With all the news about mortgage rates and the spin from VREB and REALTORS it is easy to overlook RE market trends and be influenced by what happened in one month - April.
So here are some facts and questions for my fellow bears:May is going to be an interesting month. It is usually the peak month for sales and new listings (see graphs above). After that sales taper off every month but inventory continues to grow until the end of summer. Once we get to June and July the RE industry will not be able to hype sales; they will be sliding.
- April sales were up significantly from March but are still lower than the levels seen in recent years These lower 2009 sales were with record low interest rates and associated hype. If you take a look at 1st quarter sales you will see that they were dismal. So low interest rates have driven the recent market. Will this continue?
- There is no disputing that SFH prices have increased somewhat in the last few months but it is the price trend that puts things in context. One or two good months in the peak sales season is not a trend reversal.
- Even VREB has stated that many sales are taking place at the low end. Oak Bay high end sales have shown typical increases in recent months. Here are the average and median prices but look at the rolling averages and where they are heading.
- People sell for many reasons but one of the main drivers of any RE market is move up buyers. I believe this crowd is sitting tight because new listings are not showing the big monthly spring increases of previous years.
One REALTOR told me that he believes the buyer pool is getting thin. How many FTB's with a good credit history and 5% down are still out there? Fixed bond rates are starting to move up and fixed mortgage rates will likely follow in a few months.
So stay focused on trends and not be swayed by peak sales season hype.
Tuesday, May 5, 2009
Follow the trends, not the hype
Roger always has great analysis of the monthly numbers. His April stats package, of course, raises the bar higher. In the last post, he made this comment, which deservedly needed to be moved to the front page:
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117 comments:
Following the usual banter of the real estate chattering class, they've all been calling bottom and telling us FoRenters we're stupid again. The ignorance that demonstrates truly is amazing. If you compare this spring to the 7 previous springs, the real estate market is weak. Despite the lowest interest rates in 50 years.
Affordability can only go downhill from here. And when that happens prices must fall, it is simple economics. Listen to the usual pumpers enough and you really come to understand how little they know about the market and how much they know about marketing. Somehow, they've successfully managed to confuse the two.
The low end market is moving all across the country. Check out Garth's latest post We are not the only ones predicting big problems for today's low end buyers.
There’s only one reason real estate moving, and that is the price of money. It’s an opiate. This drug has the power to turn solvent young couples into chronic debtors, blinding them to the fact the mortgages they take on will grow wildly more costly in the future, while the value of the asset purchased declines. Cheap money allows people with little cash to buy houses, and in that fashion it works exactly as did the US subprimes.
That turned out well, didn’t it?
The future of real estate is as troubled at this moment as it was a year ago, as the innocents clamour to get in.
The wise watch this, knowing only two things matter. Cash, liquidity.--
BTW - Here is a link to my Real Estate Stats Gallery for those that want to see all the Victoria RE market trends
Nick said:
“Someone like me who makes three-quarters of what you make and doesn’t have as big of a down payment is somewhat boned because I’m competing with the 5/35’ers who seem willing to take a mortgage on a Tillicum poverty box to their grave.”
I love the reference to 5/35ers as it is very telling of today’s market. I would take it one step further and call it 5/35/5.5ers with the 5.5 referring the multiple of debt relative to the buyers income. Twenty years ago it was 25/25/2.5ers and now we have 5/35/5.5ers; now wonder we have a RE bubble.
I oversee the finance of a large manufacturing company and decided to change banks two years ago when the prime rate was 6.25%. I put a deal in place with a charter bank for 3x our EBITDA and I could have pushed that to 3.5x EBITDA, but we did not require it.
Today the prime rate is down at 2.25% and I am fighting for my life to have them continue to lend to us at 3x EBITDA. Their corporate bankers tell me that it is very difficult to justify a deal today at 3x EBITDA and most deals are being down at 2.5x EBITDA if at all.
So as interest rates drop, banks are cranking UP the ability for people to borrow money while at the very same time they are putting the hammer DOWN and restricting what businesses can borrow. Today I can borrow 5.5 times my income but my business can only borrow 2.5 times its cash flow.
If government was prudent they would introduce a limit to what a bank can lend to an individual/family based on their income regardless of interest rates and amortization periods. I would suggest the limit should be 4x household income. Such a measure would limit the damage that is about to come to both individuals and the economy when interest rates rise and/or job losses increase.
If such a measure was put in place it would reduce the medium SFH price to about $400k in Victoria which is fundamentally where it should be. There would be a transition period where sellers would hold on to price expectations, but once it became clear that buyers could no longer afford those price expectations given lower mortgage borrowing capacities, the market would correct and we would have a far healthier RE environment.
But people just love the rollercoaster....3x or 4x income would be boring....I mean that would just mean that people would actually have money in their jeans when interest rates dived (mortgage payments would go down, but you couldn't run out and just get more mortgage) and instead of spending it on RE they would have to spend it on other things, and that would just create jobs for non-realtors and non-finance types. It would be a pure disaster to have so much money being pumped into other areas of the economy! (For those who can't seem to sense sarcasm in writing, I am being sarcastic).
I would extend the idea a bit further and add another cap that would kick in, in 'high-inflation' environments - that the debt to income ratio still be unable to exceed 40%....
The Nanaimo Daily News is starting to tell it like it is these days. It features a couple who are one of the few who "get it".
When Nanaimo retirees Ben and Flo Friesen started thinking about downsizing, they listed their Fillinger Crescent home for $509,000.
It was the snowiest December on record and they weren't all that keen on moving, so when few buyers showed an interest, they didn't worry about their price being too high.
That changed last month when they dropped their price to $474,000. The house sold in a matter of weeks.
"I think it's very important, but we're happy with what we got for our house because it is 13 years old and I think you have to stay within where people are willing to pay," said Flo. Big wake up call for sellers to be realistic about their prices.
With all due respect to Reid and Janice: There is a straightforward solution to this entire mess. The free market.
Banks should be able to lend at a thousand times annual earnings, if that's what they want to do. And people should be able to borrow at a million times annual earnings, if that's what they want to do.
And when both parties go bankrupt, solvent taxpayers should be confident our governments won't bail out either of them.
But if someone else guarantees that I won't go bust lending my neighbour a hundred times his salary to buy a McMansion, why wouldn't I lend him the money?
