January 2013 month to date (previous weeks in brackets)
Net Unconditional Sales: 251 (177, 87, 32)
New Listings: 917 (701, 407, 161)
Active Listings: 3812 (3759, 3681, 3574)
Sales to new listings ratio: 27% (25%, 21%, 20%)
January 2012
Net Unconditional Sales: 372
New Listings: 1088
Active Listings: 3715
Sales to new listings ratio: 34%
Sales to active listings ratio: 10% or 10.0 MOI
Last year at this point we were at about 293 sales. Despite the small sales bump recently in the low end, we're still down 14% on sales, while listings are outpacing last year by ~5%. At this rate we'll hit something like 315 sales by the end. And unlike in previous years, sales/assessment ratios haven't recovered from the winter slump yet. The spring market will be interesting to watch.
Last year at this point we were at about 293 sales. Despite the small sales bump recently in the low end, we're still down 14% on sales, while listings are outpacing last year by ~5%. At this rate we'll hit something like 315 sales by the end. And unlike in previous years, sales/assessment ratios haven't recovered from the winter slump yet. The spring market will be interesting to watch.
237 comments:
1 – 200 of 237 Newer› Newest»I think this spring will be the canary in the coalmine for how this market will progress.
The poor canary has been sickly for the last couple of years.
2144 Allenby sells at $101,000 below 2012 assessment (sold $560K, 2012 assessment $661K).
Saw an open house in OB yesterday for a character house in the Estevan area. Prices have a long way to come down before pricing is sane in this area.
Perhaps one of your affordability issues is you are looking in the most expensive areas. Why even go to such an open house?
I think this spring will be the canary in the coalmine for how this market will progress.
Many here are fond of saying that the next marker will be particularly interesting and/or helpful.
Canaries in the coal mine can't be identified in real time; it takes hindsight to be able to pinpoint canaries.
So what's say we abandon the upcoming-canary-in-the-coal-mine trope?
(I don't mean to pick on a simple man specifically.)
"So what's say we abandon the upcoming-canary-in-the-coal-mine trope?"
If you don't like canaries:
The coming market will act as a litmus test. Testing the market acidity created by credit constriction.
Hi dasmo - I can afford it, I just choose not to pay for a house that has an inflated price.
So many of the homes in OB are in need of serious upgrades and maintenance. But the owners, as they have the right, price with maximum profit in mind. And perhaps a lack of understanding on how the market has turned from two years ago.
I can agree there simple man... To me the opportunities are slim in OB though. The one you posted on Allenby is most likely going to be torn down and was bought because it has a large lot. Still, patience can be rewarded ;-)
what's say ...
What's the meaning of that?
As for us here in OB pricing for maximum profit, I think everyone does that, or at least they price for the maximum price.
The question is what, as of now, that price is. Or to put that in ornithological terms, is this a dead canary were lookin' at or is he just restin'?
Allenby was listed at $574 000. This is less than what I believe it would have been listed for in 2008.
I think this is an indication that prices are down a bit in OB for properties with "issues".
As for the assessment, likely it was too high to start with.
If you don't like canaries:
The coming market will act as a litmus test.
You're an idiot.
------------------------
what's say ...
What's the meaning of that?
*Sigh* It's an expression.
But whatever the current price in OB it will probably remain relatively high as long as OB's brilliantly intelligent, far-sighted and socially responsible council insists that population density must not rise.
Refusal to allow significant density increases in core municipalities will condemn Victoria to the status of a second rank, rather seedy and declining city stuck with ever increasing taxes as the municipal bureaucracies become increasingly inefficient and stupid. (Why for example does Oak Bay empty street-side garbage cans, or plant trees in Uplands Park on a Sunday?)
There is not a major city in Canada, with a core area population density that is not almost twice Oak Bay's.
Some intelligent rezoning to increase densities would revitalize the economy by stimulating construction, increasing the tax base, and reducing the cost and improving the feasibility of public transit.
perhaps it's simply a "common phrase variant in a regional dialect".
Oh, aahrr, aye. That'll let us all then won't it.
@koozdra
The coming market will act as a litmus test. Testing the market acidity created by credit constriction.
I've always thought that the market fundamentals are rather basic (pH > 7) ;-) Time for some red litmus paper ...
Also, info, I apologize for the "info-mercial" comment. Came across as a put down, and while you do have a consistent PSA message, I said it as a play on words and not with that intention. It was funny on my side of the screen :)
Allenby's original list was $619K.
Increasing "population density" probably won't reduce property value, it just might increase it.
The only people bullish about our economy are Canadians.
Moody's downgrades six Canadian banks
Increasing "population density" probably won't reduce property value
Depends how you look at it.
In the short run, price per square foot of land will go up, which will provide the incentive for redevelopment. But price of land occupied per person will go down, which will provide the incentive for people to buy or rent the newly constructed residential property.
In the long run, increased density could transform Victoria from a sprawling largely gov/hospital/university town to a more dynamic and more commercial center. In that case, price per unit of residential space would likely also rise.
which will provide the incentive for redevelopment.
By which I meant, will provide the incentive for property owners to subdivide or sell to developers.
2144 Allenby sells for a full 15% below 2012 assessment. Was 2012 the peak assessment?
Just one of many clear indications that the Victoria housing market is in full correction mode. It is here and now. The VREB keeps saying that the market is stable... lol. But... what else should we expect from them? The same can be said about any realtor, basically.
Good eye simple man.
I'm all for greater density in Victoria. The spot for it is around the "Hudson" where the wasteland of minute lubes and 80's dilapidated hotels are right now. Lift the caps in that area and let it go... Oak bay would never follow though. The reason it's expensive there is because how they govern their city. Converting urban SFH areas into higher density will only make the remaining ones even more rare and valuable. You can buy a condo now for an affordable price so I don't see how this is a limiting factor...
"Why didn't Victoria prices crash after 1994?"
You have brought this up before. There are many differences between 1994 and 2013, as I have pointed out countless times.
Since around 2000, the world has experienced an era of credit expansion like no other in history. Lax lending standards around the world have caused many real estate bubbles to form in many different countries. That wasn't the case in 1994. We are facing a completely different situation now than they did in the 1990s.
You have never acknowledged that current prices in Victoria are a result of unprecedented lax lending standards over the past 13 years. From the Whisperer:
"In the last seven years alone we’ve had more pro-real estate initiatives than in the quarter-century prior to that.
We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And most significantly, CMHC absorbing all lender risk."
You mostly limit your posts to talking about your graphs (that are full of ridiculous assumptions), the number of sales and the inventory.
Looking at the VREB's historical average price tells the story about 1994 prices. In 1981 the average price peaked at about $125,000. By 1994, the average peaked at about $250,000. It took 13 years for prices to increase 100%.
From 2001 to 2010 the average price in Victoria increased from $260,000 to $635,000 or about 150% in 9 years. That means prices increased at about 17% per year for 9 straight years. In 1994, prices had increased by about 7.7% per year for 13 years. There is no comparison between price run-ups between 1994 and now, no matter how you try to justify it.
The rule is that once a country reaches the peak of a housing bubble, that bubble always corrects back to where it began. No city in any national housing bubble correction has been spared throughout the years. Victoria will not be spared. In 1994, Canada was not in a national housing bubble. Victoria didn't crash at that time because there was nothing to make it crash, unlike now.
Everything that you say hinges on current emergency level interest rates, which will be much higher in years to come. Anyone who buys now or a year from now assuming, like you, that interest rates will remain at these levels is committing financial suicide. Once rates begin to rise, mortgage payments will increase dramatically and prices will be subject to even more downward pressure.
Your response to others buying at the worst time possible is " I don't care what anyone else does". That's interesting.
It can't be that bad,
Canadians are paying off their consumer debt at a faster rate...
"If prices decline another 10% or so, they will be supported by incomes at these interest rates."
You fail to understand that once a country reaches bubble prices and the price/income ratio of a country peaks, it always corrects back the same amount. This always happens, despite where interest rates are.
In the US, interest rates were SLASHED from 5-6% down to 2-3% in the middle of their crash and the crash continued for another 2-3 years.
In Canada, at present, interest rates cannot be slashed in any way comparable to what they were in the US during their crash. In Canada, at best, interest rates can be MAINTAINED at current low levels, hardly the same situation as SLASHING them dramatically.
If slashing rates dramatically does not stop a price/income ratio correction in a country, then maintaining low rates will certainly not stop a major housing market correction in a country.
Victoria is part of Canada, therefore it will also correct dramatically despite continued low interest rates.
