Richmond Condo News

Market confidence is the key

Market confidence is the driving force behind the high housing prices in Richmond and Greater Vancouver. The credit crunch of 2008 scared home buyers away from buying, resulting in home prices declining 15%. Rapid and successive cuts interest rates by the central Bank of Canada Canadian from early 2008 drove base-lending rate down from 4.25% to 0.25% by April 2009. Current rate stays at 0.25%. Low interest rates helped to boost demand for homes, and within a year home prices almost regained all the losses.

Facing the inevitable - higher interest rates

How long the current low interest rates environment can be maintained is anyone's guess? By 2006, home prices in Richmond already reached an over-heated level. Buyers who purchased their homes the past 3 years will not have a large cushion to buffer them from a large drop in home prices.

Outlook for the next few years

The current over-priced market will correct sooner or later. When market sentiment turns negative, demand from home buyers will collapse.  When home prices are losing values, more sellers will want to sell their homes, increaasing the supply causing a rapid decline in home prices. As shown in my earlier post, there is a large price gap between current home prices, and the break-even price point for real estate as an investment.

Real estate as an investment

At current price level, the risk of capital loss due to declining home prices is extremely high. The return on investment for a rental property in Richmond and other Greater Vancouver cities is negative. Home prices will have to decline significantly before a reasonable return on investment can be expected.

Click the link to view Vancouver and Richmond homes currently listed for sale.

Why Richmond and Greater Vancouver home prices are so high?

The main driver for Richmond and Vancouver home prices reaching current level is ease of financing, The average family income in Greater Vancouver assuming to be around $65,000 can only afford a $325,000 mortgage (using 5% interest rate and 35-year amortization). It will appear that the average home owners can only afford to buy townhouses or condos as detached homes are out of reach.

Longer amortization and low interest rates

The availability of 35-year amortization and ultra-low interest rates allow an average home buyer to buy a home 40% higher in value, as compared to the market conditions some 10 years ago. Easy credit, financial innovation and low interest rates have now resulted in home prices reaching an un-sustainable level. See chart below.

While longer amortization and low interest rates may account for some 40% higher in home value, the average Greater Vancouver home price around $910,000 is around 69% higher than the base trend-line price around $540,000.

Market confidence

The price difference between $910,000 and $756,000 may be attributed to buyer confidence. This may contribute to lift the average home price above the trend line. Those home owners who entered the market prior to 2004, are well cushioned and can weather a price decline of 30% or more.

What happens if interest rate rises, and market confidence collapses?

When the market sentiment turns and confidence disappears, home sellers will swarm the market. The important ratio to watch is the supply/demand ratio or "months of inventory". A reversal in the current ratio around 2.5 months to 6 months supply or more, will put pressure on selling prices resulting in a decline in home prices.

Duration of price decline   

Over the next few years, mortgage payment will go up due to higher interest rates, and rental rates may decline due to the increase in rental stock. Declining home prices and higher mortgage cost will result in more investors wanting to sell their rental properties. A more balance market will likely returned after a decline of 20% or more in home prices.

A home buyer should buy a home based on his or her own comfort level and ability to carry the mortgage commitment. Click the link to view Vancouver and Richmond homes currently listed for sale.

Below is an analysis on Richmond housing market and an attempt to establish the value of a home in relation to it's economic return as an investment.

What's the real value of a Richmond home?

The real value of a home is when the rental income can cover the cost of mortgage payment, property tax, maintenance, etc. When a market analysis (using 5% interest rate and 35-year amortization) is done comparing home values and their returns on investment, home prices in Richmond are found to be unrealistically high as shown below:

*computed at 5% p.a interest rate and 35-yr amortization, plus property tax, maintenance, etc.

Cheaper to rent than to own

The above analysis shows that it is cheaper to rent than to own except at the lower price range around $250,000 and when the interest rate is at 2.25%. As shown above, at historical interest rates around 5%, it is cheaper to rent than to own.

Generally, renters may quit renting and decide to own their homes when the cost of ownership is not more than 30% above their rental payments. As shown above, renters may opt to continue renting, until home prices decline significantly.

Break-even return on investment

Home prices in Richmond (and metro Vancouver) are much too high and cannot be justified as shown on the break-even analysis above. The lofty home values can be attributed to buyers who are willing to accept low or negative returns, while making gains on capital appreciation. Home prices at current level in Greater Vancouver is not sustainable. As can be seen from the illustration above, rental returns are not able to sustain current home prices.