If we've learned anything, it's that government will always step in. Government knows that homeowners are voters. And bankers are campaign contributors. Save one, save both, save themselves.
Not a complicated formula, really.
Art - The market works, when it's not broken. The market is broken. A bank won't make a loan if it knows it can't be repaid (regardless of the multiple of income)under normal market conditions. Afterall, banks don't exist to provide a non-profit public service and frankly they could care less about Joe Public as long as they are making money. Unfortunately, our present rules set the stage for some very adverse outcomes (particularly for Joe Public).
With CMHC insurance the banks take unacceptable risks in the household lending market, knowing they won't face the consequences because they followed the rules that were in place and they did not lend households more than 40% of income. Unfortunately this translates into more than 5 times annual income at the present 5 year rate of 3.9%. It's manageable now but when interest rates rise that magic debt-to-income ratio gets violated pretty quickly. Households then deleverage - and an economic catastrophe results (maybe you like seeing high unemployment and bailouts and high levels of volatility??). The deleveraging also results in distressed real estate sales and a real estate crash. Furthermore, when interest rates dive, instead of stimulating the economy they just compound the leverage problem and set the stage for the next round of economic distress. Under a fixed income to debt rule, when interest rates dived, households would clean up their balance sheets and actually spend their money in the real economy. Furthermore, households would likely be more diversified and hold less of their wealth in real estate, making households more economically resilient.
Any mortgage product can turn toxic under the right conditions.
If we were to go to a fixed multiple of income and debt ratio rule I imagine the financial difference between owning and renting a place would quickly evaporate...
Just Janice:
Well said
"If you compare this spring to the 7 previous springs, the real estate market is weak. Despite the lowest interest rates in 50 years."
I think this shows that sales weren't driven by low interest rates, they were driven by falling interest rates. With each rate decrease, people who previously couldn't afford to were able to buy. Eventually, rates hit zero, or as close to it as lenders are willing to go, and the party stops.
The CMHC thing might also explain the 'active bottom' and the 'dead head' phenomenon that we're seeing in the local RE market.
Basically, if you're at the top end of the market ($700,000 plus), chances are you have more than 20% downpayment as you are likely to be a move-up buyer. As a result you avoid having to pay CMHC a premium for mortgage insurance. However, the bank must take the risk on the loan. As a result, you may not be able to get as much money from the bank as you would if you were an 'insured' mortgage. So perhaps the mortgage money just isn't flowing as freely at the top end of the market as it is at the bottom end of the market as the bank just isn't willing to take the same risk...
Let's see how much more affordable a house is compared to a year ago using some rough numbers.
Let's say a house was 400k last year and down ~13% this year to 350k. Let's also say someone last year had to pay 6% fixed compared with 4% this year.
Someone wants to do a 5%/35yr and has 20k saved.
380k@6% $2431/mth
330k@4% $1736/mth
Using this rough example, it is 30%cheaper in the short term to carry properly compared to a year ago. Yet demand is nowhere close to where it should be.
To have the same monthly payment as a year ago, this person could get a 482k house while last year could only get a 400k house (ignoring the fact they'd need 5% down), so they could get 20% more bang for their buck.
What shouldn't be discounted is the government buy-back of the previous CMHC insured mortgages. Last fall $75B in high ratio mortgages were transferred off the books of banks and onto the books of taxpayers. This allowed the banks to re-leverage themselves with high ratio mortgages.
This was the express purpose of that program and it was obviously extremely effective.
Oops..realized my calcs are for 25yr mortgages...oh well
You bears fail to understand the Canadian socialist system and that will be your downfall. CMHC, CDIC et al are setup to screw savers in favour of debtors everytime. The government will never let the housing market completely collapse. Your specurenting will end really badly.
Yes I give you that the real estate market has slowed down. No one is disputing that. But look at the reaction of the government. They lowered rates and have commited to even buy bonds to keep yields/rates low. They do not want this housing market to crash and so there's no chance it will. They have a huge stick and you don't.
I think I see the trends loud and clear. Likely up to a 30% drop in 1-2 years with a long leveling out after that (call me a non-believer Maniac). So theoretically, in 2 years, provided I have the stability and the finances worked out, it would seem rationale to wait 1-2 years to purchase.
But,
I also agree with the numerous posts here that in another 5 years, when people renew their mortgages, the sh*t is going to hit the fan thanks to much higher interest rates--possibly leading to another 20% (or more?!!) drop in prices.
As such, buying in 2 years seems like a fool's errand i.e. why buy in two years, something I can get at least 20% cheaper in 5 years?
Wait until this low-interest bubble truly collapses--5 years or more out--then will be the time to buy.
If government was prudent they would introduce a limit to what a bank can lend to an individual/family based on their income regardless of interest rates and amortization periods. I would suggest the limit should be 4x household income.I don't like the bubble madness but I would prefer it if the govt. didn't tell me what I can or cannot do with my money.
If people overspend, they go bankrupt, and the govt. doesn't have the right to use my tax dollars to bailout the 5/35/5.5 mortgage fools, let em burn. All this bailout nonsense is ridiculous.
Maniac,
Your argument doesn't hold water. They are trying every trick in the book to stop the housing crash in the US and it keeps getting worse. That is because some of the debtors couldn't pay even if you made the interest rate zero. If people can't make payments they have to sell or they eventually go into foreclosure. It is that simple...
We are just falling along behind our neighbours to the South. Canada is going to see things get real ugly for highly leveraged homeowners in the coming years. This latest round of low interest rates just put gasoline on the fire.
Forget any talk of government bailouts for homeowners behind on their payments. The 35% of Canadians that are renters and the 50% of homeowners that already own their houses outright wouldn't stand for it even if the government was foolish enough to try. Politicians cater to the majority - not to a minority of fools who got in over their head.
Maniac, you are correct in the fact that the government has various tools and they have used them extremely effectively over the past six months to stimulate FTB's.
But in doing so, they have:
- basically run out of tools now to further stimulate housing
- they have set up many FTB with unreasonable levels of debt that once interest rates rise will cause the economy and these individuals a lot of pain.
So the government actions may well get them votes in the next election (given we seem to have one every 1.5 years now), but I feel they have set our society up for an even bigger real estate burst than if they just let things unfold this winter without their stimulous.
You should not keep encougaging citizens to take on more and more debt without expecting their to be fallout at some point. Just look at what happened in the US once debt levels got too high.
