Buy vs Rent.

H/T to Talus for the link via Mohican.

From the NYTimes: (in bits and bites)

One of the big lies of the real estate business is the idea that renting a home is tantamount to throwing money away. It’s a useful fiction for real estate agents, because they make vastly bigger commissions on house sales than rentals. But the comparison isn’t nearly so straightforward for the rest of us.

Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check. Buying, on the other hand, involves multiple expenses, some of which aren’t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest...When you own, you also lose the ability to invest your down payment elsewhere, like the stock market.

Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.

The concept will probably sound familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.

You should really read the rest. It's US specific data, but the same underlying factors apply here and the ratios are fairly similar. A good read, thanks Talus.

They even provide a cool Buy vs Rent calculator to play with.

A welcome addition to the Victoria RE blogosphere has arrived. Womp brings us MLSstats.ca for daily stats on the local market, emulating one Realtor I'd happily work with in Vancouver, Paul.

UPDATE: a week ago I gave you some snapshots of low-end market inactivity. A week later, of the 16 May listings for SFH in my criteria four have sold:

MLS #246067 original price $419,900. 16 days on the market. Sold for $390,000 or 8% less.

MLS #246160 original ask $419,900. 8 days on the market. Sold for $425,000. (It's a triplex).

MLS #246156 original ask $399,900, sold after 10 days for $375,000, a full 7% less.

MLS #246107 original ask $389,900, sold after 11 days for $377,500.

This time it IS different

At least in the TC courtesy of Carla Wilson.

Some notable quotes:

Markets in the West, which have risen the furthest above their underlying values, are the most at risk of an increase in defaults as a result of recent mortgage innovations

The delayed arrival of softer housing markets can be partly attributed to recent mortgage innovation that has seeped into the Canadian market during the last two years

so we are looking for even Western Canada to really start to cool off

And obligatory spin from industry:

While there is some "hefty" price appreciation, the market is starting to return to balanced conditions

Prices rose four per cent year-over-year in April, she said.

Canada's housing market is on much firmer footing than the U.S. market," it said, citing more conservative mortgage lending practices, healthy household finances, tight labour markets and a manageable supply of homes on the market

Since when is four per cent growth hefty? I mean if I bought a condo April and wanted to trade up to a house as all my friends have managed to do over the past two or three years, wouldn't I be sad to find out that my "hefty" gains don't even cover my Realtor's commission for selling my place?

I'd like to point out that the US has higher average wages, lower unemployment and just last week the RBC was telling us Canadian's weren't saving enough. How does that equate to "healthy household finances?"

Don't forget owners: you're in it for the long term. Unless you aren't. And then you're a speculator about to get caught, unless you get out now.

I wonder if the next big boom is going to be in counselling services? Can you buy stocks in that? I can see the future headlines: Counselling boom fed by dis-illusioned condo owners "I thought I was only going to have to live in it for a year, maybe two at the most."

Don't let anyone tell you different. This market has changed. And is now starting to show some weakening momentum. Prices will be the last thing to go down. Sales first, prices second.

Where have all the buyers gone?

In my PCS I watch two market segments: 2 bed 1 or more bath condos under $250K and SFH under $425K with a suite or suite potential. Both of these segments don’t include areas outside the core, so no Central Saanich or farther west than Langford. I’d argue that these two segments should be, and have been, the hottest in the market over the last year simply because these segments are the only “realistic” options for most Victorians.


In the SFH category there have been 12-14 listings (some of these are price reductions that appear new based on my filters) and no sales recorded since April 22. That isn’t to say nothing has sold, just that the PCS isn’t showing them as sold. So it could be that there are conditional offers in this list of properties that haven’t had the conditions removed yet. So much for bidding wars and unconditional offers only being accepted stories, eh?

Condos are only a mildly different story, slightly more listings, maybe 25-28 and one sale since April 29. I’ve seen price reductions and re-lists (again bringing previously higher priced units into my screening) and more “realistically” priced new listings. Same caveat around “sales” as above.

Back when we first started watching these categories we’d often see houses around $380-$400K and condos around $210K, then over last summer and fall asking prices jumped up closer to $415K and $230K. Something has definitely changed here. It appears like the buyers have up and left the building. And the sellers are starting to realize this.

Why may this be? I think the FTBer is long priced out of the market. Maybe some with help from the bank of mom and dad are still playing around, but even these, in my opinion, will be already in the market if they were going to get in with help. So the rest of us who have to rely on income and savings to support our home purchases can’t get value, or can’t get financing, so we don’t buy.

