Yesterday, my friend M was lamenting the fact that it's so hard to find affordable housing in Lotusland, particularly for a first-time home buyer. M is a first-time homebuyer. To further complicate his financial situation, he's a first-time home buyer who already has one kid, and they are planning for more, so buying a 500sf closet is out of the question.
I look all around me, and they are still building new condos, townhouses and houses like mad. And most of these places get snapped up really fast. Even the housing that is not new gets sold within hours, if the price is right.
Why is the market so crazy? A small percentage is actually local first-time home buyers. There are many who already own a home and they have some leverage to buy something more expensive. I'm certain there are those who are at the point of over-extending themselves (the "Keeping-Up-With-The-Jonses" phenomenon), but these aren't the main group of people who are the ones buying.
Many people are house flippers. Those are people who buy new developments, in particular condos, before they even have dug a hole in the ground, and almost right way, turn around and sell it for a hefty profit. The unit may even change hands a few more times before someone actually takes possession of the unit when it's actually built.
I understand that Toronto had a similar problem a while ago, but they had put a stop to it by not allowing a re-sale until the units were taken in possession for at least a year. I'd really hoped that they would do something similar here, if only to slow down the sheer craziness. But my friends speculate that this won't happen because the local government doesn't want to appear unfriendly to foreign investors, particularly with the Olympics coming in 2010. Sigh.
Ah, the foreign investors, another big player. In BC, they had added an additional fee for home buyers who either aren't BC residents or haven't been BC residents for more than a year. This, I've been told, was introduced to slow down the housing price insanity we've seen over the past five years. Frankly, this hasn't deterred them one iota. If you're a foreign investor, chances are if you can afford the $1 million plus dollar price tag that comes with the house, a few thousand more isn't going to faze you one bit.
If you look at the graph at the top, although it's a graph for condo prices in a very small (but very trendy and sought-after) area, it's a pretty good reflection of the craziness that has hit Lotusland over the last couple of years. This report from TD Bank certainly doesn't think that it'll slow down any time soon. (Oh, look, housing prices went up by 22% from last year, the highest in the country. And I thought that honour went to Calgary). The BC economy is good, unemployment is low, and interest rates are low. All good indicators that more people will want to buy houses.
Another friend, who's in the real estate business made a comment that about the same time the Dot-Net bubble burst in 2001 and stock prices crashed, the housing prices started to rise dramatically. Those with money to burn turned from investing in stocks to investing in property. After all, even with housing prices crashing (and it will happen, it's just a matter of when), property always generally goes up over time. But the craze has hit everyone. Heretofore, everyone was speculating on what the next big stock would be. Now we have a new breed of real estate "experts".
The same friend also mentioned that many analysts are saying that we may have to wait for the interest rates to go up a couple more percentage points before people can't afford housing any longer and are forced to foreclose, if it happens. Many point to what happened in the 80s, but I think there is a vast deal of difference between interest rates rising to 7% and interest rates rising to 21%.
And finally, to play the MLS game a bit, just looking at comparable units in my own neighbourhood, if we decided to sell now, we could probably list our house $80-100K more than what it was worth when we bought it Summer 2004. Like I said, insanity.
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