Predictions

Happy holidays everyone.

2008 has proven to be a year chock-full of surprises. We've seen the average single family home lose almost $100,000 in value. We've seen listings skyrocket and sales plummet. We've seen panic from within the real estate industry. We've seen the MSM go from head cheerleader to pallbearer to cheerleader to confused. We've seen "real estate industry experts" continue to demonstrate their inability to accurately predict "what time the 3 o'clock ferry to Vancouver will leave."

And we've seen the MSM tell us the "bloggers got it right" but not before Re/Max confirmed BC bear blogger's numbers with their own admissions.

So what could possibly occur in 2009?

Dear readers, I'll give you my predictions and I'll ask for yours in comments.

Spring 2009 is the turning point. One thing will definitely happen: listing will jump drastically, hitting all time highs in March/April, probably nearing 6000 total units. I expect to see a slight rise in sales volumes in March/April, not reaching spring 2007 levels, but somewhere in the neighbourhood of 450-500 units. January and February will look like Oct/Nov 08 and see drops in prices as a result.

As far as prices go, I expect to see a leveling-off of price declines (the proverbial dead cat bounce) over the same stretch, prior to 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.

I expect to see a total drop in average sales prices from the April 2008 peak nearing 30% by the end of 2009. That will mean a house that sold for $625K in April 2008 will be selling for around $440K next December. Something to look forward to bears: those crappy, neglected, homes with suites in neighbourhoods you'd rather not live in that are currently sitting on the market for around $425K, they'll be sitting on the market at the end of 2009 for somewhere around $300K.

Remember people, my predictions are worth exactly what you paid for them.

Canada's sub-prime

Interesting analysis in the G&M today regarding low-down extended amortization products. Here's some low-lights:

In the first half of this year [2008], as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

Virtually unavailable in Canada two years ago, high-risk mortgages proliferated in 2007 and early 2008 and must now be shouldered by thousands of consumers at a time when the economy is sinking quickly and real-estate prices are swooning. Long-term mortgages – designed to help newcomers get into the housing market sooner – are the most expensive in terms of interest costs, and least flexible when mortgage-holders cannot meet their payments and need extensions.

The Bank of Canada this week warned that the perilous economy could lead to a doubling of so-called “vulnerable households” – those unable to meet their debts – and perhaps cost thousands of Canadians their homes. The central bank, which is always cautious with its words, said in a report that there is the potential for “a substantial increase in default rates on household debt.”

Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that “the government has got to put an end to this.”

Critics, including former Bank of Canada governor David Dodge, say the lax mortgage policies only further stoked soaring house prices.

I remember those days very clearly. I was shocked to learn we could stretch our mortgage payments out to 35 years. I was equally awed when we next learned we no longer needed a minimum 10% down. Imagine my response when we were told we could put 5% down, extend the amortization out over 40 years and even qualify for a 7% cashback option that would give us our downpayment and closing costs; it was almost as heart attack-inducing as when I learned we could skip the cashback and put nothing down, thus "saving" ourselves an interest "penalty."

I wrote about this last September. I even did a radio show on CBC last summer when this was considered a new and innovative market designed to "help" people like me. I called the 0 down 40 year products a "life sentence to the poor house." I'd like to re-name the now defunct products and their still-proliferating brothers and sisters--5% down 35 year amortizations and the cashback options--to something more indicative of what more and more experts are starting to recognize them for: "a quick trip to foreclosure."

So much for Canadian consumers being different.

A typically slow time of year

is even slower than typical. No sales in my filtered PCS in December.

The last SFH with suite potential in the Saaniches, Colwood, Langford, Esquimalt and Victoria sold on November 18. It sold for $60K under its new asking price ($665K) once the adjoining lot was added to the property (original price $415K).

The last two-bed condo in the same areas sold for $50K under asking price on November 24.

I was walking through the electronics department of the Bay the other day. The salesman said to me, "even if it doesn't have a sale sign on it, it's on sale. Every TV."

"How much I replied?"

"Oh, give or take 25%" he replied. "Depends on the model. You interested in anything specific?"

"Not yet. Your prices are competitive. I think I will wait until they are compelling."

HHV to MSM: yer turn, I think they're hearing it

H/T to Anon for graphics (please don't make me H/T anon anymore people, I like to give credit where credit is due)

Real estate forecast grim. When I started this blog, I never, and I mean never, imagined I'd read an article with a title like that in the TC. One choice tidbit:

Greater Victoria will lead the country in real estate declines next year as both average price and the number of sales tumble

Re/Max, without using the words, have stated very clearly, that Victoria real estate is the most over valued in the country.

What I find most telling about this article is that Re/Max states that despite the fact that our economic drivers are more insulated from the overall market our home prices will fall further. I question the insulated lines, but here it really is irrelevant.

Forgive me for feeling a deep sense of vindication today. Victoria real estate bloggers and regular market watchers and commentators, you've been confirmed by Re/Max today.

November numbers

Cautious Buyers Lead to Decline in November Sales

December 1, 2008

The number of property sales throughout Greater Victoria declined in November as buyers remained cautious due to concerns over the economy and direction of the market.

A total of 268 homes and other properties sold in November through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) down from the 316 sales in October. There were 623 sales in November of last year. November’s sales were the lowest monthly sales since December, 1999. The number of properties available for sale at the end of November was 4,459. That represents a 40 per cent increase compared to November of last year but a further decline from the 4,680 properties available for sale at the end of October.

