Is it a Crash or isn't it?

Vancouver Condo has mentioned my Victoria numbers and I see there is hot debate as to whether the drop in Victoria's prices are significant or not.

The bears are calling it a crash and the bulls are brushing it off. Well 5% drop in median over two years is not a crash but it is significant (I will show you how significant soon).

In fact in a normal RE market bear markets are usually flat or down a few % to 5% tops. However after the huge run-up we have seen where prices are up 100% in many cases, over the curse of the last half decade, 5% seems rather puny.

OK lets crunch the numbers:

Rent v Buy in Victoria Nov 2009-2011 each with $100k . the renter puts the 100K into a two year 2% GIC

Assume you bought two years ago at the median price of $555K with 100K down.

You mortgaged the balance at a 5 year fixed at 3.59% you would pay $2293 a month.

You have paid $8K of property transfer tax which is gone forever!

After two years you would owe $431K due to principle pay down.

We know that with taxes and repairs the cost of owning is more than renting. In Vancouver it can be 70% or more higher. I am not an expert on Victoria but I will assume it is 15% higher. Say $3500 a year more which is probably conservative.

Now assume you had to sell due to an unexpected emergency eg a job loss or transfer.

You sell at November 2011's median price of $530K

You pay 2.5% for selling related expenses and end up with 518K

You pay off the mortgage and are left with $87K of your down-payment. However you did pay $8K in PTT.

The renter has his 100K + 7K less he paid for renting and he got 4K on his deposited money (from which tax has to be paid of... lets say $1K)

Result:

Buyer walks away with 79K

Renter walks away with 110K

Not a crash but not insignificant. You can see why in Vancouver with it's much higher median prices, the difference will be even more severe should prices drop.

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The HPI for SFH for the Sunshine Coast is down 6% in just the last year!