A 10% correction will only be the beginning of the correction that Victoria will experience over the next number of years.
Victoria's price to income ratio is the second highest in Canada. That makes it prone to a bigger correction than all other cities in Canada, except Vancouver.
There is not a major city in Canada, with a core area population density that is not almost twice Oak Bay's.
But Victoria isn't a major city.
How does Victoria's core density compare to cities like Halifax or Windsor?
"It can't be that bad,
Canadians are paying off their consumer debt at a faster rate..."
It is that bad. Canadians still have record household debt and BC has, by far, the highest household debt in the country.
"emergency rates"
were this low for 25 years in a row from 1930 on....
"I think this is an indication that prices are down a bit in OB for properties with "issues"."
In an up market, houses with issues still sell for more than assessment, pushing the average price higher. Don't make excuses for a property selling below assessed value. This sale helps to establish where the market stands for future sales.
"As for the assessment, likely it was too high to start with."
Again, excuses. When prices in Victoria shot higher because of lax lending standards, realtors refused to acknowledge this. They always justified it by using phrases such as "increased demand".
Now that the direction of Victoria's housing market has turned from up to down, we can expect to hear excuses, crying, whining, kicking and screaming all the way down to the bottom.
I won't be crying, I'll be buying...
"emergency rates"
were this low for 25 tears in a row from 1930 on....”
keep in mind what happened to prices from 1930 on with those low rates. Not pretty.
"emergency rates"
were this low for 25 tears in a row from 1930 on....”
"keep in mind what happened to prices from 1930 on with those low rates. Not pretty."
House prices in Japan also tanked despite emergency rates for more than 20 years.
"I won't be crying, I'll be buying..."
This time, unlike in 2009, as Canada's housing market tanks, there will be no dramatic, unprecedented, emergency intervention to stop it.
Good luck. Eventually you will learn your lesson.
Looking at the VREB's historical average price tells the story about 1994 prices. In 1981 the average price peaked at about $125,000. By 1994, the average peaked at about $250,000. It took 13 years for prices to increase 100%.
I've got 5 min for lunch here, so I'll write a full reply after work.
However I have to mention this:
You can't make one comparison from peak to peak, and the next comparison from trough to peak.
You claim to be a math major, but continue to make basic mistakes like comparing two very different things, or neglecting to take into account inflation (which was very different in 1981 than now).
My comparison was using real house prices, and from trough to peak in both cases. The increase was exactly the same in the 80s/90s and the 2000s.
You're comparing oranges to apples by using nominal values, and then using peak to peak in the 80s, and trough to peak in the 2000s.
If you want to do peak to peak, then it would be 1994 to 2010, which is 16 years for an 80% increase in real prices (145% nominal)
If prices crash as you predict, what I will learn is that you can buy a revenue posative property in Victoria! Why would I not do that? But, alas I don't believe that opportunity will come...
But Victoria isn't a major city.
And may never be, unless it uses land more efficiently. Perhaps Langford and Colwood will become the densely populated commercial heart of a greater Victoria, while the present "core" Victoria municipalities become the gently decaying home to decaying wealth.
How does Victoria's core density compare to cities like Halifax or Windsor?
The densest 50% of census tracts have densities of around 3800, 3,800, 3,600 and 3000 per square km in Windsor, Ottawa, Hamilton and Quebec City, respectively, according to this source, about twice Oak Bay's 1700.
Langford and Colwood don't have the bones to be the core. Nore are they on their way with the pedestrian unfriendly developments like Costco homedepot drive across the street to get a coffee land... But go ahead and invest in a Sky tower if that's what you believe.
You have brought this up before. There are many differences between 1994 and 2013, as I have pointed out countless times.
I didn't see a convincing explanation.
Lax lending standards around the world have caused many real estate bubbles to form in many different countries. That wasn't the case in 1994
So in many ways 1994 should have collapsed even harder. As you say, this time at least there is a good reason for our runup in prices (credit expansion), but in 1994 they had an increase of identical magnitude without that.
You have never acknowledged that current prices in Victoria are a result of unprecedented lax lending standards over the past 13 years.
I find it odd that you somehow know what I've never done when you've only been around for a few months. It's clear that the loosened credit rules have had an effect on house prices. However it isn't clear the exact impact of each change. Certainly you can't attribute 100% of the growth to the changes.
You mostly limit your posts to talking about your graphs
I've been around long enough that I'm tired of arguing without data. That will and does go on forever. On the one side Victoria is desirable, on the other side consumers are under record debt loads and prices are very high. In the end what does all that mean? A bunch of non-quantifiable statements lead to circular arguments and not much else. Certainly you can't really be confident about any conclusions based on that.
your graphs (that are full of ridiculous assumptions)
Most of my graphs only contain data. When I make assumptions they are clearly spelled out, and when I project I _extremely_ clearly mark those projections in red. By the way I made some more graphs based on your suggestions that don't change my conclusions. Any other assumptions that are ridiculous that you want me to change?
From 2001 to 2010 the average price in Victoria increased from $260,000 to $635,000 or about 150% in 9 years. That means prices increased at about 17% per year for 9 straight years. In 1994, prices had increased by about 7.7% per year for 13 years.
See my other comment why this is complete nonsense.
The rule is that once a country reaches the peak of a housing bubble, that bubble always corrects back to where it began.
If that is a rule, you should be able to tell us exactly where Victoria will end up. 3 times income? 4 times income? 5 times income? According to you this is a hard and fast rule, so you should have no problem making a prediction.
No city in any national housing bubble correction has been spared throughout the years.
But declines are widely variable on a city basis.
Victoria didn't crash at that time because there was nothing to make it crash, unlike now.
Aside from the fact that median SFH prices were 6.5 times the median household income. So 6.5 is sustainable? Is that what we will drop to?
Anyone who buys now or a year from now assuming, like you, that interest rates will remain at these levels is committing financial suicide.
I don't assume that they will stay low forever. However I don't expect them to increase for quite a while (2+ years). When they do start increasing I think it will keep house prices depressed but they will increase slowly enough not to cause a second decline. Maybe I'm wrong, but everything's a gamble.
Your response to others buying at the worst time possible is " I don't care what anyone else does". That's interesting.
Rent/Buy is a very complex life decision. I don't want to pretend to know someone else's situation so well that I can tell them what's best for them. That's up to every individual to decide for themselves.
It can't be that bad,
Canadians are paying off their consumer debt at a faster rate...
Somewhat misleading headline. Debt is still expanding: "Equifax said that suggested that Canadian non-mortgage debt totalled $497.4 billion in the fourth quarter, up from $489 billion in the third quarter."
"issues in the mortgage market" -Carney
What issues in the mortgage market?
http://www.vancouversun.com/videos/recommended/video.html?embedCode=NvMzVvODpXDHIqFx26mTsoFVllKw81x3
The densest 50% of census tracts have densities of around 3800, 3,800, 3,600 and 3000 per square km in Windsor, Ottawa, Hamilton and Quebec City, respectively, according to this source, about twice Oak Bay's 1700.
Why are you comparing actual cities to what amounts to a small suburb of Victoria?
This might explain why growth in debt is slowing. People are raiding their RRSPs instead A recent poll from Scotiabank found that about one-third of RRSP holders (36 per cent) reported they took money out of their RRSP account in 2012, up from 23 per cent back in 2005. As well, the average amount Canadians withdrew in 2012 was $24,531, more than double what they cashed out in 2005 ($10,716)
Wow, one in three Canadians. That's huge.
There are some financially sound reasons to take money out of an RRSP:
1. home buyers' plan - done it
2. education - done it
3. you are retired before you get your pension - will do it
In addition, if you are paying down debt above the taxable income percentage this might make sense.
I don't think vacations and general living are good reasons and I would hope this is a minority.
If you lose a job this might be a reason, especially if you are taxed at a lower rate. Divorce might be a necessity, especially as part of a settlement.
Be nice to know how much of that withdrawal is for discretionary spending.
You have a lot of patience to answer all those questions in detail Leo. I think it is valuable to read.
My best guess is at this point is the same as it has been all along - barring interest hikes, Victoria will have a softish landing.
If rates stay where they are and prices fall loads many folks will buy pushing prices back up again. I know I would. Must be lots of people hoping for this scenario.
Only thing that would stop me would be interest rate hikes.
Actually, all those emphatic statements - very few questions.
5% of those polled spent it on living expenses, 2% on vacations...
"My best guess is at this point is the same as it has been all along - barring interest hikes, Victoria will have a softish landing."
