Sunday, May 31, 2009

Another comment response..

How far do you think housing market can realistically drop? Im a real estate newbie, but I dont think further declines of 20-30% are realistic.

I am thinking it's more 5-10%?I am looking for a relatively new (10yr or newer) SFH in the Surrey/Langley area. I want something with a basement suite for under 450,000. I would be looking at a 375k mortgage, and was doing my affordability calculations based on 5% locked in at 10 years at 25 yr amort. If i am aggressive with my payments, and assuming straight 5% intrest i can be debt free in 13.5 years.

The bank rakes in 123k in interest. Now however, lets assume I wait 1 year. In that years time, i can accumulate 50k more towards the downpayment, and suppose interest increases up to now 7% for 10 years @25 amort. Let's say the interest increase causes a drop of 5% off the house price. That means, I can shave off 50k + 20k towards the mortgage.

So now I have a 305k mortgage @ 7% for 10 years at 25 amort. Putting in the same payment options I would have done for the 375 mortage, im am looking at 11.2 years before being debt free, and the bank earns $128k interest off of me.So, its looking like, do i overpay for the house, or give the bank more money? The numbers favor overpaying for the house.

I had a look at the historical rates you've linked, and the 5% rates hoover around 5-6% for 5 years, so likely I am over estimating the interest rate? But I think given what people are saying about inflation etc, maybe its not unrealistic? Sorry, I frankly do not know too much about the banking/fiancial system or real estate so If i miss something importatnt in my calculations, please let me know!

Anon- no one can tell you what you should do. We are bouncing back from a near collapse of the world-wide financial system.

The pull-back has happened with huge infusions of tax-payer money to bail out the bankers who were irresponsible and helped blow-up this international RE Bubble.

I personally dont see inflation coming for some time, because people are still losing jobs, and big companies are cutting back or going BK (like GM and Chrysler), so I cant see where the demand will come from.

However there is the possibility of a 'black swan event' like a drought or mid-east war that could drive prices of staples much higher. That would be a total catastrophe. Weakening demand and buying power coupled with rising prices is what leads to social unrest- like the Russian Revolution.

I am just putting that scenario up there, not because I expect it to come about, but because that is the only way I can see any major inflation in the short-term.
If that is the case, then we should have these low interest rates for at least a year or so (though maybe not quite as low as today).


Affordability has improved dramatically due to the drop in mortgage the second part of the equation will come into play for RE - the demand.

That depends on many factors...job market strength, in-migration from other Provinces and countries and commodity prices.

Together these will determine the cumulative demand for RE in our Province. Can you forecast one of these? Never mind all of them!

I cant. That's why I laugh when I read bears or bulls picking on one factor and saying this is the cause RE will collapse or rise. Did anyone think the desperate measure taken by the BOC would suddenly prop up RE from Toronto to Vancouver?

Did anyone expect oil prices to nearly double from the lows earlier this year which were sending Alberta into a major recession? Can anyone forecast where they will be in six months?


Therefore you can see how difficult it is to forecast RE which is dependant on all these factors.

However we all make our bets and mine is that we still have a lot of weakness ahead. Canfor has just idled three mills with no start up date, the Provincial and Federal Governments have lost control of the deficits, and cannot even forecast where they will be in three months. I would expect cut-backs and lay-offs to continue for the foreseeable future. All this does not seem to be the makings of a robust housing market.

I think your numbers make sense, however you should also be asking yourself how secure your job is, what will you do if you lose it and go on EI for six months, do you have reserves or family and friends who can help you out...etc.

Wednesday, May 27, 2009

From the comments...

