Have we hit the bottom?

With 5-year variable rates as low as 2.05% (prime minus 0.80%) and 5-year fixed rates at 2.50%, have we finally hit the “bottom” for cheap mortgage rates?

The general consensus is that the US Federal Reserve (the “Fed”) will be raising rates before the end of 2015, and at the very latest – in 2016. With continuing employment growth and improving business prospects in the US, the Fed will be obliged to raise rates to curb inflation. When the rates are increased, this will force up the coupon rate for US bonds. Canadian bonds will have little choice but to follow suit in order to remain competitive. It is the bond market that sets the fixed rate mortgages offered by Canadian lenders.

The variable rate typically follows the overnight rate, set by the Bank of Canada (BOC). Lenders typically set their prime rate at 2% more than the overnight rate – less any discount. Recent employment statistics suggest that the BOC won’t be lowering their overnight lending rate any further. When the Fed raises rates in the US, the BOC may have a few months – but will eventually be obliged to follow the US trend.

2015-06-09 21_21_59-Fixed_vs_Variable_rates

What do you think … are rates only going to go up from here?

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64 thoughts on “Have we hit the bottom?

  1. The time to be a vulture in the Victoria SFH market is now:

    1. I know this isn’t the prevailing opinion, but I don’t believe interest rates are going anywhere for 2-3 years. The $CAD will get hammered instead because that is what’s best for Canadians who are 70% fed from food grown in Canada, earn money in $CAD and owe lots on their $CAD mortgages. In turn, imports will expand and profits & wages will go up. Once wages go up, we’ll get inflation and higher prices and then higher interest rates. 3 years is enough time to build up an additional 7% equity @ 2% interest rates on top of the typical 10% down. 17% across the board is one hell of a correction.

    2. Affordability has not been better for 15 years. For the first time I have analyzed, the all in costs of housing are low enough to accumulate wealth with a reasonable rate of appreciation when compared to the rental alternative for similar properties, factoring in a stock market opportunity cost and a reasonable interest rate curve over the next 25 years.

    3. House prices haven’t gone up for 8 years in Victoria and they just started in February 2015. For whatever reason, historically this length of market rest has been a precursor to price run ups. Not only that but I would wager that upward pressure on house prices might even be greater this time around because of the run ups that have occurred in the rest of Canada. A family selling out of Vancouver or Toronto is pulling something like $1,000,000 in cap gains that goes along way over here if this is where they want to live.

    4. On an inflation adjusted basis, properties are already down 30% from 2008 peak even though the nominal process haven’t moved much. The market already crashed, simply by not going up in nominal terms.

    5. A comparison I used to rely upon was US market comparison. Yes, on average CAD RE is still way more expensive than US RE but Victoria RE is comparable to a lot of other “nice places” to live in the US. Seattle median for all 3 bedroom properties is about $515,000 USD right now. That is $643,000 CAD. Victoria average for SFH is $570,000. Not the greatest comparison and sure Victoria isn’t Seattle, but the price differentials that were there 5 years ago simply aren’t there anymore, especially with the $CAD already dropping against the $USD.

    5. I used to complain about government interference until I realized that in a capitalist/socialist market place, there is no such thing as a pure market, only one that is less or more affected by concerned stakeholders. Get used to the market is what it is and will always be acted upon by all concerned stakeholders with the power to do so, including politicians with the desire to be reelected.

    A much better strategy than waiting for “the government to get out of the market” (which will never happen) is to simply acknowledge that a game is being played, pay attention to what is happening and a piece of the pie before the massed figure it out and want some too so that you can benefit from the inevitable run ups in prices. This strategy can blow up in your face if you don’t know what your doing but ultimately, the market is what it is – metrics are generally meaningless of no one pays attention to them when they make their decision.

    All that being said, low interest rates, low house prices, low $CAD, high affordability, inflation adjusted price decreases and continued support from government = a ton of people that can enter the market. The last time this happened was when they unleashed the CMHC in 2001 and look what happened then. Get there first and ride the wave. Real estate is expensive and too emotional for too many people for it to fit in a spreadsheet.

  2. Your guess is as good as any ones these days.

    But just for instance. What do you think would happen if one or two Chinese banks closed their doors? The Chinese banks are really exposed to a housing downturn.