If the stability of the housing market depended solely on interest rates, this statement would be true.
Maybe. But it is not like I ignore other factors. I just do my best to evaluate impacts and make the best decisions I can to reach my goals.
All these predictions are just that - best guesses. Who is a better guesser? It is like there are some people who want to get the best guesser award so bad they can't wait for the ceremony.
2% on vacations and 5% for living - that means that 93% spent it on education, home buyer's plan, paying down debt and early retirement?
No, 14% of 36% and 6% of 36%...
The RRSP home buyer's plan will be responsible for wiping out the most amount of wealth from the middle class. People are taking out their savings and putting it all on the alter of real estate. When the decline occurs all their life savings will be wiped out. If they have to sell that is. We all know that no one needs to sell.
yes, i meant 93% of the 36% - where are you getting the percentages - did I miss them in the article?
What are you talking about koozdra? You can only take out $25 000 and you have to pay it back.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html
Plus you have to be a first time home-buyer.
"What are you talking about koozdra? You can only take out $25 000 and you have to pay it back."
Buyers increase their buying power by dipping into their RRSPs. During the decline their savings will evaporate as the value of their property becomes lower than the amount owing.
"Plus you have to be a first time home-buyer."
Exactly. The most vulnerable group.
I've visited a few pre-sale showrooms with a client in the last few days and January, which is typically dead, has brought forward quite a few buyers.
Sovereign has had two sales including a penthouse, two at the Duet, a few at the Mondrian; Promontory also has had a good month.
Ah, here are the results of that poll.
Mr. Spitters says. “Home prices are at historic highs and are already showing signs of correcting, while stock markets are still considered cheap by historical standards. Therefore she is better off to continue to rent for the time being and invest as much as she can afford in a well-managed equity portfolio. There may very well be a time where she can purchase a home for significantly less than a home costs now.”
Recommending to rent. What has the world come to?
http://www.theglobeandmail.com/globe-investor/personal-finance/financial-road-map/renters-want-a-house-but-if-not-at-least-their-house-inorder/article7920860/
You stated:
"The RRSP home buyer's plan will be responsible for wiping out the most amount of wealth from the middle class."
When I pointed out it is a repayable loan of a maximum value of $25,000 and only available to first time homebuyers you state "exactly"?
How exactly does that logic leap? First time homebuyers are not responsible for most of the wealth of the middle class, nor can a limited loan be responsible for wiping out most of their wealth.
Totoro (aka Toto) That would be 80% of the 36%...
thanks Leo - seems pretty okay except for the vacation and potentially the living expenses (not broken down into because of divorce/job loss and just overspending).
Therefore she is better off to continue to rent for the time being and invest as much as she can afford in a well-managed equity portfolio.
Are there any stats on how many people actually do this?
The majority of my friends that are renting, well actually all of them, are not investing in a "well-managed equity portfolio." The ones I get into long conversations about various TSX companies, cash flows, income statements and balance sheets all own homes and some with a hefty price tag too boot.
Correct - 80% of the 36% are doing okay (maybe) with their RRSP withdrawals. 40% of the 36% are using the funds to buy a home which is a repayable loan at zero interest.
"How exactly does that logic leap? First time homebuyers are not responsible for most of the wealth of the middle class, nor can a limited loan be responsible for wiping out most of their wealth. "
If they didn't need to take money out of their RRSP's to afford to buy, they wouldn't. As it happens, they do. So wiping out a "measly" twenty five thousand is going to wipe them out. But don't worry. None of that will happen here. Just everywhere else. Victoria is an island of stability amid a turbulent Canada. I think that's how the quote went.
In the 90's I rented and invested. Mind you I was in my 20's and shared my pad with a roommate and owned my car (used).
If the lass in the article is 47 and hubby is 50, and they don't own a home and only have 52K in savings, it's too late for them anyway, they can't buy a house. Hell, they need to get rid of the car lease and lower their standard of living ASAP! With a combined income of about $121,000 to boot. WTF have they been doing with their money? Forget about the RESP, That kid is on his own anyway...
That is not true. I could afford to buy right now without taking $25 000 from my RRSP. Taking this money out makes sense because it is zero interest. I would do this again if I could.
You need to cite some stats for your statements. It seems that only 40% of 36% of folks are using this method to purchase - 13% overall??
The ratio of first time home buyers in 2011 was roughly 35 percent.
I'm not a math major, but these numbers don't add up to wiping out the middle class in any sort of way.
I also took money out of my RRSP for the home purchase. I would take it all out if I could somehow...It's so untouchable in there. No more is going in now that's for sure. This is one area where I agree with Mr Turner.
I agree - RRSPs are not the best. That is why I've been looking at an RRSP self-directed mortgage. If interest rates rise and prices fall that is where I'll head.
I also didn't need to take it out of my RRSP, but I did. If it's there there not a single good reason not to do it.
Sorry for the cave man speak introvert...
"I could afford to buy right now without taking $25 000 from my RRSP."
You're getting defensive again. Not talking about you.
"I'm not a math major, but these numbers don't add up to wiping out the middle class in any sort of way. "
Math and economics are not the same thing. Economic models are a far cry from being math. Just pay attention to how people react in a housing decline. Don't worry Canada is immune though. I hear our banks are well managed.
"The majority of my friends that are renting, well actually all of them, are not investing in a "well-managed equity portfolio." The ones I get into long conversations about various TSX companies, cash flows, income statements and balance sheets all own homes and some with a hefty price tag too boot."
Definitive proof that being a home owner makes you more financially savvy.
What sort of mumbo jumbo is that? Economic models are not math? The easter bunny is not the tooth fairy. So what.
The numbers don't add up to wiping out the middle class, nor does any sort of economic theory I know about support this on the facts you are relying upon.
I'm not stating this as a defence to mumbo jumbo talk. I'm stating it to set out that the home-buyer's plan makes economic sense for lots of folks.
"The normalcy bias, or normality bias, refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects."
This just fits so well here.
Normalcy bias
thanks Leo - seems pretty okay except for the vacation and potentially the living expenses (not broken down into because of divorce/job loss and just overspending).
I would add a couple more to the bad idea pile:
- Home renovations. RRSP's are not a savings account to just spend on random things. If your house is so busted you need to fix it immediately and have no savings, then you can't afford your house.
- Paying down debt. Again, this is an indication you are living beyond your means. Sure it could be a one-time thing, but 5% of canadians every year needing to dip into RRSPs to pay down debt is a lot.
^^^agree, BUT it's 5% of those polled not all canadians...
Haven't we been down this road before? Lets see... I would say confirmation bias is being pretty spread pretty thick with a sprinkling of diagnostic fetish on top.
Here you go Totoro
http://www.wiseword.ca/art_oct99.htm
I still don't like filling up my RRSP, but if you already have that much in there, the hassle could be worth it?
"diagnostic fetish" nice...
^^^agree, BUT it's 5% of those polled not all canadians...
The whole point of the survey is to be a representative sample. So unless you think ScotiaBank suddenly completely forgot how to conduct a survey, it's going to be almost the same thing.
Definitive proof that being a home owner makes you more financially savvy.
I don't think being a home owner makes your more financially savvy; however, those that do own homes, especially expensive ones, do tend to be more savvy. Just my personal observations.
Thanks - I like the fact that you can charge a slightly higher interest rate and have a rental suite so more tax deduction and the higher payment goes back to you to be reinvested in the RRSP... run on sentence :)
What was the poll size and profile? Did they give a margin of error. Sorry, I don't think there is anything wrong with polls, but they only give an idea that is as good as the sample size and profile. If they polled mortgage customers then that will sway the results right there.
“however, those that do own homes, especially expensive ones, do tend to be more savvy.”
Not so sure on the savvy. Savvy to me means selling near the peak.
The selling price has not been released, but the 67-acre waterfront property was listed earlier this month at $8.9 million, down from $24 million in 2007 when Greater Victoria's housing market was sizzling hot.
I heard it sold for 1/4th of original list. I would say half of the expensive owners are savvy, and half fell into the money and end up losing it. So not sure if they are more savvy than the average joe.
How many times must Leo eviscerate info with logic and common sense?
info, any benefit of the doubt and credibility you may have had is now gone. I recommend you take a new tack or else make a hasty getaway from this blog.
Or, keep doing what you've been doing up to this point, and see how that works out for you.
info, any benefit of the doubt and credibility you may have had is now gone. I recommend you take a new tack or else make a hasty getaway from this blog.
