The Benchmark

A few years ago the Canadian Real Estate Association decided that it was tired of the variability in  average and median prices.  When average prices shot up the regulators got antsy and starting talking about how they could cool the market.  When prices dropped, they desperately tried to explain it away by talking about changes in sales mix and seasonality.

The alternative is a repeat sales index like the long standing Teranet HPI which tracks how the prices of homes are changing by tracking homes that sell twice (a sales pair) and taking the difference in price (and doing a bunch of statistical magic to try to remove outliers like heavily renovated flips).   This works well, but Teranet only tracked the market as a whole rather than individual property types or regions.

So the CREA came out with their own repeat sales index, the MLS HPI.   Unlike the Teranet, you can slice and dice this index into arbitrarily small sub markets.   They do this by coming up with a benchmark or typical home in each region and property type.   So they will have a set of characteristics of the typical 1 storey single family home in Gordon Head, and in Oak Bay, and in the westshore, or the core.  Same for a typical condo in downtown and so on.  Once they have defined the typical home, they try to track the price of that home over time.

For example, do you want to know how much the price of the benchmark townhouse in North Saanich increased between July 2016 and April 2017?   No problem.   Click some buttons in the handy dandy MLS Dashboard  (you plebes only get the national one but I get the detailed one for Victoria) and you can pull up a chart to show exactly that.

And there you have it.  The typical townhouse in North Saanich increased from a value of $602,300 to $690,000 in that span of 9 months.   Pay no attention to the fact that there was not a single sale of any townhouse in North Saanich in that entire period.   None at all.  So maybe it’s a stretch to call it a repeat sale index and you should take that graph with one of these.

However I don’t want to be too harsh on the MLS HPI since I really don’t mind it overall.   I’m sure that when there are no sales in a certain region of a certain property type they use sales in neighbouring regions where there were some, or in different property types and then adjust them based on historical relationships between the two.  In the end you get a number that is about as good a guess as to market value for the benchmark house as you’re going to get.   I do wish that the VREB would indicate when the data quality goes down the tubes for a region in their monthly reports but in the end it’s a minor sin.

Couple weeks ago they updated their definitions of what constitutes a typical home in each region so I thought I’d pull out a few municipalities and fields to see what this magical benchmark home is.

MuniStoreysLot SizeLiving AreaBedsBathsBuilt
Colwood184051430321979
Colwood280581841321991
Esquimalt162211276321958
Esquimalt260981547321953
Langford175001377321992
Langford25227166032.52006
North Saanich1222151897321981
North Saanich222215246432.51989
Saanich East183731484321967
Saanich East291472099321980
Saanich West174051323321958
Saanich West271731784321980
Victoria156621216221949
Victoria256621771321920
Vic West147911243321967
Vic West252271500321912

The “living area” is only above ground, so not very accurate given how many places have finished basements.   Still, kind of neat to see the differences in character reflected in the data, from the cramped lots in Vic West, to the estates in North Saanich, to the character homes downtown, and 70s boxes in Saanich.  In the downtown we see the 2 storey buildings are the older character homes, while in the westshore they tend to be the newer builds.

From looking at some areas with largely homogeneous housing stock like Gordon Head, I believe the benchmark is more of an average rather than the most common property, but still you can see the broad differences in what is common by region.

Paying the Vig

Thanks to Bman for posting the link to the mortgage arrears stats compiled by the Canadian Bankers Association.

The big factor that influences mortgage arrears is the unemployment rate.   You can’t very well pay your mortgage without a job.   But the other factor is house prices.  Even if you don’t have a job, if the market is going up you can take equity out of the house or you can sell for a profit with no problems.   So looking at the BC stats, is there any relationship between house prices and arrears rates?

Pretty interesting how arrears tend to increase and stay high when house prices are flat or declining, and drop when they go up. Continue reading

Market Timing

Some discussion here about market timing in real estate this week and whether it can be done.   Thought I’d add my 5 cents to that discussion.

Market timing in the real estate sense would be to either buy or sell based on expectations of where the market is going.  There are several kinds of market timing in real estate:

  1. For non-owners, choosing to delay buying based on an expectation that prices will decline.
  2. For owners, choosing to sell real estate on the expectation that prices will decline and perhaps that it can be bought back at a cheaper price later.
  3. Buying or acquiring additional real estate much earlier than originally planned based on an expectation that prices will increase quickly.