My guess? I’m thinking the only people buying right now are the same ones who are trying to sell. The market is flat. You have to be blind not to see it. This summer’s activity will be people trying to move across the market while they still can. I don’t expect to see anything more than a few percentage points price changing through the summer (normal for what we’ve witnessed over the past 6 months or so) but come October no one will be able to ignore the changes and the inevitable rush to the exits will ensue. Much like what is happening in Vancouver right now.

Update: Thought I'd show you all that sale on May 6, only because it's beautiful.

Original price $270K, sale price $225,000, for a 17% reduction.

Bull Psychology

Psychology in the market place is a funny thing.

I still haven’t found a way to quantify it. Pollsters will ask “intent to buy” questions of consumers and then real estate boards and marketing companies will spin it in the media to mean “majority of people between reader A and reader B think real estate is a great investment” etc. Who doesn't want to be part of the majority?

In a recent exchange in another web-place, as a response to some stats I used to back up my bear assertions, a poster had this to say: “many people have total confidence in the market here and that alone makes it unlikely prices will drop.”

I haven’t believed that confidence in the market matters much in the big scheme of market psychology. Because confidence, like all psychological factors in the market place, waxes and wanes.

I’ve found myself drawn back to this exchange frequently over the past few days. I tend to get a train of thought stuck in my head and until I’ve worked it out it nags at me like my mother did when my room was messy; I learned the only way to get rid of the nagging was to get down and do the work.

My neighbours recently bought a home. It was on the market for only a few hours just around the corner from where they currently live. They walked through it and made an offer to the owners to pay their asking price if they agreed to a deal subject to an inspection—I’m not sure if they made the deal subject to the sale of their own home or not. It doesn’t really matter, because they have confidence in this market.

This purchase was specific. They were looking for a particular house that fit a particular need at a particular price. It popped up and they pounced. They’re happy with their decision and that is really what matters to them, because they are buying a home and not an investment—future price gains were not the determining factor in their buying decision. But how much does the fact that they pounced influence their confidence in this market?

When it came to pricing their own place, they didn’t quite see eye-to-eye with their agent. They wanted a slightly higher asking price (and I should state that in this case we’re talking about literally one percent of the total price). Their agent wanted slightly less for whatever reason their agent gave them. Ask me my thoughts on their house and I would tell you that I think their home is in a very good neighbourhood, offers many income opportunities to help with the mortgage, has good bones and requires no work to make it livable, but lots of work to make it like all the newer updated places with hardwoods, granite and stainless.

I can see more upside to buying it than down, especially long-term, but in this market, with these conditions (more competition for less buyers), it may not sell as quick as they’d like or for as much as they’d like. I’ve seen so much insanity lately that I won’t be surprised in the least if it sells very soon or even in two months time. For them, I hope it's soon.

A while back I wrote a post about a Realtor respecting their client’s wishes. I thought they had good reasoning behind their decision and felt the agent should have respected this. Conversely, many others felt that selling then buying was the less risky venture. I was definitely in the minority about the right or wrong behind this family’s decision to buy before selling and I can see the why in that reasoning now. Important lesson learned for me.

This family is confident in the market. And that confidence led to this decision and this risk: they may have to carry two mortgages for a time or accept an offer they would otherwise reject due to financial pressure. I wonder how many other families are in this same situation right now in Victoria? I wonder how many young professionals who have bought re-sale condos with the intent of updating them and selling them for profit can’t carry them for long if they can’t sell them fast? I wonder how many of those same purchases are secondary properties and not primary residences, and thus doubling up the risk? I know of one handy man who sells cars for a living and rents the condo he lives in on Bear Mountain (because he can’t afford to buy it) who has flipped no less than 3 re-sale condos in the past 16 months. What kind of pressure is he under to sell his next (or current) project? How many of the available listings in Victoria do these kinds of scenarios represent? Twenty per cent? Thirty? More?

All of these anecdotal examples of potential situations are borne of confidence in this market. I can understand the rationale; after all we’ve witnessed the longest, most sustained upward pressure on real estate valuations in Victoria’s history; you’d have to be crazy not to get on the gravy train. I can see why some people—especially the ones who are too busy making money in the market to do market research—believe that we’ve reached a new pricing trend paradigm.

I was a geek in grade school, didn’t have much confidence because many other kids didn’t hold me in high esteem. I’m still a geek, but I’m much more confident because I’ve learned to value myself (and because Mrs. HHV thinks geeks are hot). Perhaps the most important lesson I learned, and learned the hard way, was too much confidence can be a bad thing.

Confidence in the market? Analyzing it rationally is a bit much for me. I think I’ll stick to things I can quantify. Like price to rent and sales to listings ratios, investment fundamentals and liquidity, and, above all else, making sure that if I’m wrong I learn from my mistakes and still be able to provide Mrs. HHV and me a decent future.

