Rate Reversal

To no one’s surprise, the Bank of Canada bumped the overnight lending rate from 0.5% to 0.75%, the first increase in 7 years.   It’s a small jump, one that won’t make much difference to anyone’s debt obligations, but it’s a sign that the bottom is in for rates.   Despite various alarmist polls out there (no, an increase of $130/month in payments won’t make most Canadians “struggle”), the majority will be just fine with any conceivable increase in interest rates.   Thing is, the majority is also completely irrelevant to the housing market.  The important thing is what happens at the margins.

The banks wasted no time hiking their prime rate by the same 0.25% which means it sits at 2.95% (except the special flower TD that charges 3.1%).  That means all those HELOCs just got more expensive (the typical HELOC of $70,000 costs an extra $15/month now).   Same goes for every variable mortgage out there.   Like I said, not going to break the bank for anyone, but it’s a sign that the seemingly endless period of decreasing rates might be over.

For now though, even with a 0.25% increase in the mortgage rate, the majority of the about 80,000 monthly mortgage renewals will be coming off a 5 year mortgage, and will find that the deal they are offered (red line)  is still lower than what they locked in for 5 years ago (green line).  

The precipitous interest rate drop in 2009 was the reason our real estate market stayed stable.   The same house cost drastically less to carry and prices plateaued while incomes increased over several years.   The result:  improved affordability which stabilized the market.   This is why I believe our next correction will not look anything like our last two.

Now we see the other side of the slope.   Prices racing ahead, and interest rates on the upward slope too.   That will quickly drive affordability back into the danger zone which correlates with price peaks in Victoria.

Tidbits

Few little bits that caught my eye lately.

Firstly, seems like the number of price changes are increasing lately.   Unfortunately the Matrix database search is a little broken when searching for price changes in the past, but looking at the last few weeks the rate of price cuts has been increasing quite a bit.

Either the market’s appreciation rate is slowing, requiring some price flexibility from sellers to get properties sold, or the overpriced properties that didn’t move in the spring are being reduced to try for a summer / fall sale.  Something to watch going forward.

Rents

According to Padmapper, Victoria has the third highest rental rate in Canada at $1180/month for a 1 bedroom (up 7.3% in a year) and $1400 for 2 bedrooms (up 2.9% from last year).    Those numbers are higher than the CMHC stats mostly because CMHC only surveys purpose built rentals, and not privately rented condos that generally go for more money.

Regulations

The NDP are discussing options with respect to curbing speculation, saying that a speculation tax as proposed in their platform may not be the only option they are looking at.   The article is light on details, but David Eby has a good handle on the housing portfolio so I’m hoping for some effective changes, assuming they can actually get into power.   Meanwhile the City of Victoria is mulling more AirBnB restrictions, which has caused a bit of a storm in a teacup about the mayor’s recusal from related discussions.

Delinquency Rates

The CMHC has new data on delinquency rates, and as discussed earlier, it’s pretty clear that they don’t tell us a lot until house prices decline.

In the strong markets of Vancouver and Toronto, delinquency rates decreased to absurdly low levels.  In Victoria we saw the same thing as prices increased.

 

After all, why default on your mortgage if you can sell your house at any time for a large profit?   In the stagnant markets of Calgary and Edmonton we can see the effect of the downturn in increased delinquency rates.  It takes a while, but if house prices stay flat or decline for a couple years, people start running out of the easy options.   If Toronto undergoes a serious correction this will be an interesting stat to watch.

For now though in Victoria, we are still happily financing this runup in house prices with ever increasing mortgages.  All good until those rates rise!

A changing of the guard

Wow, an amazing result in this election if it holds.  I was sure that the Liberals would pull off another majority but it seems the anger against them was greater than anticipated and we seem to be converging on a minority government with the Liberals one seat ahead of the NDP and the Greens tripling their seats.

What is likely to come if this holds?  Well could be a Liberal minority although I don’t see how that would be effective, or could be a coalition.   Despite some grumblings about John Horgan’s temper, it is more likely that that the Greens will want to work with the NDP as the two big priorities for Weaver was to get money out of politics and bring in proportional representation which the NDP has also promised.  Of course at current counts a coalition only gets them to 44 which is hardly enough to be effective.

