What do you do with your down payment?

Assuming you are looking to buy at some point, you’re likely saving up your down payment.   Especially after the stress test, some people may be saving up more of a down payment than before in order to get the mortgage down enough to qualify for it.

What to do with the money while you wait to buy?   With a well-diversified low-cost investing strategy you should expect a long term annual return of about 6%, but what if your investment drops by a third right when you want to buy?  Even worse, these things are correlated so when there are deals in real estate you may be poorly positioned to take advantage.

So what do you do with your down payment?   “High” interest savings accounts?   REITs to hedge your bets?  Stuffed under your mattress?   Bitcoins?   Silver?  Does anyone have a particular strategy or recommendations to share?   Should your down payment investment strategy change based on current stock valuations?   Is there any way to reasonably invest a down payment at all or should you just keep it in cash and hope for low inflation?

Market Value

Ah, market value.  That magical amount of money that a property is worth.   It’s commonly stated that a property properly exposed to the market will sell for market value.   But what is that really?   Some people think that market value is whatever a property sells at, but that is not necessarily the case.   Ask the people who’s business it is to estimate market value and they will say market value is:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: the buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale

Those guys aren’t concise.   And that definition is littered with other terms that can’t be precisely nailed down.   How motivated could a buyer be and still be considered “typically motivated”?  What constitutes sufficient advice to be well advised?   Do incentives like the government’s free money for first timers count as undue stimulus? Continue reading

Mid Year Predictions Roundup

Every year here on househunt we make predictions for the housing market in for the coming year.   Given we have data for the first 6 months, let’s see how it’s shaping up.   Predictions were based on the number of sales for the year, the annual average single family price and the condo price, as well as the Bank of Canada rate.

Let’s start with sales.  Predictions ranged from a low of 6200 to a high of 12,000 for the year.   So far we are at 4981 from January to June so to hit the low estimate the market would have to collapse to 200 sales/month for the rest of the year, and to hit the high target we would need almost 1200/month.   Neither particularly realistic.

The proportion of sales that happen in the first half of the year has ranged from 47% when the market was accelerating in 2014, to 67% when it was collapsing in 2008.   With a gradually slowing market like we have now, we should expect that more than half of the sales have happened already.  Given that, the average guess of 9200 should be pretty damn close to the final total.

I’m still OK with my guess of 9000.

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How do you want to pay for that?

One might think that part of the price increases in the last two years have been fueled by gains in income.   After all, we have an active tech industry and more younger people sticking around, so surely incomes must be going up, right?   Those $900,000 houses aren’t too bad if you’re making $200,000 a year.

Well the new labour survey numbers are out, and unfortunately it doesn’t look like that has really been happening.   Average incomes were the same in 2015 as they were 6 years earlier, just keeping up with inflation.   And once you take into account the measurement error, there isn’t much of a trend over 10 years.

Even those dual income households we hear so much about are not that impressive.  About half of our 100,000 families are dual earners, and the median family was earning $94,000 pre-tax in 2015.  Enough to buy a house townhouse costing about $475,000 with 5% down.   And if the B20 rules hit in the fall, it won’t even help to beg borrow or steal the 20% down payment anymore as everyone will be subject to the stress test.

The 2016 census data isn’t out yet to show the income distribution (scheduled for September), but here are the 2011 numbers.   If we make the very crude assumption that with an approximately ~70% ownership rate, the top 70% of earners are likely to be the home owners, we get down to some pretty small numbers for family income.

Of course most owners bought years ago and don’t have to worry about buying their million dollar Oak Bay warshack on their $40,000/year pension.  But it indicates that the incomes for the higher earning segment that would have traditionally bought a house just aren’t sufficient to get into the market anymore.  And as the older population that bought their houses for a fraction of the price on normal incomes decades ago passes away, they will have to be replaced by a much wealthier contingent.  Right now to get into the 1% of high earners in Victoria you have to be making $227,000.   That will hardly get you qualified for a somewhat better house in the core.
Unless prices drop, there will have to be either a mass shift to families in condos, or the ownership rate will drop going forward.

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.

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