Mark 16:15 "... Go into all the world and preach the good news to all creation..."
Is this something that we need to be doing more of? Should we be preaching on the street corner that house prices are too high, that renting is cheaper than buying, that North America's economy is in for a rude awakening? When friends talk about jumping into this market with heavy hearts, I try to tell them that there is no shame in waiting it out. Things will get better. We have to believe that. We have to have faith!
There are many signs out there that things are awry. I love the following sites because they remind me to stay strong.
Irvine Housing Blog's Anatomy of a Credit Bubble
Priced Out Forever's Action Page
Don't Buy Stuff You Can't Afford
Today's housing market is as much out of context as the Scripture above. I do believe that we can have an impact by telling others that high prices and unaffordability are not here to stay. The bottom line is - don't do something foolish out of fear.
Tuesday, May 15, 2007
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74 comments:
You're preaching to the choir.
I've been doing my part to let people know that they won't be priced out forever but they are so bull headed.
My husband says that when their house is all they have people don't like hearing that it is going to go down. You can't make friends that way.
Thank goodness I'm not in it to make friends. Just to give another perspective to the buy now, get in now, prices will never go down rhetoric.
S2
Just going thru the MLS cross section I check every few days and saw that there was roughly a 50% jump in FTB houses listed under $450,000 in the Victoria,East Saanich and Esquimalt areas. Usually since Christmas there is like 5-6 pages,today it is up to 9 within a few days. Why the sudden burst ? Is the US media finally sinking in ? Very interesting.
Yep, maybe some people noticed the 4-alarm fire next door.
I'm astounded that the BC market has managed to levitate for so long. It's been obvious for a year that the US market is in real trouble. And the subprime meltdown was about as subtle as 9/11.
How often in investing do you get such a clear warning to get out? Seems there are a least a few people with sense out there.
I would have to add Patrick's Crash page. I was reading that 3 years ago when nobody in California believed it could end.
The bears seem to be throwing a party there every day now, and the bulls have all but disappeared.
I would have to say that's when I started thinking about all this stuff, long before I got around to making my own web-page on the subject.
You guys have kept me sane. We own a lovely house but need a larger one (I am at home with 4 kids, 4 cats and a dog). My husband and I have been arguing for the past 3 years about getting a larger house and he refuses to sink any more money in real estate in Victoria. He is practical (ex investment banker, Europe and Bay Street) and I am emotional (mother of 4).
Anyway, after hearing all the usual crap such as - property will only keep going up, everyone is moving here, etc. etc. from our RE agent, I wanted to move NOW!!!!! This has caused some pretty nasty arguments.
After finding this blog and reading it for the last couple of months no way would I sink another $400,000 in Victoria Real Estate.
Also does there seem to be more and more blogs about the real estate bubble????? I remember looking a year 1/2 ago due to frustration and never found anything.
??????
It might be interesting to go back and look at the forcasts of the real estate industry before previous housing crashes and the predictions of the Bank of Canada and other high priests of uninterupted growth before the last few recessions.
My guess is they were spinning optimism up to the moment that their world came crashing in. Not surprising for the real estate industry whose job it is to promote the glorious wonders of home ownership but also don't forget that a primary responsibility of the Bank of Canada is to promote "economic stability" and "healthy markets".
Bank of Canada governors have barely hid the fact that part of their mandate is to influence the publics "confidence" in the economy (ie. consumer confidence surveys) and "expectations" about growth and inflation. This takes economics into a truely subjective area that is ripe for manipulation and deception.
What all this means is that you really have to read between the lines when government agencies (which central banks in any country really are) release reports on economic data. Forget the positive spin and rosy forcasts and allow yourself to see the data for what it is.
When I moved here in 2001/02, a good friend who had one of his houses out in Gordon Head up for sale had an electrical fire. Four months later, after the repair, the house sold for 40k more than the offer that fell thru after the fire. Discussing this over a dinner party with my friend, I remember how all of us were so surprised prices could have gone up in such a short time (about 10%)
We are now in 2007, and I believe people are well used to the idea of double digit annual gains. The belief that housing prices will continue to climb is fully entrenched.
I'm not holding my breath for any real price declines in the near future. I'm starting to think maybe it will be next spring or summer before real price declines materialize and are are recogized and talked about in the mainstream media and the wider public.
To be frank, i'm astounded by the stupidity out there, and I believe there is enough of it to keep this thing going and to keep prices rising for a little longer, despite the rising inventory. Opposing views at this little party are not welcome and not listened to. It's pointless saying anything in my experience.
>>My guess is they were spinning >>optimism up to the moment that >>their world came crashing in. >>Not surprising for the real >>estate industry whose job it is >>to promote the glorious wonders >>of home ownership
At some point after it comes crashing down, somebody is going to ask these real estate "experts" why they didn't see it coming.
My guess is that their response will include something along the lines of, "Well, of course we saw the crash coming! We just know that we shouldn't cry 'FIRE' in a burning building, or it will make things a lot worse.!".
>>i'm astounded by the stupidity >>out there, and I believe there >>is enough of it to keep this >>thing going and to keep prices >>rising for a little longer
I'm with you on that one.
And I think that eventually when the Bubble unravels, it will not necessarily mean price reductions. A lot of people on these real estate blogs seem convinced that is the only way the bubble will burst. But an equally effective unravelling of the bubble can occur by price stagnation for a period of multiple years.
Draw a graph of Canada-wide real estate prices over time. The graph will show a nice steady curve, a steady rate of price increases in the past (until 2001) [I only know because I've seen it elsewhere]. This steady curve is the "historical" market appreciation. Project this same curve past 2001 and into the future. Now, plot onto the graph the actual huge jump in prices we've seen from 2001 until now.
The question that needs to be asked is, how does the huge recent jump in the graph revert to the "historical" curve? One way is for the huge jump in the graph to go back down steeply (ie: huge price declines over a rather short timeframe).
Another way, which is not often discussed, if for current prices to go sideways for several years, or increase very slowly, until we are once again on the "historical" price curve.
Either way, I can see no reason why the "historical" price appreciation curve should not be a guideline for what prices should, and will one day again, be.
Another way, which is not often discussed, if for current prices to go sideways for several years, or increase very slowly, until we are once again on the "historical" price curve.
Either way, I can see no reason why the "historical" price appreciation curve should not be a guideline for what prices should, and will one day again, be.
Thats what I would expect to happen. People aren't going to rush to sell their $600k homes for $400k unless they are deeply distressed. But buyers may dry up and they may stay on the market for a long time leading to price stagnation.
As I've said before, you can easily make the plot you are talking about from historical data (like this). The result is that, as of 2006, Victoria was about 13% higher than the historical growth curve for 1978--2000. (I only calculated the historical to 2000 because adding the recent run up would only have made the current prices seem less over-appreciated). I bet we'll see something like 1994 where there is a slight dip in 1995 followed by a stagnation as wages catch up.
Real estate is to a large part about expectation. Nobody in San Francisco expects to buy a detached dwelling of any sort unless they have a huge salary. Here in Victoria, folks still expect to get what they could buy in 2001 when things were greatly undervalued (compared to the historic trend). Now that prices have caught up and overshot the trend, I don't dobt the market will correct back towards the trend. I am just skeptical that it will be a resounding crash.
jmk,
I disagree with some of your points and agree with others. First off, in 2001, no one I knew in this town felt that home prices were "greatly undervalued" compared to anything. Home prices are what they are. In reality, home prices then were closer to fundamentals in terms of 3.5 times earnings as the banks use to determine mortgage qualification levels than they are today.
