“I decided last week to look for a rental home.. and it turns out to feel like a study of Vancouver real estate behaviours. This is actually great fun.
So today I go visit a 4 bdrm home in Point Grey. Smells like a sponge, feels like a sponge. Asking: $3300. I run the numbers in my head: this guy is paying $8000 mortgage for this?!?!? He paid $1.6 million for a house I would not buy for 400K !?!??! Maybe he paid cash… Well, what a poor return on investment, even less than inflation. Not to mention the $5000 taxes.
Obviously this was an amateur landlord. The paint was peeling off the window in large chunks, and he expected me to bring in my kids? The appliances were from the 80s. For God’s sake, if you rent for $3200, you could buy a brush and some paint. The basement showed signs of freshly scrubbed mold. The door between the master bdrm and the attic looked like an outhouse door. All skylight windows had missing handles. The attic was filled with moldy dusty insulation from the 70s. I even felt sorry for the owner.
So the HAM-guy says: Do you like it?
Me: Too humid, sorry
Him: You know, I own 3 other empty homes and I am looking for tenants, including a 5 brdm in Dunbar.
Well, the vacancy rate is 2%. So either he has 20 rental homes, or he only has 3 houses and recently realized he is loosing money on them, so he should better rent them. Who knows?
I left, feeling I was leaving a completely surreal place… “Insanity” is a euphemism.”
- ‘jumping in’ at vancouvercondo.info October 28th, 2011 at 6:54 pm
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“I run the numbers in my head: this guy is paying $8000 mortgage for this?!?”
the problem with your numbers is that you have no idea what the mortgage is on any rental property. The home with $3300 rent might be fully paid with no mortgage. Basically, you’re running your numbers, not the owners
One way or another, the owner is holding a property with a ‘cost’ of about $8K (or whatever) per month (whether he is paying that to the bank, or failing to realize that in investment income (opportunity cost)).
Only the financially uneducated will fail to see that this landlord is subsidizing his tenant’s cost of accommodation, in this case up to $5K per month.
Now, we all know that this landlord is holding onto the property not for income, but for hoped-for/assumed future price growth.
Thus, he is a speculator.
If he bought entirely in cash, and he is HAM, he is missing out on some very high interest rates in China from a straight-up savings account, as I understand is the situation in China right now. So if it’s a conservative 5% return per annum, he is giving up 0.05 x 1,600,000 = $80,000 per year. Minus $3300 x 12 months ( 39,600) and he is losing $40,400 every year in opportunity cost. (This is ignoring all the repairs, maintenance, taxes, vacancies, grow-op damage, and the fact that he will NOT get $3,300 for that dump).
Diablo, this is how you spell “opportunity cost”.
you’re not understanding the purpose of the purchase.
How much is Canadian citizenship or permanent residence worth?
HAM are not investing in real estate, they’re investing in their children’s future. Please run the numbers on that investment…understand now?
Yes, I fully understand the purpose of the first purchase: the one that this guy lives in along with his family. Can you explain where it is written that to keep one’s PR status one needs to buy 3 more houses and rent them out?
you don’t understand the purchase and neither do I. The buyer is benefiting from these purchases in one way or another – just not in a way that you can run your number to. Meet the landlord and ask him why – that’s the only way we’ll find out
There are two scenarios under which the numbers make some kind of sense:
1) He has to escape from China taking whatever cash he can with him. If he has $15million, he converts it into a rental income stream that will support his family for the rest of his life. He doesn’t care what the values of his homes go down to; that they generate rental income is enough. His future in Vancouver, in safety, is assured.
2) He believes prices will go up.
That wasn’t so hard! However, I do concede you are right: to know which one it is, we would have to talk to him.
diablo an immigrant isn’t forced to buy hi value property to land; s/he can buy much cheaper elsewhere. Your buy to gain PR argument is 100% flawed.
Jesse,
I don’t expect you to understand complex immigration strategies. But you need to understand business class immigration. And for shits and giggles let’s just pull an example of of my ass.
If I were from China and wanted Canadian permanent residence but the former investor class program took on major barriers to access, where would I turn? Keep in mind the entrepreneurial class program must invest 800K. How about a “real estate holding” company? And if I need to employ someone can’t I hire a “property manager”. Is it all coming together now?