Actually please stay info. I may not agree with a lot of what you're saying but it does make for interesting discussion.
The alternative is such brilliant comments as "You're an idiot" from our local grammar enthusiast.
I think there's room for everyone here. Please stay Info - and everyone else too. If everyone agreed on everything the conversation wouldn't be too interesting:)
however, those that do own homes, especially expensive ones, do tend to be more savvy.
Those who own stocks also tend to be more savvy than those who don't, but that's not an argument for buying stocks at any time at any price.
I heard it sold for 1/4th of original list. I would say half of the expensive owners are savvy, and half fell into the money and end up losing it. So not sure if they are more savvy than the average joe.
This house is like buying a Ferrari and dropping another $100,000 into it in custom parts. You aren't getting your money back.
Also, I don't think just because the ultra-rich buy ridiculously bad investments such as yachts that they are not savvy. Life is limited by time and at some point if you've been savvy you probably have more than you can spend on day to day living.
Expensive houses = financial literacy.
Not from my observations. LIsted below: details about professions changed due to privacy.
Couple # 1 - high and mid level professionals, both mid-fifties. Last two homes purchased both just shy of 1 million. Sold the first one after 2 years with well over 100,000 capital loss with carrying costs of over 2000 a month during the year it took to sell. Purchased 2nd high level home 2 years ago. Exact same waterfront home next door, same builder, now listed at over 100,000 less then they paid. Still not sold.
Couple # 2 - Medical pro and stay at home wife. Stuck with just under a million dollar house which just won't sell despite 3 attempts. Purchased lot in desirable area with intention of building. Discovered lot has trees which are unable to be taken out, thus not allowing for desired home to be built. Stuck with lot.
Couple # 3 - Two high level scientists, mid-fifties. Lovely house, children in expensive schools, equestrian habit. Debt up the yin-yang.
Couple # 4 - Professional accountant (this one is true) and mid level pink collar. Still live in modest house they purchased years ago. Travel. Seem to be more than fine.
Couple # 5 - Verrrry high level business executive. Live like kings. Bank accounts like paupers. This one is family :-(
So I don't agree that being highly educated and owning an expensive house equals financial aplomb. It certainly can. But it is also often a high wage earner(s) living life to the max and very indebted.
But it is also often a high wage earner(s) living life to the max and very indebted.
I 100% agree, I see it every day. There is definitely quite a bit of that out there.
In my circle of friends, those that don't fit the description above, buy because they comfortably can. A lot of them recognize that a house isn't a great investment but they don't want to rent and more importantly some of the homes my friends own are not readily available for rent. Some of them have a kid or two, some of them are out of town on business half the time. Owning a home gives them a sense of stability versus getting 60 days notice to move.
We have sophsiticated renters on this blog but I don't think that is the norm out in the real world.
I'm following the big boys and continuing my stock piling. I'm out of the 'game'. I sincerely hope things slowly readjust for Canadians but I know that people much smarter than me are giving us the signals. Too many are ignoring these but I've lived long enough to know when to back away. Best wishes everyone! http://www.thestar.com/news/canada/politics/article/1321373--corporations-stockpile-of-dead-money-tops-500-million-clc-report
@intro
"How many times must Leo eviscerate info with logic and common sense?
info, any benefit of the doubt and credibility you may have had is now gone. I recommend you take a new tack or else make a hasty getaway from this blog.
Or, keep doing what you've been doing up to this point, and see how that works out for you."
Well done,Introvert. A superior example on your part of self-evisceration.
I just found this blog and am enjoying it a lot. We moved to Victoria two years ago and have been looking to buy ever since. I'm glad we've waited and we may continue to do so for a while yet.
I'm pre-approved for $500,000 (my income only) mortgage and have about $75,000 for down payment from selling Edmonton home. Prices were stupid when we moved here and getting marginally beter as time goes on. It's still shake-my-head expensive though. I hope I'm able to time the market right.
Leo, your analysis is spot on and greatly appreciated.
Also, I get a kick out of some of the comments. They bring needed levity to my day.
Actually please stay info. I may not agree with a lot of what you're saying but it does make for interesting discussion.
If "interesting discussion" includes ceaseless reiterations of previously repudiated comparisons and talking points, then our standards are obviously pretty low. But perhaps I'm expecting too much from a blog.
The alternative is such brilliant comments as "You're an idiot" from our local grammar enthusiast.
Sorry, but substituting "litmus test" for "canary" invited such a response.
Perhaps what we need is a litmus canary?
If everyone agreed on everything the conversation wouldn't be too interesting:)
Disagreement makes for interesting conversation; I'm certainly not denying that.
But what doesn't make for interesting conversation is highly repetitious, 12-paragraph-long, already-largely-debunked comments.
I've watched enough episodes of Til Debt Do Us Part to appreciate that individuals and couples with very high incomes can be financially incompetent.
Also, I don't think just because the ultra-rich buy ridiculously bad investments such as yachts that they are not savvy.
They're not investments at all, any more than a Sea-Doo is an investment for you. They don't expect to get any financial return on them. It's just recreation.
They're not investments at all, any more than a Sea-Doo is an investment for you. They don't expect to get any financial return on them. It's just recreation.
Fair enough, same applies for homes for many people. The market has been flat for 5-6 years now, I don't think buyers buying right now are expecting returns....the frenzy of 2002-2007/08 is long gone.
If "interesting discussion" includes ceaseless reiterations of previously repudiated comparisons and talking points, then our standards are obviously pretty low. But perhaps I'm expecting too much from a blog.
Ask not what the blog can do for you, ask what you can do for the blog! ;)
"I don't think buyers buying right now are expecting returns"
They definitely aren't expecting heavy losses either.
I've watched enough episodes of Til Debt Do Us Part to appreciate that individuals and couples with very high incomes can be financially incompetent.
Good show.
They definitely aren't expecting heavy losses either.
The heavy losses many have predicting for 6 years that haven't materialized?
"The heavy losses many have predicting for 6 years that haven't materialized?"
Yes.
You mean heavy "real" losses?
"The heavy losses many have predicting for 6 years that haven't materialized?
Someday my heavy losses will come
Someday I'll find my love
And how thrilling that moment will be
When the heavy losses of my dreams come to me
The heavy losses whisper I love you
And steal a kiss or two
Though the heavy losses are far away I'll find my love someday
Someday when my heavy losses come true
"You mean heavy "real" losses?"
No of course not, paper losses. Only real losses if they have to sell. But don't worry they won't have to sell. Canadians are a prudent bunch. They aren't borrowing at record levels. If house prices drop they will just hunker down and pay off the mortgage. What happened in the states and all those other housing markets around the world that imploded are not the norm. We will set the new normal for engineering a soft landing in real estate.
Other countries will be like "Why didn't we think of that?. All we had to do was keep interest rates at rock bottom levels to engineer a soft landing".
Economic text books around the world will have to updated by, what will be called, "the Canadian example". There will be a section on how to stimulate your housing market to keep your economy afloat while the entirety of your population goes into extreme debt. Then engineer an elusive soft landing.
Oh dear...
Someone is off on a tangent :)
My take on spenders vs. savers is it is personality driven to a great extent.
Lets face it. If you are hanging out on this blog you probably aren't playing the slots in Vegas as a retirement strategy.
BTW
dasmo - you are on the list - don't think I did not notice.
"If prices decline another 10% or so, they will be supported by incomes at these interest rates."
Completely wrong. Interest rates have nothing to do with price/income ratio. In order to say that incomes support prices, only two factors are considered: house price and income. If the price/income ratio is between 3.0 and 3.5, then it can be said that incomes support prices.
You are trying to put interest rates in the equation. If you do so, it becomes something else entirely different. Incomes supporting prices is independent of interest rates.
A 10% decline in prices would put Victoria at an average of about $540,000, according to VREB's stats.
The price/income ratio of Victoria would then be 7.0, which is still extremely unaffordable.
It would take a 58% price decline in order for Victoria incomes to support house prices. That would put the price/income ratio at 3.2.
"But what doesn't make for interesting conversation is highly repetitious, 12-paragraph-long, already-largely-debunked comments."
None of my comments have ever been debunked on this blog.
Sorry info, your are not buying a house in the core for 235k ever again. You missed that boat long ago.
Rates have everything to do with it. It's what created the opportunity in early 2000. Prices had been flat and rates started dropping before prices started rising. from 10 to 8 to 6 and then 4.5 when I inked the deal on my place. At 6 it was already good enough for me and I started looking. If rates were stuck at 10 it might not have gotten my attention before the mob rushed in....