Or alternatively maybe we should all enourage government to move to the Swiss model where people only pay interest on their mortgages. Then we can lever these FTB's up to 9X their family income and push RE prices even higher to extend the bubble.
I agree with Maniac, that the govt. will do anything in its power, and many things outside its power, to keep the economy going.
Low interest rates: CHECK
ZIRP till June 2010: CHECK
Tax Stimulus: CHECK
Swapping good money for bad: CHECK
Bailout bankrupt companies: CHECK
Deficit Spending: CHECK
Quantitative Easing: Standing By
The Govt. is really doing a remarkably good job of recession killing, I can't understand the people that say they aren't doing enough.
We are borrowing productivity from the future to end the recession sooner and ensure its shallower.
The Govt. knows they are creating a future liability in the low rates they are currently offering, as many here have said when terms renew there would be a whole new mortgage crisis. The govt. isn't stupid they are just inefficient. There is no way they will raise interest rates and cause people to loose their homes. We will have low rates with incredibly slow increases, if any for years. In a few years inflation will start to exceed the BoC target, CPI will be redesigned again to hide this fact.
More Canadians own a home now than ever, they will not vote for a party or policy that will see them loose their homes.
Higher taxes, higher (commodity) prices, lagging wages, lower services. Lower standard of living for all.
Just to simplify my post above:
With all the shenanigans that the Government and Bank of Canada has pulled recently. I no longer have faith that they will follow their mandate and use financial tools like interest rates to control inflation.
Metaldwarf,
This is indeed what I am afraid of. The BoC has painted itself into a corner, and the choice it will face soon will be to either let rates stay low and have rampant inflation or let rates rise and have people lose their homes en masse. Though mandated by law to keep inflation at ~2%, there could be loopholes rammed through to allow some leniency in this and prevent people from losing their houses, or even some kind of "relief" doled out to lucky homeowners through special tax breaks or loan renegotiation.
Uggh.
I think some of you are starting to come to grips with what is happening. Now the next step is to realize that buying hard assets like homes is a good move. The government will ensure that it is a good move so don't fight it. Just be smart about it and don't over extend yourselves. If you think Victoria is overpriced then leave.
Oh don't get me wrong I still think home prices will fall. They are barely treading water at a time where there is more economic stimulus than ever before.
If we ever get back to "normal" prices will fall
Manaic, you are wrong. Best case scenario even if government plays more games is stable pricing (unless they extend amortization periods).
Considering that it is far cheaper to rent than buy and prices will best case be stable, then better to rent and save difference.
Most options suggest that prices will come down. The US government has tried to stabilize the US housing for the past 2.5 years with no success. There are little to no options that will see house prices increase.
maniac don't get it. The government don't give two craps that an overinflated west coast market tanks,they only worry about Ontario and the center of the universe where the prices are far more realistic then the bloated pig we have here.
Think they will bail out a bunch of fools with too much easy credit ? dream on. Overbought and overvalued markets always correct,always.
"Despite jump in house sales this spring, 'there is more downside than upside risk to home sales and prices,' Scotiabank says "
"The brief spring rally in the Canadian housing market – although encouraging – cannot be regarded as the beginning of a full-fledged recovery just yet, the Bank of Nova Scotia said in a report Tuesday."
"Mr. Soper said Canadian housing sales will likely cool again this summer, as they typically do after the spring selling season, and will pick up again in the fall."
“We still feel there is more downside than upside risk to home sales and prices,” Bank of Nova Scotia economist Adrienne Warren said in a research paper on real estate trends."
“The significant deterioration in domestic labour markets in recent months suggests little prospect for a major resurgence in demand in the near term. Meantime, a still-high level of active listings relative to underlying demand will continue to pressure prices,” Ms. Warren said."
I don't disagree with maniac on this. The market as a whole, not just west coast, now has people entering who can't afford a reasonable rate. The gov't isn't worryed about long term, just getting reelected and will do pretty much anything to do so.
I am a bit surprised that so many bears agree with Maniac. I think we are so focused on BC on this blog that we forget that we are the only province with so much overinflated housing. As Vic said the Federal government doesn't care about BC. They care about votes and Ontario and Quebec are their main concerns.
Why no more bailouts? Because in a few years when the overextended homeowners hit the wall the recession will be over and the public will be fed up with bailouts and budget deficits. One also needs to consider that in a few years overextended homeowners will still be a minority of voters. Over 35% of voters are renters and 50% of homeowners have no mortgage at all. So the 10-15% that will be in over their heads will just sink. The majority will not tolerate a housing bailout and politicians will just give lip service while they go under.
I also think these comments about the gov't not caring about inflation are being made by those that were not around last time. I was and I vividly remember the panic, anti-inflation board and resolve of the BOC to get this under control. The BOC will do everything they can to contain this monster if they see it raising its ugly head.
Vic posted this comment by Royal Lepage:
"Mr. Soper said Canadian housing sales will likely cool again this summer, as they typically do after the spring selling season, and will pick up again in the fall."This statement is not true in BC. We never see sales higher after the spring peak. They only keep dropping until the end of the year as shown here
Why no more bailouts? Because in a few years when the overextended homeowners hit the wall the recession will be over and the public will be fed up with bailouts and budget deficits. "
Exactly roger,the Olympics will be history and the ball and chain of the debt will put no one in a buying mood when their taxes go up from Uncle Gordie,he will have no choice.
All those who out here in La La land will reep no benefits from a government that blew a billion dollars on a convention center while bringing in a record windfall in taxes. I am sure they will all want to buy some cheap BC real estate for their retirement.
"Mr. Soper said Canadian housing sales will likely cool again this summer, as they typically do after the spring selling season, and will pick up again in the fall."
Spoken like a true real estate "SALESMAN".
The BOC has said they will keep the bank rate at 0.25% for the next year. Variable rate mortgages are alluring at the current rate of 3%.
How many buyers are signing up for a variable rate mortgage in order to get low monthly payments? Their plan is to switch to a fixed rate when the time is right. What happens if fixed rates rise quickly or they are not paying attention?
The following spreadsheet shows how much they can lose if they take a variable mortgage and switch to a fixed after one year (25 year amortization).