Also, if you look at the 13% above the normal rate of inflation that you claim in Victoria home prices, how long do you think it will take for home prices to come back to the level of 2001 based on years of "zero real appreciation"? I can't quote you an exact number of years, but I'm guestimating that it is considerably longer than the 7 years of stagflation we experienced in the 90s.
We've seen bigger % jumps in the last 6 years than the early 80s. We've also seen a much longer run of inflation. What we haven't seen is the rediculous inflation numbers in the other consumer markets. But the real gap between inflation and interest rates right now is the same as back in 1982-83: 3%.
All it will take to trigger price drops is a rise in inflation or a rise in interest or both. No one can say when or if those will happen. But if one or the other does, the deck of cards will come a tumblin' down. Who knows how much or how far, but it will, because it always has.
They should rename that old saying to death, taxes and markets.
Draw a graph of Canada-wide real estate prices over time. The graph will show a nice steady curve, a steady rate of price increases in the past
Canada-wide prices are completely bogus. The country has regional markets which are only slightly correlated.
To belabour the obvious, your methodology obscures the big run up and crash in RE in both BC and Alberta in the 1980's, and the equally big crash in Toronto in the 1990's.
People aren't going to rush to sell their $600k homes for $400k unless they are deeply distressed
You're forgetting new supply. Builders are going to keep on building and they are going to sell for whatever the market will offer. Which is exactly what is happening south of the border. Existing owners who try to hold out just see the market price fall and fall.
People who bought Nortel at $90 didn't have to sell, and that didn't keep prices up, did it? You don't understand how markets work. It's not how many people want or need to sell, it's how many people are willing to sell and buy at a given price that sets the market.
And let me point out that somebody always needs to sell, but nobody ever needs to buy.
Good post HHV, we don't even need a massive jump in interest rates, the cost of owning is out of balance and sooner later the balance has to be restored,its the laws of economics.
And we aren't no San Fransico either so that comparison is not valid. People in Frisco were making way higher wages in the tech field the last 10 years and still are.
Psychology is funny thing,when it turns in the real estate market it turns fast and hard and is like trying to stop a frieghter like it did going up the last 7 years. Pretty soon it won't be "cool" to own an overpriced box and be mortgaged to the hilt.
As far as the pros in 81 bragging about how it isnt going to end ,VHB had some great quotes from the Province as the ship was sinking into oblivion. Not sure if anyone managed to copy them. One guy wore it big for his brutally wrong predictions,can't recall his name.
I know someone who just paid close to half a million dollars for a condo here. Looking forward to the equity building up for bigger and better things in the future I was told. This made me very sad.
S2
The other point I meant to make was the media effect when we do start to actually raise rates. It's been so long there has been any significant increases that a two or three quarter point rises in a short time period will set the media on fire putting the heavy negative spin. That will play into peoples heads sooner or later influencing many to bail now or lose out making anything.
In Vegas the forclosures are one out of every two hundred fifty houses (approx.) Think of it in terms of looking around your neighborhood and counting that many houses,doesn't take that long.
My guess is they were spinning optimism up to the moment that their world came crashing in
More than that - they keep spinning optimism all the way down the decline. Lereah in the US has called a bottom for RE 4 times in the last year. And the stock market gurus in the US were calling market bottoms all the way down the 2000-2002 bear market.
And here's a gem for you:
"Residential construction is booming in Vancouver, but there is no appreciable dent in the housing shortage
Both agreed there is not a hope of prices falling and there is a terrific underlying strength to the market.
The house prices have reached a temporary peak, simply because of the limitation of the purchasing power ..."
When? March 4, 1981
Hi HHV: Home prices are what they are. In reality, home prices then were closer to fundamentals in terms of 3.5 times earnings as the banks use to determine mortgage qualification levels than they are today.
There are a lot of things to talk abut in that statement. First, out of curiousity, where do you folks get this 3.5 number? My bank just offered much me much more than 3.5, they offered me what I could carry at 33% salary, which is the number I've always heard.
Second, I don't understand your comparison. How were "home prices closer to fundamentals"? The comparison I have seen people make here is median household income to median SFH price.
if you look at the 13% above the normal rate of inflation that you claim in Victoria home prices, .
I've never said that. The historic trend has outpaced inflation by at least 2% over the last 30 years. Current house prices are 13% above the historic trend. They are way above inflation (180% above!). To get back to inflation prices will have to drop 2/3.
Housing prices across Canada do follow inflation over the long term. But as folks migrate from the country to the urban cores, and in particular to desireable cities (TO, Van, Vic) those cities go up faster than inflation, while the country towns deflate.
I don't deny that prices here may go down and that 10-20% gains are not sustainable. But in the long run I would expect prices to continue to rise faster than inflation by a few percent, for all the pithy reasons you all mockingly quote here: Victoria *is* different than Lethbridge, folks like to retire here, the weather is nice, and they aren't making any more land here.
Patriotz: People who bought Nortel at $90 didn't have to sell, and that didn't keep prices up, did it? You don't understand how markets work.
Patriotz,
I didn't go to Harvard Business school, but I think I can tell the difference between $600k of real estate and $600k of paper that says I own part of an almost-bankrupt company.
Come on JMK,
don't you have a realtor site somewhere that agrees with your point of view better?
The only stat you need to look at is this:
8 X median family incomes.
That is way above the historical trend you mention in your 30 year quote, which by the way, skews the results by increasing the recent run up, which like it or not, coincides with easy al loosening the purse strings south of the border.
That fact is undeniable - a global overavaluation of real estate occurred simultaneously all over the world in the same time frame.
So when the conditions that allowed that to happen end, you would be wise to redo your statistics looking at a period like, say 1978 to 2000, if you want to see where the most likely point is for a retracement.
In Victoria, the target in my mind is this:
$350,000 for a median single family home.
BTW, when these drops happen, they usually happen in the space of 3-4 years at most. You won't know it's happening, until everyone else does, will you?
So when the conditions that allowed that to happen end, you would be wise to redo your statistics looking at a period like, say 1978 to 2000, if you want to see where the most likely point is for a retracement.
Hi Greg,
Thats how I calculated the "historic trend" - it is from 1978-2000.
8 X median family incomes.
That is way above the historical trend you mention in your 30 year quote,
It wold be lots of fun to see some evidence of either of these assertions. i.e. where do you get the 8x number, and what the historical trend of median SFH value to median household income is.
My point is that over the last 30 years it has become harder, in inflation-adjusted dollars, to own a SFH for a median earner. In 1978 dollars a $63k house cost $100k in 2001. I see no reason that longterm trend won't continue, regardless of any shortterm drops.
I know someone who paid 10x their income for their house.
I also overheard someone the other day mention that they almost didn't make their mortgage payment last month.
People are hurting and I don't think it will take much to bring this house of cards down.
