Monday, November 24, 2008

Ground view on Halifax real estate prices

At work some people got talking about houses and prices. They were a little distance away so I didn't feel like walking over to join them. Anyway what's the point; I couldn't bring myself to throw cold water on their views.

They all live in Bedford/Hammonds Plains. One guy has a townhouse, the others have houses I believe. Two of them bought this past summer. The others I believe bought fairly recently, within the last 3-4 years.

The townhouse guy had an interesting opinion. He felt that his home would either hold its current value, or possibly increase in the next year! His reasoning was something like this. A family with an income of $70,000 a year could get approved to buy his home. Thus because it was comparatively lower priced [I'd guess around $200K] it would hold its present value. They all felt any hit in real estate prices will be felt at the $400 K level and above [convenient since their houses are apparently all under that threshold].

It might sound logical when you first listen to it but there are flaws in that reasoning.

A Rising Tide Lifts Every Ship; The Converse is Also True

During the bubble years 2002-2007 every neighbourhood in Halifax benefited. Prices increased in a way detached from growth in wages and the underlying economy everywhere, from the toughest trailer parks to the most exclusive cul de sacs and south end condos.

Thus the price correction will also be applied everywhere. It is impossible for some neigbourhoods to "keep" all of the price appreciation from the bubble years; that would imply that the price increases were justified. If prices are coming down, they are coming down on every street. No area will be spared, just as no area missed out on the wins during the 1994-2008 bull market of continuous uninterrupted price increases.

Price to Rent Ratio

One of my friends just got a townhouse in Clayton Park West. He's saving hundreds of dollars a month renting vs. buying [plus what he would have lost up front with a $25K down payment + thousands in closing costs]. Price to rent ratio demonstrates that Clayton Park West is overpriced. If that's the case then every townhouse in Halifax is overpriced. Maybe more, maybe less overpriced than Clayton Park West, but still overpriced.

A major reason people were buying overpriced when they could have rented was because they felt they could "earn" truckloads of easy money risk free on the house itself appreciating [i.e. a bubble]. With 40 year/ $0 down mortgages now unavailable; people will be making decisions more on present value and cost and unless rents start rising, buying prices have to come down until they are in line with rents.

It's all relative

The people at work felt that the hit would be in the $400K+ price range. However at the stroke
of a pen a $400,000 house can become a $300,000 house. All the seller has to do is lower his price. There are plenty of people in $400K houses today that bought before 2003 or who never refinanced consumer debts onto their mortgage. If they are determined to sell then they can just take a 25% haircut and move on price to $300K and still realize a meaningful gain.

What happens then? Well anyone listing at $300K now has to move on price. Why would anyone buy his full price house at $300K when the buyer can get a formerly $400K house now for $300K. So the present $300K guy has to move on price because his house is only worth 75% of the $400K dude; and the former $400K dude is now willing to sell at $300K. It's all relative and interconnected.

So the $300K guy takes a 20% haircut or whatever to $240K. And so on and so on. So back to $200K townhouse guy. His $200K townhouse price may be based on a detached price within 1 km of his place going for $250K. But if the $250K detached house becomes a $200K detached then nobody would pay the same $200K for his townhouse when they can get a detached house in the same neighbourhood for the same $200K.

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