  3. My wife and I considered looking at an open house on the weekend. The asking price is in the mid-850’s, a lot more than we would ever want to spend. Her point was why even bother looking unless we are considering to buy. I said that I was hoping that it would be back on the market sometime (5 years plus) at a reduced price, after interest rates “correct” and the future owner decides to sell. Does that make me a vulture? … Perhaps. We decided to skip the open house and enjoy the fantastic weather. 🙂

  4. Just a guess but I see a ’90-like recession a few years out and an ’87-like stock crash in about a year. There are so many parallels to ’86 right now; oil, currency, demographics…… it’s actually quite a long list of similarities. I think wage pressures and inflation finally start to take flight (doubles?) over the next five years.

  5. I assume that you’re not seeing any recession in the future.

    But look how skittish the Vancouver market is when there is a hint of a recession. Very volatile. If you’re speculating on Vancouver real estate you have to move quickly to sell with this kind of volatility. Compared to Victoria where the market doesn’t seem to have so many and the same magnitude of swings. I suspect our market has a much smaller speculative component than Vancouver. Although, I also suspect that some Vancouver investors are buying here hoping that Victoria might get caught up in wave of speculation. Personally, I doubt Victoria has an economy large enough to create rampant speculation we just haven’t had the recent back to back years of high price increases.

    Speculators want a “sure thing” or a market that you can command prices. Like waterfront in Shawnigan Lake. A deep pocket investor could buy up every water front property that comes onto the market and drive the prices higher and higher. It’s a small niche market easily manipulated.

    However, if Vancouver takes a hit that could put BC into a recession. And recessions are not good for house prices.

  6. This crazy world of prices!

    To start to understand what is causing real estate to be out of sync with the average citizen of some cities, one has to separate real estate into two basic categories. A home to live in and raise a family versus a home used for market speculation.

    Price to income, price to rent and affordability are referenced to home occupation and not speculation. In this world simple supply and demand tempered with prudence for one’s future life’s enjoyment over the next several decades would create a reasonable price for housing. For Vancouverites desiring a home to live in and enjoy the city’s amenities with their remaining pay check. When home prices measured against incomes is too high, rational home occupation buyers opt out of home ownership. As buying today means less money to enjoy yourself in the city. The paycheck only goes so far.

    Then there are the speculators. They are not always buying a home to live in, not even to rent. The income stream is not relevant as they are not likely to rent the property anyway. The purpose of buying real estate is to hold and sell at a higher price. It becomes more advantageous to keep the home vacant than to rent as renters cause wear and tear on the unit and add costs to administer and possible problems to sell quickly if needed. The speculators are financing and re-financing the properties so that they can free up income to buy more properties. For the speculator it is the size of the portfolio that is important not the purchase price. And bigger is better! The costs of funds and supply of property determine prices not affordability, not price to income ratios or price to rent ratios. As the speculator is not considering the long term effect on their enjoyment of living in the home. They are willing to buy over priced properties just because there is a shortage of supply and that means future price increases. In this world of speculators higher prices beget higher prices. And if the speculator can access money that lies outside of the system at lower or no cost – even better.

    This is where the irony of the market exists. As cities construct more homes for no one to live in. Where developers point to rising home prices and rents to demonstrate a shortage of affordable housing and thereby encourage city councils to permit more construction while the act of building more homes has minimal effect on reducing prices or rents.

    Speculator demand is driven by myths that property values always go up and justified by reasons such a geographical constraints or that everyone wants to live here or live there. And the availability of cheap credit.

    The only way to return to a home occupation market is a recession that would purge speculators from the marketplace and erase this disequilibrium in prices. The longer the housing market continues without a recession the more incredulous the prices become. And the bigger the drop in prices has to be to encourage home occupiers to return to the market.

    To be able to understand how over priced the market has become, first start by determining the size of the speculation market. And that means counting vacant properties. The bigger the shadow market of vacant homes – the bigger the potential fall in prices. Right now it seems to be a matter of you can ask – but we aren’t going to tell.

    Would knowing the size of the shadow inventory change your perception of the marketplace? Would it make you re-think purchasing in a condo tower that is 25% vacant?