S2
jmk,
my bad. when i said this: "if you look at the 13% above the normal rate of inflation that you claim in Victoria home prices" i meant your "historic trend" not CPI inflation numbers.
my soon-to-be-wife, who sells (not many) mortgages for a bank, uses 3.5 times earnings all the time to calculate our qualification levels; this is what they do in their mortgage approvals dept. If you run the numbers they usually come out very close to the 33% gross income calculation you used.
In 2001, when the median family home price in town was slightly less than $250K, that was closer to the 3.5 times earnings (earnings have roughly stayed the same since then) fundamentals than they are today. Greg stated 8 times median income... median SFH is $480K and median income is $60K, then that's what it is: 8 times earnings.
Let's look at it monthly: 25% down, at 5.25% interest over 25 years = monthly mortgage payment of $2150. $60K median household income gives you $5K gross per month. That payment = 43% of your gross income, a full 10% above the fundamentals. Smart money would likely base the calculations on net income so that you build in some safety into your finances.
Any way you look at it, house prices have de-coupled from incomes here. We are not San Diego, Arizona or Florida (the real retirement places and leaders of the bust) so it isn't different here.
Also if you believe that they just don't make land here anymore: do a mls search for vacant lots in the CRD. There is plenty of land available here.
Hi HHV
Thanks - a few points.
Median household income is $72k.
Second, we were just approved for a mortgage at 4.1 times our income. That was not counting our downpayment, which would have made our purchase 5.2 times income, assuming we maxed out (we didn't). Our lender was one of the major banks, so I assume they have an economist on staff somewhere.
Third, the median hosuehold should not necessarily be able to afford the median SFH. 30% of households rent. 50% of the owners market is condos or townhouses, most of which are cheaper than SFHs. You are equating two medians that have no reason to line up. I would fully expect the median houshold to live in a less-than-median SFH. Anytime the median family could afford a median SFH, I would consider that to be the anomaly.
As for vacant lots, I'm sure those are available in parts of town where most of the houses are substantially sub-median as well. I don't see a lot of empty lots in the core.
jmk -
rather than reply here, I am doing so on my site. Of course, I think I can provide sources that back up my comments, but I will do that over there.
hhv, thanks for your post, but you have to realize jmk has a reason for being here other than a disbelief in current housing prices - he supposedly owns a home, and if it was purchased say at median or greater with only 4.1 times earnings, he is trumpeting family earnings over $150,000 per year.
In other words, he has no idea what is going on with the finances of the majoriy of the population of Victoria. As well, he has no understanding that the elimination of first time buyers that is occurring, will spell doom for this market - it just takes a couple years, then it will be impossible to ignore. You dealt a bit with this in your own post about whether the so-called experts ignore the negative economic news until it is obvious, out of self-interest.
I suspect jmkl has vested interests in the housing market, and is at this blog to perpetuate the greater fool theory, until the last sucker buys in.
Even if that is not the case, he obviously feels a need to come on this blog to convince us, and by extension, himself, that he didn't pay too much.
We'll see who's right about that one soon enough.
Just my $.02.
In 1978 dollars a $63k house cost $100k in 2001. I see no reason that longterm trend won't continue, regardless of any shortterm drops.
Um, how about real wages have been flat over that period, and show no prospect of increasing in the future. You really think the % of workers who can afford to buy a house can drop to zero in the long run? Just who is supposed to be buying houses, and renting them out at a loss, in such a scenario?
I could also point out that the trend has halted or reversed itself everywhere south of the border, but I guess we're not supposed to talk about the US because it's different here.
Hi Greg,
You are making it sound like I am interloping on a private party. I'm just trying to stimulate discussion by offerring the point of view of someone who doesn't consider himself an idiot and has most of the data, and who bought anyways.
and if it was purchased say at median or greater with only 4.1 times earnings, he is trumpeting family earnings over $150,000 per year.
Wow, median homes are now $615k?!? That is terrible.
Seriously: First, I never said I bought a median SFH: half of SFHs are cheaper than median. Second, I said the mortgage was for 4.2 times earnings, not the maximum possible purchase price which was 5.2 times. Finaly, even if I had been approved at median, 5.2*earnings on a $480k median house implies trumpeting a $96k household salary, not $150k.
Hi Patriotz,
Um, how about real wages have been flat over that period, and show no prospect of increasing in the future. You really think the % of workers who can afford to buy a house can drop to zero in the long run?
Yes. Eventually, zero workers will be able to afford a SFH in any growing urban area.
Two words for you: densification and gentrification. The downtown core becomes too expensive to own an SFH, investors buy the properties tear them down and increase the density. Or real rich people buy them. The densification spreads out into the suburbs as prices increase there. An SFH in the same geographic area goes through the roof, but the price of an appartment condo remains doable. If you don't want to live in an appartment, you commute from the suburbs. Why do you think folks have 2-h commutes in the North East US? Beacuse they like spending 4-h a day in a car or train?
I'm not saying we are near that point in Victoria. But the trend is there. Could it stop and reverse? Sure, just look at Detroit or Montreal. But I think it will continue, plus or minus some market fluctuations.
I didn't go to Harvard Business school, but I think I can tell the difference between $600k of real estate and $600k of paper that says I own part of an almost-bankrupt company.
Since you can't see the forest for the trees, I will point out the forest for you.
Your argument, in a nutshell, is that the unwillingness of some assetholders to sell at a loss is sufficient to prevent a market decline.
Never mind theory. The evidence itself shows that your argument is absurd. Every market has assetholders who are unwilling to sell, and all of them suffer declines.
Even if every single homeowner wouldn't sell - and we know that's never true - new stock from builders would have to sell at a price buyers are willing and able to pay and this would set the market price for all owners.
Buyers always set the market price for RE, because as I have pointed out, somebody always has to sell, but nobody has to buy.
jmk -
if you actually ever gave specifics, instead of attacking statistics, it would be easier to take you seriously, but seriously, divide $568,000 by 4.1 and voila $138,000.
Since you neglect to tell us how much the house cost or how much you earn, coming back on here and attacking my guesstimate is more obfuscation.
Besides, if you don't like having your views challenged, you ad better find a more agreeable tea party.
but since you are here for work related reasons, not pleasure, I suppose that would be expecting something that won't happen...
jmk -
I'm glad you don't feel you are an idiot, but if prices do go down, and you stick around, don't complain later if I say "told you so".
The beauty of the bear position at this point is, there is nothing to lose - unless you are seriously going to argue for even higher prices next year - ummm, check back in a year please on that one...
Interesting debate.
First of all, I am an unapologetic bear as far as both the housing market and the economy (domestic and global). But, lets put a bit of realism back into a discussion that is beginning to take on the trappings of a fundamentallist rally.
Yes I have no doubt there will be a correction in this market. The only period in the last 45 years (the period for which I could find local data - by emailing VRB) that there was not a correction after a boom was during the early 1960s to the latter 1970s (the data shows levelling off but no significant periods of decline). This, not surprisingly, was during a parallel boom in real wages and at a time when unionization rates were relatively high (love em or hate em, high unionization rates coincided with high growth in real wages).
Since the late 1970s there have been two corrections and both corrections coincided with (they were North American wide, so they may have actually initiated) recessions. These corrections also occured during what has now been a two decades long period of stagnating growth in real incomes.
On the other hand, so have the past two housing booms (this one and the one from the late 1980s to the early 1990s) occured during the same period of stagnating real incomes.
