You gotta know when to hold ’em, know when to fold ’em

Generally real estate is a slow moving beast.   There are no flash crashes here, and without an external stimulus, there is generally plenty of time to catch a market change from hot to slow or vice versa.   That said, periodically it can be quite volatile.   If we look at the history of the average single family home price, we see individual years where prices jumped or collapsed by almost 30%.

These are all inflation adjusted values, otherwise the picture would be quite distorted in times of high inflation.

So if you’re a bit queasy about the prospect of losing 25% of an asset worth hundreds of thousands of dollars, how long would you have had to hold a single family house in Victoria to avoid losses?

3 years?

Nope, if you had bought in ’81 and sold in ’84 your house would have lost almost 13% in value every year.   The late 90s also weren’t super great.    How about 5 years?

Getting better but still some periods of large negative annual returns.   Once you add in the very high transaction costs in real estate, even the 5 year periods of relative flatness look pretty miserable.  So 10 years then?

This is better.   Outside of the mid eighties, it’s been either a winning or at least not losing proposition to buy and hold a single family home in Victoria for at least 10 years.   Problem is, according to some estimates, the average Canadian family moves every 5 to 7 years so most people will move much more often than is good for them financially.    For condos, the appreciation is not as good and people tend to stay in them for fewer years so the issue compounds.

And this is looking at the past, mostly during periods of either decreasing interest rates or large societal changes (number of dual income families doubled between 1976 and 2015).   Going forward neither of those things will happen again, so as usual, your mileage may vary and past returns are not indicative of future results.

Market Update Dec 7, comment changes, and a stats update

First of the month monday market update courtesy of Marko Juras.

December 2015
Dec
 2014
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 124
389
New Listings 125
419
Active Listings 2797
3210
Sales to New Listings
99%
93%
Sales Projection
Months of Inventory

8.3

No point in projecting sales yet given the severe slowdown around Christmas but I suspect we’ll see about 470 come the new year.    A 99% sales/list ratio is pretty impressive though, could we break 100%?

Comments

Two posts ago I asked about what comment styles people prefer, and of the 8 people that expressed an opinion about it it seems at least 7 prefer the old linear system, so its now back with new comments on top.   I still like the ability to reply to comments directly but without a significantly more advanced comment system it seems the simple comments will be easiest.   We can make a few more improvements once we migrate to the new server.

I’ve also enabled Markdown for comments, which makes quoting people and comment styles in general easier.

To quote someone, put a > in front of what they said.

Automated Stats

The automated stats page has received some updates.  It now supports going back in time, so play around to see what it has to say about past dates.    I’ll be writing an article about how this thing works at some point.

Another area is why it says the market is balanced, when we know that it is quite hot right now?   Well I’ve been looking into that and there are several reasons:

  1. Using generally accepted definitions of how many months of inventory translates into a buyers, balanced, or sellers market does not take into account the season.   5.2 months of inventory in November does not mean the same thing as 5.2 in May.    I’m unsure as of yet how to compensate for the seasonality of the data.
  2. I calculate Months of inventory by dividing the total sales into the active listings.   While accurate for the entire market, this includes commercial sales and inventory, which is a totally different market and the resulting number doesn’t reflect the conditions in the residential market (this also explains the graph in the previous post).   Problem is, the VREB doesn’t publish the residential inventory, so I have no easy way to get this data.   I’ve asked them to add it to their publications so hopefully they do that in the future.   In the meantime I’d be grateful if someone posted the residential inventory from July 2013 to present (I have the data before that).

For those who missed it in the comments, here’s a good article on cash back mortgages by a local broker.

 

November numbers and a surprising insight into the HPI

November numbers are out, and it’s pretty much as expected.  The trend of an improving market continues unabated, with both MOI and Sales/List continuing along the lines they have been for years now.   The release from the VREB is mostly as expected, expect for an unusal note by board president Guy Crozier.

“The good news for buyers is that pricing remains competitive and there are new listings coming onto the market every day.”

Now why would they mention competitive prices when the market is this active?   Well it turns out the single family house median dropped a whopping 7.4% from October, or $43,500.   Now this is most likely just a random occurrence, but fairly rare given a month to month swing of that magnitude has only happened 5 times in the last 20 years.

Also can anyone explain this graph to me?  The VREB says it is sales to active listings, but calculating that value for November (573/2952) gives 19.4%, not the 25% that they come up with.