"So in many ways 1994 should have collapsed even harder. As you say, this time at least there is a good reason for our runup in prices (credit expansion), but in 1994 they had an increase of identical magnitude without that."
You really have no idea.
Lax lending standards caused a run-up in house prices that created the current price bubble in Canada. All bubbles burst and correct back the same amount, as has been shown by 48 different housing bubbles around the world over the past 40 years.
In Canada, the mortgage rules have been tightened which is the same thing as removing the artificial stimulus from the housing market. This did not need to take place for a major correction to happen. It will act to quicken the correction/crash and possibly make it worse.
In 1994, lax lending standards were not part of the equation in nearly as big of a way as they were in the current bubble.
Think of it like this. You have a small fire. You add 5 gallons of gasoline to the fire (stimulus) and plenty of wood. It burns bright and hot for some time. Imagine if you could remove the fuel and wood (stimulus removal). The fire would burn the way it was before the gasoline and wood were added to it. This is the situation we are in with Victoria's housing market. The stimulus has been removed. Much lower prices will once again be established.
The current housing market bubble is in no way similar to that of 1994.
Victoria's housing market was crashing hard in 08-09. If your theory about Victoria being immune to a crash is true, explain that.
Victoria prices plunged 15% in about 8 months in 09 before the government intervened in a massive way. Prices would have continued to plunge if the market had been left without that intervention.
Hmmmmm.... seems a little nutso to ignore interest rates because it does not accord with your chosen measures even though it has real life application and huge impact to everyone not buying with cash.
what should one do while waiting for the housing apocalypse? is there a prepper's organization.... or is this it!
info - I agree that in 2008 we would have seen the bubble burst had it not been for the gov't interventions.
Let's see what happens this time.
"Hmmmmm.... seems a little nutso to ignore interest rates because it does not accord with your chosen measures even though it has real life application and huge impact to everyone not buying with cash."
What is more important to our bubble, interest rates or CMHC insurance?
I think it's heavily weighted towards the insurance. Remove the insurance and the banks have to price risk again. Mortgage rates will rise despite interest rates being low.
There are 4 basic categories of affordability that are used by economists worldwide, none of which consider interest rates.
The latest Demographia report makes this clear. There are 4 categories that it breaks affordabiity into: affordable, moderately unaffordable, seriously unaffordable and extremely unaffordable (Victoria).
Of course we all know that you will automatically dismiss this report, as you do with any article or report that says anything negative about the Victoria housing market.
There are many more links that prove that the same 4 categories of affordability are used worldwide and have been for decades.
I am aware that Canadian banks use interest rates in their affordability calculations.
"Hmmmmm.... seems a little nutso to ignore interest rates"
I personally see value in the price/income ratio among other metrics exactly because it ignores interest rates. If you use other affordability measures that consider interest rates they are of only short term value and are flawed for a couple of reasons.
Interest rates are highly volatile over a 25 year period as compared to prices (you pay it once and it doesn't change) and income which for most people doesn't vary nearly as much in magnitude as interest rates could.
As most Canadians get 5 year terms, they are basing your affordibility (using interest rates) on 5 years only and not the entire length of your mortgage. What's affordable to a buyer now may not be in 6 years. In the same vein, in six years, real prices may then drop significantly, if interest rates say double, coming closer to the long run price/income average.
By ignoring interest rates, you are making a longer term projection that interest rates will be a wash (more or less) over the long-run.
As a contrarian, you might look at the herd over-reacting to interest rates as they tend to base their decisions on short term affordibility.
But as I alluded to, it isn't the only metric I would look at.
"In the same vein, in six years, real prices may then drop significantly, if interest rates say double, coming closer to the long run price/income average." In which case you would have been better off to buy when rates were low...
Using the 500k example, in your first term you would have paid 69k in interest and be at 427k left on the principle. vs paying 500k 6 years later and paying 141k in interest and having 449k left on the principle. In fact, if you bought now at 500k and your next 5 year term was at 6% your interest paid would be 110k and principle now at 367k. So still better of since the percentage going to interest is less as your mortgage ages... Prices need to drop in **nominal** dollars significantly for this not to be a benefit.
"Prices need to drop in **nominal** dollars significantly for this not to be a benefit."
A doubling of interest rates would kill prices.
Marko said
"The heavy losses many have predicting for 6 years that haven't materialized?"
Some of us ;) have only been predicting heavy losses for 2+ years (aka 'the peak'). If you don't believe they have been 'heavy' losses, I will gladly show you some price history.
5 more to go.
Why are interest rates so low?
Interest rates have decreased to encourage borrowing and spending into the economy. They are a form of economic stimulus that is limited only by the amount of debt your population is willing to take on. When the middle class gets tapped out this type of stimulus is no longer effective.
Why have houses prices doubled across the country? I thought real estate was local.
Real estate has local components. When prices rise by a uniform percentage amount across the country, locality of real estate can be discounted when considering the rise in prices. As people have access to more and more credit they pay higher and higher amounts for the same commodity. Further they take paper equity out of their home and buy more houses. With an inexhaustible amount of renters and houses this is a sound strategy.
Why would anyone think that rising house prices are a good thing? Do people like paying more for stuff?
The only people cheering for rising house prices are home owners. With 70% home ownership that's a lot of people. Everybody has been given an opportunity to buy into something that only rises in value (in their opinion). They dismiss warning signs and are under the impression that Canada is immune to a severe housing decline. Also don't forget that inflation is very low right now. So, according to the government, house prices can double nationally but we are still paying the same amount for things.
Wasn't there a severe housing decline in the states not so long ago?
We don't talk about that here.
Will interest rates ever rise?
Given that they are at historic lows, I can say that lowering them won't be very effective in creating further stimulus. The only direction left is up. But they can stay low for a long time. Hope your not banking on this (oooh, double meaning).
This is going to be fun.
BC Depreciation Reports for condos
@info.
Again, full reply coming after work.
However one comment. The only way we are going to get anywhere in this debate is for us both to address the specific points raised by the other.
I've tried to go through your points and respond individually because I think you make some good ones. Also I'm certainly not sure of my view, and the only way I can improve it is to have it challenged.
However you are continually ignoring the specific questions I'm asking you. That makes this debate quickly pointless since we aren't going to get any resolution on the individual issues. So if you want to actually move forward rather than repeating the same argument, please go back and answer the questions.
"Why would anyone think that rising house prices are a good thing? Do people like paying more for stuff?" I don't think anyone here is cheering on price increases. The debate around here really circles around degree of decline, from flat to - 53% and over what time period etc. It's also about trying to make the best move for oneself. I do think there is some cheering on for price decreases though but the benefit of that to some is obvious...
"I do think there is some cheering on for price decreases though but the benefit of that to some is obvious... "
There was cheering on the way up, there will be cheering on the way down.
That makes this debate quickly pointless since we aren't going to get any resolution on the individual issues. So if you want to actually move forward rather than repeating the same argument, please go back and answer the questions.
Leo, aren't you enjoying the "interesting discussion" you're having with info?
Sorry info, your are not buying a house in the core for 235k ever again.
Why do people assume that they know what is going to happen in the future?
I know it seems to many people most unlikely that house prices are going to drop by 40% as they did in the 80's.
But if anyone knew the future they'd soon have all the money. But that hasn't happened yet, and that is not for want of trying.
In this connection, I think Info makes an important point; namely, that to talk about "affordability" measured as a ratio of carrying costs to incomes is misleading and potentially hazardous to one's financial health.
Affordability so measured only tells you what you are able to afford right now and for as long as nothing changes. But by the time you have to renew your mortgage things may have changed beyond all recognition and in ways that are totally unpredictable.
My own bet is that we will see accelerating inflation over the next several years, which if it drives up interest rates, will blow present calculations of affordability to blazes.
There are other developments that could have a similar impact. The idea of owning a SFH may just go out of fashion, and if plenty of land is made available for multi-family developments we could see radical changes in relative price among types of housing.
When did this board fill up with Bulls?
Arguments filled with such vitriol. Well here's my contribution.
Reality: Housing is too expensive. Prices are going down. Get over it.
If you have 100% of your wealth in RE, get ready to feel poorer. You should probably get ready to get over that too.
There is nothing anyone can say to me that would make me believe anything other than prices are at elast 2x too high.
Anyone that believes that RE is fairly valued based on anything related to the concept of "affordability" or low interest rates is a financially illiterate buffoon.
EVERY indicator points to RE decreasing in price over the next 10 years.