So what does this all mean? I believe that over the short term real incomes put a constraint on the growth in house prices and that "expectations" of future prices, the severity of recessions and the degree of "panic", just like in equity markets, determine how far house prices will fall. In the long-term I believe that unless there is permanent economic stagnation and depopulation (see Detroit, Montreal), population pressures will push up prices. In Victoria, a town with a somewhat deversified service economy, I believe that in the long-term population growth will push up prices, not to the moon but still upward.
So if you buy now and hold on to your house for 10+ years you will make some money off it (maybe not as much as in other investments but hey, you can't live in a mutual fund). If you buy now and need to sell in 5, my bet is you are going to be sorry.
Jmk, Greg, Patriotz, for all the debating I don't think you are fundamentally very far off each other's thoughts.
Correct me if I'm wrong, but you all DO agree the the market is due for a correction.
Your main focus of disagreement seems to be whether the correction will come in the form of prices that go down, or prices that go sideways for an extended time.
My response to that disagreement is, "Who cares?"
If prices go sideways, Great! In that case, be ready to buy when you think prices are at historical norms again.
If prices start to go down, Great! In that case too, be ready to buy when you think prices are at historical norms again.
anonymous 1:55pm
>>So if you buy now and hold on to >>your house for 10+ years you >>will make some money off it
In 10 years baby boomers will be averaging just under 60 years old. Unless they are different from other 60-year-olds I have known, a fair number of them will be eager to downsize from a home to a condo/apartment as they prepare for retirement.
I don't see how this can bode well for SFH prices (although having a condo at the time may be good).
Maybe your prediction works better for holding a home for 20 years?
Hi Greg,
if you actually ever gave specifics, instead of attacking statistics, it would be easier to take you seriously, but seriously, divide $568,000 by 4.1 and voila $138,000.
You have confused the median and mean. The median in $489k ($480k for all Van Isle and the gulf islands, which is the number hhv was using).
jmk -
my mistake, however, the fact I labeled median and average incorrectly doesn't improve the stat, as I was comparing to the average price anyway, as you should be aware...
Your selective replies and obfuscation are classic evidence of your housing bull status.
Correct me if I'm wrong, but you all DO agree the the market is due for a correction.
Sure, but I have no idea when it will be. Could be tomorrow, could be in two years, could be never. In the meantime, I don't feel like paying rent. I also think that the odds of losing money over the next 10 years (even compared to lost opportunity costs) are pretty low. So, I chose option three and bought now.
Hi Greg,
OK, I'll bite. What did I obfuscate? Hopefully it is just an honest misunderstanding because I try to be as clear as possible.
In the long-term I believe that unless there is permanent economic stagnation and depopulation (see Detroit, Montreal), population pressures will push up prices.
Why? Ottawa is several times bigger than Victoria and has higher median incomes. So why is it so much cheaper? Why is Victoria as expensive as Toronto, which is way bigger, has higher incomes, and growing much faster?
That's the real issue - why is Victoria so out of whack with cities that have higher incomes and are growing.
And I will note that everywhere in North America, for centuries, house prices have tracked real incomes. Until 2001 or so.
So if you buy now and hold on to your house for 10+ years you will make some money off it
You're forgetting the holding costs of the house. If you're paying 2x rent in interest+taxes+insurance+maintenance, that extra money is an operating loss, and much be subtracted from any capital gains to get a total return.
Indeed, in a scenario where rents stay at 1/2 holding costs in the long term, you are better off never buying. Why is why prices have to correct to rents eventually.
patriotz said
Ottawa is several times bigger than Victoria and has higher median incomes. So why is it so much cheaper? Why is Victoria as expensive as Toronto, which is way bigger, has higher incomes, and growing much faster?
My point wasn't to explain the growth in house prices compared to other cities, only to suggest that, over the long term I believe house prices will rise in Victoria as population rises and as incomes continue to concentrate (as they have been for the last 25 years). Are house prices in Victoria presently "overpriced"? I would say yes. Are we do for a correction. Absolutely.
And I will note that everywhere in North America, for centuries, house prices have tracked real incomes. Until 2001 or so.
Not true. Between 1989 and 1994 real per capital incomes in BC fell over 3% while house prices rose over 66%.
The long-term trend in North America since the 1970s has been that house prices over the long-term have de-linked with real incomes. This is a disturbing trend that many on the right have ignored. The fact is, North America is becoming more like the rest of the world where property ownership is an exclusive privilidge of the very wealthy. In the short term I believe we will see a correction but don't count on prices returning to pre-2001 levels and in the long run, they will continue to rise beyond the reach of the average (or even the modestly wealthy) citizen.
If this sounds difficult to believe then take a trip down to places south of the boarder. Yes there is a correction (and likely a recession) in the US. But the long term trend in places like California has been the creation of a huge underclass of working people unable to even fathom owning a home. And I'm not talking here about some mythical Marxist-type proletariot. I'm talking about skilled workers, such as computer animators and programmers.
Indeed, in a scenario where rents stay at 1/2 holding costs in the long term, you are better off never buying. Why is why prices have to correct to rents eventually.
Take a closer look at rents in Victoria (or Vancouver or San Francisco) patriotz. Rents are also becoming more and more expensive. Yes you can move to crappier and crappier apartments. Just like you can eat crappier and crappier food (see the link on this site to the article about the how the cpi is manipulated by switching expensive items to crappier, cheaper items). But in the end you are worse off.
I went to a party in a suburb outside San Fransisco last year and spoke with many of my brothers colleages who were more than eager to spread the word about the new reality. Computer gamers, new lawyers, web designers living in overpriced apartments with no hope of home ownership anywhere within 100 miles of the city. And this was long after the dot com bust.
So in the short term, sure, hold on to your $$$ and hope for a bit of a reprieve. In the long-term, well get used to seeing your landlord once a month.
Hi Patriotz
Ottawa is several times bigger than Victoria and has higher median incomes. So why is it so much cheaper? Why is Victoria as expensive as Toronto, which is way bigger, has higher incomes, and growing much faster?
Maybe people in Victoria are more stupid than people in Ottawa. Or maybe people are willing to pay a premium to live somewhere that doesn't suffer -40C winters surrounded by beautiful mountains and water?
And I will note that everywhere in North America, for centuries, house prices have tracked real incomes. Until 2001 or so.
Everywhere? Sounds like an interesting hypothesis. However, in Victoria, prices have not followed inflation. Perhaps wages have risen faster than inflation here too.
If you're paying 2x rent in interest+taxes+insurance+maintenance, that extra money is an operating loss, and much be subtracted from any capital gains to get a total return.
If you can find rent for that little, then yes, you should rent. I don't doubt there are some deals out there. However, as a concrete example, the condo we were in before buying was assessed at $324k. Carrying costs, assuming you have 25% down, are $22.4k (5.2% interest, 1% maintenance/fees, 0.05%taxes). We were paying rent at $1400 a month. Sound high? Maybe, but when we moved out it rented within a week, midmonth, so I guess it was pretty close to market. So thats $16.8k a year to rent, or 1.3 times carrying costs.
If we'd bought that place would we have made money the first year? No. We'd have paid the bank $12.5k in interest, and the other costs are $5k, so it would cost $700 more to buy than own that place for the first year, irrespective of what any markets are doing.