  7. Monday, June 15, 2015 8:00am

    MTD June
    2015 2014
    Net Unconditional Sales: 443 680
    New Listings: 666 1,234
    Active Listings: 3,996 4,695

    Please Note
    Left Column: stats so far this month
    Right Column: stats for the entire month from last year

  8. I could be dead wrong but it seems like an inflationary staircase to capitalistic heaven (dashed-line).

    I too see the party ending again in about ten years. When it does I figure a Starbucks dark roast will set you back 15 bucks and yes, rates will be higher than now at the next crescendo, as will bears be hard to find 😉

  9. No sweat off my back thanks, more money for me to invest or save, versus paying it to the banker and the city tax man so I can mow my own lawn. You can choose to be naive and ignorant of warning signs of a market long in the tooth or you can be patient, keep an open mind and wait it out for reality to set in. I’m in no rush, as every party comes to an end.

    “Jefferies is pencilling in a headline rate of 3 per cent by the fourth quarter as higher oil prices feed through. If it is right, we will be facing a radically different economic landscape within six months.”

  10. Re “phantom offers”

    Should be grounds for immediate licence suspension in my opinion.

    That being said, the consumer has to get their head out of their ***. If I am personally buying a house I am going to offer what I feel comfortable based on the market. If you are going to draw up the terms of an offer on the basis on whether there are 2, 5 or 10 offers you are throwing all common sense out the window which seems to be a favorite past time for the average consumer.

    Just like the average consumer pays 22k+GST (still boggles my mind) to sell their average family home in Victoria the average consumer makes some super dumb decisions in terms of buying too such as letting the number of offers influence how much they offer because they “have to have” the house…..as if houses didn’t have substitutes for one another.

    Every day I scratch my head….people will line up at Costco and waste their time to save a few bucks on gas but will blow an insane amount of money on selling, or buying a house without any research or due diligence….

    What other people are doing and offering doesn’t mean it makes sense by any means.

    Perfect example of this was four years I decided to buy a pre-sale unit at the Promontory. At the time my friend decided to buy a unit as well and we headed down to the sales center and they had sold approximately 50 units of out 177. They had also sold 25 or the 26 one bedroom “F” floor plans, and 0 out of 32 “E” floor plans.

    I ran a bunch of calculations/analysis and suggested to my friend he buy an “E,” floor plan. His response, “I don’t think so, they haven’t sold a single one, and they’ve sold 25 of the 26 “Fs” so lets go with the last one.” After some convincing I talked him into an “E” and sure enough four years later they are performing much better on re-sale than the “Fs.”

    My feeling is buyers walking into the showroom saw the Fs moving and just continued to buy the Fs until they quickly sold out.

    Point is if a bunch of people are willing to overbid on a house it doesn’t mean it is great value or makes sense.

  11. I prefer to not wear rose colored glasses and to look at the reality of global financial systems, not the spring fling of house horny Victoria buyers betting the farm. Inflation last time around didn’t have HELOC’s attached to them in the trillions. Whole new game this time.

    Per the article:

    “As Stephen King from HSBC wrote in a poignant report — The World Economy’s Titanic Problem —we have used up our fiscal and monetary ammunition, and may face the next global economic downturn with no lifeboats.”

  12. As per Coleman blowing gas out his posterior. The LNG promo has many court challenges ahead of it, no slam dunk anywhere in sight.

    “But Grand Chief Stewart Phillips of the Union of British Columbia Indian Chiefs (UBCIC) is not buying into the project.

    “The answer is no,” he told the Vancouver Observer. “If the Clark government and Petronas [the energy giant controlling the project] intends to disregard, disrespect and ignore the rights and interests of Lax Kw’alaams and other Indigenous groups, they will be looking at a multitude of court challenges.””

    http://www.vancouverobserver.com/tags/bc-salmon-0/natural-gas-minister-grand-chief-odds-first-nations-support-lng-project

  13. Ambrose the perma-bear is at it again…. I say bring on the reflation. I wonder what performs well with inflation?

  14. If we’re watching the international bond markets for signs of changes ahead, this article lays out the landscape pretty well. Pretty obvious why the BOC is putting out the warnings of potential economic financial shocks.

    “Economic historians will one day ask how it was possible for 2 trillion euros of eurozone bonds — a third of the government bond market — to have been trading at negative yields in the early spring of 2015 even as the reflation hammer was already coming down with crushing force.

