Dropping the bomb

In about 3 hours, if you haven't closed on your new home, well, you're literally sh&t out of luck if you can't afford the home you want without using a 35 year amortization and require government-backed mortgage insurance.

You snoozed, you lose-d.

It will soon be March 18th. All the usual pundits claimed that a sales-frenzy would be created by the mortgage rule changes and that spring would come early for the Victoria real estate market.

It didn't. Sales have been ho-hum, averaging about 20% less than this time last year. Sure, we're seeing higher sales volume than in 2009, only marginally so, but that's nothing to be happy about considering 2011 is shaping quickly into the second-lowest sales volume start to a year in the past 10.

If you're left wondering why, you're not alone. Unemployment isn't up. Nor are interest rates. There's no economic calamity. No recession. No impending doom. No riots. No protests. No instability. What could possibly be the issue keeping the Hot Asian Money from buying in Glanford? Why aren't the rich Albertan Oilmen snapping up Bayview and Hudson condos for weekend playgrounds? I thought it was en-vogue for gangsters to buy their goo-mah a Bear Mountain condo so that when they came to golf they never dined alone? And everyone, and by everyone I mean the world's elite wealth who really know what's what and who's up when the rest of us look down, wants to own a prestigious Beach Drive address so they can park their mega yacht in the sheltered bays and snap iPhone shots to tweet out to their legions of adoring fans, don't they?

Oh, wait. It's locals. I forgot. Real estate is always local. It's location, location, location. I guess the locals are exhausted. Or priced out forever. Or maybe they stopped caring. Whatever, they sure have stopped buying. I blame this guy. You should too:

Super Jim made it harder for you to buy a home today. It's too little too late, but damn it Jim, it's still St. Patrick's Day and I'd still like to buy you a beer for the effort. In that short 20 minutes I'll have your ear, I'll convince you to fire them all at the CMHC and privatize that crown corporation to get their gambling off our collective books.

Monday market update

MLS numbers courtesy of the VREB via Marko Juras. These numbers are for the Victoria Real Estate Board's reporting area, including Sooke, Shawnigan Lake and the Gulf Islands.

Month to date March 2011 (last week's numbers in brackets)
Net Unconditional Sales: 266 (119) +147
New Listings: 647 (279) +368
Active Listings: 3,765 (3,638) +127
Weekly sales to new listings ratio: (40%)
Month-to-date sales to new listings ratio: 41% (40%)

March 2010 totals 
Net Unconditional Sales: 789
New Listings: 1,719
Active Listings: 3,712
Sales to new listings ratio: 46%
Sales to active listings ratio: 21% or 4.7 MOI

Despite the relatively high sales to new listings ratio, the true story about current market state in Victoria is being told in the low sales and listings volumes. Active listings volume typically peaks in Victoria in the spring. We're not seeing enough new listings to create significant negative price pressure. Nor are we seeing sales volumes at a level necessary to create upwards price movement.

Things look to be shaping into a dull spring market punctuated by a lack of quality offerings and a dearth of active buyers.

Lies, damned lies and statistics

VancouverCondo.info linked to this disturbing article on the CBC's website today. It's a story about a survey that says Canadians are prepared to weather a housing price collapse -- conveniently they don't define what a housing price collapse looks like, and by they, I mean the RBC which conducted the study to support their business. It's actually quite blatant what they're trying to accomplish when you read the actual press release. Here's the synopsis:

• The vast majority of Canadians (90%) believe in home ownership, you should too
• The vast majority of Canadians (85%) have no trouble paying their mortgages despite record unaffordability and rising interest rates -- so don't worry about it and get yourself in over your head today too
• The major reason why most Canadians are motivated to buy soon is rising home valuations (26%) and rising interest rates (22%) -- they want to buy now before they're priced out forever, very smart folks these, use our handy online calculator
• BCers are most likely to want to buy new rather than used, most likely to buy before they're priced out forever and more prone to group think "buy now, buy now, use RBC, use RBC, buy now, buy now"

So yeah, the RBC release was a bit much in my opinion. But fair enough, we've come to expect this from business, so our spidey senses tingle and we read it for what it is. Note to RBC: in the future, if you want to have your press release turned into a news story without the inconvenience of edits for balance, send a box of chocolates and a bouquet of flowers to the fine folks over at the Times Colonist. They're well trained in the finer aspects of RIGHT CLICK>CUT and RIGHT CLICK>PASTE.