Hi, my name is May13 Anon (Fish wants me to pick a real name). And I brought a house last week.It was a very strange feeling after firmly believed this Vancouver Market will drop at least 50% for a long time.
There were a few things happened in my situation made me to change my mind. The numbers works out good in the purchase. Since it was a family deal, we were able to pick up a Town house in a pretty good area of East Vancouver (Killarney), plus the low interest rate. My mortgage for the next five years would be around 1200. And we also arrange the deal, so we don’t have to pay the darn CMHC 1 penny (that is very important for me).
Yes, the interest rate could be 15% five years down the road. But I could have hit by a truck as well. That's life.What hits me the most happened couple weeks ago. As I was riding my bike to home I saw groups of people gather outside. You know these people too. They are usually three in a group. One well dressed person accompanying an anxious couple standing on the sidewalk. Yes, realtor + would be home buyers.
Mind you, there is not just one group but 4!I was thinking: good god! When will these people go away! We saw BC poverty rate and EI claims soared this year. Who are these people? I have no idea, but I know there are plenty of these people out there.I well aware this decision effectively kills my dream owning a SFH. But oh well, I want to live in Point Grey too.Now the darn mortgage broker hasn’t returned our calls. Which means he is probably damn busy.My bear friends, what is your take? P.S 5 yr fixed is 3.55, should I go variable?

Hi May13. Firstly congratulations! No need to apologise. I will let you into a secret...all the bears who read this blog, myself included, hope to buy a home one day.

If not, why would anybody waste their time reading a housing blog.

You bought because the numbers worked for you and that's great. As I mentioned before, the cost of home ownership has come down nearly 40% from the peak due to the price drops so far and the drop in motgage rates. There are many other reasons to buy apart from financial and there are many reasons not to as well.

No one can advise you to go fixed or variable, without knowing your circumstances. A couple of hundred dollars spent talking to a good accountant would serve you better than all the free advice that you will get on the Internet.

here are a few points however:

3.55% is remarkably low. If you look here you will see that this is historically low. These are posted rates for commercial banks so you could take 1% +/- off, but even so, these rates are incredible.

No one knows where the rates will be in 5 years, but if I had to guess I would say higher.

Over the recent years it has always been beneficial to go variable rather than fixed, since fixed has always been a few % higher and because we have been in a twenty year span when Central Banks have been bringing rates down. As rates come down it benefits variable mortgages.

Of course there have been spikes up, but on the whole the trend has been down form the 20% of the late 70's to less than 1% now.

Over the life of a 15- 25 year mortgage you would have done better going short and variable than long and fixed.

However things maybe different now. For one, we cant go any lower, so by Murphy's law we can only go higher. If inflation shows up again (say in a year or three) then the Central banks will ramp up short rates. Long rates would probably be driven up by the market too. However if you went variable and could just make the payments, you may have to leave your home with little ceremony.

Fixed offers you 5 years of security. You know how much you have to pay. Variable leave you open to the whims of Central Bankers.

A well-known episode of this occurred in 2004. When Alan Greenspan famously told everybody to save money on their mortgages and go variable. Millions followed his advice.

He then raised fed rates 16X!! From 1.25% to 5.25%. People got skewered! Their payments often doubled or more. This was one of the contributing factors to the housing debacle in the US. I am amazed no one sued him, I would have.

So there you have it.

I like security, some like to pay less for now. Maybe you can get a spit mortgage with half in each if you are not sure. But definitely speak to an accountant who can show you the difference in payment if interest rates start to move up.

BTW bears...let me clear this up-I am not buying. I think we are in a window of calm before the financial storm sets about again. We have dramatically rising unemployment, debt, deficits and I don't see any of this turning around in the near future. It might not be the near collapse we had in fall, but it is not full speed ahead again IMVHO.

So based on that I cannot bring myself to take a bullish stance. However if a deal comes my way, that makes sense, I will look at it. Nothing has come near so far.

Friday, May 22, 2009

Not much to say this week...

The Canadian banks have been down-graded by Credit Suisse who thinks we still have some fiscal pain ahead.

Japan is in bigger trouble than anyone thought, with a 4% first quarter drop in GDP. That is enormous. Since then the Yen has appreciated against the dollar so expect more of the same, as they are an exporting nation.

The Canadian Dollar has had a nice little run, which I have used to buy some US dollars for trips and shopping. Everyone is abandoning the US Dollar as they think the US government is going have to bail-out companies and issue debt for a long time. They will, but then so will every other government. So I am betting within a year the USD will move much higher once again.

