Hallucinating in Halifax

Sales down 5%, listings up 26% in Van

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Hi Garth,
Last year my husband and I bought a 80 year old home in a ‘trendy’ neighborhood in Peninsular Halifax that is now more trendy. We got an incredible deal and invested and did most of the updates ourselves .

We have increased the value around 40%. So my question is when to sell? The growth in Halifax has been more modest than other parts of Canada– does that mean the flattening and decline will be slower? Does living in the city where there are no empty lots to build mean the value will hold better?

If it were up to me I’d sell next year, but my husband is VERY resistant to the idea that the markets will crash and burn, he works a lot and I read a lot more. Any suggestions on a simple to the point argument that I can convince him of the severity of the situation? I try to translate all that I have read and my conclusions to him but I don’t articulate it well and sound crazy. He says I am a conspiracy theorist when I say the mainstream media as economists in Canada are BSing us.

Thanks for the truth telling, I caught the tail end of your visit on Halifax News 95.7, I wish I hadn’t missed it and got to hear what you had to say in regards to our area.
Sarah

Halifax is like all other major cities, and your 40% appreciation shows that quite well. Have prices there grown at a more moderate pace? Yes, and as I have said before, that will mean the flatlining and eventual decline will also be more modest. But there is absolutely no reason Halifax will be immune.

My book details the reasons for this, and you should buy him a copy. Barring that, simply ask him why real estate values should go up continuously when no other asset has had that experience? Why should homes escalate in price even when people have trouble buying them at existing prices? Would you purchase your own home today at the price you think it should command? And would you believe it to be fair value – but only if it continued to appreciate another 40%? Are family incomes in Halifax rising at a comparable rate? If not, where’s the money coming from? How long can families accumulate mounting debts, and what happens when the economy inevitably and routinely takes a dive?

Hubs needs a kick in the butt.

Hi Garth,

I just finished reading your book. Thank you for writing it! Very informative!

Not sure if you respond to personal enquiries but I have a question for you… I know that in a level play ground, profits drops to minimum possible level. Then, what is the competitive advantage of realtors and their industry that keeps them around with such high profit margins? what is their added value? As Mr. Warren Buffet puts it, what is their moat that keeps competitors away? Why competition does not shrink their percentage of commission? why 5% not 1%? How come this industry does not have a competition that we see in, say, chip/cell phone industry which dragged the prices down? Are they running a monopoly? Then should government/regulators break that? or at least facilitate competition?

I appreciate all the knowledge you shared with us throughout you book…

Ali – Toronto

PS: A condo I pre-purchased in January 2007 in downtown Saskatoon for 185k is now priced @340k. Lets see if I can find a greater fool…

For years the real estate industry laboured mightily to maintain a fixed commission rate of 6% which, in a rising market, was outrageous and in a falling market often inadequate. Obviously, as with the rest of the world (except lawyers), compensation should have something to do with effort expended. In recent years, the commission monopoly has been shattered, and you can find lots of agents who will take your listing for a rock-bottom rate.

Fine. But commission alone should never determine how you select an agent. Before you agree to list, get a detailed marketing plan and a commitment on such key essentials as advertising budget and web exposure. Choose an agent experienced and successful in selling properties like yours, and in your geographic area. And never, ever, ever fall for the ruse of signing on with the guy who tells you he’ll get the most money for your home. Instead, insist on seeing comparables before you commit, and make your decisions based on a realistic expectation of results.

Mr Turner,
I have not yet read your book, though I plan to in the near future. I hope to be enlightened on why paying a mortgage weekly or bi-weekly is so much better.

From what I have read on your blog, you suggest that we pay a quarter of a monthly payment on a weekly basis. So if a monthly payment is $1,000, then you propose paying $250 weekly.

On the monthly schedule, a person would make $12,000 worth of payments in a year, compared to $13,000 in a year on the weekly schedule. Of course the mortgage will be paid sooner if people subscribe to your logic, but what if they can’t afford the extra $1,000? My question is: If someone can afford to pay $1,000 more per year, why not simply increase their monthly payment by $83.33 ($1,000/12)? By doing this, the difference becomes negligible. The only real difference becomes the timing of the first payment.

Your advice on this topic has been offered by lenders for a long time which gives people the misguided impression they are somehow cheating the bank.

If people want to pay down their mortgage faster, making larger payments goes a lot further than paying proportionally less more frequently. As a personal lender, I find that I often have to correct people on this misconception.
René
Winnipeg, MB

You do not understand how amortization works. Interest on the total outstanding amount of your mortgage debt is calculated daily and posted to your account on an infrequent basis. Regardless of when the interest is evident to you, it is still accumulating. Therefore, a true weekly-pay mortgage reduces the total amount of the outstanding balance each week, and over years this has a major impact on the final interest bill. Paying an extra amount monthly does not have the same effect. Period.