Bull Feed

It's clear the US market is toast. It's clear the Alberta bubble has EXPLODED (Updated 05/11/08; H/T to Island Boy at VT). It's clear the Ontario market is turning.

Ours? Not so clear. Yes, inventory is piling up. Yes, sales are declining. Yes, new condos aren't selling anymore. But prices remain slightly up. I know, I know, things take time to develop.

Nation-wide, the US market took about 6-8 months to unravel. But it didn't take that long in Alberta. It's not taking that long in Ontario. And these are facts that the bulls will use to justify their argument that Victoria is different.

Open letter to the Ministers of Finance and Human Resources/Social Development Canada

Dear Jim and Monty,

I’m writing to you today because I am gravely concerned about the exposure that Canadian taxpayers have to the quickly changing Canada-wide real estate bubble, indirectly through the Canada Mortgage and Housing Corporation (CMHC). As the ministers responsible for Finance and Human Resources and Social Development in Canada, you are both acutely aware of the importance housing and markets have to the Canadian people in general and the wider-economy. You are also directly responsible for CMHC.

Over the past 8 to 10 years, many regions in Canada have experienced unprecedented escalating house price valuations. As a result, one fact has become glaringly obvious: The median family in Canada can no longer afford the median property in many urban centres. These same regions are home to the greater percentage of the Canadian population.

Beginning in 2006, perhaps as a result of your political party forming Canada’s New Government™, CMHC began liberalizing its standards for mortgage insurance. Come to think of it, personally I can’t see much difference between your government and its Liberal predecessors, so I’m more inclined to think that the liberalization of standards at CMHC was the result of internal management processes and not applied-from-above political forces.

I’m not exactly sure when the private mortgage insurance companies began providing competition—and I hesitate to use that word because statistically CMHC still has an effective monopoly on the mortgage insurance market. Regardless, the effect of private mortgage insurance companies like Genworth and GMAC on CMHC’s policies couldn’t be more pronounced. But this isn’t news to you, nor should it be.

In a remarkably short period of time for any government entity, even one governed, so-called, at arms-length of elected officials, CMHC has first stretched out amortization periods from a long-held standard 25 years to 30, 35 and ultimately 40 years. They have also dropped the minimum down payment from 25 per cent to 20 per cent in an effort to “absolve” one from purchasing mortgage insurance—retrospectively this may be a prudent decision that benefits taxpayers as it potentially reduces the total number of default mortgages that taxpayers may end up subsidizing through CMHC. They even took the sub-prime equating step of dropping the 25 per cent minimum downpayment for "investment" properties. I use quotes because I fail to see how properties purchased for valuations far above what rents will support qualify in any financial circles as investments.

One fact remains undeniable: never before has the Canadian taxpayer been more exposed to private lending practices than it is today. And as the real estate market winds down and inevitably contracts from its unprecedented expansion, Canadian taxpayers may well end up “insuring” the bad lending practices of banks, private mortgage lenders, the speculative buying activities of would-be real estate investors and the poor insurance decisions of CMHC who agreed to back them.

The governors and management of CMHC may have enough investment reserves to handle the mortgage defaults inevitable as people face higher interest rates, rising inflation and decreasing house valuations. They may not. CMHC may be able to sell enough new mortgage insurance premiums to cover increasing defaults, although common market sense suggests they won’t in a declining market.

The Government of Canada, specifically the Department of Foreign Affairs, has recognized the world-wide real estate asset bubble and acted prudently by selling off many millions of dollars of real estate at a time when it made great fiscal sense to do so; despite the fact that one can dispute the political or diplomatic sense of these decisions until the cows come home. I am asking that you please also act with the same fiscal prudence and privatize CMHC, now while the market still maintains some outward appearance of stability.

This action may cause a short-term, collective WTF with the general electorate, but given that it looks as though the combination of you governing like Liberals and the Liberals being an ineffective opposition will lead to you staying in power until October 2009, you should be OK. I believe, rightly or wrongly, that many economists who don’t depend on real estate for an income will applaud your decision publicly which should mitigate the negative effects of the public outcries from the ones who do depend on the Canadian Real Estate Association for a paycheck.

This anonymous blogger—like more and more people around him, a fact which is slowly being reflected in the mainstream media—believes that in 2009 real estate valuation schadenfreude will be as mainstream as the real estate valuation love-in that was 2007. During your election campaign in that fall you will be able to get up on your soapbox and pat yourselves gleefully on your backs while chanting, yes chanting!, “we saw this coming and we acted to protect you, the average working family heroes. The corporations will be held to account for their loose lending ways.”

To summarize, the taxpaying many must be protected from the actions of the few and the only clear way to do so is to privatize the CMHC. Who knows, CIBC will likely line up to buy it, they seem to have a way of ignoring the underlying issues present in their investments.