Ah, but the very next year (year two), the interest payments drop and more of the money goes into principal, and voila, you are ahead ($450). Add in inflation at 3%, and you are ahead $700. The differences become huge by the time you are 10 years into this game (you come out ahead by $9k a year for this example).
After that, whether you should rent or buy depends on the relative strength of the two markets.
I admit this is a flimsy anecdote, but I don't know any way of gathering the statistics. I'm sure others here are renting far cheaper and that is why they don't own.
The long-term trend in North America since the 1970s has been that house prices over the long-term have de-linked with real incomes.
When you say this, what do you mean by "real incomes"? Household or individual? One thing I can think of that would drive prices up since the 70s is the ascendency of 2-earner households. That would allow prices to rise out of step with inflation and individual salaries. (Though I guess you'd think inflation would go up with more workers in the workforce as well).
Most of Calfornia is an excellent example of folks being priced out of the housing market. One of the reasons I had no psychological barrier to buying here was that we moved from San Diego where we had an opportunity to stay. We'd have been living in a shoe box there.
Oh I get it, you're an american from San Diego, desperate to justify the deal you got after selling there and buying here...
Check this out, shoeboxes are getting a lot cheaper in San Diego.
But that would be just stupid, to wait until blood is on the floor before buying, right? Because that extra year of paying interest is so worth it, versus the tens of thousands of dollars of principal saved by waiting for prices to start crashing - right now, in San Diego - check out the reality here. Oh yeah, that's January, try this for April.
jmk said
One thing I can think of that would drive prices up since the 70s is the ascendency of 2-earner households. That would allow prices to rise out of step with inflation and individual salaries.
Actually real family incomes fell about 5% between 1990 and 1994 and have only risen 5% between 1990 and 2006. This would hardly be a force behind either of the last 2 housing booms.
Loose monetary policy, in the form of historically low interest rates and less stringent standards for credit have made mortgages more available and (in the short-term) more affordable. And as any good economist will tell you, loose monetary policy is always inflationary. And in the long-run, higher inflation always leads to higher "inflation expectations" and ultimately higher interest rates...and ultimately a correction in the housing market.
The Bank of Canada and the US Federal Reserve have been playing fast and loose with cpi numbers over the last couple of years in a silly attempt to influence "inflation expectations". But removing gas and house prices from "core inflation" numbers doesn't make runaway inflation in gas and house prices go away.
FOI:
I would recommend reading the link on this blog site to the article "Anatomy of a Credit Bubble". Loose monetary policy (either at a federal level or at the level of individual financial institutions) is almost always followed by a reactionary tightning of money (either federally or at the individual banks).
Actually, as the article nicely points out, regardless of the monetary policy of the central bank, when private banks decide it is no longer profitable to lend money to potential home buyers, either because home equity is no longer rising or because job losses are rising or both, then credit will tighten and demand for houses will fall.
All this talk of long term trends toward only the wealthy owning homes, etc. is misguided. Home prices shot up after 2001 in many cities across the world. It's important to recognize that there is no demographic explanation for this. The only reasonable explanation (ie, one that takes account of the global nature of this occurrence) is that it is directly linked to central banks dropping money from helicopters to stave off a recession in the wake of the tech bust and 9/11. The strategy worked, but it also created absurd levels of asset inflation. All that liquidity had to go somewhere, and one of the places it went was into housing. It's a classic credit bubble. It has happened before, and this one will end the same way the others did: sooner or later, something (likely a shift in global currency flows) will end the cycle of lend and spend, the excess liquidity will dry up, and the party will be over.
jmk,
"Carrying costs, assuming you have 25% down, are $22.4k (5.2% interest, 1% maintenance/fees, 0.05%taxes). We were paying rent at $1400 a month. Sound high? Maybe, but when we moved out it rented within a week, midmonth, so I guess it was pretty close to market. So thats $16.8k a year to rent, or 1.3 times carrying costs."
Those numbers are a bit off aren't they? Shouldn't the $16.8K be read as 0.75 times carrying costs? When you base the rest of your math on that number, it changes both the amounts and the length of time it would take for you to achieve the kinds of mediocre gains you describe.
As for us, as long as a landlord is willing to subsidize my cost of living by offering me a good space at less than 75% of what it would cost us to own, and the stock market continues to outperform the RE market, we'll rent in this town.
Maybe landlords will jack up their rents? Maybe house prices will come down?
I have always stated that if you purchase a place now within the "old" rules of mortgages (25% down, 25 year amortization, 33% of net income, 3.5 times annual income) you will be fine because you can afford it. If you're happy in it and can weather out any downturns in the market, you'll do well long term. The situation you describe is similar to that, so good luck to you.
Tried to post this twice now,wouldnt take for some reason.
Looks like interest rates are headed up and maybe more than one hike. Lets see about that negative media frenzy prediction I made, I am sure many are now re-evaluating their borrowing options.
The retail sales report, which “blew off the roof,” coupled with Thursday's CPI report, suggests there is “more excess demand” than the central bank had anticipated just a few weeks ago. “We now expect that the Bank of Canada will be raising interest rates sooner rather than later, with the first rate increase occurring in July,” Ms. Douglas said.
http://www.reportonbusiness.com/servlet/story/RTGAM.20070518.wretailsales0518/BNStory/Business/home
From Today's Times-Colonist:
"B.C. house sales rebound from sub-2005 numbers
Carla Wilson, Times Colonist
Published: Friday, May 18, 2007
Hold on -- B.C.'s housing market is throwing big numbers at us again.
Last month, 9,677 homes sold in B.C., a rebound after 10 months of sales running below 2005 numbers, and up 5.2 per cent from April 2006.
The total value of all B.C. sales last month moved to $4.2 billion, up 17 per cent from April 2006.
Jennifer Lynch, Vancouver Island Real Estate Board (VIREB) president, is upping her forecast for this year, predicting prices will rise 11 to 14 per cent, rather than the eight to nine per cent she'd figured on in January.
"While I don't think it is going to be a record-breaking year in unit sales, I think it is going to be very close," Lynch said yesterday.
And as far as Lynch is concerned, there's a trend happening on the Island. "We are going to have a really good market at least for the next four years." At some point, it could stabilize, "But I don't think we will see prices go down. I think we are in for a good, long haul."
The average sale price of all types of homes on in the VIREB region (north of Greater Victoria) was $321,060 last month. That's up 11 per cent from April 2006. A total of 573 residential properties sold last month, up 17 per cent from the previous April.
WestJet flights between Calgary and Edmonton and the Comox Valley are delivering Alberta shoppers.
"This allows for the purchase of secondary retirement homes," Lynch said. "While the traditional family 'cottage' or 'getaway' was a three-to-four drive outside the city, the ease of taking a 90-minute flight has become a very popular way to expose people to the West Coast landscape."
Baby boomers are looking for good-quality homes and a lifestyle change, she said. "We are really only seeing the tip of the iceberg in buying."
The story's similar in Greater Victoria, where a new record of $568,710 was set last month for the average price for a single-family home, although the median price came in lower at $489,000.
This region's total number of sales rose to 898 in April, higher by 15 per cent than April 2006.