The UK had it's rating put on 'credit watch'. Now some of you may think that it is impossible for a first world sovereign nation to be put on credit watch. It did happen to the UK in the 70's when the IMF had to pull them out of the ditch. However it goes to show you how bad things are.

I do not think we are out of the woods by any means.

I am seeing a slight drop off in sales for this week, and lower prices on the sales. The froth that built right after the big mortgage rate cuts, is diminishing. Folks are beginning to realise that there is no point taking on a $1M asset, loaded with debt, however low the rates....if... there is a good chance you they not be able to make the payments in a year, the asset is no longer appreciating, and they end up having to sell and lose your equity.

What are the rest of you seeing out there?

I am seeing consternation amongst the bears and even the most bullish Realtor bloggers are expressing surprise about the market strength. No surprise at all.

About a year ago, when the market was it's feverish heights, many bears (myself included) estimated that the market was 40-50% ABOVE the affordability level for this city.

Well we were right, it's just that the mechanism of correction wasn't what we expected. We expected housing prices to drop 40-50%. Well as we all know, sales went into free-fall from Oct 2008 and we hit 20 MOI.

Then the Central banks cut rates to near zero. The net result is a 12-15% drop in prices and 30% drop in mortgage payments, which gives us our 40%+. The payments have come down to the affordability level of a year ago.

So am I buying? Not yet. Note above I said the affordability of a year ago. I think we live in a very different world from a year ago. In the interim many large banks in the world have teetered on BK and have been rescued by tax-payer money.

Two of the big three auto makers are moving slowly into bankruptcy, even Toyota has suffered it's first loss in 70 years!

So this is not the same world. I doubt many of you reading this blog will get much in the way of pay raises if you are an employee, or make as much money as last year if you are self-employed.

So the affordability level is actually lower now than last year and I would expect housing to have to correct further. How much further? Well that depends what happens to interest rates. they cant get lower, but they can go up, as is happening in the US now. As rates rise, the prices will have to adjust for that as well as lower earning potential.

Meanwhile I found this sad tale on the Internet. The dirty side of a reckless boom going bust:

Wednesday, May 13, 2009

Response to a comment

Anon (wish you would pick a name) said :

One more thing adds to the spring bounce. In the chinese media. They report shipload of chinese investors are buying. Canadian dollar has gotten a lot cheaper. Overseas chinese investor has more wiggle room than us even if the market drop another 20%.
If you earn a paycheck here in vancouver. Various taxes have already eaten 40%. I feel it is harder and harder to get by.I myself already cut one of the family cars. So the government has one less thing to tax me. Family finance really doesn't really add up.
If anyone interested, I can let you know how much I spend and how much i earn every month. As I think a lot of people are in the same boat like me trying to make ends meet. However, both political parties do not seem to get it.
Fish, I can see you have soften your bearness. I guess this is the reality out there. I've also given up my hope for affordable housing in Vancouver. We will probably buy the end of this year as all my reasons to delay the purchase have proven "wrong".Good health to all.

Lots of stuff there....

Firstly I agree, when folks come from areas where they haven't paid taxes it makes it tough for the locals to compete after paying 30-40% in taxes. It's nice to get their money here, but it also pushes up housing costs for those who live and pay the taxes here. It is certainly a double edged sword.

China is such a behemoth , that I have no doubt it does and could have an even bigger effect on Vancouver house prices, just as US buyers/investors were the main drivers of Whistler's explosion over the last ten years. However I haven't seen a huge influx of wealthy Chinese investors as of yet.

So I have become a 'softer' bear' :)

When I started this blog a year a couple of years ago, I was a rip-roaring no holds barred bear. The price inflation in RE was just crazy and I tried to warn folks to be careful.

We went higher and dropped down and are now back to the levels when I started the blog, or down a few %, but 5 year fixed mortgages have dropped so much that affordability has improved. Am I just as bearish?

Well I am worried. Not worried, like you, that I may have missed the (tiny) window of opportunity to buy and prices will now sky-rocket again. I am worried about the over-all economy.