Variable to FixedIf they switch to a fixed at any rate higher than 4% (currently 3.8%) they pay more interest and the monthly payments increase considerably. Even switching to a 4.5% fixed increases the monthly payments by $310. So what do they do. Increase the amortization and pay even more interest over the life of the loan.
Follow up to last post..
But what if the homeowners were really pushing to buy the most house with the lowest monthly payment? In this case they took a 35 year amortization and then after one year switched to a 4.5% fixed. Payments jump by $339. A 5% fixed would result in $459 a month increase.
35 Year Amortization
CMHC, CDIC et al are setup to screw savers in favour of debtors everytime....
Hello? CMHC and CDIC protect creditors (mortgage lenders and depositors respectively), not debtors.
The government will never let the housing market completely collapse....
You mean like in BC/Alberta in the early 80's and Toronto in the early 90's? What makes you think that if the government was unable or unwilling to do anything about those regional busts, it will able or willing to do anything about a global bust? How's Uncle Sam doing these days?
A cool little vid: watch the American housing market spiral out of control
http://www.vimeo.com/4240369
Well Roger, if I am understanding this correctly. A 1 percent increase from 3 to 4 percent in monthly payments is not the same at an increase from 13 to 14 percent but would be more like a jump from 13 to 16 percent as a percentage increase in montly payments, like what was happening in the 1980's.
"Hello? CMHC and CDIC protect creditors (mortgage lenders and depositors respectively), not debtors."
So many people have this mixed up. They think since they are paying for insurance, it somehow protects them. I actually heard someone complaining that when his buddy lost his house, the CMHC didn't lift a finger to help him.
CDIC and CMHC subsidize debtors in the following way:
1) Thanks to CDIC, depositors could care less what the bank does with their money meaning they can take risks and no one cares. All they have to do is keep their capital ratios and the deposits keep rolling in.
2) Because deposits are so easy to get banks don't have to pay high interest rates to attract them. Savers lose, debtors win.
3) CMHC insulates banks from defaults. This means banks can charge lower interest rates on mortgages. Again savers gain nothing, debtors win again.
Always remember that CMHC and CDIC are social programs for debtors.
"How many buyers are signing up for a variable rate mortgage in order to get low monthly payments? Their plan is to switch to a fixed rate when the time is right. What happens if fixed rates rise quickly or they are not paying attention?"One thing that I never quite understood about this "switch to fixed when the time is right" strategy -- you are forced to take whatever fixed rate your bank offers you at the time, no? So you can be certain that you won't be getting the best rate, since you can't shop around at other banks.
Oh, and if anyone's in the market for a great bait-and-switch mortgage, this mortgage should interest you.
The focus on this blog has mainly been on single family homes. Last month in Greater Victoria there were 400 single family homes sold and 204 condominiums. Some buyers are trying to use a condo as a step up the property ladder.
I was curious about the rent vs. buy decision as it applies to condos. I decided to use an example based on a typical 1000 sq. ft. condo in Fairfield - MLS 257564 which is listed at 250K. Lets assume an eager buyer pays full price, with a 50K downpayment, and stays in the property for five years. What are the total costs during this period and what is the monthly occupancy cost?
Detailed analysisAfter paying all the upfront costs (legal fees, PPT) the monthly outlay is $1380 per month. But part of this amount is principal which is building equity. The actual "sunk costs" are $1188 per month, escalating at 3% per annum over the five year period. At the end of 5 years the increase in equity is $22,704.
Now what about renting instead? If you can rent for less than $1188 you are financially further ahead than the owner, excluding any possible change in the value of the condo.
Questions for readers--
- Do you see any omissions or errors in the calculations or assumptions?
- Do you think an equivalent rental can be had for less than $1188 per month?
- Given the initial costs and the selling costs the adjusted cost base is around 265K. Will the market value of this condo exceed this amount in five years?
Roger, equivalent rental is a red herring, IMHO. I think what readers should be asking themselves is can I rent something I'm happy with, for cheaper than buying something I'm happy with.
As a renter, my expectations are lower for the unit I rent. Sure I'd love 6 appliances, but in reality I'm perfectly happy with two as long as I have easy to access to two more.
The baselines change for ownership, especially for a condo. Most condo owners don't stay long. They own on average for 2 years. Resale becomes a huge issue. If you can't offer a competitive product in a competitive market (read a true buyer's market) then you're actually taking a really big risk.
Let me use this analogy: I'm perfectly happy driving a car with no auto transmission and no power features. But I know that car will depreciate faster and be more difficult to sell as time goes on because of those omissions.
Rent the car (apartment) you're perfectly happy with, buy the car (condo) everyone else wants. That would be my theory. I think this is supported by the CMHC statistics too.
CMHC's average 2 bed rent in Victoria last year was $908 (or something like that, could have been $918). That's indicative of the Fairfield or James Bay two bed apartments. Walk into one of those and then view a condo, they're rarely the same. Condos get updated, have appliances added etc, rentals get painted and cleaned.
I know you're trying to level the playing field, but why not acknowledge that renting is considerably cheaper precisely because we rent what we need and buy what we want or think others will when we go to sell?
I think I should add to that above re rental equivalency. If we did a comparison on SFHs we'd see a much bigger gap between rent and ownership costs. This is where rental equivalency plays a more important role in calculating how far off the trend line we are. At least in my mind anyway. I'd love to hear your thoughts.
this article, fairly balanced, has pretty good analysis of what we're discussing here.
Roger,
What about depreciation? After the 5 years the building you have bought a part of is 5 years older. The actual structure is then worth less. The market value increases may dwarf this but if your looking strictly at costs this should be included. I think typically depreciation is 1-2%.
Also, after 5 years the renter could liquidate his assests quickly and cheaply. The owner will have to pay legal fees, realtor fees etc. if they want to get the equity.
HHV said,
I know you're trying to level the playing field, but why not acknowledge that renting is considerably cheaper precisely because we rent what we need and buy what we want or think others will when we go to sell?--
I don't agree with this at all. One needs to compare apples with apples. It is not fair to say I can rent cheaper than I can buy if I live in something not as nice. Heck you can now live in a tent in Victoria's parks if you want to take that argument to the extreme. One needs to compare the equivalent costs for renting and buying the same type of property. Where you choose to live while you wait to buy is immaterial.
In my own case I live in an apartment and want a house. When the type of house I want has the equivalent occupancy cost, whether renting or buying, it then it is a good deal. If I even get in the ballpark I will pay a premium because the added lifestyle benefits are worth it to me.