    “It was the greater fool theory. They always thought there would be some other sucker to buy at an even higher price. Now we are returning to sanity,” said Mr Stein.”

    http://business.financialpost.com/investing/worst-bond-crash-in-30-years-is-early-warning-of-turmoil-to-come

  15. Small hurdles ? Like First Nations resistance and an environmental review that may not be out til after the fall election ? Coleman trivializing two major walls is a joke. I don’t see a word on how much profit to BC’ers either… oh right, Christy’s trillions down graded to billions by 2050 when most of us will be long gone or rocking in the old folks homes.

  16. The Crazy World of Peak Real Estate

    http://www.macleans.ca/economy/realestateeconomy/the-crazy-world-of-peak-real-estate/

    I like this part: “the Real Estate Council of Ontario plans to introduce new regulations July 1 that are meant to crack down on so-called “phantom offers.” That’s when unscrupulous agents hint to potential buyers that they have another offer that doesn’t actually exist in the hope of extracting more money. Under the new rules, agents won’t be allowed to suggest or imply that they have another offer unless it’s signed and delivered. ”

    Wait, aren’t real estate agents supposed to be professionals that we should trust? Apparently not if it takes the real estate council to force them not to tell baldfaced lies for their own profit.

  17. Historically, it’s been better to go variable about 80% of the time. This makes sense. You’re taking on some risk but if you don’t hit a spike in the interest rate that risk will pay off.
    With a fixed rate you are paying a bit extra for the security. So it’s really just down to risk tolerance.

    Predicting rate movements 5 years in advance is a fool’s errand. Don’t listen to anyone that tells you otherwise. Predicting even the next BoC move is basically down to chance.

    We went fixed because the rate was quite low (2.79), but I think at renewal we will probably go variable.

  18. We need only to release the Kraken! …I mean Psyllid! 😉

    “It’s a tiny sap-sucking bug called a psyllid, a Japanese predator that appears to feed exclusively on knotweed.”

  19. You do realize your bearish article is pre-announcement.

    The go-ahead announcement is a big deal. BC LNG will rival the early days of the oilsands boom for investment dollars. Sure there always remain a few small hurdles, but the green light from Petronas is the biggy.

    Why the go-ahead for Pacific NorthWest LNG is a big shot in the arm for Canada’s energy industry
    http://business.financialpost.com/news/energy/petronas-lng-launch-a-big-deal-for-b-c-industry?__lsa=9b5a-2993

  20. I believe that with BMO’s so-called “Smart Fixed” mortgage you can’t break this mortgage before it comes up for renewal in five/ten years unless you: sell the property, refinance with BMO or do an early renewal into another BMO product. All the usual prepayment penalties (which are pretty significant) would apply in these situations. Compare this to a typical variable rate mortgage where you just pay three months interest.

  21. Watch the fine print.

    Speaking about fine print. I had a term life insurance policy come to an end this month. I had no plans to renew, so I let it lapse. Well I received a letter in the mail yesterday stating that it automatically has been renewed for another 10 years and my pre authorized payments will be increased by 3 times the old rate.

    I didn’t think they could do that. I called and she said that this was clearly written on page 3 of my policy. Of course the insurance agent never explained that little poison pill to me when I signed.

    Well after my blood pressure dropped down to the level of an 80 year old chain smoker, I asked how much is this going to cost me to get out of this and how do I.

    She emailed me a form which I have to fill out. I can not email the form back, I can not fax the form back. I have to snail mail the form back within 5 working days.

    %$&^%&^ fine print.

  22. Now we might think we’re special but…

    Brooklyn New York is having similar problems as here. The difference between here and there – they do market studies!

    The borough’s median income is $46,000 and the median sale price is $600,000. This is the most unaffordable city in America. The prices have gone so high that in some cases it is cheaper to buy in Manhattan.

    The developers are there telling how the only way out of this dilemma is build more. In other words let’s stimulate the economy so that there are more people earning more money to drive prices even higher.

    Because of the city’s high land values, properties are seen more of as an investment than for home occupation. The people who are interested in bidding on the properties are not end users such as a family. As they simply can’t afford to buy. It’s an investment group looking for a property to add to a portfolio. All cash deals that are meant to maximize value and not provide an income stream. Better to keep the property vacant, drive up prices and sell at a profit. It is in the investment groups best interest to sit on the property and leave it vacant driving up prices and rents to make the metrics of buying the property look appealing.