This is no ordinary recession.

- In previous recessions I didn't know anyone who had lost their job and couldn't find one straight away. This time, I have several friends and family out of work and looking.
- I told you that once the election was over, we would learn the truth about the economy and cuts would come. Well today we learnt that there will be some cuts as Provincial government income drops. e were also told that the economy will contract 3% in BC instead of the previously forecast 0.8%. Big difference!

Why is it that our governments never save for a rainy day, but spend every penny in good times and then have to cut spending at the worst possible time, right into the teeth of a recession?

Anyway anon. I think you WILL see lower house prices. I don't think we are out of this mess by a long way. The only reason we have not collapsed, is because the Central banks are throwing everything they have at this. Low rates and even buying auto loans from lenders. The ship is still listing badly despite all the baling.

Good health to us all, indeed. I have learnt first hand how important that is, more important than whether you own or rent or timing RE.

This will be my week-end post and I will add to if anything comes to mind.


How bad could things get?

Well here's how bad they are in some parts of the US

House-Price Drops Leave More Underwater by Ruth Simon and James R. Hagerty Monday, May 18, 2009 Wall Street Journal

The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration's efforts to stabilize the housing market.

The increase in the number of such "underwater" borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

For instance, fewer will qualify to take advantage of a key component of the Obama administration's plan to stabilize the housing market. Under the plan, announced in February, as many as five million homeowners whose loans are owned or guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac can refinance their mortgages, but only if the mortgage loan is a maximum of 105% of the home's value. Government officials are considering an increase in that limit.

"It's a question that we're looking at," said James Lockhart, director of the Federal Housing Finance Agency, which regulates Fannie and Freddie. Real-estate Web site said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter.

"What's going on here is that you don't have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks" of communities where home prices have fallen, said Stan Humphries, a vice president. Borrowers who owe far more than their home is worth may also be less likely to participate in another part of the government's housing plan, which provides incentives for mortgage companies to modify loans to make payments more affordable.

Thomas Lawler, an independent housing economist, said borrowers who owe 30% more than their homes are worth are far more likely to walk away from their property than those who owe just 5% or 10% more and expect prices to rebound. More than one in 10 borrowers with a mortgage owed 110% or more of their home's value at the end of last year, according to First American CoreLogic. There are some recent indications that the housing market could be beginning to stabilize.

(stuff deleted)

% of Homes with Negative Equity

Las Vegas 67%
Stokton Ca 51%
Modesto Ca 50%
Reno 48%
Vellejo Ca 46%
Phoenix 42%
Orlando 42%

Over-all US 21.9%

Monday, May 11, 2009

The market drivers

In my last post I told you how RE has become a lot more affordable due to the 15% drop in prices from the peak and the drop in mortgage rates.

These two factors have reduced the cost of owning property by between 30-40%. No small amount.

Add this to the normal seasonal factors and the current strength in the market, which seems so inexplicable to many bloggers, is obvious.

Does that mean we are off to the races again and should expect double digit appreciation?

I don't think so. Why?

The economy will trump everything. In the US they had the same metrics and housing only stabilised temporarily before resuming it's downtrend.

Of course the US had crazy 0%-down, neg-am, interest only, no-doc mortgages which helped bring their house of cards down. We are not in such a bad shape, but we do have a lot of people who have got in way over their heads in upper and lower end RE. We are also very dependant on resources and the construction and service industries (eg building and selling houses to each other) and have a higher median age than Ontario or any other Western Province.

We are in a major recession, with more lay-off coming and if the economy doesn't turn soon, 'we could see a race for the exits', as some owners are forced to sell..

As the economy weakens, two factors will impact RE prices. Wages will not rise and family income drops as unemployment increases. So while affordability is increased, it may be cancelled out by lower income.

Secondly rents are likely to stagnate or even drop. Therefore the rent/buy comparison I made a few posts ago tend to favor renting, where costs are fixed- whereas owners will face the increased costs of repairs, increased taxes and changes in interest rates.