The question remains... Can someone rent the same calibre of condo or apartment, as shown in my example, for $1188 per month? If so the occupancy costs are the same and there is an argument for someone buying this condo. However they need to be prepared to accept the risks of the market value dropping or major condo building repairs.
As far as condo owners only staying two years I don't believe that is correct. Perhaps young FTB's might think this way but in my experience this doesn't happen very often. I have been a renter in several condo buildings and the turnover of resident owners or tenants was much longer than this. Even if you tried to sell after two years the realtor and legal fees plus the dreaded property transfer tax would require a pretty significant capital gain to even break even.
Rhino,
You raise some interesting points about depreciation and liquidity. I was looking at this example from the point of view as an owner not an investor. I specifically chose a condo example because it constrains the maintenance and depreciation variables.
The purchaser of a condo is not going to care about depreciation unless it affects either market value or special assessments. The condo fees not only cover off current expenses but they also build a reserve fund for building upkeep and repairs. If at the time of purchase the strata minutes and books indicate that the building has been recently inspected, and is in good condition, and the reserve fund is adequate I would not be too concerned about depreciation. Most buyers would be concerned that the architecture would not date itself quickly and that they are in a desirable location, thus enhancing potential, future market value.
As far as liquidity goes that is a personal decision. Some people like to have their assets in a very liquid form (stocks, bonds etc.) while others like non-liquid assets like real estate. Real estate does take time to sell, involves big fees and is not a fun process for most people. I think this is why some people like to be perpetual renters. In my case, I prefer being an owner and doing what I wish with my property and not under the thumb of a landlord.
Roger,
Thanks for doing this. In your detailed example, is it fair to deduct the initial acquisition costs of $3800 from the principal reduced over the 5 year period to arrive at the total equity? It seems to me that such costs have been already included in your "total costs over the 5 year period" and hence the equity (difference in house cost and remaining principal) would be $26,504 not $22,704.
Also, how did you calculate your lost revenue on down payment from your after tax return on investments @ 4.5% interest?
I wish that a condo was an option for me. However, for those with child/pet considerations, the selection of appropriate condos shrinks dramatically. I'd only be buying a condo to move to a suitable house as soon as possible, in which case I'd lose money on the condo unless the value of the place increased fairly rapidly.
I wish that townhouses were more affordable for young families, but when you factor in the strata fees, a decent townhouse is often not much (or any) cheaper than a starter SFD. And not to be too bourgeois, but townhouse complexes and condos are often not the sort of areas that I'd want to raise a family. I've seen a few townhouses that are decent enough on the inside, but the complex and surrounding area is about as close to a ghetto as Victoria gets. I'd rather eat the extra couple hundred a month and at least get a piece of land and a better neighbourhood.
Stargazer said:
In your detailed example, is it fair to deduct the initial acquisition costs of $3800 from the principal reduced over the 5 year period to arrive at the total equity? It seems to me that such costs have been already included in your "total costs over the 5 year period" and hence the equity (difference in house cost and remaining principal) would be $26,504 not $22,704.--
I was trying to look at the five year ownership from two different, but separate, perspectives. The first was all the costs during the first five years and the second strictly from an owner looking at the property to see if they made money. You have raised an interesting point. In the equity calculation I should not have included the PPT, legal and realtor fees.
I included PPT and legal fees in the first section because I was trying to determine an occupancy cost in order to see what the equivalent rent would be. This is not a calculation 99% of owners would ever do. There was no assumption that the property would be sold after five years - it was just the term of the common 5 year fixed mortgage.
Also, how did you calculate your lost revenue on down payment from your after tax return on investments @ 4.5% interest?--
There are lots of major Cdn. bank rate reset preferred shares available paying 6.2% annually. Due to the dividend tax credit the after tax return in around 4.5%. I compounded this rate for five years. This is how you do it.
Let me google that for you
I just uploaded a new condo slideshow to the RE Stats Gallery.
Highlights for 2009:
- Inventory has been falling for several months. Only a few projects have completed construction this year and listed on MLS.
- Sales have been increasing as they do every spring.
- Average and median prices have been rising for several months. It is difficult to say if market value is increasing or more expensive units are being purchased.
Just Jack - Can you shed any light on the current condo situation?
Did you include property tax, strata fees and maintenance in the calculation? I didn't see them anywhere. Those are the big ones, outside of interest paid and interest lost on the down payment.
If you're talking about a new condo the strata fees as advertised are probably not accurate. Pretty much every person I know who bought a new condo had their strata fees jump up after the first year, sometimes by double, because the developer deliberately understated the upkeep costs.
Ryan said:
Did you include property tax, strata fees and maintenance in the calculation? I didn't see them anywhere. Those are the big ones, outside of interest paid and interest lost on the down payment.--
I think you missed my original post showing all the details for owning an older, Rockland condo (MLS 257564). Here is an updated version with Stargazers suggested corrections.
Five Year Condo Costs
Out shopping today, Future Shop was a ghost town,was approached by 5 salesguys at every corner while I browsed for a few things. When have you ever walked in there in the last 5 years and had to wait ages to even get ones attention ?
Walmart on the other hand was steady with those trying to save their pennies. Times look tough out there in La La land...but maybe I'll just go into hock for a half a mill shack, just so I can be on the property ladder.
"Here is an updated version with Stargazers suggested corrections."
Aha, thanks.
Well it looks like bidding wars are back, these sold in the last 2 days:
MLS 261805
City Assessment: 511K
List: 538K
Sold: 572K
MLS 261888
City Assessment: 501K
List: 599K
Sold: 620K
MLS 261971
City Assessment: 445K
List: 529K
Sold: 540K
I wonder if these buyers will be still be happy in a few years that they "won" the bidding war in the middle of a recession. Time will tell.
Repost - html error
Continuing with the analysis of buying that condo in Rockland.... What happens if our FTB decides to take a 35 year amortization instead of 25.
35 Year Amortization--
Well the payments drop from $1030 to $858 per month resulting in a total monthly outlay of $1208 including PIT and fees. This is within a few dollars of the occupancy cost of $1204.
Sounds pretty appealing if you don't look under the hood. The downside is the total equity is only $65K. The renter that invested the 50K would have 62K after investing at 4.5%.