Capture

 

Just Jack uncovered a truly delicious tidbit in the comments on the last post which deserves more attention.   As most of you know, the MLS Home Price Index was introduced a while ago to provide a more stable measure of house price changes than the median and averages, which tend to swing wildly month to month (November being exhibit A).  The MLS HPI joins the much longer standing Teranet House Price Index.   Both are based on sales pairs, so that the change in value of the same home can be compared, and thus both are dependent on having enough sales pairs to come up with a stable index value.   In the past we’ve noticed already that the Teranet HPI starts behaving a little erratically once sales pairs in a given month drop below about 150.

Now here is where it gets interesting.  The key difference between the MLS HPI and the Teranet HPI is that you can break down the MLS HPI into house types, and areas.  So for example, one might want to look at single family homes in Gordon Head separate from all other houses and see how they performed.  At first glance this is a sensible option to have, given how different areas can have totally different markets.   The issue of course is that the more you divide your sales, the less data you have to come up with your benchmark home price.

Case in point: The VREB claims that the “benchmark” townhouse in Oak Bay increased in value by $23,300 (4.5% from October to November 2015).  Sounds great right?  That’s an annualized rate of 53%!   Well Just Jack uncovered the truth behind that number.

There were no Oak Bay townhome sales in November. When I say no – I mean there were zero townhome sales. In October there was 1.

In other words, the increase in Oak Bay townhomes as stated in the MLS HPI is 100% pure fiction.  There is no possible way you can calculate a benchmark price based on no data whatsoever.  And by extension almost all of the subcategories by area are total fiction and should be ignored.   I’m no statistician so I can’t say for sure how many sales pairs you need to make any statistically valid statements as to benchmark prices, but we can be sure that number is more than zero, and probably closer to 50.   It’s pretty dishonest for the VREB to publish benchmark house prices that have no basis in fact.

So in case you find yourself reading the VREB news release, feel free to ignore pages 5 through 10, as they aren’t worth the pixels they’re printed on.

Market Update Nov 30

Monthly data will be out tomorrow, but here’s a sneak peak with only one day missing thanks to Marko.

November 2015
Nov
 2014
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 145
270
415 547
465
New Listings 238 426 556 716
682
Active Listings 3060 3029 2986 2948
3631
Sales to New Listings
61%
63%  74%  76%
68%
Sales Projection 609 567  581  574
Months of Inventory

7.8

Also a quick question regarding commenting.  On the old blog, comments were simple and linear.  Pre-historic you might say given there was no ability to reply to a comment.   What people did instead was quote people they were replying to or target comments at them using the @USERNAME (e.g. @LeoVictoria) in their reply.

Currently we can reply to comments, but only 2 levels deep.  It’s nice to be able to reply, but can lead to chaotic conversations where some people hit reply to a comment, and others just post a new comment on the article.   Also it’s much harder to get caught up on new comments, since comments can end up anywhere in the page, rather than all at the end.

So without running a formal poll, please let us know in the comments what you would prefer.   Some options are:

  1.  Leave the commenting system as is.
  2. Leave the threaded comments, but increase how many levels deep you can reply from 2 to some higher number (there is a limit at which point there is no more horizontal space to indent).
  3. Go back to linear commenting, so all new comments are at the end.
  4. Some other suggestion (WordPress experts, please suggest plugins to improve the commenting experience).

Personally I prefer option 3, unless there’s a way to highlight new comments in a threaded system.

Smaller mortgage, higher rate?!?

If we lived in a world where free market forces set prices we might expect a buyer with a larger down payment or a smaller mortgage to get a better rate.   After all a lower loan/value and more of the borrower’s skin in the game reduces the risk for the lender.

Instead the mortgage market is highly distorted by the commission sales model and government insurance.   Are you trying to save up the 20% down and keep your mortgage small?  Well perversely you may have to pay a higher rate than your neighbour that bought a McMansion with 5% down.

For the banks, your neighbour’s government insured mortgage is about as safe as they can get, while your work to get out of the CMHC requirement means they need to shoulder the risk or pony up the CMHC insurance fees themselves (which makes their mortgage backed securities more attractive to investors).   At the same time the broker tempted with the prospect of commission on a $800,000 house will be a lot more motivated to negotiate than that sensible $300,000 you’re borrowing.    Robert McLister explains more in the G&M.

