Differing Opinions

I've gotten way more than my $2 worth out of the National Post this weekend. Two commentary pieces caught my eye, or rather, contradictions within themselves and each other caught my eye.

The first, entitled What subprime crisis? reminded me that I'm pretty much sub-primed out. It's almost as if the sub-prime debts have become the big bad wolf that economists and people who write about the markets can just refer to and expect us all to just get it--though apparently few do--without question. It's as if they can't explain their point using rational, reasoned, time-tested economic theory, so they just cry "wolf."

In a completely different section, and an obscure location as if editors either expected no one to read, or wanted no one to read, Our housing bubble may be the next to pop seems to have a more credible author (economics professor) and an easier sell in hhv-land.

Here are the highlights:

What subprime crisis?

Subprime does not mean the interest rate is below the prime lending rate. It means the borrower is below what is considered a prime candidate for a mortgage.

Canadians are not facing a subprime mortgage crisis.

After [subprime lenders] got the borrower to sign on the dotted line, the lending institutions packaged up the loans and sold them to hedge funds, mutual funds and private equity groups looking for quick returns.

The shares of these companies were then bought by pension funds and insurance companies looking for high returns, even though they would never have bought the risky mortgages outright.

Over the past five years, thousands of new mortgage brokers have entered the market in Canada and the U.S.

...it is true that some Canadian lenders dramatically lowered their lending criteria...

...the Canadian housing market has not been artificially driven by bad lending practices.

So, what's the lesson in all of this? Chasing short-term returns leads to an inevitable correction in any market.

Look carefully at those last three lines: lowered lending criteria, not been artificially driven, chasing short term returns = correction. Anyone else see the contradictions there? Nope, no one in Victoria has been chasing short term returns in the RE market. Not my dad with his two houses, nor my friend's parents with their two houses, nor my other friends' parents with their three houses (only one of this group happens to be rented by the way). Nope 5 people, 7 properties, 3 principle residences, 1 rental, and 3 vacant "flips." Nothing to see here kids.

Our housing bubble may be the next to pop

After a decade of low interest rates, it is no surprise that investors poured their money into real estate and the stock market.

Not raising interest rates in the foreseeable future may stave off pain for a little while longer, but the end of cheap credit is near.

...Canadian housing prices over the last decade have risen to the extent that we may also need to be concerned, given interest rate trends.

In Canada, the average MLS residential price rose from $150,720 in 1995 to reach $249,311 in 2005 -- a 65% increase.

In many cities, the price increases are so steep that homeowners are experiencing massive wealth effects as their homes appreciate, while first-time buyers are increasingly unable to afford a home.

The lowest interest rates in 40 years fueled this boom, and as prices and mortgage sizes have risen, financial institutions have "helpfully" come up with new affordability strategies, such as putting only 5% or even a zero down payment and extending amortization periods beyond 25 years.

A price-earnings ratio is the ratio of the price of an asset to its earnings flow.

...a crude P/E ratio can be constructed by taking the average MLS residential price and dividing it by the average annual rent for a two-bedroom apartment.

Declining P/E ratios can represent undervaluation, while rising P/E ratios can represent overvaluation.

...in Toronto, the residential housing P/E ratio remained at about 20 from 1995 to 2001 and then jumped to 27 by 2005.

...Vancouver, which already had P/E ratio of 31 in 1995. This actually declined to a range of 26 to 28, but then soared after 2003 and reached 35 by 2005.

Does this mean anything? Maybe no.

...in stock markets, whenever the P/E ratio for the market has risen substantially above 25 there has often been a correction, meaning a sharp drop in the prices of shares.

The P/E ratio for Canada as a whole is about 28, suggesting that the real estate market may be overvalued.

In light of the turmoil in the U.S. economy and the tightening of credit markets, which foretell a rise in interest rates, the question is not if but when the housing boom here will end.

Reading this one seems kind of familiar to anything else being espoused lately by economists: inflation concerns, rising interest rates, over-valued markets, looming correction. History has a funny way of repeating itself, non?

As an aside, with my new schedule it would appear I will have all kinds of blogging going on over the weekends. I know many of the regular readers of HHV are Monday-Friday types, so I'll make a habit of indexing the weekend posts on Sunday afternoons so you can catch up Monday mornings if you'd like. Did you like the polls?