The CBC, well in this case, they did try to inject some balance into the story by using RBC's inconvenient survey contradictions against them. While RBC is currently saying Canadians are having no problems buying and paying for their houses, they didn't ask how the effects of doing so are impacting other important financial activities: like actually saving real money. Thankfully for us, back in October, RBC did ask Canadians that question and thankfully someone at the CBC (likely an industrious intern; they always go above and beyond) Googled for some balance (was that so hard?). Here's what they found:

• 58% of Canadians can't save what they think they ought to
• 38% of Canadians can't save at all

But the intern(?) didn't stop there. Industrious little folks, not content to wait for the established players to retire off and open a career path for them; nope, I tell you, these new-fangled millennial careerists are go-getter's who are going to manage the news desks sooner than the previous generations did; picked up the phone (not likely), or e-mailed (they're tech savvy), CAAMP to get a second opinion! And what did CAAMP tell them?

• "Housing market crash? You're making a big deal out of nothing, there's nothing to see here, we're not like Americans and we didn't load up on mortgage debt over the past decade"
• Only 2000 Canadian households would face foreclosure if interest rates rise
• The Canadian mortgage market expanded by 10% this past decade

There's an old saying: there's lies, damned lies and statistics. In this piece, I've pointed out the lies and those last couple of bullet points are most definitely a damned lie (or it could be a misquote). Here's the statistics:

Does that look like 10% over the past 10 years to you? It's actually more than double. Maybe CAAMP meant 10% per year over the past 10 years?

What about last year when CAAMP told us that 16% of Canadians couldn't weather a $300 increase in mortgage payments and that 11% of Canadians couldn't weather a 1.5% rise in interest rates (source)? That surely will impact households significantly and a great many more than 2000 homes could (will) be forced into foreclosure.

Monday market update

MLS numbers courtesy of the VREB via Marko Juras. These numbers are for the Victoria Real Estate Board's reporting area, including Sooke, Shawnigan Lake and the Gulf Islands.

Month to date March 2011
Net Unconditional Sales: 119
New Listings: 279
Active Listings: 3,638
Sales to new listings ratio: 40%

March 2010 totals 
Net Unconditional Sales: 789
New Listings: 1,719
Active Listings: 3,712
Sales to new listings ratio: 46%
Sales to active listings ratio: 21% or 4.7 MOI

In the last week of February, we witnessed 173 sales. Many people felt February sales volume, especially in the last week, would have been impacted by the snow we had. If that was the case, wouldn't it have made sense, at least a little bit, that sales would have carried over into the following week and caused a "bump"
in the data? If so, that bump wasn't very evident in the first week of March.

I've made some projections for sales and listings volumes for March data which you can see in the following graphs.

 

 

I won't be at all surprised if my March projections are off by 10%-20% when the final numbers come in, especially on the total active listings numbers. It's a steady as she goes kind of first week in March 2011. It's just one week, built on just two months, but I still don't see the kind of sales volume spike we'll need to create any upwards pressure on prices. Of course, to the opposite, I'm not seeing the listings volume pressure building up yet to create significant downwards price pressure either. 

If you're out there shopping, and can't convince yourselves to keep renting, take your time shopping. There's certainly no reason why you should feel compelled to act fast in this market.

Wait or buy: some singular analysis

Interesting discussion in the previous post's comments. Thought I'd try to expand on it a bit with an example I've been working through.

There is, what I think anyway, a great rental property available in the Hillside/Cedar Hill neighbourhood right now. It's listed for $1395 per month. Here's the listing. It's an odd skinny looking place, squished onto an odd lot with little yard space, but it's finished quite nicely and would be suitable for a professional couple or small family. It's only 2 bedrooms, but it's got 2 bathrooms, and at that price point, considering it's the whole house and not a partial suite etc, it's likely appealing to more than a few people. I'm guessing it's likely about 1200 square feet in total.

