Saturday, February 28, 2009

Buy vs rent: FTBer condos

Some discussion in the previous post inspired this one.

When calculating buy versus rent ratios, remember to calculate apples to apples and not apples to oranges. It may be difficult to find two granny smiths, but in some cases you can.

Take this example from Craigslist and These aren't the same unit, nor the same building. But they are two similar units in buildings that almost touch in a neighbourhood that would be considered "affordable" for FTBers. So think of it as comparing a granny smith to a golden delicious.

For the renter, it's going to cost them $1100/month, plus utilities.

For the owner, it's going to cost them somewhere in these ranges (assuming 4.5% interest):
  1. Using a 5% down and 35 year mortgage: $939.00 + $196 (actual) strata + $75 (approx) property tax = $1210/month plus utilities
  2. Using a 5% down 25 year mortgage: $1105 + $196 strata + $75 PT = $1376/month plus utilities.
Given these scenarios, I can understand, all things considered, why a FTB couple may be tempted to jump on the ownership bandwagon. Except all things haven't been considered yet.

Condos have lost 26% of their value market-wide in Victoria. Sales to listings ratios are under 10%. Active listings are very high. There is over a year and a half of supply on the market. And more new condo developments will be completing soon, adding even more inventory into the market. Check out the news on Reflections if you want to see what will likely happen, price-impact wise, to the entire condo market in Victoria over the next year or two.

If you rent that Quadra Village condo, your shelter cost will be fixed at $13,200 for the year. If you buy the condo, you will likely lose about 1% per month over the next 12 months or $25,200. You will also not be building any equity in your mortgage because almost the entire amount of your payment is interest, especially if you opted for the 35 year amortization.

My advice for FTBers considering this scenario, hang onto your money, save a bigger down payment, and wait for sales to listings ratios to get much closer. Currently there is 18 months of condo inventory. When there is 4-6 months of condo inventory (MOI) on the market, you will start to see a bottoming out of prices. The question no one can answer right now is: how long will that take? The clues will be found in the sales to active listings ratio, when it creeps up over 60% or so, you can expect to see the MOI number drop fairly quickly.

Even if you can see yourself living in this condo for the next five years, you will gain more by waiting a year, and renting from the guy leaving town, than you will by buying today.

Friday, February 20, 2009

Credit crisis visualized

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

H/T to Tim Ayers for the video link.

Canadians like to say this didn't happen here. We especially like to claim that our banks are the best in the world. And we love, especially if we make money in the real estate industry, to spread the myth that our banks didn't play this game in Canada, that Canadians didn't buy properties they can't afford and that because of these two "facts" we are somehow immune to a Canadian version of these events.

Hogwash. There is absolutely no proof that Canadian banks didn't engage in these behaviours. In fact, there is proof that they did. The difference, it would seem on the surface, is scale.

A friend of mine bought a house last week. She's self employed. She had a down payment, albeit a small one, so she trucked off to a mortgage broker to get a loan. The house she wanted was outside of her qualification range. Because she is self employed, she was using a stated income loan application (no proof of income required). No problem says the broker, we'll just up your income.

Of course she had some misgivings. Enter the REALTOR who explains it's only a temporary miss-statement of income because your income really will go up when you start collecting the rent from the basement suite you're going to build. Fair enough, says my friend.

The broker, the REALTOR and my friend all were complicit in this little work-around to get the deal done. But sole responsibility for the deal rests with my friend. She wanted the house and was willing to do anything to get it. She's aware of the market conditions, but after having just lost her previous house to a relationship breakup, she just couldn't "go back to renting." And the mortgage she bought is not considered a sub-prime product. In fact, it's available, only through a mortgage broker, but is a product underwritten by a Big 5 bank.

We've seen estimates of so called sub-prime lending in Canada at 5%. We're starting to see all kinds of ads for low-interest, interest only and subsidized monthly payments as builders try to liquidate their inventory without dropping sales prices. All of these incentives, incite people to spend money they don't have, to take on debts that leave them hyper-extended, and contribute to Canada's homegrown version of sub-prime. The disease may be called something different, but the symptoms are the same.

Last year the government recognized the toxic nature of 0 down 40 year amortization loans. After a year or so where pretty much 50% of all mortgages sold were "low-down and extended amortization products" the government got rid of only the most toxic. And then promptly bought them from the banks transferring the risk to the taxpayer.