A life sentence to the poorhouse
Weekend Poll

A life sentence to the poorhouse

A while back I received a request to give my opinion on 40 year mortgages on the local CBC radio station. I was on the road at the time and planned to do a story here about the 40 year mortgage and my thoughts but as things tend to go life got in the way and I never got around to writing down my thoughts. Until tonight.

The National Post ran this story today: 40 Years of Debt. Here are some highlights, emphasis mine:

Benjamin Tal, a senior economist with CIBC World Markets, says the change in the way Canadians pay off their mortgage is the most significant innovation to hit the industry in almost three decades.

Mr. Tal, who is the process of compiling a report on how the new products have changed the market, says interest-only and zero-equity loans are probably less than 1% of new business. It's the long-term amortization that has caught everybody's fancy.

"They were available in the early '80s and nobody was interested. The attitude toward debt is totally different now," says Mr. Tal, who adds his study will show a "significant" amount of new money is geared toward that 2047 mortgage-burning party.

The Canadian Real Estate Association says the average sale price of a home was $311,495 in July. If you bought that house with 0% down and a 25-year amortization, the total interest would end up being $277,993 over 25 years, based on monthly payments and an interest rate of 5.85%, a typical discounted rate today. Extend the amortization period 40 years under the same terms and you end up paying $488,116 in interest --more than the price of the house.

[Mr. Cirotto, www.amortization.com] laughs at the suggestion the 40-year amortization is giving Canadians more flexibility when it comes to making lower monthly payments. "I'm not sure you can call it an advantage to pay interest for another 15 years," says Mr. Cirotto. "To me it's bullshit. The best way to save money is not to have any mortgage."

Much of what is happening in Canada has been lender-driven, agree many in the industry.

"The 40-year amortization is the only way to get people qualified."

Want to know how much that 40 year amortization "saves" you every month? I'll do up the numbers on an arbitrary $300,000 mortgage. Doesn't matter what you put down or what your home is worth, the mortgage is $300K regardless. Interest rate is 5.85%.

$300K over 25 years = $1892/month and $267,732 in interest

$300K over 30 years = $1756/month ($136 lower than above) and $332,188 in interest

$300K over 35 years = $1666/month ($90 lower than above) and $399,754 in interest

$300K over 40 years = $1604/month ($62 lower than above) and $470,112 in interest

So by amortizing over 40 years you'd "save" yourself $288 dollars a month. In order to save yourself $288 dollars a month it will cost you $202,380.

Look at those numbers again. Notice how the big jump in monthly payment "savings" is between 25 and 30 years? Every five year period tacks an additional $70K in interest, roughly. But the payment doesn't lower proportionately. In fact, the "savings" shrink drastically the longer you amortize. There are some even more interesting numbers at work here behind the scenes. They have to do with income.

If you want to amortize $300,000 you need a household income of approximately $83,000 annually--that's assuming 0% down and no other household debt. What happens when you amortize over 30 years? Income need drops to $77,500. Over 35 years? $74,000. Over 40 years? $72,000.

Rather than close with my own advice for you, I'll quote someone far more knowledgeable than I:

[Mr. Cirotto] has an answer for the people who say the only way they can buy a house is with a 40-year amortization: Don't buy a house! "There a lot of people buying a house who shouldn't be buying the house they're buying. They need to buy a smaller house. People turn down their nose at smaller houses. They need to lower their expectations."

I know this article is leading, but I believe that readers of this here blog are smart enough to see through my opinion and form their own. So I give you another poll. Comments, as always, are welcome.

Weekend Poll

Just trying something a bit different. Who have you used to buy or sell? Who would you use again? Who would you recommend? Comments of course are welcome. This is unsolicited, and totally not scientific. Just curious to see what the readers of HHV think about the various full service realty companies in Victoria.

We owe all bears an appology

No we didn't break down and buy a place. It's much worse than that. Apparently it is the complete and utter fault of Ms. HHV and I that this market is now balanced and has returned to historic price-to-income fundamentals.

We've heard a lot in our house hunt journey, but I think we can officially say we've now heard it all. You see with entry level homes at around $400K and our annual income approaching close to 25% of that (believe me, there's no "hey look at how great we are" in that statement) we can now buy an entry level home at the historical norm of 4 times annual earnings. And if we can do it, anyone can. No sh&t! That's what I was told. No correction looming because you FTBs can buy again with confidence that your "investment" has no where to go but up.

What a crock. This nameless/shameless person went to great lengths to "explain" how wrong we are to hold firm to our belief that this market is beginning to correct even as I write this.