You can view the metro Vancouver housing price chart here. The correction in 1994 took 4 years to bottom out in 1998 and another 5 years to recover to the 1994 level .

Market confidence & low interest rates

The critical factors affecting home prices today are buyer confidence, low interest rates and low supply of homes. The market dynamics can shift over-night with a change in market sentiment if interest rates rise significantly. Current low interest rate environment is not expected to last long. Eventually, higher interest rates will result in the housing market making a correction. A balance market will come about when the rental return from the investment is more in-line with other investments.

When renting is an option, home buyers may want to wait and see how the economy and interest rates play out in the near future.

Click the link to view Vancouver and Richmond homes currently listed for sale.

Can Greater Vancouver housing market go higher?

Market sustained by low interest rates

Longer amortization and low interest rates have a huge impact on home prices. With the introduction of mortgages with 35-year (from 25 years) amortization, home buyers are able to afford homes 16% higher in value. Coupled with interest rates drop from 5% range to around 3.55% for 3-year fixed rate now, home owners can afford homes 40% higher in values as compared to 10 years ago.

The above price chart for detached homes at $910,000 range shows a huge price gap between current average house value and home pricing trend line around $540,000. The above chart showed that average Greater Vancouver home price as of November/09 is 69% higher than the base-line price!

Danger of higher interest rates on home prices

If the mortgage rates are raised from current fixed 3-yr term around 3.55% to 5% or higher, home buyers will be constrained to buy homes at only around 80% of today's price. A loss of market confidence will trigger a collapse in home prices. Current rental return is generating negative cash-flow if an investor is buying a home for investment.

Rental returns as compared to home prices

From 2001 to end 2009, rental increase was in the range around 25% to 30%. On the other hand, home prices more than doubled and gained almost 135% in value.  A big jump in interest rates from current 3.0% level to higher rates of 5% to 6%, will have a major impact on many home owners.

When renting is an option, home buyers may want to wait and see how the economy and interest rates play out in the next year or two.

Homes currently listed for sale in Vancouver and Richmond can be viewed here.

Buyer Agent for Vancouver & Richmond, BC.

Majority of the homes sold in Canada are done through the MLS system, involving 2 Realtors. When the seller's Realtor is also the buyer's Realtor, the loyalty of the Realtor is with the seller. You are in a disadvantage position if you are buying a home with "no agency representation" or through a "limited dual agency" arrangement.

Myth: you can get a better price

Some home buyers are under the impression that they stand to benefit when they are not using their own Realtors to represent them. They assume the Realtor will pass on the buyer agent commission saving to them.

This is a myth, as there is no way anyone can find out whether you get a better price, or a buyer agent can help you negotiate a better price. The fact is that without a buyer agent, you are at a disadvantage. You may not know if you are paying too much for the home you are buying.

Why you should use your own Buyer Agent?

Your Realtor has a "client-agent" relationship with you. You benefit by:

 - your agent is working with your best interests in mind
 - guide you through the home buying process and help you with financing where required.
 - save you time by showing you homes that meet your requirements.
 - you are provided with competitive market data on similar homes and their selling prices.
 - property value trends, the neighborhoods and future developments(good or bad).

For more information on homes for sale in Vancouver and Richmond, you are welcome to contact me at 604-721-4817 or email me.

Real estate commission in B.C.

When a home owner decides to sell their home, they often agree to pay their chosen salesperson / real estate company a commission based on a percentage of the selling price of their home. The sale commission is specified in the Listing Agreement when a home is listed for sale by a home owner. In British Columbia, the commonly used commission structure is based on 7% on the first $100,000 and 2.5% on the balance of the selling price. Other real estate companies may used 6% for the first $100,000 and 3% for the balance of the sale price.

Sale commission is negotiable

While majority of the home sellers accept paying the above commission fee structures when selling their homes, some may choose to negotiate on listing and paying their homes at lower commission rates. There are discount or flat-fee brokers willing to provide full MLS and real estate marketing services comparable to the traditional real estate companies. As in any business transaction, a home seller should firmly establish the level of service they will be receiving and the fees they will be required to pay.

How much should a home seller pay?

If you are looking for a good Realtor who is prepared to negotiate with you for a fair commission to sell your home, you should check with your local network of Realtors. Find a Realtor who is willing to work as a "discount broker" and negotiate with you on the sale commission. Make sure you are satisfied with the terms of the service, and you are getting the full service at a discount.

You can use the links here to research homes for sale in Richmond and Vancouver.