  23. CBC News: Canada’s debt-to-income ratio inches down to 163.3%
    The debt-to-income ratio of Canadian households ticked down three-tenths of a percentage point to 163.3 per cent in the first three months of the year. That’s the first decline we’ve seen after three consecutive quarterly increases, something the data agency attributed to disposable income increasing by more than debt. Income was up 0.9 per cent compared to 0.7 per cent for debt in the three-month period.

  24. I don’t know if the velocity of appreciation has to do with over valuation. Mostly because we don’t have a credible idea of what is meant by over valued. Over valued relative to ?

    I think that if you’re travelling down the highway of higher prices you first have to slow down and stop before prices can start go into reverse. That might mean smaller cities like Victoria may have a correction before cities that have greater price momentum such as Vancouver and Toronto.

    Right now it seems to me that price appreciation in the general market has stalled in Victoria. Yes there will be some exceptional prices paid for some select properties. But in general, it seems Victorians are at a financial price ceiling at the current interest rate. Which is interesting because you might be able to project the value of housing at different interest rates knowing that we are at a maximum point.

    The median price of house in the core districts is say $630,000 at a 3 percent interest rate.

    What would the median be then at 4, 5, or 7% Ceteris paribus

    I still believe that a market correction in detached homes will have a precursor. And I suspect that would likely be falling condo prices. And I’m not currently seeing that happening in Victoria.

    If you bought a house in the core today, it will likely be worth the same in three months from now. The farther you project forward the less certainty in the outcome.

    I doubt anyone, including CMHC, knows what will happen in a year or two from now to house prices. So is it a good time to buy? There certainly doesn’t seem to be any Iceberg in front of us. And there should be warnings of falling house prices that would allow you to sell before the masses catch on. The only thing I don’t like about this market is the lack of selection and that you’re paying for fresh squeezed orange juice and getting orange crystals.

  25. On both those flips I think the large increase in re-sale is most to do with the upswing in the market we’ve had….send me your email to markojuras@shaw.ca and I’ll send you the history on the last two sales from our system (you can see before photos, etc.). Easier then having to type out all the info.

  26. Marko, I’ve noticed two recent flips in Gordon Head: 1808 Fairhurst Ave and 1825 Laval Ave.

    For each property, I’d love to find out:

    a) the asking price for the 2 most recent sales
    b) the sale price for the 2 most recent sales
    c) the sale date for the 2 most recent sales

    Thanks!

  27. “Keeping up with the Jones’s” is nothing new, but it appears that social media is putting a new twist on conspicuous consumption. Back in the 1980’s there was a joke about yuppies, with their rallying cry being: “Whoever dies with the most toys, wins!”. Things haven’t changed …

  28. In the next week or so, I’m going to post a new topic regarding variable versus fixed interest rates. Hopefully the HHV community will “chime in” and help you decide what’s best for you.

  29. If we take a clue from relative appreciation, I would say currently Victoria no longer stands out as wildly overvalued. Back in 2008 it definitely did, because we had appreciated at a rate near the top of all the major markets in Canada. But since then we’ve gone exactly nowhere while they all continued appreciating. So while we de-risked, they caught up and kept going.
    So max risk… Vancouver and Toronto are the obvious ones, although Vancouver has defied all reason for 30 years so who knows. Some of the smaller markets out east might be in even more danger (Ottawa, Quebec, Halifax, Winnipeg)..

  30. Money laundering is so complex that neither car dealers nor the land registry have anywhere near the resources necessary to render an opinion on whether the sources of funds is legitimate or not. It is debatable what “legitimate” even means. For those situation where documentation of source is simple and obvious (employees relationships for example) that capital can be admitted through immigration using a similar process to the admission of people.

    For undocumented capital, I think an easier way to go about admitting it into Canada is to treat undocumented dollars coming into Canada as though they have been completely untaxed and then tax it before it can be spent. You want to bring $50MM in cash in Canada without an easy to understand source? You better have $100MM and a check book. If you can’t prove that your capital has played by the rules, then it could be made to play by ours before you bring it into the country.

    This would motivate legitimately wealthy people to make sure their affairs play by the rules and would confiscate 50% of illicit capital right out of the gate. Not a perfect solution in that Canada would be benefitting from undocumented capital, but I think it would end up more a consequence than the intended out come of the process. Generally what I would expect see is application for citizenship by those that are legitimate, organized and easy to audit and those that have complicated /opaque sources of capital would go somewhere else.