Can’t find an extra $1,000 per year? Well, get used to paying tens of thousands more over a decade.

Hello Mr. Turner
I enjoy reading your blogs and was wondering if you could answer me a question. I am 32 married and have been looking to buy a home as we have waited a couple of years for a downturn which appears to be on the way. however, people keep telling us to buy now since we are buying a house for long term so it would not make a difference considering we pay 1500 a month in rent. When do you think we should jump in?

Peter

Can’t answer with any validity, as I have no idea where you live. However, it is obvious to me we are in the first few initial stages of a real estate downcycle which could last from two to five years, and bring a price decline of from 10% to 40%, depending on the market and type of home. For example, yesterday a colleague told me of a home on his street in suburban Toronto that was listed for $679,000 and sold for $529,000.

First comes a decline in sales. Months later valuations crumble. Still later the industry reports it.

That 20% haircut is but the start. Why on earth would you buy now?

27 comments ↓

#1 Gabby on 05.03.08 at 3:14 pm

I have been reading all your posts with interest and much fear. I bought last year in East Vancouver a beautiful 100 year old home. We paid $750k and put down $330k. A few months later, BC Assessment put the value at $807K. Should i stop crowing and begin crying? we plan on staying here at least 13 years.

Congratulations on your property tax. — Garth

#2 vultur on 05.03.08 at 4:49 pm

Gabby,

Ignore Darth Mortgage. He’s just bitter that you’ve found yourself a fine place to call home scenic BC while he’s probably stranded in some corporate suites unit in unappealing Ottawa.

Enjoy your new residence and don’t obsess about its market value as long as you can afford it.

#3 anxious renter on 05.03.08 at 5:30 pm

PS: A condo I pre-purchased in January 2007 in downtown Saskatoon for 185k is now priced @340k. Lets see if I can find a greater fool…

That’s crazy, doubled in less than a year. The whole market is saturated with these speculators. They all want out now, watch out fools…

#4 Clive on 05.03.08 at 5:46 pm

Hi Garth

Thank you for writing such an informative book – Greater Fool.

I have a question for you. I currently own a 1200 sqft Condo on the Waterfront in Toronto(Queensquay) that is currently leased.
I paid $335K for it in 2004 and I currently owe 220K on it .

Given the fact that this condo is so close to the down town core, I had no problem leasing it over the last couple of years mostly to corporate clients who want to live close to work. There is also a lot of development in the area as the goverment commited to developing the Toronto Waterfront.

What are your thoughts in regards to the leasing market there? Will the property values tank in this area ?

My wife and I love the Waterfront and would love to live there eventually.

As you know, that is Condo Alley, with tens of thousands of units already built. Your strategy depends on two things: (a) current market value – do you know it?, and (b) leasing rate – have you been covering property taxes, condo fees, mortgage payments and lost earning power of the cash already invested? If you’ve made a capital gain, why not get it out? You will be able to buy in there for less, guaranteed, a year from now. Plus, if you have been in negative cash flow, is there any doubt? — Garth

#5 Jennifer & Steve on 05.03.08 at 5:54 pm

We recently sold our place in Campbell River – and none too soon as the market has gone downward recently due to the forest industry layoffs and “spec” building for the Calgary crowd. It amazes me that someone will pay $500,000+ on a house built out of OSB and cheap asphalt roofing … with no landscaping!

Anyway – we are looking to buy in Qualicum Beach, but it seems somewhat immune from the downward trend… possibly because it is such a sought after retirement community. What are your thoughts in regards to “desired” retirement communities such as Qualicum Beach; Victoria or even Tofino for that matter. The demographics alone would imply the demand will remain high for property in communities geared toward the retiring population.

#6 vultur on 05.03.08 at 7:45 pm

You will be able to buy in there for less, guaranteed, a year from now. Plus, if you have been in negative cash flow, is there any doubt? — Garth
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What makes you so sure of that Darth Mortgage?

#7 Sam on 05.04.08 at 12:59 am

Garth,

What’s going on in here..
http://network.nationalpost.com/np/blogs/toronto/archive/2008/05/02/addicted-to-that-toronto-real-estate-porn.aspx

This looks so unbelievable but of course it says it a recent situation…

#8 Ultraman on 05.04.08 at 1:05 am

Bi-weekly versus weekly payments,

Again, as discussed in previous post, there is little benefit to make weekly payment as opposed to accelerated bi-weekly. The reason being that you are not making any additional contribution to the principal. Your average mortgage calculator will confirm that.