Keep guzzling that chardonnay you stupid spoiled Boomers because you're all about to get bent over a barrel by a younger hungrier generation.
Interest rates have nothing to do with price/income ratio.
Strawman, no one ever claimed that that they do.
If the price/income ratio is between 3.0 and 3.5, then it can be said that incomes support prices.
So what you're saying that the last time incomes supported prices in Victoria was in 1990. Why do you think prices didn't crash in the last 23 years if they weren't supported by incomes?
You are trying to put interest rates in the equation. If you do so, it becomes something else entirely different.
Yes, something different, like affordability.
In 1994, lax lending standards were not part of the equation in nearly as big of a way as they were in the current bubble.
So what you're saying is prices in Victoria don't matter as long as Canada itself is not in a bubble. In 1994 the price/income peaked at 6.5. That is severely unaffordable according to Demographia. Why didn't prices collapse? According to you they were not supported by incomes.
In Canada, the mortgage rules have been tightened which is the same thing as removing the artificial stimulus from the housing market.
Not quite. It is the same as removing some of the stimulus. Most of the stimulus is in the form of interest rates, and that has not been removed.
Victoria's housing market was crashing hard in 08-09. If your theory about Victoria being immune to a crash is true, explain that.
First of all, my theory is not and has never been that Victoria is immune to a crash.
As for why it was crashing, the affordability theory already explains that. Affordability was bad and was correcting. Then interest rates were lowered which improved affordability to a point where prices were supported again.
Another note is that everything was crashing in 2008/09 regardless of the quality of the investment. The best stocks were crashing beyond all sensible values, so just the fact that something crashed doesn't necessarily mean it was overvalued.
There are 4 basic categories of affordability that are used by economists worldwide, none of which consider interest rates.
Yes it's a convenient measure because it's simpler and doesn't get into all the differences between mortgage products in different countries.
It is also good as a measure of risk. A high price/income implies that consumers are exposed to a high level of interest rate risk, even if affordability is within historical ranges.
However there is no causal relationship like high price/income always leads to crash. I only need one counterexample (Victoria 1994) to disprove this theory.
Of course we all know that you will automatically dismiss this report
I've linked to demographia many times on this blog, including the latest issue just a couple weeks ago.
I personally see value in the price/income ratio among other metrics exactly because it ignores interest rates. If you use other affordability measures that consider interest rates they are of only short term value and are flawed for a couple of reasons.
I completely agree. High price/income comes with high interest rate risk. If rates increase affordability will be impacted severely and prices will have to decrease to compensate.
Leo, aren't you enjoying the "interesting discussion" you're having with info?
Immensely.
Affordability so measured only tells you what you are able to afford right now and for as long as nothing changes. But by the time you have to renew your mortgage things may have changed beyond all recognition and in ways that are totally unpredictable.
Of course. But at least affordability tells you _something_. Price/income tells you nothing about whether you can afford a place or not. In 1981 price/income was only 4.5 at the peak of a crazy bubble.
My own bet is that we will see accelerating inflation over the next several years, which if it drives up interest rates, will blow present calculations of affordability to blazes.
Maybe, maybe not. I find it quite unlikely that interest rates would be raised in the middle of a housing slump. But it's all a gamble.
There is nothing anyone can say to me that would make me believe anything other than prices are at elast 2x too high.
Now that's efficiency.
"Keep guzzling that chardonnay you stupid spoiled Boomers because you're all about to get bent over a barrel by a younger hungrier generation." Good luck with that attitude... Work on yourself and your own situation and success will come to you.
"Keep guzzling that chardonnay you stupid spoiled Boomers because you're all about to get bent over a barrel by a younger hungrier generation."
There will be enough "bending over a barrel" to go around for all the generations.
"My own bet is that we will see accelerating inflation over the next several years" And this will somehow lower house prices?
"My own bet is that we will see accelerating inflation over the next several years" And this will somehow lower house prices?
"My own bet is that we will see accelerating inflation over the next several years" And this will somehow lower house prices?
Price/income tells you nothing about whether you can afford a place or not.
I don't think anyone said it did, although I would certainly defend anyone who did say it did.
The comment In 1981 price/income was only 4.5 at the peak of a crazy bubble seems a non-sequitur. There is no connection between interest rate risk and price/income ratio.
Whatever the price/income ratio, if the loan service cost to income ratio is high, you are at risk of a spike in interest rates.
To believe that a house is affordable when the ratio of price to income is seven to ten because you "find it quite unlikely that interest rates would be raised in the middle of a housing slump" (i.e., because your estimate the interest rate risk to be low) seems rash in the extreme.
The financial world revolves around much more than houses prices in Victoria, and now that central bankers are talking of combating the depression by targeting not inflation but GDP an increase in inflation is at least conceivable.
And if inflation picks up there will be a bond sell off and a rise in interest rates, which is unlikely to be stemmed by central banks buying bonds for their own portfolio using printed money.
But I am not trying to discourage anyone from accepting interest rate risk. Lots of fortunes have been made in real estate by making large leveraged bets.
But if you're gonna take a risk, it may be best to understand what that risk is.
"My own bet is that we will see accelerating inflation over the next several years" And this will somehow lower house prices?"
If it drives interest rates 5, 6, 10%, yes.
"Keep guzzling that chardonnay you stupid spoiled Boomers because you're all about to get bent over a barrel by a younger hungrier generation. "
This is interesting. What's in store? Compulsory euthanization at 70, or what?
"Keep guzzling that chardonnay you stupid spoiled Boomers because you're all about to get bent over a barrel by a younger hungrier generation. "
Beautiful sentiments, but given where the voting power lies it is likely that gov't policies will continue to favour the old over the young.
Some interesting comments here. Someone should tell these people that we don't need young families here in Victoria.
http://www.timescolonist.com/news/local/victoria-living-wage-18-an-hour-report-estimates-1.58717
Question: Does Info use the word "emergency" in every comment thread.
Answer: Not quite! He did miss one earlier this month.
Will Info ever be able to convince a bunch of people who think housing prices will fall that ... housing prices will fall! Not unless he tries a bit harder.
"This time, unlike in 2009, as Canada's housing market tanks, there will be no dramatic, unprecedented, emergency intervention to stop it."
"Continued emergency rates in Canada cannot stop a major correction from bubble prices"
"The combination of extreme, bubble prices and emergency rates makes it the worst time to buy real estate in the history of Canada."
"In 2008, he predicted the crash of 08-09, which was halted by a massive, unprecedented, emergency intervention. Nobody could have predicted that."
"Monthly mortgage payments, in some cases, might (for now) make your monthly cheaper than renting, but this is due to temporary, extreme, emergency interest rates, which will be moving much higher in the future."
"We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit."
Introvert and Leo - I doubt that either of you is aware that, in 2008, Mcleans also correctly predicted the Canadian housing crash of 08-09, which we all know was halted only because of a massive, emergency intervention."
"Canada's housing bubble will make a full correction this time. There will be no massive, emergency intervention to stop it like the one we saw during the crash of 08-09."
"It's always a bad time to buy when you have extreme, bubble prices and extreme, emergency level interest rates."
BTW no-one could have predicted that BoC would cut rates in 08-09 when the economy was going into the crapper.
OTOH now that the Canadian economy remains in the crapper and our largest trading partner has signalled they are unlikely to raise rates anytime soon we can confidently predict that rates will rise in a big way soon.
"an increase in inflation is at least conceivable"
Conceivable - but not likely in the short term. Deleveraging is deflationary.
Of all the chronically wrong predictions the idea that inflation is about to get out of control is one of the most persistent.
IIRC inflation has been about to get out of control since about 1984 or so.
History suggests the inflation predictors will eventually be correct, but it might not be anytime soon!
When looking at affordability, most people just look at "how much is this going to cost me each month". Obviously, this amount is affected by interest rates. A lower purchase amount with high interest rates could be very similar to a higher purchase cost with lower interest rates. For example, a $350K mortgage at 8% amortized over 25 years works out to $2671.25 per month, while a $500K mortgage at 4% amortized over 25 years works out to $2630.10 per month - essentially the same. Of course, this is assuming that interest rates will remain constant over the 25 years.
However, there is a subtlety that is often overlooked. Interest rates are typically higher when inflation is higher. If inflation is higher, then so are the annual adjustments to wages and salaries. When inflation is higher, the percentage of income spend on servicing the mortgage drops at a faster rate each year than when interest rates are lower.