And also, a belated set of Monday stats thanks to Marko.

November 2015
Nov
 2014
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 145
270
415
465
New Listings 238 426 556
682
Active Listings 3060 3029 2986
3631
Sales to New Listings
61%
63%  74%
68%
Sales Projection 609 567  581
Months of Inventory

7.8

Under 3000 inventory and almost 75% sales/list.   Yikes it is getting tight out there.

October wrapup. It ain’t pretty

Another month another increase year over year strengthening of the market.   In fact the president of the VREB reports that “This is the twenty-ninth month in a row that we’ve seen monthly sales increase over the year before.”   How rare  is that?  Well it hasn’t happened since 1997 which is where the data starts.   Runner up is 18 months of consecutive YoY increases starting in 2001.   It has been a very gradual but also very consistent ramp.

The VREB is justifiably excited about the market, emphasizing that now more than ever you should be consulting with your favourite all-caps professional to get in on the frenzy with minimal stress.   After all when it comes to dropping $593,000 on the median house, it should at least not be stressful.

How is this October compared to others?  Pretty tight, with the hotter Octobers in recent memory being 2009 when the market bounced back, and 2007 before it collapsed.  At 4.6 months of inventory, we are still a ways off the insanity of 2002 to 2005, but the market in the core might be approaching that level of activity.

Capture

Oct2015Market

If you’re a seller you’re breathing a sigh of relief.  After 5 years of languishing the market is finally picking up a bit.  But what to do if you are a buyer?   Wait for better conditions in the spring or jump in now before it gets even more insane?  Will a legion of the white haired anxious to retire liquidate their investment properties into the spring market?  Or will we be tossed into a 2003-era insanity where buyers have to show up with suitcases of cash to secure anything?

Market Update Oct 26th

Thanks to Marko for providing the numbers.

October 2015
Oct
 2014
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 268
412
567
602
New Listings 371 570 766
945
Active Listings 3338 3282  3247
3927
Sales to New Listings
72%
72% 74%
64%
Sales Projection 755 733
Months of Inventory

6.5

Pace has slowed a tiny bit but still on track for a 20% sales increase over last year.   Last time we had these kinds of sales was October of 2009 with 742.  Inventory was pretty similar back then as well, but new listings are coming on even slower now.

Election monday update

Well my tables aren’t as nice as David’s, but it’s time for a Monday update.  Thanks to Marko as usual for providing the numbers.

October 2015
Oct
 2014
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 268
412
602
New Listings 371 570
945
Active Listings 3338 3282
3927
Sales to New Listings
72%
72%
64%
Sales Projection 755
Months of Inventory

6.5

October should handily outpace last year once again.

Given the date, what effect do you think each potential government will have on the national housing market?   Will it matter to the market who is elected?  We haven’t seen a lot of talk about real estate during the campaign but we’ve seen how much the market is at the mercy of government direction, so there might be some change coming.

September Sales – Cooling Down

Two weeks ago, I suggested that the real estate market in Victoria might be slowing down. At first glance – the sales volume of 704 properties sold being the highest since 2009 (776) would suggest otherwise, but strangely the inventory of 3668 active listings is at the lowest level since 2009 (3509). As Marko has pointed out, you have to go back a dozen years to find such low available listings for September.

The Single Family Home (SFH) average selling price dropped a substantial 7.3% from the previous month, and is the lowest monthly average since February. The SFH median selling price also dropped slightly, but the three month rolling average is similar to last April.

Great Victoria - September Market History - September 2015

Victoria SFH Median and Months of Invetory - September 2015

With the average SFH price dropping but the SFH median remaining fairly constant, the gap between the median and average prices is closing. This suggests that the market is shifting – with an increase in the volume of SFH selling substantially less than the median being tempered a similar increase in sales volume above the median (as indicated by the 6-year high in sales volume).

2015-10-01 16_55_57-September 2015 Sales

The volume of condominiums sold is up a significant 30.2% from September 2014, but the average price is down 2.8% from September last year and down 4.1% from August 2015. The volume of townhouses sold is up a whopping 51.0% from September 2014, but the average price is down 3.0% from September last year but actually up 7.9% from August 2015.

In spite of very low interest rates and a stable five months of inventory (near sellers market) from July through September: there’s an increase in volume of less expensive real estate being sold … things are cooling down.