Furthermore it doesn’t make sense to pay weekly if you are paid bi-weekly. Why leave the money in a checquing account at minimal interest for a week when you can apply it to your mortgage.

The most profitable option is to match your mtg pmt with your pay period and the only time when you should be making weekly pmt is in a situation where a couple are paid on alternate week.

#9 Future Expatriate on 05.04.08 at 5:01 am

Garth, understand why you are approving vultur’s comments in the interest of fairness and to create a little healthy controversy, but please, for the rest of us coming here for truth and answers, please consider trashing his useless posts, no matter in how many other incarnations he attempts. He’s tiresome, irritating, and infantile.

Thanks.

#10 P* on 05.04.08 at 6:12 am

Therefore, a true weekly-pay mortgage reduces the total amount of the outstanding balance each week, and over years this has a major impact on the final interest bill. Paying an extra amount monthly does not have the same effect. Period.

Actually, the interest savings from paying weekly is rather minor compared to the benefit of the extra amount paid on the “divide montly payment by 4 and pay weekly plan.” See the discussion from the post a few months ago over at Four Pillars (the post is titled “The ‘Myth’ of Weekly Mortgage Payments” in case my link doesn’t work).

So, if you can dig down and find the extra $1000/year to pay towards your mortgage, you would get nearly as much benefit paying an extra $83 monthly as you would by paying weekly and sneaking those extra $1000 worth of payments. Of course, the real trick is that the mortgage lenders seem to treat the extra $83 monthly as affecting your stated amortization time differently than the “rapid weekly” plan.

If you can’t afford the extra $1000/year, you will still save some money in interest by paying weekly, but the difference is slight (it adds up, but it’s nowhere near the benefit of finding those extra payments in your budget).

#11 Clive on 05.04.08 at 10:38 am

Garth

Thank you for response to my post yesterday .

In the book you mentioned certain kinds of urban condos of livable space, city bunglows, towns and some duplexes would be a brighter spot in real estate in the next couple of years ( page 202 )

The question is why to sell a Waterfront condo which is 1200 Sqft near the heart of the downtown close to everything? Does it not fit the size and location requirements for your statement above?

#12 Brad on 05.04.08 at 11:22 am

I’ve said it before, but I’ll say it again: The wheels aren’t going to fall off the economy until after the US election this fall. Call it a hunch or just gut instinct, but it’s my opinion that Bush will NOT let an economic collapse happen under his tenure. I’m also quite sure that “helicopter” Ben and good ‘ole Paulson will do anything in their power to keep the game going as long as they can…

And some might ask what exactly this has to do with the Canadian economy? To that, I say stay tuned.

#13 Alex on 05.04.08 at 12:25 pm

Fewer resale homes sold in first three months of year; new listings up
The Canadian Press
April 29, 2008 – 8:12 p.m.

TORONTO – Sales of existing homes in Canada fell by 6.8 per cent in the first three months of the year compared to a robust fourth quarter in 2007, the Canadian Real Estate Assocation reported Tuesday in an update of preliminary statistics issued earlier this month.

The group announced on April 17 that sales volumes in major markets in the first quarter of 2008 was down 7.1 per cent. The more recent analysis covered a broader selection of real-estate markets across the country.

In both reports, CREA attributed the decline was largely to fewer sales in Toronto in February and March. Toronto typically accounts for about 20 per cent of all existing home sales in Canada.

Activity also softened in British Columbia but remained strong in other markets, with new quarterly records for seasonally adjusted sales set in Newfoundland and Labrador and Saskatchewan.

On a seasonally adjusted basis, 117,000 units sold during the first quarter.

At the same time, the number of new listings reached a record level, the association said.

On a seasonally adjusted basis, new residential listings rose 5.5 per cent over the last quarter of 2007 to 223,400 units.

New listings surged in Alberta and B.C, more than offsetting a slip in Toronto

Year over year, residential average prices climbed 6.4 per cent to $312,580 in the first quarter – the smallest such rise since the fourth quarter of 2001.

#14 Sam on 05.04.08 at 12:35 pm

Future Expatriate ,

I fully agree. I would love to see Vultur banned. He is abnoxious and at times, insulting.

#15 Cam on 05.04.08 at 2:08 pm

Wow, everyone’s picking on Vultur.
“Enjoy your new residence and don’t obsess about its market value as long as you can afford it.”

Vultur is 100% correct about this statement. If you are in the market and only have a primary residence, enjoy it and don’t obsess over its market value. Assuming you haven’t overstretched yourself with debt and you made a reasonable down payment, all you can do now is move sideways. That is, if prices decrease along with your home, you don’t realize the loss when you move (similarly when prices increase).