At the very least it seems like it might be worth looking at what each party says about housing.  Let’s look at the NDP Platform and what it says about housing:

  1. New Supply: Build 114,000 affordable rental, non profit, co-op and owner purchase housing units through partnerships over ten years.  Use public land to build housing.  Get new student housing built by removing unnecessary rules that prevent universities and colleges from building affordable student housing
  2. Renters: Introduce a refundable renter’s rebate of $400 dollars per rental household in BC each year.   Close the BC Liberals’ “fixed term lease” loophole and ensure controls on rent increases are enforced.   Re-invest in co-op housing.
  3. Speculation:  Close the loopholes that let speculators dodge taxes and hide their identities.   Direct the revenue from the absentee speculators’ tax into a Housing Affordability Fund.  Establish a multi-agency task force to fight tax fraud and money laundering in the BC real estate marketplace.
  4. Foreign buyers tax:  There isn’t anything specific in the platform, but other reports have said the NDP want to bring in a 2% foreign speculators tax for foreign owners that don’t pay income tax.

What about the Greens?  Well looking at the Green Platform on housing we can see it is a bit more aggressive:

  1. New Supply:  Build 4000 affordable units per year.  Use public land to build housing.  Rethink zoning.
  2. Owners:  Make the home owner grant income tested.   Make property taxes progressive based on income.
  3. Renters: Introduce incentives for construction of rental properties.  Enhance the Residential Tenancy Act with more protections for renters.
  4. Speculation:  Implement a sliding scale PTT from 0-12% for properties between $200,000 and $3M with additional tax for flippers.   Lifetime capital gains limit of $750,000.
  5. Foreign buyers tax: Expand across province, raise to 30%.

What do you think will happen?  What will be the effect on Victoria’s and BC’s market?

CMHC: Victoria Overvalued

Last year the CMHC started releasing their quarterly housing assessments and I had some fun ridiculing their conclusions.   Once again they’ve swapped out the analyst in charge of Victoria, which makes it the 4th analyst in just over year, and none of them are from here.

The new report for Spring 2017 is out, and by new report for Spring 2017 I mean released spring 2017 and actually only covering data up to Dec 2016.  Again, how a measure is supposed to give an “early indication of potentially problematic housing market conditions” when the measure is at minimum 4 months out of date I have no idea.

They analyze the housing market based on evidence of Overheating, Price Acceleration, Overvaluation, and Overbuilding.  Let’s go through their analysis in detail.

Overheating

Their definition of overheating is a sales to new listings ratio of 80% or higher for the quarter.   This is relatively sensible, although the threshold is quite high.   Looking back at recent history, the hot market recently and the mid 2000s would have been identified as overheating.  Note that the overheating evidence does not go higher than “moderate evidence” because it is only based on one metric (sales/list ratio > 80%).

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10 years of HHV: Time for a meetup?

It’s been just over 10 years since the first post appeared on the original House Hunt Victoria blog.   Back then the blog was an expression of the frustration of the original author in trying to understand the insanity of the local housing market in early 2007.    It’s interesting to go back and read some of those early posts and see the similarity to the market today.   Many of the same factors were present, with an ultra-low rental vacancy rate of 0.5% and a condo building boom.  To HHV’s original author John, something about the current prices didn’t quite add up.   And indeed after many years of rapid price appreciation, 2008 marked the end of the bull run.

However the big crash that some predicted did not arrive, and in retrospect it was clear why that was the case.  Interest rates at very low levels combined with price stagnation and income growth combined to return affordability to more reasonable levels.

What’s in store for the next 10 years?   Sounds like something to discuss over a couple beers so I’m proposing the much delayed HHV meetup.   Given everyone is obsessed with Oak Bay, I suggest the patio (enclosed, heated) of the Penny Farthing on either the evening (6ish) of Thursday March 30th or Friday April 7th.

Let me know if interested by putting your name on either or both dates at this doodle.

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The Owner Builder Exam

This post is based on the information gathered and tireless work done in this area by Marko Juras.

Each year Rich Coleman – our Minister Responsible for Housing – pens a letter to BC Housing laying out their mandate for the year.   Last year he reminded them that as a public sector organization, they were bound to the Taxpayer Accountability Principles which state that their actions should be consistent with government priorities and be executed efficiently to respect the taxpayer’s dollar.  Unfortunately it seems like that letter fell on deaf ears.

You see, BC Housing has a department called Licensing and Consumer Services (formerly the Homeowner Protection Office) that amongst other things administers residential builder licensing.  For a builder to get licensed they have to show experience in building and continue to receive training (such as on this arduous Caribbean cruise) to maintain their licenses.  An exception to this has always been individuals building for themselves – the owner builder – who merely had to pay BC Housing for an Owner Builder Authorization.  In the last 15 years, some 45,000 people went that route in BC.