A lower purchase price with higher interest rates doesn't mean that you will initially be paying less on you mortgage - but each time the mortgage comes up for renewal, you'll find that less of your income is spend on paying off the mortgage.
I would suggest that this is a compelling reason why interest rates cannot be excluded from the "affordability" question.
There is no connection between interest rate risk and price/income ratio.
Sure there is. Higher price/income means higher interest rate risk. That is, at higher price/income, smaller changes in interest rate will have more effect on affordability.
To believe that a house is affordable when the ratio of price to income is seven to ten because you "find it quite unlikely that interest rates would be raised in the middle of a housing slump" (i.e., because your estimate the interest rate risk to be low) seems rash in the extreme.
I'm not believing anything. I'm using the only definition of affordability that impacts the mortgager and calculating the result. If interest rates stay low and incomes don't decline, then house prices are within ~10% of "affordable" giving historical norms.
What actually happens to interest rates is a completely separate issue, and is also not what I mean by "interest rate risk". Interest rate risk is separated into two components. The first is the actual risk of interest rates increasing, and the second is the effect of that increase. I think the risk of rates increasing is small (but of course no one can predict this), and the impact of them increasing is large because of high price/income.
My own bet is that we will see accelerating inflation over the next several years, which if it drives up interest rates, will blow present calculations of affordability to blazes.
Like a house price meltdown in Victoria, inflation keeps not coming.
My own bet is that inflation won't be a problem any time soon.
The idea of owning a SFH may just go out of fashion ...
Really? I'm pretty sure that owning a home will stay in fashion. Owning may begin to be viewed less like owning a gold mine in the years ahead, but I'm certain people will still desire owning a chunk of land and a structure they call home. And I'm also certain that they will continue to pay in some cases unreasonable amounts in order to fulfill this desire.
When did this board fill up with Bulls?
It's pretty awesome, isn't it?
Welcome to a thing this blog is approaching called "balance."
It's a bitch, ain't it?
Arguments filled with such vitriol.
Bearish arguments: vitriol-free!
Bullish arguments: vitriol-laden!
Keep guzzling that chardonnay you stupid spoiled Boomers because you're all about to get bent over a barrel by a younger hungrier generation.
Vitriol detected!
Question: Does Info use the word "emergency" in every comment thread.
Answer: Not quite! He did miss one earlier this month.
I love the people on this blog who defend info. Give your head a shake!
It's not that info's views and opinions are unacceptable. It's that no one can engage him in what most humans would call "discussion."
And isn't the "discussion" the thing that has made and continues to make House Hunt Victoria a success?
info is a talking-point machine who refuses to respond to any direct questions, especially any questions that might advance the discussion.
Plainly, it would be best if info decided to engage in honest, well-meaning back-and-forths, like the rest of us do (most of the time).
However, if info persists on imitating a bullhorn, I--and others--will continue to (rightly) admonish him for it.
Addendum:
Nevermind "honest, well-meaning back-and-forths" with info; any back-and-forths would be appreciated.
As Leo has pointed out, he simply ignores most questions put to him, and soon after posts another highly repetitious wall of text.
"My own bet is that we will see accelerating inflation over the next several years" And this will somehow lower house prices?"
If it drives interest rates 5, 6, 10%, yes.
You can also add the effect of stagnant wages and rising consumer prices.
I agree with DavidL. I have also wondered if people are really taking into account the actual price of the house they are buying, or are they just looking at what it costs them per month to live in that house. Obviously, the low interest rates and long amortizations have made it seem affordable, but you have to wonder how many considered higher interest rates down the road when buying. Do people believe interest rates will stay this low, not only in the short term (which I think we all agree is the case), but for the entire duration of their mortgage?
The price increases over this last decade seem far too steep. I was looking at the VREB historical prices for SFH in Oak Bay the other day. In 1990, the annual average price was $268,587. By the year 2000, the annual average price had increased to $368,878. Looking at the next decade, the hysterical annual average price for OB had increased to $946,379 in 2010. That’s a huge difference in increases between the two decades. What is the explanation for that? Is Info right?
Another thing that struck me during the period 2001 and 2006, was how quickly and easily everyone adapted to the rising house prices. I remember going to an open house on Newport Avenue for fun (I’m guessing it was around 2003 ‘ish). One of the fairly big houses, slab on grade, but with wonky baseboards and in need of some modernisation. It was listed at $615,000 and we thought “Nobody is going to pay that.” Well, they did and very quickly, and up went the prices again.
Heard so many times that the houses listed in the $700,000’s or the $800,000’s were worth it. All I remember thinking was that a few years before, similar properties were selling in the $300,000 or $400,000 range.
People love to boast about monthly payments which are tied to low interest rates. Inflation is low because interest rates are low. The government isn't in full control of interest rates. If interest rates spike inflation will run away. House prices will collapse. These facts are so strong that even bulls contend it would be a disaster.
The bull sentiment here is to bash Garth for being wrong, then to make the following statement "I just don't see interest rising any time soon". That's just a bunch of bull.
Anybody buying because interest rates are low can consider themselves a speculative leverage investor. You are speculating that interest rates will not rise and you will be able to service the mortgage. To use a phrase that bull's love to use on this blog, "you don't have a crystal ball".
Great news everyone, Canada's most sustainable industry is showing the strongest income growth.
"Earnings in the construction industry showed the strongest gains, up 6.6 per cent to $1,172 a week, on average."
Average income shrinking is becoming more and more likely in the coming years.
Salaries tick higher in November
Ten years is a long time. Right now you can get a ten-year fixed-term mortgage at 3.74. We chose a ten-year term for the rate security. I preferred it to uncertainty despite the research that shows variable is the way to go.
We have chosen to make additional annual payments on our mortgage even though the rate is low.
After ten years we will still owe about $140 000. Even if rates are 7% our payment will only be $950 a month upon renewal.
Even if we did not make extra payments, upon renewal in 10 years our mortgage payment will be less than today while our rental income should have risen.
http://www.ratehub.ca/best-mortgage-rates/10-year/fixed
To be clear, a real estate bull is:
"An investor who believes the price of a particular asset or asset class in general will follow a broad upward trend."
Who on this board is predicting a broad upward trend? As far as I can tell, there are no "bulls" on this board. There are; however, "bears".
What we have on this board is a debate between those who believe there will be a huge crash and those who believe there will be a fairly soft landing at this point. I believe the soft landing position has been referred to as the "halibut" position.
We also have debate about rent vs. buy at this point based on the same analysis.
We also have folks who are firmly entrenched in their beliefs about the future and those who have a more analytically bent and enjoy data analysis.
Another thing that struck me during the period 2001 and 2006, was how quickly and easily everyone adapted to the rising house prices. I remember going to an open house on Newport Avenue for fun (I’m guessing it was around 2003 ‘ish). One of the fairly big houses, slab on grade, but with wonky baseboards and in need of some modernisation. It was listed at $615,000 and we thought “Nobody is going to pay that.” Well, they did and very quickly, and up went the prices again.
This is a good point and I've brought it up a few times how people get de-sensitized to high prices.
However your example also demonstrates how that initial reaction of "wow that's a lot of money" can be misleading. If that place sold for $615,000 in 2003, what do you think it's worth now? Quite likely despite the price it was a good purchase in 2003.
The bull sentiment here is to bash Garth for being wrong, then to make the following statement "I just don't see interest rising any time soon". That's just a bunch of bull.
I don't think anyone here could be classified as a bull.
Anybody buying because interest rates are low can consider themselves a speculative leverage investor.
While we're twisting definitions you can extend this to anyone that buys period.
You are speculating that interest rates will not rise and you will be able to service the mortgage.
Not true. You can easily model the scenario for different rate increases at renewal. Then it is about managing risk. If rates increase to 8%, can you still afford the mortgage? If the answer is no, you should think twice about buying.
"Inflation is low because interest rates are low."
More like the other way around. Government/central banks can get away with low (i.e. "dramatic emergency rescue") rates because there are currently no big inflationary pressures
"Ten years is a long time. Right now you can get a ten-year fixed-term mortgage at 3.74. We chose a ten-year term for the rate security. I preferred it to uncertainty despite the research that shows variable is the way to go.
We have chosen to make additional annual payments on our mortgage even though the rate is low.
After ten years we will still owe about $140 000. Even if rates are 7% our payment will only be $950 a month upon renewal.
Even if we did not make extra payments, upon renewal in 10 years our mortgage payment will be less than today while our rental income should have risen."
Could this be? an Info style commercial?
"Hey everybody, my personal situation is great!!" -Totoro
"you should think twice about buying."
