M- at vancouvercondo.info January 7th, 2011 at 2:01 pm – “In spring 2007, I sold my Vancouver westside condo for $435K. The new owner has put it up for sale a few months ago. Initially they were asking ~$470K (I can’t remember the exact number), but it didn’t sell. They dropped the asking price a month ago, and are now asking $459K.
So for buying and holding the property for almost 4 years (my god, has it been that long already!), *if* they sell at their current *asking* price, they’ll get 5.5% more than they paid. Take off the realtor fee (7/3 = ~$20K after HST), property purchase and transfer tax (~$7K), and legal costs to buy&sell (~$2K), and they’ll come out with a *LOSS* of $5K, after owning a property for 4 years.
Let me say this again: the people who bought my condo owned it for nearly four years. After transaction costs, if they sell for their asking price, they’re facing a LOSS of $5,000. They also paid strata fees, property taxes, mortgage interest&principal, electricity, and any special assessments that may have been assessed during those 4 years, so it’s not like they “lived for free” or anything like that…
They tried asking for more, but it’s been sitting for a month at the current price; I think their chances of selling at the asking price are slim. Obviously there’s no bidding war.”
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- Chat Thread
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- “I just visited Manhattan for a week, and happened to snap some real estate ads on both the Upper West and Upper East sides of the island. Compare to Vancouver. It simply doesn’t compute.”
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- ‘Vancouver City Hall: Housing Report Card 2012′; Plus Revised Version
- “My folks find themselves at 65 still owing half the value of their home and recreation property to the bank. After almost 30 years of ownership in the BPOE and a number of boom markets, they have very little to show for it.”
- “Rent for $2,200 a month or buy and have a mortgage of $4,310 per month. Why would anyone buy?”
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- “One of my old high school buddies finally got her mother to sell the family home in Kitsilano – sold for over $1M, monies realized after debt paid off $185K.”
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- “A beautiful Belfast home, in the equivalent of 1st Shaughnessy, bought at their RE peak in 2007 for £3.5 million, has now sold for £800K, almost 80%-off. The market didn’t suffer any significant economic shocks. Rates & unemployment didn’t skyrocket. They didn’t build more land. Sentiment just changed and the prices fell and fell.”
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- “I was walking in the Fraser neighborhood yesterday, I noticed that the population, on average, seem to be composed of workers. I belong to the top 5 percent in terms of income. Nevertheless, I cannot afford any of the houses for sale in that neighbourhood.”
- “Vancouver is an urban resort whose value mostly resides in its real estate and not much else.”
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- The Vacant Lot of Versailles, Richmond.
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I don’t think that count as a lost. If you rent, you have to pay rent, electricity etc…
this person basically comparing an apple and an orange.
$5000 is nothing compare if you pay $1000/month for 4 years.
What are you talking about?
The 5000 loss is after everything is said and done. Including all the money spent on mortgage payments, strata fee, taxes, closing costs etc etc.
Also the money spent on the down payment + extra money saved if the person was renting could have been invested. Hopefully he had at least 10% down, that is 40k. In 4 years you could have gotten some decent returns if managed well.
Heres another example.
My coworker bought a 1br for 280 near Higate in 08 from someone who bought presale probably for 220 or so. That person who he bought it from made off like a bandit and there are many that did during the last 7-8 years. No doubt about that. But try to do that now, good luck.
My coworkers place is now worth 310k, and he is doubtful he can even get that. So that means 30k increase in a little over 2 years, minus all the closing costs. It is pretty much a loss, he knows it and is not too happy about it. He wants to start a family now but is stuck in his 1 br.
In contrast I have been renting since 08 and save at least 1k a month after all my housing expenses. We both make about the same money. I have a place in Taiwan, but would never think about buying here, it just doesn’t make sense. I am not against real estate, but anyone thinking of jumping in now would have to not really care about the ridiculous premium they are paying. It is no longer like the wild west days of the last decade.
So is that not apples to apples?
His carrying costs for a 1br prob around $1750 a month after strata and taxes
My rent 1/3 of a house private 2 br for $750. No I am serious. Incl utilities too. But even at market rate for a 1br would be around 1200. That is still a 550 difference. If he holds on to the place for 10 years maybe he would make some money. But like I said he wants to start a family.
“$5000 is nothing compare if you pay $1000/month for 4 years.”
This person was paying well more than $1000 on the interest on their mortgage. They were not building equity, i.e. “paying themselves.”
MHL, it sounds like you haven’t worked out how much it costs to own a place. You’ve got to rent the mortgage from the bank, plus maintenance etc.