Clearly the idea that that many people could build their own home relatively unmolested by the government could not stand, so last July BC Housing introduced the Owner Builder Exam. This 100 question exam requires 70% to pass, and you only get one attempt for your application (you get a partial refund if you fail but then you have to re-apply).  BC Housing justifies this test saying it protects the consumer, helps owner builders expand their knowledge base, and creates a more level playing field.   This sounds great, other than the fact that it is complete and utter nonsense.   Let’s examine these justifications in detail. Continue reading

2016 Assessments Now Available

Unless you were one of the lucky few thousand that got an early warning about your assessments, you should be getting some mail next week with the updated assessed value of your house.   Luckily it’s the Age of Computer and while that might mean that nobody knows exactly what’s going on, it does mean we all get to look at assessment values of friends and strangers online.

Given the market insanity in the past year, you can expect some big increases, but remember, that doesn’t mean you will necessarily be paying more property tax.   Yes, your property tax is set as a percentage of your assessed value but those percentages are re-calculated every year.  If your assessed value has gone up by a percentage that is similar to the rest of the properties in your municipality you can expect your taxes to only increase to cover the growth in the city’s budget.   So the property tax rates will actually go down in a year where assessed values jump.   If the assessed value seems out of whack, make sure that the property information is correct and take a look at the sample sold properties that BC Assessment thinks are comparable to yours.   Remember that the assessors are not actually visiting your house in most cases so if you know something they don’t you can always appeal your assessment and try to have it lowered.   The deadline for appeals is January 31st and as it seems our property information has an error I will try the appeal and document the process here.

What are you seeing in your area?

What one hand taketh…

the other hand giveth away.

Just when you thought the governments were all aligned to beat down our monster of a housing market, BC decides to give away free money to people without any.   In an effort to buy some votes from those pesky left leaning millennials, the BC Liberals have offered them up to $37,500 to hand over to the condo developers.

It’s called the B.C. Home Owner Mortgage and Equity Partnership Program and here’s the details:

  1. Program starts taking applications January 16, 2017.
  2. Maximum loan is 5% of purchase price.
  3. Open to Canadian first time buyers earning less than $150,000 and purchasing a place under $750,000.
  4. Loan is interest and payment free for 5 years, and must be repaid over the following 20.

The kicker is that you can use the free money as part of your down payment as long as you had scraped together at least half.   So on a $500,000 condo you now only need $12,500 down which combined with various mortgage cash back programs I’m sure you can whittle down to almost zero.

So while the feds have taken specific aim at first time buyers with the new mortgage stress tests, the province is actively undermining those policy moves before they even have a chance to take effect.   Election years sure have a way of leading to schizophrenic policy decisions.

The issue here is threefold:

  1. The only thing this will do is drive up prices for first time buyers.   Handing out free money sounds like a great idea but really it just means prices will jump up to match the extra cash people now have.
  2. Higher loan to value ratios are correlated with higher default rates.   In other words, if you have less skin in the game you are more likely to default and that is especially true in a declining market (as the CREA just predicted 2017 would be).  Again, just after the feds raise the down payment requirements on loans over $500,000, the province negates the change.  Ridiculous.
  3. With an interest free loan for 5 years, you are setting people up for payment shocks when they have to start paying back those loans.   Anyone remember the havoc that adjustable rate and interest only loans caused in the US?  Now our loans won’t be huge so the shock will be less, but this is a bad direction to go in.   Also given the abysmal repayment rate on the Home Buyers Plan (only half repay them properly), I suspect the province will spend a lot of money chasing those first timers down.

Certainly makes sense to take advantage of it if you are thinking of buying next year but I doubt this will do anything to make housing more affordable.  Do you think this is good news for first timers or not?

Foreign Buyer’s Tax Has No Appreciable Effect on Victoria

New stats are out from the Ministry of Finance and they reinforce what we have already noticed:  the foreign buyer tax was blunt but incredibly effective.   The percentage of foreign buyers in Vancouver is down some 90% from before the tax, and while there was a small bump in September, they are now down to at or below the average of the rest of the province.

There was some concern that a tax in only one region would push buyers to other regions, most notably Victoria.  However that fear has turned out to be unfounded, as the sudden implementation of the tax and the warning it could be extended to other regions has put the fear of Clark into any buyer that may have still had their heart set on BC.

foreign_buyers

While there was a slight decline in Victoria as well, that is as likely to be noise as signal.  Essentially there was no impact.  Of bigger importance to our market is whether the small flood of Vancouver buyers we saw in the spring has abated.  This may be the case, as VREB president, Mike Nugent, recently told the Times Colonist.  “While evidence is anecdotal so far, it seems fewer Vancouver buyers with deep pockets are crossing the water to buy here.”  

So good news all around.  A return to more local fundamentals in Vancouver, and a possible stemming of the overflow into Victoria.

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