Agreed. However, people aren't thinking. They are buying and looking purely at their monthly rate.
Yes, of course, I use the term "bull" loosely.
"More like the other way around. Government/central banks can get away with low (i.e. "dramatic emergency rescue") rates because there are currently no big inflationary pressures"
In any event, they are now linked. A rise in interest rates would mean a huge boost to inflation as people will struggle to pay their debt.
We've had some discussion on the civility of this blog as compared to some other housing blogs around the country. The reason is that all the bears moved away. How many years in a row can you call a decline and hope to be able to afford a house before you say "fuck it", to use the parlance of our times, and move elsewhere. How many people looked at the job situation and the housing market here and decided not to move. Ridiculous house prices are wrecking havoc on the local economy. Nobody cares. Everybody has just won their own personal little lottery. Their house prices doubled.
If people were financially prudent and considered the possibility of rates doubling in the near future, we would not have a bubble in the first place. The amount financial literacy in peoples minds out there is completely eclipsed by the detailed knowledge of all the personal lives of the characters of the bachelor.
Higher price/income means higher interest rate risk.
Not so. Price to income reflects interest rates -- because if affects "affordability" -- right?
So, if you buy for one million and borrow at three percent, your interest rate risk is the same as that of someone (at another time but with the same income) who buys for half a million and borrows at six percent.
In either case the same proportionate increase in interest rates will impact the two borrowers in the same way and to the same degree.
"Ask about 3% assumable mortgage(save thousands-buy with less than 10% down & no CMHC fee!)."
Begin the era of alternative financing.
http://www.realtor.ca/propertyDetails.aspx?propertyId=12782219&PidKey=-1596398525
What we have on this board is a debate between those who believe there will be a huge crash and those who believe there will be a fairly soft landing at this point.
Can any one suggest a polite but forceful equivalent for bollocks?
And to prove his point, T.V. will give us some hand-waving numbers about his own convoluted financial circumstances.
The only sensible debate about the future must focus on scenarios based on stated assumptions. No one knows what the future will bring so it seems futile to wrangle on about such things as whether interest rates, or house prices, will go up or down or sideways.
We simply don't know and because someone emphatically states their opinion about the future is not going to affect anyone else's opinion in the slightest.
@koozdra We've had some discussion on the civility of this blog as compared to some other housing blogs around the country. The reason is that all the bears moved away.
So bears are uncivil? I don't think this argument is going where you want it to go.
@CS So, if you buy for one million and borrow at three percent, your interest rate risk is the same as that of someone (at another time but with the same income) who buys for half a million and borrows at six percent.
In either case the same proportionate increase in interest rates will impact the two borrowers in the same way and to the same degree.
Yes, but the chance of rates increasing by 3% is more than the chance of them increasing by 6%. Anyway, I think we both understand the issues, we're just arguing semantics.
We simply don't know and because someone emphatically states their opinion about the future is not going to affect anyone else's opinion in the slightest.
Sure, but convincing argument might change opinions. The reason I'm here is that I can learn and change my opinion based on the posts by people who know more (e.g. patriotz and many others).
Are you referring to me re. the convoluted personal details? If so, I'm a she not a he. :) Surprise!
In any event, they are now linked. A rise in interest rates would mean a huge boost to inflation as people will struggle to pay their debt.
If prices rise, owners won't struggle. In 1980, prices soared higher with ~15% interest rates.
Anybody venture a guess why?
Hint: RE likes Inf > i, RE not like Inf < i
(current Inf less than 1%)
Btw, it's probably better to think about the relationship between inflation and interest rates, the way caveatemptor mentioned.
Dave, back to work!
Urban frogs are commonly hermaphroditic.
So, according to the government, house prices can double nationally but we are still paying the same amount for things.
Today Mish explains how house price inflation affects, or rather doesn't affect, the CPI. He also considers the impact of including house prices in the calculation of the CPI.
Of all the chronically wrong predictions the idea that inflation is about to get out of control is one of the most persistent.
Chronically wrong in the past decade. But then how many people were making this chronically wrong prediction in the last decade?
It has surely been clear enough to most people that globalization created an era of chronic deflation. You know, the cheap stuff from the slave plantations of Asia that has wiped out tens of millions of N. American and European manufacturing jobs. And thene there were the service jobs, Microsoft's New Delhi call center, etc., etc.
"I'm sorry, but are you dense?"
Nobody thinks they are dense.
All I remember thinking was that a few years before, similar properties were selling in the $300,000 or $400,000 range.
In 1879 I was like, That acreage isn't worth a nickel; similar acreages were selling for a penny a few years earlier.
Could this be? an Info style commercial?
I'm sorry, but are you dense? info literally tells his audience to do x and not y because of z. Please show me where totoro does this.
Sorry for the deleted comment. I wanted to correct something.
not to suggest that Totoro is in any way that.
I'm suggesting that koozdra is dense for suggesting that totoro wrote an info-like post.
If inflation is higher, then so are the annual adjustments to wages and salaries.
That has been the case during much of the post-WW2 period, although I do not believe it has been so during the last decade. Globalization has destroyed union bargaining power, e.g., that of the United Auto Workers, outside the government sector. And even public sector wages have been tightly controlled.
The inflation we may experience during the next decade will not likely be out of control, but it will be deliberately engineered with a view to lowering real wages. That is the only way out of the current depression.
The new government in Japan has declared 3% inflation as a target, which is at least 3% more than the current rate. Britain, which has experienced four years of GDP contraction, has just hired Mark Carney as Governor of the BoE, and Carney has been talking the same way as the Japanese government. And in the US, where the economy is now in contraction, Bernanke has promised money printing without limit.
The last major US/Canada inflation occurred toward the end of the Vietnam War, and enabled the US Government to slough off war debts at the expense of holders of US bonds. The War Against Terror has created a similar accumulation of debt, so inflation will solve two problems, mass unemployment and government insolvency. So it seems rash to bet that the US will not go for substantial inflation, and if they do, Canada will surely follow.
Good points made by SJ and DavidL.
People with average means who buy today or bought in the last few years are on a tightrope. The tenor of the comments made by many on this blog reflect that.
House prices over the last decade have outpaced incomes by a huge amount. For the typical buyer that means taking on more debt.
Attitudes towards debt appear to have changed. You can have what you want and you can have it now. Forget the debt total for your house and concentrate on that monthly payment. Forget that interest rates and house prices can vary but the debt is constant. But, doesn't debt = wealth?
Well, if that's the case, maybe a heloc for renos and a few toys. After all, "you're richer than you think" and you deserve it.
I think that most people believe that banks are prudent lenders and that they wouldn't let people borrow huge sums unless they had confidence in their financial situation. So, if the banks are okay with it then it must be okay. Besides, everyone else is doing the same.
This attitude has led Canadians to take on very high levels of personal debt. As a result they are vunerable to minor changes in their personal financial circumstances.
All this has led to a situation where houses appear to be priced to perfection. It won't take too much to change market sentiment. That has already begun. Prices have softened somewhat but I believe we are only at the beginning stage.
Most recent buyers see this, but nonetheless attempt to discredit or minimize all the factors that point to a significant downward slide.
Will this happen? I don't know but I sure wouldn't bet against it.
From the New Yorker: a very short article, In Praise of Inflation
Some highlights:
The best estimates of the cost of inflation find that even a ten-per-cent inflation rate—much higher than anyone is currently pushing for—shrinks consumption by just 0.1 to 0.8 per cent.
[T]he historical record suggests that the risk of three-per-cent inflation turning into hyperinflation is very small.
So why is inflation unpopular? The biggest reason, Shiller found, was simply that people believe higher prices reduce their standard of living and make them “poorer.” This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn’t have much of an effect either way on people’s standard of living. (After all, we’ve had sixty years of inflation in the postwar era, yet we’re much more prosperous than we were in 1950.)
"Chronically wrong in the past decade. But then how many people were making this chronically wrong prediction in the last decade?"
Gold bugs, doomers, Austrian economists and the glibertarian right in the US in general. Failed US vice presidential candidate for one specific high profile example. Peter Schiff is another specific example. Doug Casey has also called higher inflation.
Forget that interest rates and house prices can vary but the debt is constant.
Debt is constant? Then why does my principal owed decrease every two weeks?
Obviously Victoria isn't in a bubble because.... well, just because.
So what are people's feelings about Vancouver. Bubble?
Months end is almost here, very interested to see what average and median prices are...
I'm a she not a he
Sorry for the mistake, Ma'am.
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