The problem isn't solved in Canada. The same products that existed in the US are still being used today. The big difference here is CMHC insurance. Because the banks have insurance on these deals, they don't typically turn around and sell them. But over the past 6 months, they have. The Government of Canada bought $125 Billion of these toxic debt products from the banks. And the banks in turn have lent out more in the form of credit card debt, low-down mortgages and HELOCs.

All Canadians are on the hook. All of us who pay taxes anyway. Home prices are falling. People are losing their jobs. Some will lose their homes (granted our walk-away laws are very different than the US which should prevent voluntary walk-aways up here).

Any way you try to explain it away, Canada did engage in this same credit swap scheme. The players involved are slightly different and so are the products. But to make the claim that people didn't buy what they couldn't afford using products that leave them perilously close to default is misleading.

Time will tell how bad our credit unwinding will be. But as long as prices continue to plummet, and plummet they are, credit will have to tighten. The scale will be less, but the damage may end up being just as bad. I fear the only true measure of the real problem will be the number of "motivated" sellers we see over the coming years. And like our US cousins, this correction will be played out over years, not months.

Thursday, February 19, 2009

Something stinks

I think it may be this lender's bottom, line.

Alternative lending, the class of lending that added to the mess in the US, and the class of lending that was only supposed to make up 5 per cent of the Canadian mortgage market, which according to Home Capital Group actually makes up 20 per cent, is shoring up the price drops.

No that wasn't an earthquake. It's just me shaking my head.
Confident that buyers are returning, Home Capital has begun tearing down the tighter restrictions it erected in the fall of 2007, as the credit crunch gathered force. "We have cautiously begun lending again," the CEO said.

A price decline in the order of between 12% and 15% year-over-year is Home Capital's tipping point. If the price has fallen within that range, the lender offers mortgages of up to 75% on uninsured mortgages.

Folks, we've heard it all. In January, the talking heads were telling us that activity was picking up. Then the sales numbers didn't support their talking points. Now we've got an alternative lender telling us their relaxed lending rules will build a new floor. Um, OK then.

What happens when you ask a lender who requires proof of income about what's happening out there on the street?

"Our sense is that the Canadian housing market will remain under pressure for most of this year," said Sal Guatieri, a senior economist at BMO Capital Markets.

"It's not just a question of affordability any longer because of lower prices [and] lower mortgage rates. That's not the issue.

"What is the issue is the recession, which appears to be deepening."

Monday, February 16, 2009

Protect yourself

Roger suggested a positive topic at the beginning of the last post in comments:
how to protect yourself and your family in this downturn. Many of us have been through one or more recessions in the past and we could contribute some positive suggestions on what folks can do to weather the storm. Hopefully, this might help some of the readers, many of whom never post but visit the site on a regular basis.
I know what I'm doing: paying off any outstanding debts and minimizing all non-necessary expenditures. Any necessary expenditures I am trying to source locally and attempting to support the little guys who have made positive contributions to our communities. I'm going to leave it at that.

What are you doing? What tips do you have for readers of HHV on how to weather the storm? What do you do to keep your chin up during this period of hyper doom and gloom?

And in case you just want to discuss real estate meltdowns, here's the latest BCREA graph:

Roger added a green line to show you the last time sales were this low and his pink lines show you the speed at which sales are falling off the proverbial cliff. Imagine what this graph would look like if it were adjusted on a per capita basis? Shudder at that thought, eh?

Wednesday, February 11, 2009

So it isn't different here after all

I've been waiting with baited breath while our Vancouver siblings have been witnessing receivership sales and "once-in-a-lifetime" blowouts of pre-sale condo contracts gone sour. I've always thought that our downtown luxury condo market in particular, and the condo market in general, has been the playground of wanna-be Trumps over the past several years. In Vancouver, would be condo-flippers upon learning that the banks wouldn't lend on the agreed upon purchase price in a declining market, simply walked away from sales contracts.

Will we see this now in Victoria?

It should come as no surprise that the TC in their never-ending quest to be late to a real estate market downturn story is now reporting that we're seeing assignment of contract offerings. Here's the highlights, with my cheeky comments below:
Real estate buyers lined up in advance to snap up the best units before they sold out in a matter of hours.