Lets say the condo is sold for 246K. Take off 11K for legal and realtor fees, pay the bank 185K and the owner gets back the 50K downpayment with no return. The owner has to sell for more than 258K in order to get the same return as a 4.5% investment.
So fellow bears... Is this a good deal?
Roger, no. And it goes back to my original comment above. Unless you "want" to live in a condo for a great length of time, the risks just aren't worth it. Your scenarios assume no market value change which I think is a safe bet to make right now. Short term prices will decline, however, if this correction plays out like past corrections, then in 5 years time, the chances of getting the same money out as in are fairly realistic, not accounting for sales costs.
I think we're approaching this from two very different places: as a FTBer, I'm not planning on a 5 year stay in a condo (actually, I'm not looking to buy one at all). I think FTBers like me look at a condo as a property ladder step only. Not a long term living situation.
From an analysis perspective only, even at today's interest rates, it seems to me to be a 6 of one 1/2 dozen of the other situation. For empty nester's, I can see the temptation. For the FTBer, I think they are banking on a higher price in 5 years time to make this a good financial decision--they should be recognizing that they're gambling, but they're not.
(edited for problems)
Hi Roger,
Thanks. I really appreciate how you have broken things down here. I guess one way to look at whether or not the purchase has been worthwhile is to see how much money you have after 5 years have elapsed.
Basically, after 5 years the owner has "earned" $26,504 in equity with his $50K cost but over the same period he or she has "lost" $28,070 in costs (condo fees, insurance, PPT, legal fees, maintenance, lost investment revenue, etc.) The difference is -$1,566.
Not buying, the tenant (assuming the same monthly outlay) would not have any equity gains but no costs due to ownership. Instead, he or she only gains the investment revenue on their $50K, or $12,309, right?
Of course, the benefits for owners improve with time, assuming no change in the value of the condo, as equity rises. That latter bit seems to be the X-factor in these calculations, since a large net increase or decrease in the value of the condo at the end of the 5 years can really make a big difference in your profit or loss.
Roger, your analysis itself is well done. You may want to reduce the property taxes by the homeowner grant if you did not factor that in (about $540 per year I think), otherwise it looks fine.
But as far as buying one, I am with HHV on this one, even if costs are the same it makes no sense to buy unless you plan on staying there for a long time.
I have bought seven homes and sold six. One thing I can tell you is that it costs A LOT of money to buy/sell. I just dug up costs for my last move which were almost $36,000 including real estate fees, PPT, legal fees, moving costs, etc. The cost of moving is just way too high to buy when you have a plan to sell later and buy a house. Better just to save and wait unless of course you are sure that real estate is about to surge upwards and you cannot afford the house.
Today all indidations are prices will be no higher than we see today in 3-5 years, so for me there is way too much risk in buying that condo.
If you are an empty nester and plan on living the condo lifestyle for a long time, then it may make sense. The risk this buyer faces is that interest rates could rise quite substantially.
I think we're approaching this from two very different places: as a FTBer, I'm not planning on a 5 year stay in a condo (actually, I'm not looking to buy one at all). I think FTBers like me look at a condo as a property ladder step only. Not a long term living situation.I have to agree with HHVon this side of the analysis for non-baby boomer, potential upsizers.
The last few years, with a small outlay some condo buyers saw big gains on their investments (not as much as sfh buyers, but that's another story).
However, for me there are other risks. My sister paid big assessments on a few different places, including one on Wark St, in "trendy" Quadra Village. That pretty much vaporized any gains.
For people who are looking at starting a family, or who already have a family, they are either going to be constrained by condo living a la New York (or downtown Vancouver?), or could take a hit on equity that would be different to recover from.
While prices are going down, better to wait for a house, or townhouse.
Roger, you've provided great analysis. Are you leaning one way or the other yourself on the scenario? I know you usually refrain from "recommendations" but I'd to hear your thoughts if you'd be willing to share.
question for all you bears in Internet land.
If you buy a house will you continue to make the same contributions to your RRSPs? Or will you plow any extra onto your mortgage principle?
I pay $1300 in rent and put away $500 in RRSPs each month. But when I have been doing my calculations I always assume my $500 would be deverted to the mortgage payment allowing me equal monthly carrying cost of $1800
If/when you buy will you continue your rrsp contributions?
HHV,
Thanks for your comments. I did this analysis because there is a prevailing view on this blog that "everything" in Victoria is way overpriced and renting is the only way to go. Perhaps that is because most posters are focused on SFH.
This example shows that are are still some reasonable alternatives to renting. But there are several things to consider.
- Condos are not a good option for FTB's that want to quickly move up the ladder. Even if you buy today and wait five years there is a very slim chance of making a big profit and moving into a SFH. An FTB is better off living in a modest rental and banking the savings in good investments.
- You have to want to live in a condo. Lots of people like this option. Retirees that are downsizing or those that have lost a spouse. Professional couples or empty nesters might also be interested.
- The unknowns can really bite in a condo. Some of the stratas have poor reserves and need to do a special assessment if anything significant comes up.
- Sometimes the maintenance leaves something to be desired. Some condo owners are in their twilight years and will not vote for a dime to be put into the common areas so they end up looking pretty shabby.
You asked about me. I am leaning to leaving town. There are better values elsewhere on the Island as shown by the latest VIREB stats.
Metaldwarf said:
If/when you buy will you continue your rrsp contributions?--
Stuff everything you can into your RRSP. When the refund check arrives use the whole thing to paydown your mortgage.
Two birds with one stone..
I won't be putting money into an rrsp when I buy, but will pay down the mortgage. I remember seeing the math done out for some one like me with a gov't/company pension, and when you pay the tax on the money when you take it out at the end you are way behind doing the rrsp and rebate cheque on the mortgage lie the industry has been pushing.
BTW this is my last post as the google password thing doesn't work and is wasting a good 10-15 min each time I try. I guess this is now a closed board.
Metaldwarf said:
"If/when you buy will you continue your rrsp contributions?--"
Investing for retirement in my opinion is far more important than owning a house. If you need your RRSP contributions to support the mortgage payment, then in you cannot afford the house.
With the dramatic reduction in the number defined benefit pension plans (DBPP) in Canada these days there will be a very large number of poor retirees in 20+ years.