The people that it matters for, and those who probably take the most offense to vultur’s comments are:
1) First time home buyers
2) Owners looking to cash in equity to subsidize retirement by downsizing/renting
It does matter when they enter/exit the market, to the tune of 1000s in mortgage payments and equity (respectively).

The other thing vultur says which you should agree with is “as long as you can afford it.”. In Vancouver income has been declining during the housing boom according to the latest census data. The current ratio of housing price to household income sits near 11.5:1 (Apr. ’07 benchmark = $771,321, income ~$67,000). A level NEVER before seen. Previous booms did not even surpass 9:1. The average ratio was 6.75 (from 1980 to 2007) for Vancouver making the average price around $450,000 (adjusted for inflation). I don’t expect to see that much carnage (you never know though, in previous downturns, the ratio moved lower than 5 in the 80s and just above 6 in the 90s) but clearly forces have driven the market beyond their fundamentals. Bottom line is there are plenty of people who can’t afford houses in Vancouver and plenty of inventory building. Affordability has been eroded to new heights (see RBC)

Thanks for reminding us about this vultur, you make good points about real estate in Vancouver.

http://www.rbc.com/economics/market/pdf/house.pdf
http://langley-financial-planning.blogspot.com/2008/01/vancouver-real-estate-bubble-uberpost.html

#16 vultur on 05.04.08 at 3:42 pm

Future Ex and Sam,

Darth Mortgage has no clue what he’s talking about. He’s just a snake oil salesman trying to peddle his wares.

#17 Nappo on 05.04.08 at 3:45 pm

Still waiting for the stats, or anecdotal evidence of what is happening with the Toronto market. Looks like it is the hardest data to find.

#18 Sam on 05.04.08 at 8:10 pm

Very hard to find any housing data – especially
Toronto. correct.

When are the numbers coming out for April sales ? Any idea ?

#19 Jordan on 05.04.08 at 8:27 pm

Mr. Turner,

My wife and I read your book recently and found it very illuminating. It’s hard to argue with most of your assertions, however dismissive the real-estate establishment might be of them.

We are in our early 30s and have rented since moving back to Canada four years ago. Many of our peers (mainly those who had “real jobs” while we were in grad school!) own homes, and we have heard the “renting is like throwing money out the window” argument from them several times. The calculations you present in your book go a long way toward refuting that statement (especially the value of investing the down-payment money).

I wonder if you would consider putting some kind of application or Excel spreadsheet on your website that could be used to carry out the calculation you go through near the end of your book (person A who rents a house for $2,400 per month vs. person B who buys it) to show how renters often end up ahead financially, depending on the appreciation of the house, local taxes, interest rates, etc.

There’s nothing like hard numbers or a graph to debunk widely-held myths.

I’m a scientist and am fairly adept at Excel, but I don’t know how all of the charges / rates apply, and when, in a real-estate transaction. Otherwise I would set up the spreadsheet myself.

Something to think about?

Jordan
Toronto

#20 vultur on 05.04.08 at 9:24 pm

Jordan,

Depending on where you live in the GTA I can almost guarantee you that you will come out ahead financially if you rent a house over the next 5 years, all factors considered. However, there are a few things to consider:

1. Do you want to risk uprooting your family if your landlord decides to occupy or sale the house on short notice?

2. Do you have any desire to create a warm and personalized home environment for your family by renovating and decorating your house? You probably won’t be able to do that if you rent the house.

These are important consideration that transcend the dollars and sense involved. I do agree though- if you’re only costs are rent and utilities and the owner covers repairs, taxes, and mainenance then I would virtually guarantee that you would save a significant amount of money as a renter in the GTA in the next 3-5 years even if the housing market continues to appreciation moderately.

#21 vultur on 05.04.08 at 9:28 pm

dollars and ‘cents’
lol

#22 Stoneleigh on 05.05.08 at 9:50 am

Think of renting a paying someone else a fee to take the property price risk for you. Considering how large a downturn we are on the verge of, it’s a very good deal for most people, even if you can’t paint the walls any colour you want. How much money should one be prepared to throw away just for the sake of for painting privileges?

In England, where the grossly-overvalued real estate market topped earlier than it has here, property prices are now falling by an average of 1000 pounds sterling (about $2000) per week. Good luck trying to build equity under those circumstances.

In Canada valuations had not got so far out of hand, but prices have been driven by the advent of 40-year mortgages which are our equivalent of sub-prime lending. These are a trap that will close once long term interest rates rise, which is likely even if short term rates are held down by central bankers.