Greater Victoria also saw a 12.9 per cent boost in the value of sales, totalling $1.2 billion to the end of April this year compared with the same four months in 2006.
So far this year for B.C., the total value of sales rose by 8.6 per cent to $13.4 billion compared with the same period last year. However, the total number of homes sold in the first four months of this year was down 2.7 per cent from the same months in 2006.
The market remains strong as the average price of all types of homes in this province moved up 11 per cent to $431,945 last month from April 2006.
"B.C. home sales rebounded in April after declining for 10 consecutive months," said Cameron Muir, chief economist for the B.C. Real Estate Association. "A 25 per cent increase in the number of homes for sale and favourable labour market conditions are contributing factors."
B.C.'s strong economy reinforces the demand for housing, he said, but affordability remains an issue for many.
"While April's performance is notable, it will take a few more months of increasing home sales to consider demand on an upswing."
S2
From today's Vancouver Sun:
"Helping the kids buy a home requires a bit of figuring
Cashing in RSPs is 'an ugly way to do it' because of the tax burden, planner says
Fiona Anderson, Vancouver Sun
Published: Friday, May 18, 2007
Kent Curley figures he's a typical retired dad. He's got a good pension, his house is mortgage-free and he's got some savings to boot. Now what he'd really like to do -- besides putter in the garden and on the golf course -- is help his son buy a home.
Curley's son has two young children of his own and while he has a steady job and is pre-approved for a mortgage, he doesn't have enough for a down payment to get into the Lower Mainland's sizzling real estate market. And with prices rising as they are, Curley figures a lot of retired parents are in the same situation he is, comfortably retired yet watching their children struggle.
"You want to be able to help them," Curley said.
Kent Curley is retired and enjoying the good life -- which includes plenty of gardening -- but would also like to help his son buy into the housing market.
Ian Smith, Vancouver Sun
But at the same time, Curley wants to make sure he helps in a way that doesn't hurt himself.
"I don't need that money," Curley said. "I would like to use it but I don't want to incur a lot of penalty. And I want to be able to leave something."
Adrian Mastracci, portfolio manager with KCM Wealth Management, says helping children financially is one of the top concerns of his retired clients, whether it's to help them buy a house, start a business or just get out of debt.
With people living longer "it's a question that's on the minds of many," Mastracci said. "How can I help them now as opposed to waiting 30 years?"
The Vancouver Sun set Curley up with certified financial planner Michael Thorne of North Vancouver. As a planner certified by the Financial Standards Planning Council, Thorne has training in all aspects of personal finance, including investing, estate planning, tax and insurance.
Thorne called it a no-brainer for flush parents to help out their kids.
"But when it gets down to the nuts and bolts on how to do it, it gets interesting," Thorne said
The best source of money is cash in the bank because it wouldn't trigger any tax consequences, Thorne said.
But that's not an option in Curley's case. His three choices are taking money out of his registered retirement savings plan, taking money out of his non-registered account or using the equity in his house, Thorne said.
Taking money out of an RSP is "an ugly way to do it" because the tax could be as much as 43.7 per cent, the top tax rate in B.C. So to provide a $100,000 gift to his son, Curley would have to withdraw about $175,000, which could seriously deplete his RSP.
The increase in income for the year the money is withdrawn could also lead to other consequences, like a clawback of Curley's old age pension, Thorne said. "So taking it out of an RSP is not the way to go," Thorne said.
If Curley has sufficient money in a non-registered account, he may want to consider using that instead, though it too would have tax consequences. While the money would not be considered income, it would trigger capital gains tax if the investments have increased in value. Only 50 per cent of gains are subject to tax, but that could still be a big chunk of change if the securities have gone up significantly, which is often the case when they have been held for a long time.
Mutual funds may also have deferred sales charges or other fees that have to be paid when they are redeemed.
So again, more than $100,000 would likely have to be withdrawn to yield an equivalent down payment, although how much more would depend on the particular holdings.
A third alternative is using the equity in Curley's house, either by remortgaging or taking out a line of credit secured by the house, Thorne said. Money could then be taken out of the RSP or the non-registered investments as needed to make the principal payments with the son paying the interest.
Mandy Wu, a portfolio manager with RBC Dominion Securities and a chartered accountant, says Curley should sit down with an accountant to actually crunch the numbers to determine which suits his needs best. He should also talk to his investment adviser about the upside of the investments he currently holds to ensure he sells the ones that are likely to underperform. And after he determines what to do, he has to make sure he rebalances his portfolio so that he's properly diversified, Wu said.
And all that is just to determine where the money should come from. Curley then may want to think about how to give the money, whether as a gift, a loan or perhaps through a co-ownership agreement on a house, Thorne said. And then see a lawyer to put the necessary paperwork in place.
So while it seems like a "no-brainer" to want to help your children, how to do it can get complicated."
S2
"B.C.'s strong economy reinforces the demand for housing, he said, but affordability remains an issue for many."
And many more who are on the bubble of qualifying will be shut out in the next few months which will hurt sales not increase them.
Of course there will be the mantra of "buy now before higher interst rates shut you out forever". This has been a bomb waiting to go off and I think the fuse has been now lit.
On a side note, my significant other was talking to an agent the other day who adamantly admitted that prices are way too high but the mantra the companies are telling the agents is prices are going up. In other words if you believe they are overpriced or going down you better go work for someone else if you can't tow the company line. Sounds like 1981 all over again,higher interest rates and higher inflation = crash.
>>"buy now before higher interst >>rates shut you out forever"
The low-interest-rate carrot is not all that much of an incentive, when you look at it closely.
Low interest rates is a main reason that prices are so high. As the rates have come down, Joe Sixpack has been able to afford a larger mortgage, and prices have gone up. Simple Supply & Demand. Prices adjust with interest, in equilibrium.
The same must happen in reverse, just like in the early 80's. As interest rates go up, prices will have to come down.
For all the recent cheering and pressure to buy before interest rates go up, I would personally rather buy a house at the top of the interest rate cycle. Why?
(1)As interest rates come down, I can renogotiate my mortgage and make lower monthly payments (consider the other way: as interest rates rise, not only did I pay the highest price for my home, but when I renogotiate my 5-year-mortgage I end up paying high interest rates anyways)
(2)As interest rates come down, if I ever need to sell my property I can rest assured that it is worth more than I bought it for. If you are buying another home, this doensn't matter so much, but -hey- there may be reasons you have to go back to renting.
(3)My down payment pays off a bigger chunk of the home to start off with.
Really, the "low-interest" frenzy and panic is a bit of a scam ("Oh my God! You HAVE to buy now!").
Don't people realize that as interest rates rise their homes will be worth less? Don't people realize that as interest rates rise, and their 5-year-mortgage ends, they will be stuck with having paid the highest prices, and then higher interest rates on top of that, on a home that is worth less?
Nuh-uh. No thanks.
Hey, where's jmk today?
Must be out driving eager Alberta boomers around to showings of luxury condos and townhouses.
About the second article, S2 posted: watching CTV Newsnet this morning during breakfast, I noticed the CHIP ad ("Wouldn't it be nice...") now suggests one reason to get a reverse mortgage is to "help your kids get their own house." (Image of grateful young adult getting a presumably fat cheque from Mom & Dad.) Great! Burn off that inheritance for an overpriced home today!