    For those that still see the value in coming to Canada even while forking over 50%, well we can use some of that 50% to monitor their activity & build assurance around their cash flows over time.

    As far as Toronto and Vancouver being money laundering centers, I would say that they are more stops in a long chain of illicit flows of money. The actual laundering happens all over the world, the fact that Canada has laws lax enough to allow our residential real estate to be a part of the laundering process is another problem entirely.

  31. If the Bank of Canada is right and Canadian housing is overvalued nationally by 10 to 30 percent (today’s Financial System Review refers back to page 16 in December’s), is there any way to guess what that might mean for individual markets? Presumably Vancouver and Toronto would be overvalued by more than the 10-30 national amount, because other less hot areas would undershoot the national figure? What about Victoria?

    I’m not sure how to interpret what they’re saying.

  32. What we need is anti money laundering legislation not a tax on speculators or foreign ownership.

    Any person buying an asset over $50,000 that does not have proof of Canadian citizenship must provide information of where that money is coming from. When you go and buy an $80,000 BMW or a $51 million dollar home in Vancouver if you’re are not a Canadian citizen the dealership or land registry has to document where that money is coming from. And a copy of that documentation would be sent to the buyers home country’s government officials. They might want to talk to that person when they get home.

    Make the practice of using a third party “strawman” to purchase property subject to confiscation of that property. Something that every developer must inform a purchaser and have them initial the document. Then if is an illegal money scheme the government could split the proceeds of the sale on a 50/50 base with the country the money originated from. That’s likely hundreds of millions in property seizures.

    And all “cash” transactions of real estate must be accompanied by certified appraisal of the property before the property could be registered at Land Titles with money transferred through a Canadian lending institution. Money launderers hate leaving a paper trail behind them. In fact that kind of defeats the purpose of money laundering.

    Vancouver and Toronto are big time money laundering centers. It seems everyone in the world knows this but the Canadian and provincial governments. When Canada tightened up on its immigrant program, Australia boomed in real estate transactions. It’s like putting the cap on the toothpaste then squeezing it, the toothpaste is going to come out somewhere.

    There is the moral issue behind all of this. How can a government demand that its citizens conduct themselves in a legal and ethical way when the government is doing a “nudge, nudge, wink, wink” with money launderers?

    https://youtu.be/IrnZo-fjs_o

  33. The market is certainly insane, as Marko stated below.

    From our experience in the market (and we just found a place,) there are a lot of people looking for the same type of home in the same type of location: 2-3 bedrooms plus a suite within walking distance to downtown — You could even expand that to within 5km of downtown.

    The other issue is price. For us, with a 20% deposit, anything much over about $500k needed a suite or a basement in which one could easily be put in. Im not sure how many people buying homes right now (and we’re right in that millennial group Dasmo mentioned) can afford more than $500k without suite income.

    But Im probably just stating the obvious.

    I am glad for the topic of this post because we are at a point in the next few weeks/months where we will have to decide between variable and fixed and I have no idea which one to go with.

  34. I think demographics can tell a lot of the story but there is also increasing pressure to consume that drives demand as well.

    TV and now the internet has helped people from around the world figure out what’s out there to be had and the pressure and competition to get it all has never been more fierce. Not only that, but if you’re failing to get what you think your slice should be, that is totally visible as well.

    Facebook literally pipes the successes of your friends right into your face in real time:

    http://waitbutwhy.com/2013/09/why-generation-y-yuppies-are-unhappy.html

    The impact on demand is this: most folks in my parents generation were happy with a nice house in a nice neighborhood and a decent car or two because that is what their friends had. You were happy because everyone near you had more or less what you had. Having what your friends had was “having it all”.

    Now here’s the rub: having what your friends have is still considered “having it all”. It’s just that now, instead of 3 or 4 friends in the same socioeconomic group as you who live near you and a few family members who may or may not be outliers, you have 500 friends from every socioeconomic group and you can see everything your friends have in real time from all over the world. It is made painfully clear that there is a lot more to want and feel bad about not being able to obtain than there ever has been and I have a feeling that this drives demand for everything that can be socialized as success on social media. Cars, houses, food, clothes, everything.

    While pure demographic pressure may have decreased compared to the boomer generation, the pressure to compete and consume at higher per capita levels has never been higher and easy financing has only helped it along.

