pretense of "giving it away" and take it straight to the e-recycling...
sad but true
Monday, February 17, 2014 8:00am
MTD February
2014 2013
Net Unconditional Sales: 200 394
New Listings: 588 1,039
Active Listings: 3,599 4,072
Please Note
Left Column: stats so far this month
Right Column: stats for the entire month from last year
Leo S said...
@TJ
The power law is correct. If you expect prices to increase 1% a year then they increase exponentially.
Leo you would be correct if those were real prices, but they are not. They are inflation adjusted prices you are fitting in that plot. Inflation adjusted prices do not grow according to a power law they grow linearly at a very small rate over the long term. Inflation itself is what's giving the power law price movement, not the "real" house price. I suspect you already know about this but if not Google "house prices from 1900 to present" and explanation will come up.
So either fit the non-inflation adjusted with power law or fit the inflation adjusted with a line.
If you project out 20 years and then factor inflation back in you'll see that the prices the power law on inflation adjusted prices predicted will be huge (this is what I was saying).
Not sure this link will work but this is what I am referring to:
http://visualizingeconomics.com/blog/2011/03/23/real-vs-nominal-housing-prices-united-states1890-2010
Leo sorry evidently I can't seem to type what I'm thinking..in the first sentence of my post above replace "real" with nominal.
Nominal prices increase power law
For long-term data sets, inflation-adjusted (real) house price increases are much closer to linear.
The point is the increase in prices long-term is due mostly to inflation. When you take inflation out, the power law fit should go away.
Hope this makes sense can see what I'm saying comes across confusing.
@TJ
All Leo is doing is displaying the data. He isn't manipulating it or changing it. He applies the power law to the display of the data that is all. If it is going up exponentially it simply is. It's not the result of how Leo is adjusting the display....
Hello, can somebody recommend an agent in Kelowna? Thank you.
If it is going up exponentially it simply is.
And if house prices adjusted to constant dollars according to the BoC CPI inflation index show an exponential trend, one may wonder whether the inflation adjustment is applicable to real estate.
An inflation index based on money supply times velocity of circulation divided by total economic output might (would probably) yield significantly higher inflation numbers, which would likely be more applicable to house prices.
Lois Lane said...
Hello, can somebody recommend an agent in Kelowna? Thank you.
February 17, 2014 at 7:57 PM
_____________________________
Without a doubt Mike Willmott who works with his daughter Joanne. Mike has worked with us, successfully, on 3 properties in the past and either buying or selling, he has the background and time in the area - IMHO
Nothing against his daughter but work with Mike if you can.
Cheers,
http://willmottandassociates.com/
Hello, can somebody recommend an agent in Kelowna? Thank you.
Buying or selling?
@Jack and Cate, thank you.
@Marco, we are looking to buy. Thanks.
I don't have anyone particular to recommend but a quick google search yields a number of business models offering buyer incentives such as....
http://okanaganchoicerealty.com/buy-a-house/
Something to consider when looking for a REALTOR®
"REALTOR®"
Is there any other profession that demands it's members be referred to by all caps then followed by a registered trademark symbol?
DOCTOR®
JUDGE®
GOD®
It should really be:
®®REALT-R®®
We wouldn't want to offend the gate keepers to the real estate industry.
Wasn't my idea...I am just following the rules set down :)
Dasmo - leo is fitting a model to the data. Previous analysis shows a power law model works over a time scale equivalent to the data for nominal prices not real.
If just the green lines were there (real prices) then you would be right. But when lines start getting fitted, that's a model. If the model doesn't fit what we know about the data, that's when you've got to ignore the lines.
Personally I think the best fit is a straight line that goes through the early data up to about 2000. If you draw a line there, it highlights what a bubble we are in, and the fact that real (inflation adjusted) prices still have a long, long way to go. The nominal prices won't got quite as far but they will still come down a lot.
Just wish I could post what I'm talking about, the light bulb would click on if I could make a chart or two oh well.
Dasmo - leo is fitting a model to the data. Previous analysis shows a power law model works over a time scale equivalent to the data for nominal prices not real.
If just the green lines were there (real prices) then you would be right. But when lines start getting fitted, that's a model. If the model doesn't fit what we know about the data, that's when you've got to ignore the lines.
Personally I think the best fit is a straight line that goes through the early data up to about 2000. If you draw a line there, it highlights what a bubble we are in, and the fact that real (inflation adjusted) prices still have a long, long way to go. The nominal prices won't got quite as far but they will still come down a lot.
Just wish I could post what I'm talking about, the light bulb would click on if I could make a chart or two oh well.
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