Now some of yesterday's buyers with pre-sale agreements are putting units back on the market before the high-end, steel-and-concrete condominium buildings are completed.

Several units bought as pre-sales have been listed in Greater Victoria real estate advertisements recently.

The question is whether these offerings are the beginning of a trend, spurred by a worsening economy.
Good question. I believe the obvious answer is: ya think?

Let the spin begin:
In one case, a buyer wants a different unit in the same building and in another, the person is moving away from Victoria. Sometimes people are in tight financial situations...
Emphasis mine. Can we assume one buyer needs to spend less money than they originally planned and the second is maybe on the pointy end of job losses?

Bill Ethier, a real estate agent with a listing for an assignment at a downtown condominium said, "I would say there probably appears to be more now because they are not selling as quickly as they did."

Buyers now want to hold onto their property and are prepared to wait until a project is finished. Their attitude is, "I want to go inside and actually touch and feel ... that's kind of where the market is now," he said.

With over 16 months of inventory in the Victoria condo market (new condo supply is much larger, though I can't quote exact figures) and prices approaching 26% less than last year, I'm thinking that may be because buyers don't want to "touch and feel" anything except the cash stuck between mattress and boxspring--if, and this is a big if in a nation with a higher debt to income ratio than the US, it was ever there.

Hold your breathe, obligatory moment of truthiness coming:
someone may have speculated and never planned to live in a unit. A buyer may have placed a downpayment on a unit with the idea of turning it over for a profit before the building is finished. In all these cases, a buyer may wish to seek an assignment to sell their right to buy the unit.
Let's have a little fun with words to uncover the un-spun truth here shall we? Replace the emphasized words above with these ones, in this order: did, did place, plan and must. We get this:
someone did speculate and never planned to live in a unit. A buyer (or more?) did place a downpayment on a unit with the plan of turning it over for a profit before the building is finished. In all these cases, a buyer must seek an assignment to sell their right to buy the unit.
Wasn't so hard now was it? Granted, the TC does need to have interviews to establish what went on, and I'll bet it's really hard to find a presale specuvestor to "own up" publicly to their wanna-be Trumpism right now.
Tony Gioventu, executive director of the Condominium Home Owners' Association, wrote in a recent Times Colonist column. "The current credit crunch has also placed a number of small investors at serious risk as they might be struggling to qualify for financing to complete their sales agreements."
Notice how he doesn't say a "small number of investors" but rather opts to state "a number of small investors"? Will we see blow-out sales and walk away's in Victoria? Time will tell.

I've been doing some digging lately in mortgage contracts I have access to but haven't found an answer to this question yet: Can a bank, after granting financing approval to an individual mortgage holder on a presale agreement or builder mortgage, reappraise the market value and refuse to lend on the agreed upon purchase price? If they can, look out, things will get very ugly very fast in the Victoria new condo market.

Monday, February 9, 2009

Good people are hurting

Consider this a selfish cleansing post if you will.

I have very close ties to the home building/renovation industry in town. People are hurting. It has only just begun. I've heard anecdotal stories of small-scale businesses closing their shops on Friday afternoon and suggesting their employees "not wait for the call-back."

I know of larger scale operations that have work that are running five crews on a job where six months ago they'd have one. No one there is getting laid off. Yet. The work will get done five times as fast and then all five crews will be laid off together, unless the contractors secure more work, which is doubtful.

I've heard stories of frustrated estimators walking away from job bidding processes proclaiming that the winner "will lose money. They have to buy the same materials as we do and there is no way they are even covering their material costs adequately." And that's if they actually get invited to bid. Many are not. In a town of who you know, the who and the know just got exponentially smaller.

Government sent out a memo to all employees this past week to let them know that further announcements were coming. They attempted to dispel the "myth" that there is a hiring freeze right now, which is the first confirmation that there basically is a de facto hiring freeze. There won't be replacements for positions lost to attrition. Twenty percent of deputy ministers and assistant deputy ministers will lose their jobs. Most ministries have ended contractor relationships and frozen any further contracting out. After the budget on February 17th, more details about what the Public Service Agency is going to do will surface (read cut-backs to budgets and auxillary employees contracts terminated).