On my old condo:
Strata fees: $260/mo = $3100/yr
Mortgage Interest: 5% (it was pricey in 2007) on $400K = 20K/yr
Property taxes: $1200/yr
Electricity: $50/mo = $600/yr
Maintenance (plumbers, etc) = $200/yr
The building’s not a leaker, so nothing big there, but the roof needed to be replaced, and the contingency fund was bare, so maybe $4K in assessments? ($1K/yr)
Estimated annual cost: $26,100.
Estimated monthly cost: $2,175.
Add in the capital loss on the place, and you’ve got another $100/month, for a monthly cost of $2,275. I haven’t included any mortgage principal paid in the above rough calculations, because you get to “keep it” in the form of equity in the property– but it adds another $350/month in out-of-pocket expenses.
My rent these days is $1800/mo, and it’s a brand-new building in a nicer area.
On VCI, somebody commented that the mortgage interest was $20K in the first year, and dropping every year thereafter. Yes, this is true, but it doesn’t drop much at all. If it’s on a 35-yr amortization, in the 5th year, you’ll be paying $18.8K per year in interest.
Also on VCI, somebody commented that maybe my buyer didn’t have to pay the property purchase and transfer tax (PPT). Well, when they bought it, the property was too expensive to get any exemptions from the PPT. So regardless if they were FTBs or not (this was a second residence for them), they were going to have to pay the PPT.
Conversely, if you kept your place and renewed your mortgage in 2008 at 3.5% you would now be in a much better situation (using your figures):
Strata fees: $260/mo = $3100/yr
Mortgage Interest: 3.5% (this is being conservative for 2008) on $400K = 12.5K/yr
Property taxes: $1200/yr
Electricity: $0/mo = (renters pay electricity too) $0/yr
Maintenance (plumbers, etc) = $200/yr
Estimated annual cost: $17,000
Estimated monthly cost: $1.417
As per your example, I’m not including mortgage principal paid because as you said you get to “keep it.” At this point (2011) you would be paying about $950/mos against your principal (ie. forced savings).
Your ‘rent’ at this point would be about $1417/mos ($400/mos cheaper than your current situation) plus you would be ‘saving’ $950/mos. By banking this $950 every month you get a 3.5%/yr protection against price declines. At this point you would have a ‘price protection’ of 10.5%.
In your example you are not using 35 year amortization, you are using 25 year, so your balance would be about $356,818.65. You’ve paid off (saved) $43,181.35.
Also, you would have ‘saved’ the $14,500 in commissions that you paid your realtor to sell your place in 2007. This is another 3.5% ‘price protection’ for holding your property rather than selling it, so you would now have 14% insurance against a possible correction.
Here’s a link to the PPT exemption requirements: http://www.sbr.gov.bc.ca/individuals/property_taxes/property_transfer_tax/first_time_home_buyer.htm
M— : Thanks for the summary; a very comprehensive rebuttal.
—
Sloppy thinking and the inability to do simple math helps perpetuate bubbles.
M — so difference between renting and owning, using your numbers ($2175 for owning vs $1800 for renting) is approximately $300 … that’s doesn’t seem much if it allows you to gain from any upside in the market … renting is not that much cheaper than owning. And who is disciplined enough to invest that $300 difference — most people would just spend it. At least a mortgage forces you to save on a monthly basis.
You are forgetting . 300 per month plus the 80k downpayment which you could invest in other things you need for the downpayment if you do not want to pay CMHC insurance.
Or you could just put down 5%.
Lets not talk about the people that cannot afford a place either way.
Focus on the people that have the money for a downpayment, would buying a home make financial sense? That royal lepage release said 3.5% in 2011. Even if you believe that you can do better investing elsewhere.
Cause that is what we are talking about here right, financial sense? Not the ownership pride. If you are dead set on owning a place then financing doesn’t really matter right, you are willing to pay extra.
So you’re suggesting that a $300/month premium to force someone to save (which is actually savings only if houses maintain value), makes sense to you?
For the suite I’m in, the difference just in interest would be $475/month; before taxes and maintenance. So I’d be paying above $600/month, every month, in order to trick myself into savings?
Huh. Well. That makes no sense to me. Because, I don’t know about you, but I don’t have $600/month extra to pay “tricking myself” fees. But it is the thinking that makes us all so vulnerable, with net worth sitting in a single vulnerable asset and a savings rate in the toilet.
Raj: apples and oranges.
It’s $375/mo cheaper, plus I’m in a 25% bigger unit, plus it’s new (not 15 years old), in a better neighborhood, and on a quiet street.
My wife and I needed more space, so our choices were to move farther away, or stay in the same neighborhood and add $200K more debt for a bigger unit, or sell and rent.
And yes, I am disciplined enough to save the difference, and more.
Bought a condo downtown in nov 2009; possession march 2010. property assessment is up…so I guess it’s all good.
Congratulations! You get to pay more property taxes!
Fannntastic!
Thank you. I pay 5 figures in property taxes a year. I’m quite proud of that achievement. Can’t wait to hit 6 figures.