Despite current comforting pieces of journalism (for instance Paul Krugman in today’s NY Times), the global credit crisis is very much nearer to its beginning than its end. Writedowns for bad debt have barely begun in many jurisdictions, non-borrowed bank reserves are negative, and central bankers like Bernanke and King (in the UK) are trying to eliminate as much transparency as possible (so that the market doesn’t immediately begin picking weak banks off one by one).

Credit can only tighten from here, at which point many who thought they could afford their mortgages will suddenly find they can’t, but by then selling into an illiquid market will be almost impossible.

#23 Robert B. on 05.05.08 at 4:47 pm

@Jordan: the Goverment of Canada has the exact calculator you’re looking for here:

http://www.ic.gc.ca/epic/site/oca-bc.nsf/en/ca01821e.html

In fact, they have lots of these kinds of calculators handy. You can also google “rent to own calculator” but most of the calculators are put out by real estate places and limit what you can enter. The Gov of Canada is one of the best because you can enter the return that your downpayment/investment will return.

#24 dekethegeek on 05.05.08 at 9:00 pm

Interesting viewpoints all around.
Seems that the majority of comments from potential purchasers on this comment section are folks who are gonna sit this “buying spree” out.
I live in north Burnaby and while cycling into Vancouver to work ( yes im a granola chewing west coast wanker!) on a daily basis. I have noticed over the past 3 months the amount of “For Sale” signs that have popped up like tulips in spring.
But, unlike previous years, many of those “For Sale” signs dont have “sold ” stickers slapped on them within 1 week.
Can it be? Have the Lotus Eaters out here finally realized that 70% of your pretax income to pay your mortgage is RIDICULOUS!
Last year everyone out here was talking, “Buy, buy ,buy. The housing prices will climb until the Olympics!” Not now.

#25 Jim on 05.05.08 at 9:12 pm

Jordan,

You should have bought 4 years ago NOT rent. You cannot come ahead investing 100K @ 9% fully taxable while losing the TAX FREE capital gains if your 400K home appreciates at even 3% average per year.

Anyways, if you had purchased prudently and taken a 15 year mortgage, you would be 11 years away from owning your home outright. That’s pretty cool. And 11 years from now rents WILL be considerably higher. Guaranteed.

#26 wealthyrenter on 05.05.08 at 11:07 pm

Jim

Your answer is wholly misleading. You conveniently forget to mention the carrying costs associated with owning the home. Secondly, the run up in current house prices means that a FT buyer today faces a different reality than Jordan did, even 4 years ago!

Lets take your case as an example.
Person X has $100K down payment for a $400K home
Person X takes out a 25 year mortgage @ 6% (instead of the insane 40 year option)

The home will have a final mortgage charge of $676K. My parent live in Milton, and their neighbours (same model,) just sold for $420K. My dad is very particular in his accounting habits, and he told me that he and my mom carry their home for 9K per year (taxes, utilities, cable, phone, minor repairs, and internet.) Yes, my dad is addicted to vacation web sites and mom MSNs! :)

Assuming a modest 3% increase in these carrying costs for a new homeowner over 25 years, the total cost of the home would swell another 300K (or more, too tired to do the calculation.) Our investment has now costs almost a million dollars, and I have not yet factored in the repairs my folks have done: complete replacement of windows, hardwood flooring installation, roof, driveway etc….

Assuming 3% gains over 25 years is a big stretch in many markets. At the height of the boom in the late 1980s, my parent’s model sold for $320K. The real estate marketing machine is quick to extrapolate recent gains as if they now constitute some kind of predictable future reality.

I am not goofing on home ownership. Clearly, home ownership has many practical and psychological benefits. It is a wonderful thing when a home is both affordable and livable. At best, the financial benefits are debatable. Because of this fact, I cringe at any simple, “Home ownership is an investment without fail,” slogans. Investing is never that simple.

#27 Robert B. on 05.06.08 at 10:39 am

@Jordan: the Canadian Government has a website with lots of handy calculators on it. The one you want is here:
http://www.ic.gc.ca/epic/site/oca-bc.nsf/en/ca01821e.html

This one is good because you can enter the rate of interest or ROI that your downpayment/investment can get, factors in the price of the home appreciating and so on.

All you need to do is google “rent or buy calculator” and you’ll find lots of these calculators. Lots of them from real estate places in fact. These tend to be simple things that won’t allow you to enter in your return on investment assuming 5% as if you put your money in a bank account and not in a proper investment vehicle like Sprott Asset Managment that returned about 25% last year (I am not an investor in Sprott, just making a point).