Our actuary told me last year that almost 90% of retirees who have retired over the past 30 years have had some form of DBPP, so even the most financially incompetent people will have something to fall back on. This number is expected to drop to 20% in 20 years time. So you better take retirement seriously unless you have a DBPP.
OMC,
I am not having any trouble logging in with my Google Blogger ID. Have you tried clearing your browser cookies?
I'm a DBPP'er myself and don't see the point of RRSPs, they've been oversold. Each person needs to do the math themselves, I've done the math and between a full pension at age 60, CPP and OAS, I will be able to replace 90% of my pre-retirement income in retirement. I really don't want to make more in retirement than when I was working, so my goals will be a pure mortgage paydown strategy (if and when I get one) and maybe using the TFSA for additional investments (at least I won't have to pay income tax on them when I use them!).
My spouse on the other hand...well we're going to be RRSPing pretty much to the max as there is no DBPP in his self-employed future.
Just Janice,
Just something to think about...
I was a government worker for the first twelve years of my career. Then I left for the private sector and my government pension money was transferred to an RRSP and I was on my own. I wouldn't plan on getting that government pension. Life is what you get while you are making plans.
I'm a future FTB/GreaterFool, likely more of the later. =) I see a lot of comparisons with traditional 25yr/20% down comparisons for pricing and value. I honestly think it's 35yr/5% is now the value judgment. That is what people are buying with. That's where the rent vs buy comparisons are at.
Ideally, I want the cheapest, ugliest SFH I can find that has good bones. The cost of townhouses/duplex's are so close (or even higher with fees) to that of a SFH it often isn't worth it.
Roger, I spent some time on the web last night looking at houses up-island. Man alive, I wish that the career opportunities presented themselves for me and Ms HHV to live in the Courtney/Comox area. It's like houses are 50% off up there compared to here.
HHV,
The problem with the Courtney Comox area is that the winters have much more snow than what you get an hour further South. Parksville-Qualicum has much better weather and so does Nanaimo.
BTW - Nanaimo used to be only a mill town. That has changed considerably in the last ten years. Now there are a lot of professionals, self employed tech workers and quite a few telecommuters that pop over to Vancouver on the ferry a few days a week.
It is about time that we organized another bear beer get together. Although prices have not been falling the last few months it might be fun to get together and have a chat. We could meet at the same place as last time. What do you think?
I'd be down with that. How about next Thursday, May 14?
I kinda like the snow, and a 30 minute drive to the ski hill has it's +'s. You have to add almost $100K to live in Nanaimo though no?
The great thing about Canada is we have no subprime and never try to burn people with teaser rates.
A Variable Alternative--
Most variable-rate mortgages are still at prime + 0.60% to prime + 0.80%. That rate premium is part of the reason people aren’t as jazzed up about variables anymore. Many think prime is going up in the next year as well.
If you’re one of these people, and don’t want to commit to locking in a 5-year variable at those high premiums, Merix offers a solution: a 21-month fixed-rate promotion at 2.90%!
This product is not perfect for everyone, but it’s a solid choice for variable-lovers in the crowd.
The fine print:
* Only available for high ratio CMHC-insured financing (i.e., those with less than 20% down payments)
* No pre-approvals or switches--
Gotta love that CMHC insurance if you are a lender. Buyer pays for premium, government insures lender against losses and lender makes all the profit.
With the dramatic reduction in the number defined benefit pension plans (DBPP) in Canada these days there will be a very large number of poor retirees in 20+ years....
But they won't need pensions because they will be able to sell their houses and live on the proceeds.. um...
Uh oh.
HHV,
Next Thursday, May 14th works for me. Does 4:30 sound like a good time?
You can get a really nice home in one of the better areas of Nanaimo for under 400K. In the low 300's there are places that are top tier starter homes.
Garth has a post on pensions and the boomers..
Ooops.--
About half of us have no dedicated or substantial retirement savings. The average RRSP owner in Canada is now in his or her mid-forties. And of those people who have got money stashed, the median amount is about $50,000. Meanwhile over 70% of Canadians have no corporate pension plan, and the public plan (CPP) was designed to provide just a quarter of the cash seniors need to live on (it pays an average of $6K a year).
At this rate, the majority of the adult population will suffer a bungee-style drop in income when they stop working. Especially now – after market mayhem and crashing interest rates have gutted or capped savings. The situation’s made more dire by all those damn Boomers – 9,000,000 of them in Canada, comprising 32% of the population. On average, they are between five and ten years from retirement, and that has been pushed forward dramatically by the Great Recession. Lots of laid-off Boomers will never work again. Except in Wal-Mart.--
Roger great article; hammers home the point. Unfortunatley I think too many FTB's are ignoring the reality of retirement, especially because most people they know who have retired were OK.
But history is no proxy for the future given all the changes that have occured with pensions over the past few decades.
If you believe that interest rates will stay low for a long long time then you may be right that house values will remain high, but you better plan on having at least twice as much money in your retirement fund to support any sort of a post retirement lifestyle.
I grew up in Comox. It really doesn't have that much more snow than Victoria. In fact often it seems that Nanaimo got more snow than us (I remembering lamenting this as a kid when their schools would be closed and not ours).
Regarding Condo's/Townhouses:
The other issue with these besides financial is having to deal with the strata. Some are good while others are not. I owned a townhouse in a complex dominated by a over 65 Strata. They spent a good deal of their time passing rules making life as unpleasant as possible for those with kids, room mates, pets, etc.
I don't know about here, but I've been reading on Mish's blog about problems with the DBPPs in the US, especially government pensions. They have been underfunded for years, and to make up the shortfall they started taking on more risk in their portfolios. And even worse than that, some of them took out bonds to beef up the portfolio that cost them more in interest than their investments earned. And then the market tanked.
Bottom line, even people with DBPP could be SOL if the whole pension plan blows up. The money you personally have is the only money you can count on. And those of use with defined contribution pensions need RRSPs even moreso, because those are explicitly underfunded.
Ryan on DBPP's
In Canada companies are forced to contibute based on something called solvency which is complicated but it forces companies to overcontribute to the DBPP especially when medium term interest rates are very low (i.e. today).
So most Canadian DBPP's are in better shape than the US pensions. The risk of not getting your pension mostly has do to with the long term viability of your employer.
Interestingly government (who sets the rules) excluded themselves from the solvency requirements so if your DBPP is with government it may well be far more underfunded than a corporate one.