Mostly we hear about the first on that list, and then occasionally we see people attempting the second.

In the stock market, there is pretty good evidence that market timing doesn’t work, but what about in real estate?   Having read many thousands of very intelligent and convincing arguments about why the market was either under or overvalued in the last 10 years, I’m inclined to think that although the local fundamentals like incomes and market conditions can be used to make reasonable predictions, the macro-level factors (credit availibility, housing policy, market sentiment, immigration, etc) are so influential that you can’t have much confidence in those predictions. Continue reading

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?

Fear and loathing in Victoria

No I’m not talking about a pot fueled housing tour (although there’s an idea…), I want to discuss the impact of fear on the housing market.

If you’ve been tuned into the news, hardly a day goes by without a high profile warning about our national housing prices.   Obviously the focus is on Vancouver prices that amazingly seem to have returned to growth, and Toronto prices that increased 33% last year.  No matter how important we think we are in Victoria, on a national scale we’re about as interesting as Hamilton: just another town caught up in the maelstrom of a bigger bubble.

There is no doubt that various levels of government are hyper focused on the problem right now because the anger it is creating has the potential to unseat them from power.   So what happens if the legs get swept out from under the Toronto and Vancouver markets?  How might it affect us here in Victoria?

If a policy change is introduced it could take out foreign buyers or first timers or speculators.  But what if Vancouver and Toronto simply collapse under their own weight?  It won’t change the fundamentals in Victoria but it will radically alter market sentiment.   Suddenly the belief that housing only appreciates goes up in smoke.  Greed turns to fear.  And fear can have a powerful effect on the housing market.

We last saw this in 2008 during the financial crisis.  Despite the financial crisis not having a big effect on local employment, the market completely dried up as the double digit daily declines in the stock market hit the news.  In the end all that was left were those sellers that had no choice but to sell becoming ever more desperate to unload their houses in an environment that felt like the end of the world.   Over 8 months the median detached house lost some $70,000 (12%) of it’s value while the median condo lost $50,000 (16%).   

Of course it bounced back just as quickly as it dropped, once the market realized that nothing had actually changed in Victoria, and now mortgages could be had for half price.   This is as close as the housing market gets to a flash crash, and it played out over 18 months.  Plenty of time for a brave investor to recognize the opportunity and be greedy while others were fearful.

I believe that when Toronto and Vancouver turn downwards dramatically (I’ll avoid the word crash), it will be felt here in Victoria.   Will it be enough to change the rosy perception of housing as an investment for longer, or will it be another blip?  Will it be another opportunity for investors with foresight, or will it be a bull trap now that the world is weary of quantitative easing?   I only know it’ll be entertaining to watch.

Happy Easter everyone.

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.

Continue reading

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 Predictions Roundup

Every year we make predictions on this blog at the start of the year.  It’s not the end of the year yet but we are close enough we can estimate the final numbers, and it won’t make much difference given everyone was catastrophically wrong anyway.

Without further ado here’s the roundup of results with category winners marked in green.

UserAnnual SalesSFH
Average
BoC RateTeranet
June
Teranet
Dec
Leo S8800$710,000.25%158165
Marko
Juras
8000$665,000.50%153155
Dasmo8500$690,000.25%151161
Fireecology8000$700,000.25%----
Michael7800$705,000.50%156164
Caveat
emptor
7800$670,000.25%----
CuriousCat8450$650,000.25%----
Actual10622$754,586.50%162175*

*actual numbers approximate until the final year totals come in.

I’ll crown myself first of the losers on that one.    Continue reading

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?

Double Whammy

One of the common pieces of advice you hear about buying a home is to “buy the biggest house you can afford” (yes it’s usually real estate agents that will tell you this).   Now this may be good advice insofar it will lead you into a house that you can stay in for a longer period of time but other than the obvious downsides of having to pay off a larger mortgage, a bigger or more expensive house compounds expenses on top of the price itself.

Taxes are clearly proportional to the house price, and while they are higher or lower depending on what municipality you live in, they definitely go up with increasing home value.  And with local mega-projects like the sewage treatment plant on the horizon, you know the rates are only going in one direction.

A bigger house also means more maintenance expenses.  More bathrooms to get outdated, more square feet of floor to replace, more systems to maintain, more roof to leak, more windows to blow seals, and more granite to stain.   Again, all elementary stuff that I imagine most buyers do at least give some cursory consideration. Continue reading