"Don't say I didn't warn you, but you'll be sorry you didn't buy now while you could, because pretty soon you'll be priced out forever."

I'm getting pretty good at not getting baited into the trap anymore. After this individual finished berating me for my "silliness" I simply walked over to his laptop and showed him this graph. (H/T Mohican) Then I said:

"We don't make an average income. We make an above average income. We won't buy an average house. Because we can't. But we can buy a neglected dump "with good bones" and with a dumpy "mortgage helper." For too much. But we won't. Because, well, how can I say this politely? We won't pay too much for a crap house in a crap neighbourhood because history has always shown that people who do buy at the market peak, end up needing to live there longer than they ever wanted to while waiting to just break even again."

The rest of the conversation went like this:
"it's not the peak."
"yes it is."
"no, it's not"
"is so"
"uh uh"
"whatever"

August Numbers

You may have noticed, if you're a regular reader, an absence of "low-end market segment" numbers last month. I decided not to do a count because a) it was depressing and b) I'm not sure if anyone else was getting any value out of it. If I'm incorrect on b, let me know in comments and I'll begin again September 15th.

VREB released their August numbers today. It's a mixed bag 'o' positive if you're selling a house or make a living selling/building housing in this town. Here's some highlights:

• There were 846 sales through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) in August, up 22 per cent from the 694 sales in the same month a year ago.
• There were 922 sales in July of this year. Meantime, 23 sales of over $1 million, including one sale in Oak Bay of over $5 million, helped push the average price of single family homes sold in August to another record high of $576,632
• the median price was considerably lower and remained unchanged from July at $515,000; the six-month average was $566,094.
• nearly 20 per cent of sales of single family homes last month were under $400,000.
• The average price for all condominiums sold in August was $298,852; the average for the last six months was $313,852. The median was again lower at $275,000.
  
• The average price for townhomes last month was $395,646; the average for the last six months was $398,299. The median was $379,000.
• There were 3,352, properties listed for sale on the MLS® system at the end of last month, virtually unchanged from the 3,345 properties in the same month a year ago.

In a nutshell, sales are up significantly, prices are a mixed bag, but generally flat in SFH and slightly down in condos and townhomes. I'm completely de-sensitized to this bad/good, depending on who you ask, news so no glum feelings for me. MLS doesn't release DOM numbers but I'm guessing where it previously took days to sell a home it now takes weeks, if not months. A house down the street from us sold for too much after 3 weeks on the market; SFHs in Saanich don't seem to have trouble getting between $500-$600K.

We're expecting condos to get ugly soon. There is a glut of product in our immediate neighbourhood about to come online. Tuscany is almost done and still not 60% sold. Richmond Gate has been "over 65% sold" now for months. I keep waiting for that sign to say 75% or 80% but I guess they don't have the money to update it? That should drive some prices down.

Any parents of college kids out there buying condos as an investment rather than making your kids try and fight for rooms in the rental pool?

As a complete aside, I started a new Monday-Friday daytime job, so posting will likely happen in the evening now. We're officially DINKS, I expect our realtor to be calling everyday as we just pre-qualed for an extra $100K. This may be fun for a while.

UPDATE: Roger has a great analysis of why this news is good for those of us who consider ourselves RE market bears.

I love my city

So when I see headlines like this I can't help but be saddened, H/T to Stargazerxl. I've re-published it in its entirety for your convenience. It may disappear suddenly if the NP complains.

DISGUSTED IN VICTORIA: National Post, September 1, 2007

There is something wrong in this city. Blessed with natural good looks and a charming, historic downtown core, B.C.'s political and tourist capital is losing appeal, nonetheless. It's no secret why; local officials don't try to deny it. Junkies, panhandlers and drunks are growing in number and becoming more brazen. They are scaring people.

"The state of downtown is our number one issue," says Victoria Mayor Alan Lowe, sitting in an outdoor cafe. "It's the same for tourists and for those of us who live here. It's the fear of coming downtown."

Most Canadians probably still imagine Victoria as a quaint seaside community, tweedy, mild of climate, with a distinct British accent. It's still all of that. But there is more talk of "junkies" and "fear" and "disorder," from the Mayor on down, and, correspondingly, more worry about the city's reputation as a great place to live and to visit.

A senior provincial bureaucrat -- B.C.'s Auditor-General, no less -- is startled when addicts start injecting drugs outside his downtown office. In February, he fires off a letter to city council, demanding action, more police patrols.

