JCH at VREAA 26 May 2011 10:52pm – “We narrowly avoided buying into this completely abnormal market, as we thought it was just annoyingly expensive until we started doing more research. Now I feel we have probably avoided the biggest mistake of our lives. I call us ‘strategic renters’ – in more normal circumstances we would embrace home ownership. (We DO have 25% (!) down for a lower mainland SFH, and could easily afford to buy but refuse to do so.)”
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- Advice Regarding Renting In Vancouver, Please – “Unfortunately, the Vancouver rental stock is absolutely atrocious. It just seems like every landlord is looking for someone to pay 100% of their mortgage on a crappy place through rental income.”
- “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.”
- Ben Rabidoux In Vancouver Next Week
- “The mortgage company told me they were calling in my 40-year, 0-down mortgage. I have paid nearly sixty thousand dollars towards it, but, nearly five years in, I have yet to touch the principal.”
- ‘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?”
- “They were talking about two couples they knew who had recently bought a lot and planned to each build a house on it and live as neighbours.”
- Greater Vancouver Home Builders’ Association Annual First-Time Buyer Seminar Attendance Plummets
- Mom and Pop Get It Wrong In All Markets, Time And Again
- The average British Columbian homeowner is not going to pay off their mortgage by the time they retire.
- “He’s sold all his properties except his current one, which is now for sale. He explained that the market’s currently in crash mode, worst that he’s ever seen.”
- “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.”
- “I know someone who just declared bankruptcy because her condo was assessed at $150k and she bought it presale north of $250k in 2005 or 2006.”
- Sturdy, With Views – “Calling Froogle Scott!… Is Dr. Scott ‘In The House’?” [Not In This One, Certainly]
- “She said the market was dead in Victoria and that it would remain so for a very long time. I asked how she knew. Her answer was fascinating and should scare the pants off the real estate crowd.”
- Kits Notes – “I’m pretty sure that this is the first 3+ bedroom property of any type that I’ve seen in the 5 years I’ve lived here that is priced below $700K.”
- “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.”
- “Two family members of hers are trapped, underwater, in condos on the East Side.”
- “Interprovincial migration is not saying good things about BC’s economy.”
- Vancouver RE: Not As Expensive Provided You Don’t Think – “It’s clear that our perception of affordability has been coloured by living on a continent where housing is unusually inexpensive.”
- More Undisclosed RE Industry Insiders Publicized As Clients – “In 1995, Allan and Karin Hoegg were mortgage-free. But no more. Today their Vancouver home is a valuable source of income as they plan for full retirement.”
- Rumor that some OV units will be reduced by 20%.
- Downside Weights On The Vancouver RE Market – “One of the older guys (over 60) mention to the guy beside him that he and his wife were thinking about selling their family home, and renting, in order to get some of the money that was locked up in the house.”
- “My buddy was looking to upgrade to a house in the Coquitlam area. With 200k extra for a home, that’s half of lifetime saving between him and his wife.”
- “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.”
- “Rogers Communications is expanding into RE; aiming to relaunch website; providing critical data that can help potential buyers assess the value of a property from the comfort of their home computer.”
- I’m only 50 and I can just about retire if I want to, all because of a single simple decision – “When prices rebounded to their former highs, then rocketed another 30% higher to what I considered to be totally unsustainable levels, I decided that only a fool would pass up a second opportunity to harvest such a massive non-taxable capital gain, and in 2011 I sold my place.”
- The Vacant Lot of Versailles, Richmond.
- “I don’t think that most people think things are going to crash, just that there is going to be a slight correction, but it was amazing to me how sentiment has changed, and the fact Vancouver RE is too high was just understood.”
- “The ‘investor’ who purchased our house put it up for sale two months later, in January 1981, but the bubble had burst.”
- For A City To Have That Kind Of Vacancy, It’s Like Cancer – “Downtown, the vacant unit rate is so high that it’s as though there were 35 towers at 20 storeys apiece – all empty.”
- “What’s the worst that can happen? You can’t pay your mortgage, so sell your house! No fear.”
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Well, at the risk of incuring the wrath of VREAA, I have being reading that same anecdote from the days of VHB. Although this time I do think its different and the end is nigh.
Jim -> No risk whatsoever of ‘incuring wrath’ by pointing out (correctly) that some of us have been calling this a speculative mania for years. And it has indeed been a speculative mania, an abnormal market, for all those years. It’ll be clear to all after the fact, but, until then, it sure is taking its own sweet time topping out.