Respectfully,

HouseHuntVictoria

Journalistic Integrity?

In light of the much bandied about hullabaloo going on over at VancouverCondoInfo and to a more limited extent at CondoHype, I figured I'd weigh in, but more importantly direct traffic to this issue on the other blogs.

Does the MSM, and specifically in this case, the VanSun, owe its readership the debt of integrity-based journalism, or owe its advertisers the opportunity to market themselves virally under the guise of a story?

We likely all saw, and more likely didn't finish reading, this weekend's piece titled 15 Real Estate Myths and Realities. We didn't finish reading it, because as bears, it read like advertising, or as bulls it simply reinforced what you already know and are "profiting" from. I don't think anyone, except a minor few, read it as a well written source of advice backed up by unbiased experts at arms length from industry--be it RE or media.

I don't think I need to answer my rhetorical question from above. I think that CondoHype has done a more than adequate job of doing so in his post; and that perhaps, if one sentence stands out above all else, it's this: "When it comes to real estate, the assumption is that the reader is in the market and is looking to invest."

I think the assumption is fair, well researched, and true. The reality is, more people own their own homes in BC than don't. I'd even go so far as to suggest that perhaps right now, more so than ever before in the history of BC, home ownership is likely at an all time high. Goodness knows that we citizens of the best place on earth have been given more opportunity and reasons to buy now (or be priced out forever) than ever before. I'm also willing to go out on a limb and suggest that more homeowners than renters, again defined in terms of percentages, not only subscribe to, but actually read, the Sun.

I'm not suggesting that renters are a bunch of illiterate chumps, but I am suggesting that simply by analyzing why people choose to rent (forced to economically, move around too much, etc) will point to the obvious fact that homeowners are more likely to get a paper delivered. And subscription equals delivery. Furthermore, the number of subscriptions directly correlates to advertising income. Circulation definitely factors in here; but I believe, rightly or wrongly, that subscriptions likely hold more weight with advertisers concerned about the demographics of the readership due to the information gathering capacity of knowing who's account information is available.

To me the problem doesn't lie in and of itself in media funded by advertising. The collective "we" have become very savvy in recognizing, and resisting, marketing. As a result, the collective "them" (in this case advertisers) have become more sophisticated in their marketing efforts. Remember that companies like Google and Facebook get their major revenue streams from targeted advertising based on what they know about their users. And more and more, this advertising is going "underground" or viral; like the Pepsi can on the kitchen counter of a TV show about a group of kids living in Orange County. Am I the only one who remembers when the cans were just labeled generically "beer" or "soda" in TV shows about a group of kids living in a 90210 zip code?

The Sun story was, and likely was recognized as such by most readers, inundated with viral marketing from RE industry "experts." It was a story that reinforced the common myths and masked over the increasingly visible realities of RE as an investment. And that is the true problem: the vast majority of people who own their own homes are not RE investors. The word, in my mind, should never be mixed in with anyone who owns only one property. Nor should it be misused to describe someone who owns a property that does not pay for itself AND generate a return on investment not only today, but growing into the future. Everything else is speculation and very few people like to be labeled a speculator in Canada as it seems to offend our more "moderate" and "risk-adverse" financial "sensibilities."

If people truly crunched numbers on their 2nd and 3rd RE purchases, then took five minutes to look-up what those numbers meant in the land of investments, they'd quickly learn that they are exactly like they were during the dot-com era: over exposed to "investments" whose market values were not nearly supported by their underlying economic fundamentals. Imagine if your shares of Nortel had been bought with your line of credit at their peak?

For the record, the stocks that I purchased recently using a value investment strategy are also speculative buys and not stable investments. I am counting on capital gains to make them worth the risk. The difference is, their underlying price-to-earnings ratios are vastly better than any RE in BC and therefore, in my mind, far less risky in both the short and long terms.

When someone uses an extended amortization, low-down payment mortgage product to buy a second condo to rent out at roughly 50% of what it costs to carry it, they should never be called a real estate investor (and given recent data released by ScotiaBank "someone" is roughly 60% of all mortgage holders) . They should be called a fool. And you know what they say about a fool and his money. I wonder how "soon", soon will be?

UPDATE: seems like D.Penner felt some "pressure" to provide a more balanced follow-up story.

Also see J.Chevreau's piece in the post Saturday if you're thinking about an extended amortization mortgage product.

Also see the effect that bloggers are having on the big bad MSM. I've got to say this: when someone resorts to a character smear, by accusing their "attackers" of a smear, well, isn't that kind of like the pot and kettle thing? Maybe I'm just missing the point?

UPDATE: From time to time I get press releases in my email. I won't publish marketing, but some are public service announcements. I won't put them up unless the readers of this blog want me to. What say you?