This is one area where government likely under estimates their future liabilities. When all these baby boomer civil servants retire we may be forced to top up the pension plans through our taxes.
RE: snow? You can't always judge by mere latitude... the lay of the mountains and prevailing weather patterns have more to do with annual precipitation.
HHV, if you like the snow and ski hills then take a serious look at the Southern Interior. The weather in my opinion is far better (hot sunnier summers and no rain in the winter).
Plus the skiing in the Interior blows Mount Washington out of the water and there are numerous hills in the area.
"Interestingly government (who sets the rules) excluded themselves from the solvency requirements so if your DBPP is with government it may well be far more underfunded than a corporate one."
Mish's column was about municipalities, and I think the same thing may happen here. There's an article on the cover of the G&M business section about how the UofT pension fund lost $1.5 billion.
Fortunately (for me, as I have no other DBPP) the CPP seems to be much better managed, and is actually profiting from the downturn. However, the problem in the US municipal pensions is that they are guaranteed by the government who's workers they represent. Which in the short term is fine, but over years and decades can add up to excess liabilities greater than the municipality can cover, causing the city to declare bankruptsy.
This password thing is an absolute nightmare! Every time I go to use it, I have to got through the entire sign up process again with the identical information. I have cleared my browser and every other thing I can think off. It seems that google isn't remembering the information I enter. If I am having this problem I am sure that many others are. Did the occasional bitter realtor mean that much?
Reid, I don't think we could make either work in all honesty. We're really on a big city track career wise unfortunately. I work from wherever right now, but the Ms has to be near one of the major centres (as in driving distance).
If you're interested in a bear beer, drop me an e-mail and I'll let you know the loco.
OMC,
Roger here. I went and created a new blogger name and all went smoothly. I was referred back to the HHV page after registering. I could compose a post. I then closed my browser and flushed all my cookies.
In order to make a second post I had to do two things...
- I had to go to my email account and acknowledge the signup.
- I had to sign in using my email address, not my username and my password. (I tried my username first and was rejected).
Everything works now on my second account. Hope this works for you.
BTW - Since HHV required signins the posts have been great and there has been no spam or nasty posts. Great!!
Yup I have done that about 12 times. I can go and sign up for a new account and post until I surf away from this page. then I can either go through my email and reset the password, entering the same as it was before, or the faster signing up for another account with identical info.
there is some sort of software incompatibility with my machine? I can't seem to be able to just sign in.
I know the spamming and drive bys have decreased, and we only have to look at PB's to see how silly it can become.
test
Thanks Roger,
You do have to sign in with your email, not username as you would think.
I can never sign in here, I have to go to GMail and sign in, and then I'm able to post here.
HHV, have you ever looked at Ottawa? It isn't BC, but I would say it is nicer than 90% of BC. Housing is affordable (heck every thing is cheaper there), good paying jobs and people under the age of 100. Traffic that isn't that bad either. Museums, concerts and culture and lots of good restaurants.
I travel there once in a while as I work for the feds. as i work for the feds my wages are set nationally, not locally like here. I make a wage based from Ottawa which is up tp 50% higher than iwould make privately or for the provincial gov't.
Ryan,
You have to sign in with the email you opened the account with, not user name.
Here is a screenshot of the sigin procedure..
screenshot
Mish's column was about municipalities, and I think the same thing may happen here....
No it won't. The municipal pension structure is completely different from California. There is one plan for the whole province which covers all municipalities.
BC municipal pensionsNote also that the large majority of police officers in the province are RCMP who have their own pension plan from the feds.
Testing
sorry guys about the sign in. I understand the grief the xtra step seems to create (i was the worst culprit for not logging in previously). That said, I'm pleasantly surprised that discussion hasn't withered and quality has increased. please hang in there.
I'm having success using the log in right below the comments box, just using my user name (not @gmail.com) and the password. I use firefox, not sure if that makes a difference or not (shouldn't)
HHV,
If the email is not a gmail account you have to use the full email address as your username and then your password. After that your actual nickname will be in the post. See my earlier screenshot.
Goofy but that is the way it works.
Took me around 5 tries to remember my password, but logging somehow worked...
I have a g-mail e-mail address and it has been working perfectly.
i have no problem with the log in but if we are going to continue the experiment i believe you can set the login information to just require you to post a name, and not require a blogger account. no sign up is needed just a unique id.
Oh, I am also in for bear beers
Same place as last time?
I'm up for beer's, since beer is good. The last I was at was the very first one, I'm assuming some have happened in the meantime. =)
MD,
This is the lowest level of blogger requirement besides open to all. I tried to just block anonymous posts, but blogger must have gotten rid of that option.
OMC,
We just moved back from Ottawa in the fall. I agree that it's a beautiful city with lots of outdoor activities year-round. We would have spent a long time there if we didn't prefer to be closer to family here.
I disagree with your statement about the traffic. We encountered some of the craziest drivers while living there. We compared it to big cities like Toronto and Montreal. Running through red lights seemed to be the norm. Nope, I prefer traffic here. Maybe because we're scooter riders.
Beer sounds good, I'll try to be there...
I could use a beer, especially since I was out of town for the last one. How does one find out where it is?
Stargazer,
HHV was planning a get together for next Thursday May 14th.... Email him for details - househuntvictoria@gmail.com
If you're interested in a bear beer, drop me an e-mail and I'll let you know the loco.Chicken. Don't want any contrary opinions (like on this blog now)?
Today's News Headlines-
Costruction slowdown 'weeds out guys'--
A drastic falloff in new-home construction this year is forcing some builders into retirement or out of business and others into commercial projects and home renovations.
Contractor Steve Copp, first vice-president with the Victoria chapter of the Canadian Homebuilders Association, said residential construction is down to a trickle as an oversupply of new homes snared in the economic downturn work their way through the resale market--
Regional unemployment hits six per cent Statistics Canada analyst says the rise is a significant change
Greater Victoria's unemployment rate climbed to six per cent in April, while rates remained flat for B.C. and Canada as a whole.
Statistics Canada analyst Vincent Ferrao called the rise from 5.4 per cent in March a "significant change."
Another 3,000 fewer people are working in the professional, technical and scientific services.
Well I guess Victoria is different after all. Seems we bucked the trend and lost jobs while the rest of BC balanced out.
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