Not directly related to this post. I was reading an article about new rules in Australia for foreign ownership of RE. Somebody posted this comment and I was wondering why the Canadian government would not implement something similar…
“Many countries have restrictions on foreign ownership of real estate and other assets. I live in Indonesia and can not own property in my name. I either have to partner with an Indonesian national or I can lease the property for 25+ years. As a decent house in a decent area Bali, for example, can be bought for a fraction of the cost of a comparable property in Australia, it makes sense. Otherwise no locals would ever be able to buy property since their incomes are generally only a fraction of the incomes of most Australians. Governments have some obligations to look after people who contribute and are prepared to become citizens or permanent residents. Foreign investment in real estate does nothing to contribute to the economy. It just exposes the inequities. If foreigners want to invest in Australia, make them invest in assets which produce something or which add value. How does buying a house and letting it sit there idle make a contribution?”
The article can be found at this link: http://www.news.com.au/money/property/australian-federal-government-gets-tough-on-foreign-ownership-rules/story-e6frfmd0-1225857643432
The problem is the other 75%
I mean if it takes you years to save 25%, how are you going to pay the rest off when your expenses triple? You need a high income to buy a house right now, or massive savings (50%?). There seems to be no margin of safety for the middle class, which means their position is precarious.
As a firm believer of Murphy’s Law, there is no way I’m leaping until the ground is there. Maybe I’d feel differently if I didn’t have kids or if I didn’t remember the 80′s. As I recall, people were getting by until interest rates rose. And there were two recessions, because the first one didn’t fix the problem. Back then we had high inflation, now we have high debt. I expect another go around.
Great post.
I am in the same category.
Can pay 30-35 percent down payment easily personally (and more through my company) but why?
I am an immigrant Canadian and have held on and build my assets based on common sense and reading fundamentals. “Chinese investors” paying over 1.5 Mil for a shack are not very smart, are they?? Does not make sense
Hey! What happened to Richmond?? To quote a humorous response elsewhere
“Richmond is FLATTER than an Asian chest right now…more listings and literally no sales.”
Yes, I wonder that myself. Why does the media show these Chinese investors as being “smart” for buying crack shacks for $1.5 million? Why aren’t we pointing and laughing “fools!” I think those “investors” are about as smart as those who bought Nortel on the way down at $70. We shall see…
25% is right at the point where your savings really starts to either pay you real money in dividends so that it grows of its own accord. Waiting at this point makes the waiting much more pleasant, as your money is doing a lot of the work for you toward affording comfortably in the future.
As a follow on to the above headlined post (thanks VREAA), a bit more detail…
We started shopping Oct 2009 for a house in Langley. Approved for $520,000 mortgage, 25% down (husband self-employed, me home with our 2 kids). Mortgage of $375K would have cost about $1900/mo (5 yr fixed @ 3.75% – 4%). Considered buying the house which we are currently renting. After calculating other costs of ownership such as insurance, prop taxes, maintenance, opportunity cost etc., we concluded that it would cost us nearly $2800/mo to own the house we rent for $1800/mo. ($520K at the time would buy a mediocre 25yo SFD, 3 br, 2.5 ba on 6000-7000sf lot. )
After further reading, we decided it would be a mistake to buy now (then) at that price. The extra $1000/mo cost of owning is your equity portion, more or less, i.e. “but you’re building equity by owning”. By renting, we can either spend (or relax and not earn) the extra $1000/mo, or bank it. If banked, after say 5 years, your equity is the same renting OR owning, i.e. $60,000 paid off the mortgage principal or $60,000 cash in the bank. People just do not grasp this concept. In fact, most people are either too lazy or too mathematically-challenged to cross-check their assumptions that “buying is always good, renting is always bad”.
So, if $1000/mo of ownership goes to equity, the other $1800 is a sunk cost, i.e. straight loss on owning. So, it’s costing us exactly the same sunk cost per month to rent as to own. The differentiating factor then is the direction of prices. At such fundamentally high prices, the chance of a drop is much more likely than the chance of a rise. So, we are greatly reducing our risk by delaying a house purchase for some years, and additionally do not have the risk of unforeseen expenses of home ownership such as oops, need a new furnace/hot water heater/fridge/roof…
I made a spreadsheet to track the FVREB stats for Langley SFD houses, (monthly HPI % change), applying it to the approx. $500,000 we would have paid for this house in November 2009, which calculates our gain/loss on NOT having bought the house. As of the April stats, it shows that the house has dropped in value by $17,836.07 from Nov’09 to Apr’11 (-3.57%). This is how much more net worth we have because we DIDN’T buy! We’re talking real money here, and that’s with only a relatively tiny drop in prices.