It also happened to sell in October 2010 for $475,000:

Which gives us a perfect opportunity to run some rent versus own equivalency numbers moving forward for a couple of years. I'm going to use the wait or buy analysis tool that, long-time commentator though MIA for some time, Roger created a couple of years ago. It's the best tool I've seen yet to do a comprehensive analysis easily. I highly recommend it. It's linked to the right under Resource Links.

This first scenario shows rent versus owning with the expectation of a modest 10% price correction playing out over 2 years. It assumes a 20% down payment and a rising interest rate environment, again a modest 2% in fixed terms over two years which is in line with what the banks are talking about.

Even only a modest correction indicates huge savings. Here it is broken down for you dollar for dollar:

 

I know there's more than a few of you skeptical of future devaluation. I get it. Real estate only goes up in Victoria, the boomers are coming, H.A.M. will save us... so I've taken the liberty to show you what will happen if the purchase price remains unchanged (surely no one is going to argue prices will go up much over the next two years right?). 

If it plays out like this, the renter has essentially gambled and lost a cool $3,000. Here's the detailed breakdown of how that might have occurred:

At least the renter still has their savings in the end to offset some of that $3,000 gamble. Which is a far cry different for the folks who buy today, counting on prices staying flat over the next two years, who if wrong, and only a very modest correction of 5% per year for two years plays out, could find themselves a whopping $55,000 down in the hole.

Feel free to mess around with the calculator. You could say that we're 30% overvalued right now (the Bank of Montreal thinks we are) so we'll see that kind of correction in the near term (I'm not personally thinking it will happen, but you can) and then you'll see a massive monetary gain for the patient buyer who waits a couple of years before buying the home they live in from their landlord who is potentially in financial distress. If this little scenario plays out the renter nets $147,000.

You could also easily argue prices rise with inflation for the next two years, so say 6% in two years, in which case the folks who snapped this place up last fall will be $37,000 ahead of the folks who are renting the place from them, despite having subsidized their lifestyles by almost $500 per month for two years.

Things really don't look so bad for the patient buyers these days. Even in a rising interest rate environment, the risk/reward factors are heavily in favour of the folks renting this place. 

Houses and incomes, they correlate, they always have

That's not to say that other factors, like say, rising and falling interest rates, can't also play a factor in home prices. Of course they do.

Long-time readers of HHV may remember this post from April 2009, just about the same time the mini-crash we experienced in the latter half of 2008 and early 2009 was ending, highlighting a TD Economics report that pegged Victoria average home prices to be 18% out of whack when incomes and rents were compared.

In the past couple of days, BMO has released a similar analysis of the Canadian real estate market. Ben over at Financial Insights has some commentary up. And the Financial Post is weighing in too with this piece titled: Housing crisis inevitable if prices outpace incomes.

While the economist at BMO, Sal Guatieri, was quoted, and some of the quotes were juicy purple bear kool-aid, the report can hardly be called a damning indictment of the current market conditions. But let's drink from the fountain anyway OK?

Tighter mortgage rules, which come into effect March 18, along with higher interest rates, lower affordability and elevated household debt, “should keep house prices on a tight leash,”

Emphasis mine. Did you see what bond yields did today? Astonishing (H/T Ben). That's right, if this doesn't drop in a hurry, you better prepare for fixed-term interest rate hikes in short order from the major lenders. Do I hear a full half percent in a 30 day span? Effectively dropping qualifications an additional 7%?

By March 18, when the new mortgage rule changes come into effect, if we see a coincidental interest rate hike, buyers could see their mortgage qualification amount drop substantially. But of course, this won't impact Victoria 'cuz we're on an island and we're insulated.*

Let's get back to the numbers. TD Economics had us pegged at 18% overvalued in 2009. Back then interest rates were roughly what they are today. So what's happened? Well, according to BMO, BC is now 31% overvalued. Considering the Victoria average is oh, 10%-15% higher than the BC average, we might say things are looking downright Saskatchewan-y in Victoria if you buy into the history of price to income ratios.

