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
BoC RateTeranet
Leo S8800$710,000.25%158165

*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

The double edged sword of increased regulation

Regulation has been the big real estate story this year, with several rounds of tightening at all levels of government.   Back in May I pondered the likelihood of the days of a self regulated real estate industry being numbered and six weeks later the province took over the Real Estate Council.

Since then we’ve seen some impact from the new oversight in the form of tweaked regulations.   The real estate council is now all government appointed rather than elected industry insiders, shadow flipping using assignments was effectively banned in June, and the bar for passing the realtor licensing exam was slightly raised a few weeks back.

Effective September 30, there were a whole host of amendments to the Real Estate Services Act (RESA) that I think may have some unintended effects.  Several things have changed but importantly some very significant changes to penalties that can be applied.

  • Maximum penalties for brokerages contravening RESA increased 25 times to $500,000 (per contravention)
  • Maximum penalties for individual agents contravening RESA increased 25 times to $250,000 (per contravention) plus the commission they received on the deal
  • The Superintendent of Real Estate (Mr. Noseworthy) may impose additional administrative penalties of up to $50,000

Meanwhile FINTRAC is cracking down on BC brokerages with a quadrupling of audits and with it the administrative penalties they can apply.  I understand what they are doing, they are trying to legislate ethics into an industry using the fear of large penalties.  In general this is a good thing, but the flipside is that it will likely increase costs for everyone as brokerages price in the increased risk of the penalties and pass the costs on to the agents who pass it on to the consumer.

I am firmly of the belief that real estate commissions are too high and far too much money is spent on transactions that are really not that difficult.   20 or even 10 years ago everything was done on paper and every signature required driving across town.  Agents received the new listings by fax and updated their own binders of listings, or received the comprehensive MLS listings book every 2 weeks.  Working with buyers meant actually working to look for properties and make recommendations.  Now buyers are doing most of the legwork themselves, contracts are completed and accepted online, and sellers are getting the vast majority of their marketing through rather than agents buying ads in the paper.  Meanwhile property prices have exploded and agents are collecting increasing commissions for less and less actual work.

Now there are some low cost options for sellers like mere posting services that will allow you to list and sell your house for around $1700.    However they rely on low cost brokerages to offer this service while still making a profit, and you can bet those brokerages will be increasing their costs as they face more regulation and the threat of higher penalties.   So is the increased regulation really a good thing for the consumer?

The real estate industry is on a path to becoming more professional.  On the face of it that sounds like a positive trend, but professionals cost money and do we really need another professional involved in real estate transactions when we already have lawyers involved?   And is it actually possible to legislate professionalism into a career that anyone with a few thousand dollars and a spare couple months can get into?

Victoria market problematic? CMHC says nay

The first time the CMHC released their quarterly housing assessment I mocked them for using out of date information and thought that surely their all-green report for Victoria was because they hadn’t looked at the insanity we were experiencing in the early spring.    The second time they again decided that there was nothing out of the ordinary in the Victoria market, and I puzzled at how they could possibly conclude that our market was about as unremarkable as Moncton’s.

Well another report is out, so let’s take a look.   It’s the third analyst in as many reports, so let’s see if he’s come to a different conclusion than his predecessors.  First of all, the CMHC has for the first time raised their Canada-wide alert level to high, so surely given we are amongst the most expensive markets in the country that should be reflected in our assessment.


Nope, they are sticking to their guns here.  Victoria is green damnit!

Continue reading