“Entrepreneurs must invest and participate in the management of a business in Canada that creates at least one additional job for someone other than a member of their immediate family. They must report regularly on their progress”.
diablo do you even know what you’re talking about? Computer says no.
Jesse,
your ignorance is showing again
diablo do you think an investor class immigrant just forms a shell corporation and invests in real estate? Just curious thx.
Some anecdotes for your vreaa-
1. Husbands colleague married in 2010 (warehouse guy earns about $14 p/hr, she makes more but not sure how much) and they bought a new house in Langley. Loads of deficiencies when they moved on, some which were half-ass addressed, some never fixed. This summer he took his car off the road and started taking the bus to work to save cash. Last month, they rented out their house and moved into her parents basement suite. Can’t sell because they will lose money.
2. Friends in Squamish recently announced they were putting their house on the market. When asked by friends why, they said “umm, just too much house.” I’m pretty sure they’re listing to cash out, they see the cliff coming and didn’t want to get into it at the partay.
Clarification on anecdote #2 – actually I KNOW they are listing to cash out because they said they were planning to sell and “rent awhile.”
This is just my understanding, but isn’t it a little late to cash out in Squamish? They may still come out ahead depending on when they bought, but they aren’t they taking a substantial loss on peak pricing?
Maybe they bought a while before the peak.
That’s what I said. They can still come out ahead. BUT in order to sell, they WILL have to slash the price substantially from the peak asking prices (See VCI for discussion on state of Squamish today).
These are an example of the kinds of sellers that will set the new (lower) market valuations, because they can afford to move downward in pricing and still make a profit.
They may have bought in the 2008 dip but I think it was 2009. I don’t think they’ve been in that place very long…
uh-oh….
diablo seems to think that this person involved in RE in this anecdote is acting in his best interest. He thinks this despite evidence presented to the contrary – why? Because it’s crazy to think someone could be that financially imprudent!
lolz. You serious? People do and think all crazy sorts of things all the time – especially in a housing bubble.
Moe,
what I seem to think is that this person didn’t come to have money because he’s stupid with it. Just because you and I don’t understand the transactions doesn’t mean they don’ make sense on some level. Perhaps this is why we aren’t in a position to buy 4-5 westside homes and he is.
eyesthebye, if you believe there is any necessary connection between intelligence/skill and wealth, you are even more clueless than i thought
That’s because diablo is an idiot.
***
Disclaimer for the wannabe economist with nothing better to do than attack a wannabe PhD economist: Look elsewhere. I am a biostatistician, not a wannabe economist and certainly not a wannabe “quant”. My name on this board is to portray my story, a well-educated high earner living in a basement suite due to Vancouver real estate prices. So get over it.
***
Disclaimer for the asshole who doesn’t like this disclaimer. Too bad. I don’t like you.
looks like basement suite PHD is a little long in the education department and a little short on earning. Over-education and under-employed
Dream on, gas station jockey.
Perhaps he inherited the house. Who knows.
Even if he inherited all four houses, the opportunity cost of renting out at these price:rent ratios is very, very large: a fortune, in fact. Not to mention the risk he’s taking with market exposure.
Most likely scenario: Another gambler, mortgages on all 3 or 4 properties, betting on price increases.
This whole system is a sham. Banks want us to lose our shirts.
Come on, the guy will sell to someone who will develop it to highest and best use. Comparing price and rent isn’t valid. This property is an option with a small residual income. Likely large DP.
“Surreal” and “insane” are entirely appropriate adjectives to describe a city where one landlord owns four houses in Dunbar (probably all in dubious repair like the house the commenter “jumping in” describes above), which this landlord intends to rent to some desperate family just until the time that the market changes, at which point he kicks out his renters. This scenario is what many renters now can expect. Can the city step up to the plate and insist that landlords who want to speculate like this, and treat renters like this, get rewarded by ensuring that their tear-downs can only be replaced with multifamily housing?
“tear-downs can only be replaced with multifamily housing”
Many neighbourhood associations and residents loathe multifamily and will fight hard to keep it at bay. No candidate/slate is running on the multifamily provision, but in my view reviewing all the options of neighbourhood land use planning, from complete neighbourhood autonomy all the way to central decrees, needs to be on the table for discussion.