"This is not the workplace I or my staff would like to have, and certainly not the image we want to have about Victoria," writes Arn van Iersel.

A U.S.-based company cancels its four-day conference in Victoria last summer, citing "countless homeless children" as a main reason.

An event organizer explains that the atmosphere downtown "was not relaxing and enjoyable but rather quite uncomfortable. It reminded me of the Downtown Eastside of Vancouver rather than a world-class city."

A pair of veteran restaurateurs pulled the plug on their waterfront business this summer, blaming "human misery and degeneracy" in the downtown district. Other business people empathize. "I call the police on a regular basis once or twice a day," the manager of an adjacent furniture shop tells the Victoria Times-Colonist.

One can see why. On Thursday, a pair of injection drug users crouched in the shop's doorway. They pushed needles into their arms. Finished, they tossed their empty syringes on to the pavement, struggled to their feet and wobbled off. Watching some of this unfold from across the street was a horror-struck family of five.

One block south, in the narrow gap between a derelict building and a parking lot, there is a busy outdoor shooting gallery. Users call it "the pit" or "the cage."

It rivals anything in Vancouver's drug-riddled Downtown Eastside. Except "the cage" is a short walk from the provincial legislature.

Men and women of all description squat on dirt and rocks and inject drugs: combinations of heroin, cocaine, crystal methamphetamine, prescription tablets ground into powder and then mixed with water. Others smoke crack cocaine and crystal meth. Trash lies everywhere.

It's where I meet Codty Gray. At 19, he claims to be the youngest person here. He says he holds a "legit" job at a fast-food restaurant, but smokes crack to ease some personal trauma and anxiety. His mother died of a heroin overdose 10 years ago.

Mr. Gray claims to live on the streets; outside of work, his world is restricted to about 10 downtown city blocks that are filled with restaurants and retail stores, many of which cater mainly to tourists. The area is also inhabited by other drug users who leave trails of syringes and broken bottles. Some defecate on sidewalks. "It's getting pretty disgusting," concedes Mr. Gray. He estimates that 200 drug users frequent "the cage" on a regular basis.

He scoffs at the suggestion, promoted by some advocates, that some 70% of drug users living on the street had mental-health issues before turning to dope. "If we have mental illnesses now, it's because of drugs."

There are other notorious hangouts, among them the plaza that surrounds Victoria's City Hall. Known as Centennial Square, it seems especially popular with boozers. They loll about a grassy knoll and on benches, drinking. They make rude comments to passersby. They seem to rule the place. A security shed sits outside one of downtown Victoria's few public toilets. It's a single room, shared by men and women. For "control purposes," I'm told. A guard warns me not to linger there.

Kenneth Kelly is general manager of the Downtown Victoria Business Association; his office faces directly on to Centennial Square. Mr. Kelly is an enthusiastic civic booster and points to many improvements the city has seen in recent years. Even so, tourism, the city's lifeblood, is flat.

He acknowledges that Victoria needs to clean up its act. "There are some days when I look out at the square and I think, 'This place is a zoo,' " Mr. Kelly says. "We should not be tolerating this."

Yet it is tolerated, to some degree. "What are the options?" shrugs Mayor Lowe. Yes, he would like to see more police officers on Victoria's streets. A summer pilot program that diverted more officers to downtown foot patrol was a success. But there's no money for more hires. And the Mayor thinks it important to "strike a balance" between law and order and respect for individual rights and freedoms.

"I don't think that grabbing people and throwing them in jail to rot is much of a solution," he says. Neither, he adds, is ignoring the growing drug problem. "Letting people overdose in the streets? I don't think that's what we want, either."

Mr. Lowe has struck a task force to identify ways to deal with public disorder in the downtown core. An interim report is expected next month. He concedes it will take more months, perhaps years, to address the problem -- and, he expects, millions of dollars for more social housing, treatment and other forms of assistance to drug addicts, the mentally ill and the homeless.

He thinks Vancouver may be on the right track, offering such services as a supervised injection site where injection drug users can fix in a controlled, "safer" environment rather than in streets and alleyways. Mr. Lowe wants to open a "supervised consumption site" where users can both inject and smoke drugs.

But the Vancouver approach -- or experiment -- can't be called a success. That city's drug problem is as bad as ever. Some say it is getting worse, thanks in part to the increasing availability of user services, most of which are concentrated in the Downtown Eastside, where thousands of addicts live.