    Not only that, but the “presentation value” of apparent success has never been higher, driving those who might not demand consumption to do so more frequently to avoid the feeling of being left behind, only adding to the demand out there.

    As social media only becomes more ubiquitous, I would expect that it’s impact on the definition of “having it all” will only continue to expand, further offsetting general demographic trends.

  35. The market for houses in the core is relentless. I am amazed that the demand has remained strong with such a low selection of homes for sale. Less than 2 months of inventory and a median 23 days on the market to sell.

    Even more incredible is that the median price isn’t increasing! The median remains at $626,000 for a 2,200 square foot home on a 7,200 square foot lot.

    Listings are still way too low with only 590 homes listed in all of the core districts.

    The condo market looks bad in comparison with the detached market but it isn’t. We have 640 condos listed with 165 selling in the last 30 days with an median exposure of 42 days to sell. That’s close to four months of inventory which is still a market that favors sellers in negotiations. Median price for a 1,000 square footer remains unchanged at $284,000.

    What we have is strong demand, low supply and ……..

    flat prices? WTF

    It seems the will is there to pay more for homes in the city but not the financial means. We seem to be tapped out on home prices. Of course there will be exceptions, The fringe markets are acting differently than the mainstream housing market. That’s why 2.5 million will get you a 5,000 square foot home with a 24,000 square foot lighted indoor riding ring, swimming pool and 59 acres in Cordova Bay. Fifty-Nine acres.

    Which is about the same price for two condos at the corner of Oak Bay and Foul Bay in Village Walk.

  36. As I have been saying… to me the generation population curve does not spell doom to me… seems I’m not alone. “With 4.3 million millennials turning 30 this year and the number set to jump to 4.6 million by 2020, there will soon be more adults in their early 30s than at any other time in U.S. history, according to an analysis of U.S. Census data by Wells Fargo.
    As a result, fund managers are increasingly buying home builders, mortgage lenders and baby clothes makers that stand to benefit as millennials spend less on themselves and transition to parenthood.”

    https://ca.finance.yahoo.com/news/millennials-reach-parenthood-fund-managers-bet-burbs-050557123.html

  37. DavidL said “that when interest rates climbed again, that prices plateaus or dropped a bit.”

    Huh?!? I think you need to look at the chart again, or maybe I do…lol, cuz I’m not sure I see what you’re seeing. Are you saying that many years after rates begin rising, as they did for instance in ’87, that prices will then eventually plateau or fall as they did in ’90?

  38. @Michael

    The chart shows Vancouver house prices, which have not always followed the same pattern as in Victoria (such as in the 1990’s and 2010-15). That said, the chart clearly shows that until the early 2000’s, whenever there was a relative drop in interest rates, that prices climbed up; and that when interest rates climbed again, that prices plateaus or dropped a bit. Keep in mind that periods of high interest rates typically were also periods of high inflation, The chart does not show normalized prices over time.

    Compared with the average of 9.75% interest from 1960 through 2005, interest rates in the past 10 years have been much, much lower. In the past decade, with each monthly mortgage payment – the interest paid has been much less, while the repayment of the principal has been much more.

    Compare a mortgage with a 25-year amortization, paying $2500/month. At the “historical” 9.75% interest you could get a $285,000 mortgage, while at the “current” 3% interest you could get a $538,500 mortgage. It’s no wonder that housing prices have skyrocketed – as shown in the chart that you referenced.

  39. @Just Jack

    Yes, I realize that most of the properties are “cash” purchases. What I meant was that as rates increase and prices drop, that the resale value of these vacant properties also drop – when they are resold in an open (competitive) market. I guess that each municipality would also be able to determine which properties are owner-occupied when the annual tax notices are sent out.

  40. I think you have to take into consideration if the economy is expanding when interest rates are rising. Generally, rising interest rates are meant to cool down the economy. In that way it is logical, to me, that house prices would rise as interest rates rise. People are confident about their jobs and their lives and want to get a home while interest rates are still low. If they’ve been approved by the bank they likely have interest rate guarantee and that prods them into buying as well.

    However, if you don’t have control over the economy and interest rates rise as the economy slows then you will have declining prices. It isn’t just whether interest rates are rising or falling but where we are in the business cycle. That makes it plausible to have house prices fall as interest rates decline as well.