If a neighbourhood abhors more density (maybe not Dunbar, but others), I would argue the City is harmed by this if other areas are increasing density at a faster rate. There needs to be some acknowledgement that if a neighbourhood wants more autonomy that the holistic costs of this need to be considered and adequately compensated. (Read: tax the crap out of the buggers.)
Thy hornet’s nest hath been perturb’d
And if you listen to certain candidates in the upcoming civic election, I think they understand density is the endgame, but the views are so “nuanced” I’m suspicious what sort of density they would end up supporting.
Agree on all counts!
Update below from “jumping in” (I’ve pasted this in from vancouver condo info. — is that okay?). I also ran into a number of “property managers” who were “managing” properties for “friends”. And yes one wishes some journalist would be interested in investigating this whole phenomena and finding out more about what it’s all about.
‘House hunt day #7
Called another landlord today. Yes, the ham-guy said “which rental, I have 3.” However, after talking to him over the phone, he said he is managing 3 properties because they belong to “friends” who do not speak English.
I was wondering: Did they buy a place to park money? Do they live in China? Do they intend to retire here when the economy miracle will collapse? Do they live in a basement suite somewhere for less then the rent they are asking on the dwelling? The situation really deserves good journalist/sociologist investigation’
makes more sense now. Just as I suspected…
“you’re not understanding the purpose of the purchase.
How much is Canadian citizenship or permanent residence worth?
HAM are not investing in real estate, they’re investing in their children’s future. Please run the numbers on that investment…understand now”?
“Please run the numbers on that investment”
i.e. earnings don’t matter. We’ll see!
jesse,
your numbers are not his.
What is good for you is not necessarily good for everyone.
Run any number you want, it will always be your number
Martians have landed and value Vancouver SFHs as a unique fuel source, valuable only to them, something completely beyond our ken (perhaps something to do with mold effects?). We can’t fathom their math, but, for some reason, houses are now worth a billion dollars.
Would you be a buyer or a seller under those circumstances?
@jesse, how much earnings do you place on the value of your only child. I do some work in the education industry here in Vancouver and I can tell you that these HAM do not care about how much money they spend when it comes to their children.
Remember, you can only have one child in China.
@diablo I actually find Jesse’s arguments the best out of all the Real Estate bears. He brings up excellent points about not using Asian rental to own ratios because Asian money markets are not as well developed. To that point I can only say we will see because I know the HAM sure don’t trust western money markets either. The only thing they trust is real estate. That view may eventually change, but not for a long time.
Like I said before in my arguments, Vancouver is a rare place on this Earth that can fit what they are looking for, I will spare the explanation as you can read it on my other posts. The thing about Martians that vreaa mentioned isn’t actually as inaccurate as you think because to some of them, this is one of the only places that they can go.
Question for Julian:
Imagine the following chart:
x axis: money spent on child through upbringing
y axis: child’s current and future life ‘success’ (as measured by whatever multifactorial model you choose, may encompass earnings, quality of interpersonal relationships, creative endeavours, satisfaction/happiness, etc)
What is the shape of the curve?
More for Julian ->
When you say “The only thing they trust is real estate. That view may eventually change, but not for a long time.”
We’d be of the position that you underestimate how sentiment can be changed by a short (2-3 year), sharp bear market in RE, with price recovery (real) taking up to 25 years. Two or three generations will fairly rapidly learn that you can’t trust real estate.
This process may have already begun in China. I’m sure the much publicized Mr Wang, whose condo dropped 30% (likely wiping out everything he has), feels very different about real estate now compared with how he felt just one short month ago.
” how much earnings do you place on the value of your only child”
Actuaries say about $200,000. Again your argument boils down to earnings not mattering, but you’re adding in emotional components to justify overpaying. Fine, they can overpay because they can’t stand uncertainty, but they’re still overpaying.
@vreaa, you are still assuming that they see Vancouver the same way as you. What they see is a place where they can basically roam around like they do in China, not having to learn English because everything here is also in Chinese, an education system that is less harsh on their children than china. I have no idea what the shape on that chart looks like but more importantly, neither do they. They feel the more money that they spend on their child the better their life is. Hell, they think that the best way to do this is by giving the kid tens of millions of dollars and leaving them here in Vancouver, hence your satelite family theory. Again, I am not here to debate the basis or merit, but that is how they feel.
