News Flash: Real estate guy dumps on article below
Just received this insightful email, which is well worth passing on. Was it just six or seven months ago the property experts of idyllic Kelowna were saying it couldn’t happen there? Duh. — Garth
Mr. Garth Turner,
I know your time is very precious in this election year, but I though Iâ€™d drop you a line about the city I live in; Kelowna, British Columbia.
According to OMREB (Okanagan Mainline Real Estate Board) data, our housing market peaked out in March of 2008, with the average home price sitting at around $542K. In the six months following the peak of our market, the average home price has fallen about $67K; by far the highest raw dollar and percentage rate in all of Canada, and perhaps in all of North America for the six months following a market peak.
This is greater than Vancouver ($45K over 5 months), greater than Calgary ($62K over 16 months) and greater than Edmonton ($64K over 14 months). In effect, the owner of an â€œaverageâ€ home purchased at the height of the Kelowna housing bubble has been losing $11,000 per month, or about $370 per day of their home equity.
When you look at that $67K drop, that ends up being about 12% from the top of the market, or 25% annualized. This is a rate of decline which is accelerating, because the annualized rate based off of August OMREB figures was 21%. I would not be surprised to see the annualized rate of decline to hit 35% before the new year.
The thing is, when you have a look at all 5 Fundamental Housing Rules, the Net income of the average Kelowna family and combine them with Kelownaâ€™s 50-year moving trendline, it would not be unreasonable to expect prices to fall 70% (or more) in order to return to the realm of affordability.
These â€œ5 Fundamental Housing Rulesâ€, which have been used to great success for the last century, are:
- The monthly mortgage payments should not exceed 33-35% of monthly Net family income.
- The monthly mortgage payments should be around 1/120 of the mortgage, and no less than 1/200 that of the mortgage (this is the â€œ120 ruleâ€).
- The monthly mortgage payments should be – at minimum – 15% less than comparable rents for similar units in the rental market.
- The price of the house should be about 3 and no more than 3.5 times that of Net annual family income.
And perhaps, the most important one of all;
- The average house must be affordable by the average family and their combined income.
Using all 5 fundamentals, the 50-year moving trendline of the price of an average Kelowna home ($174K) and the average Net family income for Kelowna residents ($53K/yr), the resulting â€œwindow of price rangesâ€ means that the average home price should sit somewhere between $150K and $180K. This is a drop of about 70% from the March 2008 high.
Image thatâ€¦ a price drop of 70%. And this is a middle-of-the-road estimate; neither optimistic nor pessimistic.
Now imagine if the world enters into a Greater Depression. Average wages decline, which then causes the â€œwindow of house pricesâ€ (as defined by the 5 Housing Fundamentals) to go downward as well. If we do indeed end up facing harsh economic times down the road, we could easily see a peak-to-trough drop of up to 80% in the value of the average Kelowna home.
80%. Peak-to-trough. Boggles the mind, doesnâ€™t it?
What makes these figures all the more realistic and rational is the state of the Kelowna and area economy. In a normal, healthy economy that can weather significant changes in prices, there tends to be 30% of the population employed in service-level and/or entry level jobs, 60% in middle-income, middle-wage jobs, and 10% employed in high-end, top-tier jobs that garner the highest wages. With this kind of a distribution, the middle-income, middle-wage families provide the economic buffer to moderate any bubble and cushion any crash.
Unfortunately, Kelowna has these percentages switched around — over 60% of our economy is service level and entry level jobs, many of which garner less than $12/hr (and this is in an economy where people require a minimum of $15/hr in order to properly support themselves, much less a family). Only about 30% of the jobs in Kelowna bring in a decent, middle-income wage. As such, Kelowna is particularly vulnerable to dramatic bubbles and catastrophic crashes.
And there is precious little optimism for future growth. The Alberta Oil Sands projects are slowing dramatically, and fewer Albertans are going to have the cash or the desire to spend copiously on a second or third vacation home. Retirees, who have made up more that half of our population growth, are seeing their retirement funds wiped out; both in the devaluation of their current home (which many retirees have been relying on to fund their retirement) as well as the value of their investments in the overall markets. In particular, the massive declines of the stock markets have been delaying the retirement of many baby boomers by as much as a decade or more. Remember, retirees are on a fixed income, and as such, are by far the most cautious of people — they are the first to avoid a declining market and the last to jump back in once it bottoms out.
Compounding this entire clusterfrack of a housing bubble is the speculative market. Many new developments have had the majority of their units sold to speculative investors. The Centuria project on the corner of Bernard Ave. and Gordon Dr., in particular, is over 60% flips and assignments. Even my own apartment complex – which is relatively new but far from prestigious – has had close to 15% of its units purchased by speculative investors. Once all of these speculators and flippers try to flee the market, we will have an unprecedented glut of housing that will push prices through the basement.
In fact, we are already seeing a massive spread between listings and sales that is unprecedented in our history. Sales for September have all but collapsed (265), and listings continue to reach for the sky (6692). If the trend continues, as many as one in five homes within city limits could be for sale at some point in 2009. Heck, we already have 25 months worth of inventory sitting on the market, and a healthy and normal market should only have about 3 months of inventory. These kinds of market stresses will only force the price plunge to be sharper and deeper.
Yes, things are going to get very nasty in Kelowna over the next few years. There are going to be many homeowners, speculators and flippers who purchased within the last few years who will find themselves holding an asset that is worth far less than the mortgage on it. I have posted at length on this subject in a local community website and forum called Castanet.net; you can find my forum threads at http://tinyurl.com/castanet-1 and http://tinyurl.com/castanet-2. Be aware, however, that the second one was started last November, and currently is sitting at 338 pages and 5080 posts. It will be a long read.
The Chinese have a very polite curse: â€œMay you live in interesting times.â€ To be certain, the next three to five years will be very interesting times for Kelowna and its residents.
30-year resident of Kelowna, BC