Victoria Stats and Trends

Real estate was an exciting, dynamic topic up until February this year. The last few months have been booooorinnnng…. which is clearly reflected in this blog and others, where the conversation heads towards other more interesting topics (for now).

The wife, our especially cute baby and myself hit up a couple open houses this past weekend just for fun, and it was pretty much the same old crap. A 1940’s trashed-by-student-rentals on an ultra-busy street with a 6′ basement for $429k+. A modestly updated home in a modest area with a business conversion in the bottom that desperately needed unconverting for $500k, listed with 1% Realty.

The number of listings is nothing new, the number of sales is nothing new, the creeping changes in prices (up or down) is nothing new, and the greed displayed by sellers and landlords is nothing new.

Something new is needed. For us, it’s a new townhouse rental (hooray!). For the market, it’s interest rates. I wait with blogging fingers at the ready, daring to hope that they actually do something.

Could you live with 20% less salary then you are making now?  Could you pay your mortgage if you bought a house in the last 3 years?

That’s what government workers in BC are up against. It’s sad when a harsh prediction comes true, but over the last year, the prediction of government job losses after the election might have been one of the most astute that the bear camp has been making. Not even two weeks after the election, the government backed up the manure truck on them and announced the “voluntary”, “10-week trial” of government employees moving to a 4-day work week.   Do any bulls want to predict just how temporary this will be?

So where does this leave Victoria, with it’s all-too-diverse economy, (as the Zone would have you believe).  Well, we can use BC Stats publications to estimate that there are 22,300 government workers of all types in Victoria, and that about 25% of those are provincial government, which translates into roughly 5,500 jobs.  About half of them are currently “eligible” for the 20% pay cut, but come the end of the summer, it’s anyone’s best guess as to how many will be forced to take the ultimate pay cut.   Whatever the hard numbers are, they aren’t good for the Victoria economy.

CBC news reported tonight that there was a 47% increase in welfare recipients in BC since September (more than 10,000 more people), including a 75% increase in the number of families that were receiving it.  I can only imagine what it’s going to be like twelve months from now.

Every which way I cut the news, I’m not finding the bottom yet.

Yes, I’m still here. Yep, I’m still blogging. I prefer not to post when I don’t have anything to say, and that’s been the case for the last month.

It’s been just over a year since we signed our condo away, although we had a long closing on it and it’ll be a couple months until the anniversary of the sale. The market hasn’t continued to drop in the last few months, but in the course of one year, the price relief has still been substantial. Last year at this time there wasn’t a real SFH on the market for under $425k meeting our criteria, but now there are more than 50 listings.  So a 13% price drop has definitely had a real and noticeable effect.

However, the last few months has been a great lesson of just how correlated house prices are to mortgage rates. The power of a rate drop from 5.5% to 3.66% was underestimated by the bears, and vastly understimated by myself.

My Fair Value Calculator, which I use to roughly ballpark how close an asking price is to what it’s real value is in terms of equivalent rent, shows a stunning change in fair value with this change in rates.  For example, a townhouse listed at $345k that rents for $1500 a month is 18% overvalued (fair value of $280k) when the mortgage rate is 5%. Change that rate to 3.66%, and the property is now underpriced by 11% (fair value of $383k).  This is just the nature of the formula, and as mortgage rates trend to zero, it become less and less useful as a tool.

This is not actually hypothetical situation - we are planning to move into the above townhouse for the above rent. How come, you might ask, when it seems like it would be better to buy it?

Well, first off, I believe that interest rates are a trap today.  They are the only reason this market is afloat.  If rates were still 5% right now, the bears would have been a lot closer to the mark on their predictions this spring, and prices would still be declining.  Since they have nowhere to go but up, we’d be putting ourselves at what I would consider to be extreme risk of unaffordable payments five years from now.

Secondly, in the long term, buying when rates are so low is very bad on the appreciation side of the equation.  Appreciation is the only way to make money in the real estate that you occupy - it is a technically a liability without the price appreciation.   And with the price appreciation being inversely correlated with mortgage rates - it is historically the worst time in history to expect your house value to go up long term.

Thirdly, even though the Fair Value equation says “yea”, the equity equation says “nay”.   At 3.66%, we’re right at the cusp of rent equivalency, but the $5000 in strata fees, property taxes and average maintenance means that by renting,  I beat the equivalent equity I’d be getting in the first year of holding the mortgage by about $3000.

So we’re happily upgrading our rental situation in a big way, and will continue to be vultures in this market.  It’s really only been two months of “bullish” action on the market, and we are unfazed by it, although it sure would have been nice to just get the whole downcycle over with in one year.

Probably the best blog discussion of the year so far is currently going on over at HouseHuntVictoria - check it out if you haven’t seen it already.  Reid’s post explains the numbers behind what is happening in the market right now, and HHV follows it up with a post showing how dramatic an effect the low interest rates have actually had in stimulating the market.  It’s pretty clear that without this stimulus, prices would still be going lower right now.

I admit then, that my calls in December were off.  I did not foresee the pending interest rate cuts as having such an effect.  But the low end of the market is definitely churning, and that is keeping inventory lower than I expected.  I do think we’ll return to higher inventory numbers this spring (it’s unlikely that sales will outstrip listings IMO), but it seems more like we’ll hit last year’s highs rather than set groundbreaking new ones.

So where are we at?  Prices are somewhat lower than last year, but are likely to remain stable for the next couple of months.   Like Patriotz though, I think layoffs are a’ comin’, and unlike the anonymous “economy pump” ads that the Zone has taken to playing, I think Victoria won’t fare well through the summer.  Tourism is probably going to be the worst year in memory, government layoffs are a sure thing, and I know from some close sources that retail sales are still down (at least in certain segments) by large numbers (think 50%) from last year.

It’s shaping up to be a dull couple of months in the market in my opinion.  My wife and I are content to keep sitting tight, especially as we gaze out on the moving van in the driveway and celebrate new neighbors moving in below us