Real estate bubble bloggers have been targeted with all kinds of rediculous slander over the years: personally I've been called a bitter renter, an angry arguer, a negative nelly... and those are just the nice things. Lately I've seen comments suggesting that we bears who choose to sit and watch from the sidelines are heartless cheerleaders of destruction.

I'm feeling the fear and the frustration of the people I know and trust who are hurting right now. These are good people. They did their jobs: building people's new homes and helping people fix-up their old ones. They were honest and charged fair value for good work. And now the work is drying up fast.

It was reported today that housing starts dropped 47 per cent. That means there is 47 per cent less work for everyone in the construction industry in Victoria. Today. Trades-related employment grew so fast over the past three years, with so many young people entering into the field instead of going to university, that the long-time people I know were astonished. They'd seen it all before. The cycles. The downturns. But the kids haven't. Until now.

Some of them will leave the industry and go to university. Some of them will chase work elsewhere (but with the oil & gas industry basically shutdown in BC and Alberta and housing starts down a whopping 66 per cent in Calgary, there won't be much work to be had).

The people I know are family people. They are long-term Victorians who own properties here. They have bills to pay and mouths to feed. Sure they could sell their houses if it came to that. Most of them will be OK for the short-term. But if this dramatic drop speeds up and falls as far as some of us think it will, I shudder to think of the consequences. And most of the people I know in the construction business are telling me this is nothing like what they saw in the 80s and 90s.

During the party on the way up, we bears were called all kinds of nasty things for having the foresight to be concerned about the events we are starting to see today. Now as the economy shrinks and the wave-effects crash into our little worlds, we bears are smeared with similarly negative statements for having the "gall" to observe the local real estate economy with a healthy dose of analytical education and truth-based commentary, glass half-empty opinions or not.

When I hear about the good people hurting, I feel like I've been punched in the stomach.

If you or anyone you know is in need of some construction related tradespeople, please send me an e-mail and let me know how to put good local people back to work.

Monday, February 2, 2009

January 2009 VREB stats

Found here (H/T omc)[emphasis mine]

Property sales throughout Greater Victoria in the first month of the year got off to a modest start amid continuing concern by buyers and sellers over the economy.

A total of 247 homes and other properties sold in January through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) up slightly from the 239 sales in December. There were 464 sales in January of last year. Last month’s sales were the lowest January sales in over 18 years. There were 3,678 properties available for sale at the end of January. That represents a 22 per cent increase compared to January of last year but a further decline from the 3,824 properties available for sale at the end of December.

Victoria Real Estate Board President, Chris Markham, says the uncertain economic climate continues to have an impact on the local housing market. “It’s clear that many people are holding off on the decision to buy or sell unless they have to and are waiting until they have more confidence both in terms of their personal financial situations and in the market as a whole.” Markham cites the decline in the number of active listings over the past three months as further evidence of a “wait and see” approach among sellers.

The slowing market has also had an impact on prices, especially for single family homes and condominiums. The average price for single family homes sold in Greater Victoria last month was $526,148, down from $548,025 in December. The six-month average was $545,984 and the median price in January was $475,000, down from $507,500 in December. Markham noted that the softening in prices has led to improved affordability, “Forty-two per cent of single family homes last month sold for under $450,000.”

The overall average price for condominiums was $259,742 last month compared to $280,487 in December. The average for the last six months was $297,649. The median price for condominiums in January was $255,000. The average price of all townhomes sold last month was $393,982 up from $389,371 in December. The six month average was $405,718 while the median price in January was substantially lower at $382,500.

MLS® sales last month included 141 single family homes, 62 condominiums, 32 townhomes and five manufactured homes.

Average and median prices both dropped. Prairie Boy's predictions were right on the money, almost to the cents.

I must admit I am surprised to see the number of active listings have dropped month over month, especially considering that new listings account for over 1000 of the 3824 total active listings. The sales to new listings ratio is approximately 24 per cent.

I'm not sure what this will mean for overall price trends at this point, but I'm guessing they will have zero impact at this stage because we still have 15.5 months of inventory. Looking forward to Roger's updated stats analysis and graphs.

More BCREA predictions can be found here.

There is nothing positive for any "true believersTM" to be found in any of these news releases.