Ever see episode of "The Simpsons" where Homer recalls asking Grandpa for financial help buying a house? Grandpa reluctantly agrees to sell his own house and a broken-up Homer tearily says to his Dad that he'd be honored to have his father live with him. The scene cuts to the present and Bart says "How long did that last? Three weeks?" and there is EXTENDED gut-busting laughter from the entire family.
"Hey, where's jmk today?
Must be out driving eager Alberta boomers around to showings of luxury condos and townhouses. '
LOL....most likely down at the bank when it opened to lock in the mortgage interest rate for 40 years. ;)
Or out working to earn the money to pay his mortgage.
Facing the Housing Mess
by Terry Savage
Friday, May 18, 2007provided by
Alan Greenspan said he was "puzzled" about why the subprime mortgage mess hadn't had a greater impact on the economy.
That was last month.
The latest economic data show that indeed the combined crunch of higher mortgage payments and higher energy prices are sapping the sales of companies ranging from WalMart to Liz Claiborne to General Motors. Overall economic growth for the first quarter was an anemic 1.3%.
Clearly, the mortgage mess impacts all homeowners, even indirectly. If the house down the block is sold at a foreclosure auction, how much is your home worth? The thought is chilling for millions of Americans who count their home as their most important asset -- both financially and psychologically.
More from TheStreet.com:
• Don't Be Afraid to Ask for a Better Deal
• New Orleans: Rebuilding a Cultural Economy
• Permit Data Bolsters Builders
How bad can things get? How far can home prices fall? It depends on which economist you ask. Months ago, Robert Z. Aliber, retired University of Chicago economics professor, told me home prices would drop 30%. The forecast was so shocking that I hesitated to print it.
The latest gloomy forecast -- backed up by compelling data -- comes from A. Gary Shilling, frequently bearish but even more frequently correct. To be blunt, Shilling is forecasting a drop of 40% to 50% in home prices in the more overpriced areas such as California, Florida and Las Vegas or downtown condo markets. And the ordinary homeowner, he says, could see a decline of 10% to 15% in the value of a suburban home.
Shilling's forecast is based on the historic value of homes, adjusted for what he calls the "McMansion effect" of today's larger homes being worth more. Using historical data compiled by Robert Shiller, he says that home prices would have to drop 45% to get back to their historic normal levels.
Existing-home prices peaked in October 2005 and are down about 4% on a national basis through March 2007. But Shilling says the worst is yet to come, because he estimates that it takes about 18 months from when home prices first start to slide for homeowners to recognize that this is not a fleeting blip. Now the "interval of denial" is about over, and homeowners will start realizing that if they want to sell, they'll have to cut prices, says Shilling. But actual recorded sales at lower prices will take a few more months to show up in statistics.
Even worse, Shilling says there is no way this problem can be confined to the housing market. He estimated that overbuilding has resulted in at least 2 million "excess" homes -- a factor that will depress not only homebuilding but related industries as well in the coming years. Already, housing starts have fallen 33% from their peak of 2.265 million in January 2006, to 1.518 million in March. Shilling predicts an additional 25% decline in housing starts and says there is no way that capital spending by businesses can pick up the slack. Ugh!
It's a good thing there's a contrary opinion on this subject. Economist Brian Wesbury takes an opposite viewpoint. He points out that the housing industry has fallen victim to the Fed's 17 consecutive rate hikes (before the recent period of stability, which the Fed said Wednesday would continue).
Wesbury contends that "absurdly low interest rates" in 2002 to 2004 pushed housing activity beyond fundamental levels and created incentives for buyers to make purchase decisions that seem irrational now. Today, he says, rates have moved "closer to normal," causing a housing crunch.
But Wesbury says that since rates are not excessively high today, there should be little impact on other sectors of the economy. While acknowledging the pain of the housing slump, Wesbury says that overall low unemployment and strong manufacturing indices demonstrate an accelerating economy, despite continued woes in housing. Says Wesbury: "After the shock of rate hike works its way through the system, the ample liquidity of an easy monetary policy will reassert itself," resulting in renewed growth.
The stock market seems to agree with Wesbury. Shilling predicts "an American recession to commence later this year, and to extend globally in 2008." Time will tell.
In the meantime, under the heading of "mortgage news you can use:" Washington Mutual has just announced a new mortgage product that will provide the flexibility of an adjustable rate mortgage with the ability to lock in a fixed rate at any time with no cost the first time you make a change. In fact, you can relock your fixed rate again if rates drop, or return to an adjustable rate -- all without a new closing as is typical with refinancing. This process is allowed up to two times per year and costs only $250 after the first free change is made.
Unfortunately, this won't help subprime borrowers who are currently struggling. You must have at least 10% equity in your home and a good credit score to get this new mortgage.
Tough times always bring out American ingenuity. And that's The Savage Truth.
Copyrighted, TheStreet.Com. All rights reserved.
Looks like everyone is comparing only cost to income or carrying cost vs rent. Another simpler formula that I've seen (and has been tested) is multiply the rent by 150 you have a normal market value. Multiply it by 200 and the study showed you have a price that is unsustainable and will come down.
So JMK's example $360,000 (estimate based on his numbers) house that rents for $1,400 shows a ratio of 257 - 1. Clearly, according to the historical analysis a bubble price that is unsustainable.
To revert to a historic norm the price should drop to $210,000 a 42% drop in prices. Or to put it another way prices are 171% above where they should be.
This is economics JMK not fantasyland. I'm sorry you bought a house and you now need to rationalize a poor decision but you're wrong and you will lose money in the long term AND in the short term.
Vancouver has hit an affordability wall. Victoria has slightly higher wages and lower RE prices so you MIGHT see a continued raise in prices for another year or two. However I suspect that once Vancouver begins to tank the psychology in Victoria will reverse. A whole wad of "investors" will try to get out with their shirts and begin selling. Landslide, economic troubles due to the sudden lack of construction jobs, misery piles up, psychology turns even worse, people panic it all ends very badly but the RE prices will revert to historic norms. To argue otherwise is to argue that the sun will not rise tomorrow. Nothing short of Deus Ex Machina will save the bubble.
Or maybe people are willing to pay a premium to live somewhere that doesn't suffer -40C winters surrounded by beautiful mountains and water?
Correction: people are willing to pay a premium to buy in Victoria, but not to rent. Rents in Ottawa and Victoria are identical. Explain that one.
People who buy assets with subpar yields are throwing away money. The smart money always wins out over the dumb money. Always.
S2's second article,
Now they are telling us that we should buy our kids houses too. When will it stop. The average to above average income cannot afford University fees and saving for retirement as well as buying little boo boo a house. Many people have more than one kid and what you do for one your must do for the others. Also as one article said people are living longer now and may require full time care at some point in their lives. That is not cheap.
Honestly. now we have to buy homes for our children too????
Can you imagine the conversation when our kids grow up
"but mom, Jason's mom and dad bought him and his family a house. Why can't I have one? I promise I'll take care of it."
S2
Hi Drachen
Another simpler formula that I've seen (and has been tested) is multiply the rent by 150 you have a normal market value. Multiply it by 200 and the study showed you have a price that is unsustainable and will come down.