Victoria Real Estate Board President, Tony Joe, says it’s clear the uncertain economic climate is having an effect on the housing market. "More people are taking a ‘wait and see’ approach and are less inclined to buy or sell unless they have to given all the uncertainty we hear about almost every day. Despite this, so far there has only been a modest effect on prices for single family homes and townhomes." Joe noted that the average price of single family homes in Greater Victoria last month was $524,128, down from $565,741 in October; the six-month average was $562,772 though the median price in November at $500,000 was up slightly from $495,000 in October.

Condominium prices were most affected last month. The overall average price for condominiums was $273,890 last month, posting a significant decline from $323,028 in October. The average for the last six months was $308,133. The median price for condominiums in November was $258,450. The average price of all townhomes sold last month was $447,370 up from $389,731 in October due in large part to two sales, one in Victoria for over $775,000 and one in Sidney for over $950,000. The six month average was $425,086 while the median price in November was substantially lower at $372,250.

MLS® sales last month included 153 single family homes, 77 condominiums, 20 townhomes and seven manufactured homes.

Thank you Tony, your credibility went up from last month's lows, at least in my eyes. Overall, these numbers are not great for impatient bears, nor are they great for the "this time it's different crowd." More of the same from last month really.

Highlights not shared: April 2008 average SFH price was $626K, this month $524K, an approximately 17% decline.

Tony to Bob: yer turn, I think they're hearing it

Just maybe not buying it yet, me thinks...


Some "mythical" highlights, courtesy of Bob; and some debunking, courtesy of me:

• BC's housing starts hit 39,000 units in 2007, significantly higher than our 20 year average of 30,000.
  

Too bad our rate of in-migration is unchanged at just under 1% per year and that in 2008, sales plummeted to a ten-year low: must suck to be a builder with units to sell right now, especially when you are overbuilding by almost 30%.

• Home ownership in BC is high at 70%

Which means there are no first time buyers left to get into this market: must suck to be a first time owner trying to unload that crack shack/lottery ticket you thought was a "sure thing" last year.

• BC has the lowest rate of mortgages in arrears in Canada, which already has a historically low rate. This is much different than circumstances in the US.
  

But not unlike the US, the debt servicing ratio is at an all-time high in BC right now; in plain language, that means more BC'ers owe more on their homes as a percentage of both their incomes and the current market value of their homes. This is a ratio that will increase, not decrease, as the market value of BC'ers homes falls leading to a higher rate of underwater homeowners, mortgages in arrears, and inevitably defaults.

Bob, your message then turns to utter bullsh$t: can someone please tell me when prices are falling at an annualized rate of 26%, how this can lead to "More potential for increased equity in the home." Bob, do you really think BC'ers are that stupid?

Now Bob, just to be fair, I do like your use of Warren Buffet's quote. Too bad it has nothing to do with real estate markets, nor is it well-timed because Warren himself always chooses to wait until everyone is "fearful" before he starts getting "greedy." He also uses easy to understand ratios of value to pick his buying opportunities: like price to earnings, or in the the land of real estate, price to rents. Considering I can rent a luxury condo or SFH in this town for less than 60% of its ownership costs, I think Warren would advise me to put the safety back on my buying gun for the time being. Clearly, you and the people you represent, and the people who sell on your behalf, are still in the "greedy" stage--though I can smell your fear starting to get stronger.

Bob, I give you an "C+" for effort, at least you got the TC to agree to run your ad without having to clearly disclose it is an advertisement.

I've purposely left a few choice garbage bombs for reader comments... have at 'er.

Hanging ten on the boomer wave

I've been looking a lot lately at demographic stats in an effort to understand future trends. I take issue when people tell me that because real estate has "doubled every ten years" over the past while in Victoria, that it will continue to do so in the future. I ask these people why? They say, because it has. I say, you need to understand why it has in the past in order to predict what it will do in the future.

Apparently I'm not the only one subscribing to the theory that the past 30 years have been an anomoly in real estate valuation cycles. Two academics in California published a paper early this year that made some news, and created some waves.

78 million Boomers are about to enter the years when people tend to become sellers rather than buyers. And as a result, they expect "many more homes (will be) available for sale than there are buyers for them."

"The Baby Boom generation was born over a period of 18 years, and once its sell-off commences, it could dominate the housing market for up to two decades," they say.

This theory is known as an age wave in economic circles. We can't argue that this won't happen. What is up for discussion is how it will impact local real estate price trends and whether or not current immigration/migration rates will replace the demand the boomers represent and the supply boomers will create.

My own thoughts, at least at this point, are they won't. I don't see a bright, expansionary future for real estate here in Victoria. I see a return to the pre-1970s eras of logical, sustainable, inflation-equaling growth (albeit cyclical); but only after we see a correction that will at least equal the one--as far as total percentage (maybe not rate of decent)--of 1982.

To me, my house, when I buy it will be a hedge against inflation, not a retirement plan in and of itself. Which is all a house should be. If you want to get rich in real estate under those conditions, you'll have to return to cash flow positive real estate investing, which means having a downpayment and a rent that exceeds your carrying costs by at least 10%.

What do you think?