It amazes me that I have talked to so many homeowners who are ready to make a move out of their current place (for various reasons), and none see that keeping the house instead of selling now and renting for a while to remove the downside risk would make them more financially secure. They all have too much riding on the belief that “RE aways goes up” and don’t realize that just because this has been true for a decade, doesn’t mean that it will always be so. In fact, the higher the prices go (beyond fundamentals), the more likely they are to drop. I think we are closer now than we have ever been to a painfully large correction in prices.
Contrarily, most of these same homeowners will admit that a 5% drop in prices is likely this year, while ignoring that 5% * 500,000 current value = 25,000 or a $2000 loss per month that they hold the dropping asset! That’s more than enough to pay rent and moving costs if they’d rent for a year or more.
(We previously owned a big condo in Abbotsford from 2003-2009, and this kind of calculation is what made us decide to sell it. One Saturday morning we ran the numbers, and by the end of the day were ready to sell. After decluttering, emptying, painting and staging, 17 days later it was on the market).
Some may say I’m being too analytical by reducing an emotional asset purchase to mere numbers, to which I say, if you find yourself a good, happy rental situation, you can remove a lot of the emotional side of the rent/buy decision. Don’t rent the cheapest place you can. Get a nice place, perhaps even splurging on a place you could never afford to buy (especially if your spouse is lukewarm/opposed to renting). Insist on a one year lease (or better yet, two years or more). Tell the owner up front that you do not want to move for a number of years, and set the expectation that they can’t just up and sell on a whim (or if the market is crashing around them
Get permission to repaint (if needed), plant a garden etc., whatever you feel the need to do to make it “yours”. Then settle and feel insulated from the greater real estate market around you.
On that note, I’m off to buy more flowers to plant in our rented yard!
When it comes to money, investments and business emotions are the last thing that should decide
the one thing that renters do not factor into their calculation is the cost of keeping pace with housing appreciation. If your 525K home produces a nominal appreciation of 5%/year, then you need to save 2K/month to keep pace – and this is on top of your rent.
Of course, if you believe prices will decrease in your desired area it might pay to wait. But I think Langley is set to take off. Lot’s of folks moving from Vancouver to settle there.
All the best with your speculation
all the best with your condescension
Assuming housing appreciation… Tell Americans about your theory…
How do you figure housing prices are set to take off in Langley when we are more than likely set to have another hike in interest rates over the next quarter/years? In addition Langley is not considered a desirable neighbourhood with fixed supply of land and a demand from foreign investors such as the west side of Vancouver. Are Chinese bidding up Langley real estate? Not yet anyways and probably not for a long long time if ever. Are vancouverite’s selling their homes and moving to Langley? Probably not in significant numbers.Bottom line supply outstrips the demand in Langley and will continue to do so. Interest rates in the long term will not help as well are at historical lows and they are set to rise.
The article written by JCH is thoroughly researched and has backed their opinion with sound financial facts not emotions. It frustrates me when homeowners who have seen such an increase in their net worth from homeownership in the last 5+ years fail to see the fundamental factors which control the rise (and fall) in real estate prices. These price increases are simply not sustainable year over year especially after what we have seen over the last decade. The basic fundamentals and fiscal policy all point towards downward pricing not upwards. Sell your overpriced home, rent someone else’s overpriced home and let them take the hit. Then you can buy it from them at half the price. Try to remember leveraged investments work both ways!
ah rusty sucked you into the black hole of dumb – 3 weeks after the post, too!
Thank you, very interesting story. Another thing you might want to calculate is all the one-time costs when buying a home. I don’t know how much they are, but every buyer I know was stunned by how much they paid for all those fees and taxes.
Rusty, of course I factored in the cost of ‘house appreciation’ – it’s where I said ‘differentiating factor is direction of prices…at such high prices chance of drop is much higher than of rise’. If we actually thought prices were NOT at or near a historical peak, we’d probably buy. With prices in such a massive bubble, we are pretty much guaranteed a ‘reversion to the mean’ ie much lower prices sometime in the future. No bubble has ever continued forever. With it being just as cheap to rent, it doesn’t matter to us if it takes another decade to burst. Oh, BTW I’ve already been proven correct – prices here HAVE decreased. They peaked Feb’10.
Re Langley set to take off, LMAO! You’re such a card. I’ll be sure to tell the owners of the two houses on my street that have been for sale for over a year each.