    If you’re worried about your paycheck – you’re not going to be buying regardless of the interest rate. That’s likely what is happening in Europe with negative interest rates. People lack confidence in the future. The Governors of the banks of these countries have to get people feeling good about their futures, then they’ll spend again and create an expanding economy.

    Sometimes you have to give one helluva big party, like the Olympics did for us.

  41. History says otherwise on the inevitable slide DavidL. It seems crazy to me too, but following multi-year slides in interest rates, selling prices in BC’s largest markets typically increase rapidly once mortgage rates begin to rise… as is clearly shown in the shaded regions below.

    The explanation is partly to do with BC often being the economic frontrunner as we start a new interest rate cycle, although there are other reasons too. This cycle is so far on cue as BC markets have gone bidding war in the face of rising yields since January (50 basis points and counting). Yields are up 3% today alone for example.

  42. Most of these properties are mortgage free so the interest rate is a moot point. And kept empty so that they aren’t damaged and they can be converted to cash quickly.

    We don’t know how big this shadow inventory is in places like Vancouver or Toronto. Partly because we don’t want to know.

    Ask BC Hydro how many homes are only drawing enough electricity to power a fridge each month. Or ask BC Assessment how many residences are getting their assessment sent to a different address. We could have the answer in 30 minutes.

    But if you ask the question then you have to know what to do when you get the answer. And I don’t think the government wants to address this issue.

    In contrast, it may be useful for someone thinking of buying a strata home to know that they are buying into a complex that is significantly empty of full time residents. Or would the buyer even care?.

    I would think the government has an answer, they just don’t want us to know. -the answer is likely that bad

  43. Home equity lines of credit will let you have it all -today. Instant gratification. And that makes us envious of those with the 5,000 square foot homes, two investment condos, destination weddings, luxury cars and designer baby clothes.

    We ask ourselves… Why them? Why not me?

    Economics is about scarcity. When a rational person has to make a decision of buying one thing over another. Today ,this social science seem to be not working well. As you aren’t faced with the decision to pick one or the other. You can have both. And that leads to irrational decisions.

    Of course there is a cost. But that cost seems to be far into the future. People have little concept of risk because they haven’t experienced an economic downturn that bankrupts them. The longer we continue without a recession the more confident we become that this time is different but at the same time the next recession gets one day closer.

    The people in this article will simply be….

    Collateral Damage

  44. I would surmise that the “wealth conversion” approach to buying real estate and leaving it empty is only possible when rates remain low. When interest rates increase, the selling price will inevitably start to slide downwards – making for a loss on the “wealth conversion” investment.

  45. This morning’s breakfast conversation centered around Victoria’s irrational market. At least one new town house complex has drawn a significant number of buyers from outside of Victoria. The newly purchased units are to remain vacant for wealth conservation.

    This creates an illusion that there is a shortage of housing in greater Victoria. And that makes it easier for developers to manipulate city councils into approving more strata homes. The idea is that by building more smaller strata homes we will solve both affordability and rental problems.

    Building more doesn’t solve these problems it makes the problems worse. Since you’re stimulating the local economy but not significantly improving the stock, mix or quality of housing destined for owner or rental occupied dwellings.

    Taxing or penalizing speculators intent on keeping these units vacant isn’t going to work. In my opinion city hall should take advantage of these speculators. Basically manipulate these purchasers into buying strata homes that are too expensive for local buyers but will draw owners to the downtown core during a recession when these units fall in price.

    I’m suggesting that any strata development approved by city council should have at least 20% of the units being 3 bedrooms of not less than 1200 square feet. And encourage the non Victorians to buy them for wealth conservation. Because we are going to need these larger units to encourage families to live in the downtown areas come our next recession. What we don’t need is tower upon tower of empty micro suites come the next recession.

    If non Victorian investors are going to treat our city like a whore – then they should pay us like one too.

  46. Back in 2009, I was paying 1.45% on my variable rate mortgage. The prime rate was just 2.25% and I was getting a 0.80% discount. Strictly speaking, variable rates have increased since then. Fixed rates have fallen since 2009.

    I expect our rates to stay low through the spring of 2016 and then slowly increase. Of course, we have a federal election this fall (and a presidential election in 2016). Who knows how future political leaders may try to tinker with markets and economic policy.

  47. The bottom will be at 1.99% for at least three years fixed. But… Close enough to call it the bottom. How long will it stay at the bottom is the question…

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