It may seem to my readers that I am arguing both sides of the coin, saying how much more affordable RE is in one post, how renting and owning are becoming comparable in another post and then explaining how I still think prices will fall further.

The truth is, there are many cross-currents affecting RE, as with any other investment, including some I haven't thought of, which may in fact be the critical ones!

However look at the housing boom of the last 7 years.... As affordability became more stretched, the bears became more convinced that a correction was inevitable. That was 2004! It caused a small drop and then we had fours more years of sizzling hot price inflation.

By 2006 I remember bears frothing at the mouth on the news that 50%+ of income was needed for housing costs. Sure enough there was another small and very short-lived blip down then, too. But by 2008, it had reached nearly 70%. Momentum and a speculative boom overwhelmed the lack of affordability much to the bears disbelief. (me included)

You can see the very short-term dips in 2004 and 2006 on this chart:

Now we have the opposite. Increased affordability has stopped the market from dropping, but the negative momentum and uncertainty will likely overcome the short-term stabilisation.

I think we have moved from a bull market in RE, ( and stocks) to a bear market in both. Both will have a bounce, but I think they will both eventually go lower.

At least that's how I see it. However, as I mentioned, there can always be some other factor which unexpectedly changes the equation. You can only make the guesstimates based on the information you have available. If I see a very strong summer/fall in RE and a solid turn around in the economy, then I will have to re-evaluate my theories. I don't expect either one.

Saturday, May 9, 2009

Where to now?....and then some

Rob Chipman, the realtor who has been blogging and posting numbers steadily for the past few years put up a thoughtful post recently: In it, he admits that even he is surprised by the strength of the Spring bounce and wonders what's up?

Well I think what's up is that a lot more homes just became affordable. We are down anything from 12-15% from the peak and interest rates have brought the monthly mortgage payments down 20% or more. Combine those two and you can estimate, that even though we are still at bloated valuations (compared to income, historically etc), homes have become 30-40% cheaper to buy than at the peak.

That's pretty good and some folks who have been waiting to buy, or move up, have jumped on this opportunity. Others have refinanced at these low rates and so maybe able to hold on to their homes longer through these difficult times (another good thing)

This is exactly what the central banks wanted. They could see, residential and commercial property and stocks in free-fall and the whole system was at risk of collapse.

In our leveraged society, the ultimate holders of these assets are the banks, insurance companies and CHMC. The only thing that they could do, was what they had done again and again for the last two decades, debase money so no one wants to hold it.

Forgetting of course that this was exactly what got us into this mess in the first place. However, this time they had no choice but to pull out all the stops.

Frankly speaking if this didn't cause a small blip up in activity then we could all kiss capitalism goodbye and look for another system of societal interaction.

In the US, the blip was tiny, but enough to stabilise the stock market from it's quickest decline in history.

In our city, the blip was a bit more. That's good, but unfortunately I don't think it will persist for much longer.

We still are in a nasty recession. Lay-offs like the 800 person closure of E-bay's Burnaby call center will continue. Add to that the government cut backs, that in my opinion, WILL come from Gordon after the election, when a 'special budget' will show us how bad the books really are.

However for now there are folks buying. You see, there are some people who look at monthly payments and some who look at price. Those who look at monthly payments, cant believe their luck; prices have dipped, rates are down..they can buy...and they have decided that they wont look at the price in 6 months and kick themselves if their equity goes, or if the foreclosure down the street shaves 20% off.

Others are focused on price, they see a 20% a year, multi-year rise and then, in the worse financial crisis since the great depression, a 15% drop. Surely that cant be it? They would be upset to buy something, the biggest thing you ever buy, and then find it 15%+ cheaper in a year or two.

Count me in the second group. I have waiting so long another year is hardly a chore.

June and the summer will be very telling.


Just got back from the EPIC sustainability show. A bit of a disappointment. I was expecting some solid ideas on how to reduce waste, particularly plastics which are destroying our oceans and rivers. Instead I paid $15 to wander through a bazaar with people trying to sell me stuff.

There were a few stands given to Fraser River protection and other environmental groups, and some interesting speakers, but ING? Investors group? The car companies??