That sounds like an interesting study. Do you have a reference to it? A quick google only turned up a normalized-to-1982 number for me. And the Motley Fool claiming 150 was a cheap market and 200 an overvalued one. I didn't see a reference to a study on their website though, so who knows how they concocted that number.
Anyhow, I'd kind of buy it. $324k/1400 = 231 (not sure where you got $360k). That is 13% above 200x rent, which is exactly how high we are above the historic trend. If you want things to fall at 175x rent (half way between the Fools' "good deal" and "overpriced") then we are 23% too high. In either case, 3-5 years of stagnation will bring things back in line.
I'd still be very intereted to see Victoria rent numbers. Does anyone know where to get them?
Sorry, that should say "prices would need to drop 13% to reach 200x rent". 231 is of course 15% higher than 200.
>>Many people have more than one >>kid and what you do for one your >>must do for the others.
This reminds me....
I've had to shake my head in disbelief at those couples who own a home, have multiple children, and cheered (and still cheer?) on the housing bubble, smug in their knowledge that it is making their home asset more "valuable".
(1) On the one hand, for these families the price gains are only psychological, if you think about it. At the end of the day, it is still the same old house, with the same old problems; despite how rich they think they now are, no limousines have magically appeared on the driveway of these family homes. They still have the same mortgage payments (or higher, if they'd like); Johnny still needs new shoes.
In fact, if such families ever want to sell and "cash out" on their "newfound riches", they will quickly find that all other homes on the market went up just us much as their own! So much for the riches! All they did was float up with everybody else. There was no "gain".(Sure they can go and get a larger mortgage now that their property is worth more, but that is a rat's nest for its own obvious reasons)
(2) Greed has taken over their ability to rationalize. This point is quite sad, really - as these couples cheer on rising home values, they neglect to realize that what they are really cheering on is that much more of a difficult future for their children. Heck, I guess they never wanted their children to be homeowners anyways, right?
(3) Unless these families own a home other than the one they live in (and most families don't), the only winners are the (A) real estate agents, and (B) the tax man. And that is because a 6% commission, and X% tax, of today's inflated home prices is a lot better than a 6% commission (and X% tax) on yesterday's historical prices.
I have to conclude that single-home-owner couples with children really have little to cheer about. If anything, they should be a little glad if they bought in before prices shot up, but they should be just as concerned that prices go back down by the time their children grow up to be homeowners. But for these couple to be smug & cheering on prices to go up, up, up, defies reason.
>>Another simpler formula that >>I've seen (and has been tested) >>is multiply the rent by 150 you >>have a normal market value.
Is this study assuming that rents are always "rightly priced", as a premise for seeing what a home price should be?
Doh - jmk,
I suggest looking at Craigslist. Try rent.
Of course, rents are all over the place. Too bad those cheap rents show up for those pricey townhouses.
Doh. Sometimes I think about adopting a persona like surfer-x, if anyone her knows who that is, they know what I mean.
Doh.
I like the market value formula of 150 X rent. The house I rent currently for $1300 is assessed at approximately $500,000.00. It would have to drop more than 60 percent to have a "normal" market value based on that formula.
As for the comment of parents assisting children buying houses, I have friends who have said that they are worried because they know all their children will have to move away when they grow up because they won't be able to live here....
Is this study assuming that rents are always "rightly priced"
Rents are always rightly priced. You cannot speculate on rents. You pay now for consumption now.
Only exception is under rent controls, but note the the current mild controls do not apply to new tenants, i.e. any available rentals.
Note in 1984 the price/rent ratio in Vancouver was about 100, with no rent controls of any kind. This of course was 3 years after the gurus were assuring us that Vancouver RE prices could never go down. This ratio is fairly typical of a market bottom in a "desirable" city. Less attractive places can go lower.
JMK:
I can't read the original paper that came up with the 150-200 rule but it's been quoted so often in other papers and scholarly works (do a google scholar search) that I presume it's widely accepted in economics circles. All I know is that they did a historical statistical analysis and 100% of the time if the market went over 200 it came down below 200 again. "normal" market conditions are generally at 150 which is a "good deal" because if you own for more than 10 years or so you are ahead of renting. 150 is the number that we can expect things to return to once irrational exuberance is taken out of the equation.
Your "things will float until inflation catches up" theory simply doesn't match historical trends and given that this is so much larger than past bubbles I can't see any reason why it should take LONGER to unravel.
360k as I said was a guesstimate by reverse engineering your numbers.
That makes sense to me. When I started to rent my home in 1998, home prices were flat lined, I was renting at 150 times.
Today, the home is at 233 times.
The Vancouver market had a big time hit in the 1980's. For the most part, people just stop buying homes to live in. This mainly left investors to purchase properties for the rental income.
I was working in Vancouver at that time and a friend in my office offered to sell his west side rancher to me for $135,000 or roughly 135 times rent. I was making $36,000 a year and could not qualify for a high ratio mortgage. I took a brief look on the Vancouver MLS and similar ranchers are now $750,000 and probably rents for $2,000 a month or 375 times rent.
Eventually, we will hit the wall in prices and people will just stop buying as they did in the 1980s. Leaving only the investors who demand a positive income stream.
So, I figure prices have to fall to the level where the investor will buy with a positive cash flow.
Which is probably 100 times rent.
Siobhan
Hi Drachen,
Took your advice and came up with this as the top hit. They make the pretty strong case that comparing price-to-rent ratios and income-to-price ratios does not make a lot of sense when interest rates are different. i.e. it makes no sense to look at the rent-to-price ratio in 1982, when interest rates were 20%, and compare that ratio to present day when interest rates are 6%. You simply pay far less per month now than you did then for the same price home.
My guess is that we are nearing the limit of what prices are justifiable compared to rent. As I've said, at 25% down and a price-to-rent ratio of 230 you still come out ahead buying. At 10% down you lose.
I understand that it would not be fair to compare two different interest rates. However, what you should be looking at is the affordability of the monthly payment (a function of interest rates and home price). In 1982, prices were lower and interest rates were astonomically higher which equals a high monthly mortgage payment.
Today, prices are astonomially higher and interest rates are low which equates to a high monthly mortgage payment.
Given that the affordability levels (as a percentage of median household income) of both markets are now quite similar, comparing the two markets would be valid.
Siobhan
I agree that comparing price-to-rent ratios doesn't make much sense when comparing different interest rates. The obvious reason is that when interest rates are high you may have the opportunity later to refinance at a lower rate. So, if you are ever going to pay a premium above the 150-200x rent multiple you'd better make sure you're buying while interest rates are high.
Right now rents are low. So, if anything, prices should be BELOW the 150-200x rent multiple because there is no possibility of refinancing in the future.
Thus, I think you should surely not pay a multiple of 230. You're almost certain to lose money. The NY Times has a nice calculator that will show you how much money you will lose. See http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185681600&en=f1540861ea0e2e4f&ei=5070 Note that the calculator is assuming a 5% return, which is just about guaranteed in bonds. If you're willing to invest in stocks (which you should be unless you're very close to retirement), you should assume 10%, and you'll see that paying the 230x multiple will lose you MASSIVE amounts of money versus renting.
I meant to say that interest rates are low, rather than that rents are low.
Also, I noticed the calculator link is cut-off. Google "buy or rent" site:nytimes.com" and it should be the 1st or 2nd hit.
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