The drug scene in Victoria is not so concentrated; rather, it is spread throughout the downtown core, which is small and easily traversed on foot. There is no desire to even attempt to contain drug use in one area. "I don't want to give any one zone over to the junkies," the Mayor says.

So "the cage" on Store Street, where Mr. Gray smokes crack, is four blocks west of a busy needle exchange on Cormorant Street, which is nine blocks north of a drug haunt and former homeless encampment near Beacon Hill Park, which is a few blocks southeast of the Inner Harbour, where panhandlers roam, which is a couple of blocks from Douglas Street, where there is just about everything.

There is virtually no place free from street crime and public disorder in downtown Victoria. No one knows this any better than Inspector John Ducker, a 28-year veteran of the Victoria Police Department. He leads the Focused Enforcement Team, a group of 25 officers that patrols the downtown area. Half of the officers walk the beat at any given time.

His men and women are overworked; Victoria police officers already have one of the highest annual caseloads in the province, at about 90 each. The national average for municipal police officers is about half that.

"Twenty years ago, we were dealing with drunks hanging around the bus depot," Insp. Ducker says. "Now it's hundreds of drug users."

He does not have any proven answers. "Things have definitely become worse in just the last two years. Open, intravenous drug use is now common. It's upsetting to people who have lived here all their lives, and to people who come to visit because it's a nice place."

It is still a nice place. Just not as nice as it used to be.

As we approach the Olympics in Vancouver, this problem will get worse and not better. Victoria is focused entirely, as is Vancouver, in transforming downtowns from multi-socioeconomic venues into playgrounds for people with money. This problem is a direct result of poor civic planning and catering to developers pimping the "World Class City" dream. I'm sorry, but no matter how many world class communities developers build, the problem on the streets will not go away.

How many times have we been told in our house hunt that skyrocketing property prices is good for cleaning up neighbourhoods. We've heard this about Vic West and Esquimalt. We've heard this about Langford and Colwood. Where do people who can't afford to rent or buy get pushed? Vancouver is redeveloping live-in hotels into luxury condos. Victoria is absorbing Vancouver's Downtown Eastside problems as fast as vagrants can "bum" ferry fare. World class city indeed. This city needs to be woken up from its ridiculous dream of being a two-month playground for the world's uber-elite and re-focus on developing sustainable, reasonable living and working conditions for the people who want to call it home year round.

Marketing to the ages

We're having a little fun today with some of the marketing "geniuses" at work in selling local RE. We're first time buyers. We're little city folks with big city dreams and the careers to go along with them. We figure this ad is targeted to us:

Gone are the days when a real estate developer just wants to sell. you. a. house. Radius is different because Radius believes that potential condo buyers don't want just a place to live; nope, apparently condo buyers want to purchase their way into a daytime soap opera complete with all the intrigue and surprises that come from inviting nosy-neighbours in for a cartoon cocktail. Note the "older lady's" statement: "They initially bought at Radius as an investment, now they live here part-time to avoid the cold winters."

Note to marketers: the tired, old statement of blah, blah, blah, Victoria RE is great investment, blah, blah, blah, great mild winters is, well, both tired and old. We do like the fact that you call the north-end of downtown Uptown. That's better than calling it kitty-corner to the arena. Or right across from the cop-shop. Or White Spot just down the street. You get my meaning, non? We'd just like to tell everyone from away, do your homework on the neighbourhood before buying, cause Radius's location is at the very heart of one of the most aesthetically challenged parts of "Uptown." In the meantime, could someone pass me a prozac, I'm feeling a bout of "suburban long driveway loneliness" coming on ;-)

So we've seen how marketers target the lower-end segment of the market by appealing to our "youthful playfulness." How do they go after the aging Boomer who has it all? Here we turn to Aquattro, who apart from offering four types of waterfront, markets with a massive, back page ad in today's Homes section of the TC:

THE BEST THINGS IN LIFE ARE $750,000 to $1,500,000

Some of the best things in life are free and some are well worth the money...

Extra, extra large luxury condominium and townhomes available for those with money to enjoy

Wow. And in case you were wondering what apparently other people think about Aquattro: try here. This link is in their section titled WHAT PEOPLE ARE SAYING. Think you this may have absolutely nothing to do with either Aquattro or say condo/townhouse communities on the Westshore? We figure it can only mean one thing: back up for the agent selling the place saying to a potential buyer "now past performance is no guarantee of future returns, but (wink, wink) I'm sure these people would beg to differ."

Someone. Please. Help. Us. Soon.