Lots of food samples, given out in little plastic cups...duh! How the heck is that sustainable??

Kudos goes to Salt Spring Coffee Company which was the only one (that I saw) using coffee mugs for their samples, and this company stood out for me: You can buy all your summer picnic wear..plates, cutlery, even straws for $30 or less and it's all biodegradable.

However the show did not meet my expectations, but then it was sponsored by my least favorite media monopoly.

First look at the convention centre for me, and I liked it. Lets hope it isn't an expensive white elephant.

BTW - when I bought my ticket they asked for my phone number? Huh? Why? The last thing I want is some call centre trying to sell me something...maybe even a newspaper subscription?? No!

Tuesday, May 5, 2009

Another way to value a house

In this post I compared renting versus buying, as one way to try and value a house.

However it does imply two things, 1) that you have money to pay down a mortgage. If not, it is much cheaper to rent the same property than to buy it. 2) that you have security of income stream. If not, having to sell under duress could be financially disastrous.

However, if I was an investor, I would be evaluating the price by slightly different metrics. As I mentioned, these mirror, but are not the same as the rent/buy comparisons.

Cash flow negative, neutral or positive?

OK time for some explanation. Every property is cash flow positive if you buy with 100% down! So these terms are relative. At what % of down-payment does the property become cash-flow positive. 10%, 25%, 50%?

During a boom, investors are more likely to buy properties which are only cash flow positive with high down-payments. It means they often 'top-up' the rent to pay the expenses, but expect to gain on a robust rental market, and with capital gains.

Rents go up by inflation or more, while the mortgage is being paid down, so properties that start off being cash flow often negative end up being positive after a few years.

In a recession the opposite is true. Rentals are weak, renters may fall behind, and capital gains cannot be counted on, in fact the property maybe dropping in price and will need repairs etc.

In this case I would want to see a the property cash-flow neutral or positive with a very small D/P at purchase.


I don't think this is the average recession. If it was, we would not be sitting at near zero rates and the politicians and central bankers would not be saying, with fear in their eyes, 'we must prevent a depression', before the recession had even started.

This may be one of the few times in history when renters can negotiate no increase or possibly even a rent reduction, when their lease comes up, as the economy softens.

I have just negotiated my house and commercial lease with zero increase for the coming year. And in case you think I am so smart (I am not) I could leave and get into comparables for both 5-10% cheaper. Had I done a bit more market research before I signed the lease extension, I may have got a better deal.

So imagine you are an investor and your renter wants a rent reduction. The alternative is to try and rent it our again in a softening market, with possibly other concessions too. In this instance, a cash flow positive property can become cash flow negative!

So if I buy something now:

1) I would have to be able to carry it without suffering too much, if the income drops or if the renter falls behind, or leaves after missing several months of rent, or it cannot rent quickly, or the market dictates a lower rent.

2) I could handle a reasonable increase in interest rates. No one can foretell where rates will be a year or five from now, but they are remarkably low now. So if the property cannot cash-flow at these rates, then you are unlikely to get much benefit from lower rates in the future.

Incidentally the investor will need to make provision for repairs and special assessments AND the very real possibility of increased property taxes after the Olympics.

While an owner may shrug these of as the cost of owning, for an investor these added expenses reduce, or in some case can completely obliterate his/her returns.

Therefore the deal for an investor has to be significantly better than the rent/buy comparison particularly in a softening market and recessionary environment.

BTW: another great post by Mohican which must not be missed:

Sunday, May 3, 2009

Sorry about that lack of posts folks

I really don't have anything to say.

In my opinion, we are in a temporary stabilisation driven by low interest rates and the realisation that the financial world did not come to an end, despite the irresponsible actions of the elite who run it.

Nothing goes straight up or down and we were due for a bounce, to let some anxious buyers get on board.

I am waiting until after June to see what happens to prices.

I suspect there is a lot of inventory waiting for see firmness to list. If so, being human, they will wait and wait, until the first sign of weakness and then try and unload.

Time will tell...