The margins really are ever so tight right now. I giggle like a school girl every time I hear someone talk about the current situation in comparison to the big market crash Victoria experienced in the early 1980s. They say inflation was rampant back then. They say interest rates jumped to over 20% back then. They say that there is no way interest rates can jump that high again. They say because that can't happen there's no way the same situation can play out in Victoria now.

I say they don't have a clue how interest rates effect payments, markets and qualification amounts. We don't need 20% interest rates to see a monumental reduction in affordability to 1980 crisis levels. Two or three percentage points at today's prices will create the same conditions. Looks like the bond markets are starting to get jumpy with all this risk floating around.

BMO expects interest rates to rise 2% over the next 18 months. If that expectation plays out, say good bye to 30% of your mortgage qualification amount. Best buy now before you're priced out forever.**  

* We are on an island, but that doesn't mean we're insulated, regardless, get ready to hear this meme in overdrive from the usual suspects.

** Yes, this was sarcasm. Extremely sarcastic.

The problem with "evidence"

I've often wondered why the filter that different people use to view the evidence surrounding them can render a picture so different than what others would consider reality.

If you've ever read a political blog, or the comments on a political story on a media website, you'll know exactly what I mean. Heck, for that matter, if you've spent enough time on this blog and read the various comments you've likely caught yourself wonder WTF is that guy thinking? I like to think I've inspired a few of those moments for you readers over the past 4 years myself.

I had a couple WTF moments today that left me scratching my head at just how brain farts thoughts get tossed out as evidence in the world of real estate marketing.

On Twitter today I came across a tweet from what I assume to be a well-regarded, well-known and fairly successful REALTOR®. The guy is, of course, bullish on the Vancouver real estate market where he works. He's likely seen first hand evidence of the Hot Asian Money being thrown around on the west side of town his offices occupy. It's beginning to feel like spring, so of course listings and sales activity is increasing. But this tweet didn't just say "Wow, I'm really getting busy, got 2 offers and 4 showings today." Nope. It said something along the lines of this:

Vancouver real estate market is hot. Listing increased its price today from $1.7M to $2.2M.

Face, meet palm.

There's three things far more logical to connect with a listing price increase than evidence of a hot market:

1. A seller who believes their home should fetch $2.2M instead of $1.7M (despite not selling it for $1.7M yet, in other words... face, meet palm)
2. A REALTOR® who took over a listing renewal by telling the vendor the reason why they hadn't sold their home at a lower price was because they were targeting the wrong market (H.A.M. types don't spend less than $2M in case you didn't know)
3. It's a slow morning, and a not yet two cups of coffee thinking one to boot, so the REALTOR® in question found himself hanging out at StartBucks, iPhone4 in hand, trolling for clients, and thought he'd drum up some high priced listings business by tweeting out to his 2,439* followers (2,429** of which are other REALTORS®) something that may or may not be true and something that the majority of people wouldn't think to question the truthiness of anyway.

Let me bring this a little closer to home. I'm checking out a Facebook page. Over on the right is a link from a REALTOR® promising me access to stats I can't get elsewhere. You can see where this is going: I have an addiction to real estate numbers so, despite my reservations, I clicked the link and ended up on the REALTOR®'s blog. OH, THE HORROR! Here's what I found:

A strong economy drives employment, and employment drives immigration. Of course, these new residents need a place to live! With the recovering world economy and emerging asian markets on a real tear, BC is in a great position to take advantage of the next decade.

Apparently H.A.M. is being tossed around in Fernwood, Fairfield and Oak Bay too, not just the west side of Vancouver and Richmond. But the best part of these "statistics" I received after I clicked the Facebook ad was the link that was offered as their source took me to this story here, a story that doesn't mention Victoria specifically, doesn't talk about immigrants, says BC's unemployment rate is up post-Olympics and that Saskatchewan is the shining light of the West with Saskatoon and Regina growing fast due to their proximity to the economic engines of oil and agriculture.

* I made this number of followers up.
** I made this number up too, but if you're on Twitter and follow REALTORS®, you can be forgiven for thinking this is true.