I pay ….. zero property tax in Vancouver.
Own near Taipei 101. But I rent in Vancouver haha
Good luck with the 6 figure property tax?
paper gains are not real, you need to be worried about what things will be if you decide to sell in few years, or you need to renew the mortgage in a few years.
Full cost of ownership is the critical calculation everyone needs to do, but most people don’t because they don’t know that they need to do it. A great change to the laws should be that if you apply for a mortgage you need to present the bank with a full balance sheet and a worked out full cost of ownership form that way the bank at least knows that you understand what mortgage is and that you are responsible with money.
We have a driver licenses to make sure everyone knows the rules of tho road and you can’t operate a car without a license. Maybe it’s time that there is a financial driver’s license that shows you understand how to computer interest, and do basic financial calculations.
I rent and with every rent cheque I pay, I feel that I am wasting money to the bubble even though I don’t own any property in Vancouver. The only way I can think of not wasting money to the bubble is to leave Vancouver.
An owner takes a loss only when there are no ways left to convince himself he’s made money. We’re obviously not there yet and frankly it doesn’t matter. If some guy can sell for less than what he bought it for and still come away looking positive on the situation, no matter how much he’s twisted reality, I guess I can’t fault him for that.
I’ll look at the bottom line thanks very much.
The problem with real estate is people only see the lure of the leveraged gains
and they don’t comprehend the high risk of leveraged losses
Real estate is the usually the only leveraged asset the average consumer gets involved in so it’s not surprising the asymmetric risk escapes them.
What gets lost in this discussion is the dynamics of falling property values. Regardless of mortgage rates, amount of down payment, strata fees etc. there is a reality to a dropping market that affects all sellers. Most will be ignorant enough to chase the market all the way to the bottom. People get very obstinate about the “value” of their property, forgetting that the value is only what a buyer is willing and *able* to pay. For an extreme example there’s a mansion back east (can’t remember details but it was featured on GT’s blog a few months ago) into which the owner had poured 10s of millions and is now asking about half a mil. The Detroit Silverdome was sold to some Toronto investors for $583,000.00; that’s right a little over half a mil—Google it if you don’t believe me.
Only smart, objective, lucky and well situated sellers will get out in a falling market. The rest will suffer the fate millions of home owners in the US have already endured. They will reduce prices by grudging percents always being a little above what someone will pay. They will see their equity evaporate; they will go underwater and more of them than you can imagine will lose their homes to foreclosure.
And when that happens home ownership will become toxic to the majority of potential buyers. They will rightly wake up to the fact that prices do not always go up, that leverage’s risks are greater than its rewards and that a home cannot shelter you from financial storms.
Nobody’s got a crystal ball to see into the future of real estate in B.C. but we’ve got the next best thing–our neighbors to the south. They told themselves the same stories we tell ourselves about how it’s different here. Even Bernank Almighty abjured a real estate collapse but look where that went. You won’t have to wait long to see it; this train’s left the station and is just gaining speed.
Raj,
“Bought a condo downtown in nov 2009; possession march 2010. property assessment is up…so I guess it’s all good.”
Property assessment up just means higher taxes. Nothing more than that. If you need some kind of external validation of your purchase and you are happy to pay higher taxes to get that, then bully for you. I frankly don’t care what the tax authorities think about me, so long as they keep their hands out of my pocket.
“Property assessment up just means higher taxes.”
Nope. Check how property taxes are determined in BC.
“The simplest way to explain the assessment and tax relationship is: The market value of a property multiplied by the tax rate set by the tax authorities equals the property tax.
BC Assessment deals solely with the assessment of properties and has no jurisdiction or control over taxes or tax rates. ”
This is from http://www.bcassessment.bc.ca/ website.
Is that not correct or how is the property tax calculated?
As we’re collecting annecdotes here is one I encountered today.
Went to Costco to order some prints and got to talk with the girl there. I noticed that they had “redecorated” a lot of the place. She told me that someone from headoffice came by and wasn’t happy with the “clutter” (his words) so they streamlined it now.
I asked her how business was in regards to the large 24×36 prints (as I had just ordered one) and she told me that business was down quite a bit. I tried to clarify if she just meant the photography department or overall and she said that overall it’s much emptier at the Costco downtown and apparently they let 100 people go last week, if that is just this location, lower mainland or country wide I am not sure, but considering that one would think that Costco would do rather well it sure is an interesting piece of insight. Not in the least because of the condos that opened up there in the neighbourhood (including Woodwards).
I have the feeling spring will be very interesting in that regard.
I’m not too surprised that Costco wouldn’t be too popular around a bunch of condos — the kitchens in most of those places weren’t designed for storing the products of buying in bulk to save, but rather just-in-time food deliveries!