And that Mr. Wang is not a HAM. HAM’s has a lot more money than Mr. Wang does. I have asked many HAM’s the same question, why do you keep on paying 4 million for a west side house. They tell me, more of their friends are coming, this is only the beginning. That is scary to even me.
@Jesse, you are right, they are overpaying based on sentiment, I never thought that wasn’t the case.
So, Julian, what will happen to the appetite that these guys have for Vanc RE when prices drop 10%, 15%, 20%, 25%?
If what you say is correct, they should step in, and sales volume should increase (they’d be getting ‘in’ for even less). Correct?
If what I suspect is true, the demand will fall off: they are people with money who are as interested as hanging onto it as the rest of us. And, they are ‘follow the money’ momentum investors, not value investors. Most of them made their money in a momentum fashion, and they won’t change their ways now. They bought Vancouver RE as a ‘safe-haven’, maybe, and for the ‘added value’ of immigration perks etc; but when prices start dropping in earnest, Vanc RE will fall out of favour with them like the proverbial hot-potato.
It’ll be easy to test our respective hypotheses, during the next downturn.
@vreaa, yes, agreed, definitely we can test our hypotheses during the next downturn, along with Jesse’.
Vancouver has been in favour for the Chinese immigrant for, oh, about a hundred years now. I don’t think this city is in any danger of falling our of favour any time soon.
diablo -> Yeah, and in the 1930′s, you could buy a SFH here for less than 3 years rent…; and in 1982-4, you could buy a SFH here for 50% less than in 1980-1…; etc
your point is?
@VREAA
concave downward parabola?
@Julian Lee:
” I can tell you that these HAM do not care about how much money they spend when it comes to their children.”
Is spending on a westside mansion really spending it on the children?
In a related update, the Chinese multigenerational family I mentioned earlier have closed the deal on the 1.4M house. I like this part the best: my little source tells me that their neighbour is a “Real Estator” and he and his family are remaining at the house, renting it back from the developers. Now, also, it looks like the developer is going to hold on a bit longer instead of developing – he was not clear on how long. Our family, meanwhile, criticises the neighbour’s choice, because “they may get ripped off for the rent and also, if the neighbours complain about them making noise, they may get evicted.” But they figure the neighbour knows the developer so may not get ripped off for the rent, so there’s at least that… They themselves have no such connection, so it is best to buy.
Wow, the price of stability IS damn high for some families.
Funny that the child in question really rather wanted the 1m dollars to be spent on his education and on a vehicle rather than a house… makes no difference to him whose name is on the deed. (The family is not HAM, though, so I guess the part about spending any sum on your child may not be one of their core values).
Easy to find out. A simple LTO search will get you mortgage docs on property and tell you what mortgage and terms are,
again Jesse, there are two arguments to each home purchase:
(1) the investment value
(2) the intrinsic value
You look at the home as only (1) and don’t ever factor in (2).
The % of each factor varies widely. Seems renters on this board place 100% on (1) and nothing on (2)…hence being able to “run numbers” on each and every home purchase as though the entire motivation was (1).
diablo -> I agree re your dissection re 1 and 2 (and actually a 3, too).
I’ll expand in a ‘speculator’ post, which has been a long time coming.
By Tuesday, perhaps. Or Wednesday.
@diablo investors have no “intrinsic” value. You are, I think, stating that houses are traded like art. I agree, for certain properties. For a vanilla condo, and for the vast majority of properties in Vancouver I have to disagree; it’s about cash flow. (And art can be illiquid like you wouldn’t believe.)
vreaa/jesse (probably the same person),
How do you ever decide that buying a home is a good investment? Most have mortgages 20+ years – that’s 100-150K in interest payments for most homebuyers. How do you run these numbers and have them make sense? I just don’t think buying a home is ever going to happen for “number runners”
“vreaa/jesse (probably the same person)”:
–
ROTFLMAO
Actually, EVERYBODY here is the same person, except you, Formula1/diablo/the604/henley/Rusty/Rollie/eyesthebye/I’mLosingTrack/WhattaYawn….
The thief looks behind the door.
don’t shoot the messenger
… or, in this case, the ‘non-sequiturian’.
To Julian, once those HAM immigrates here, they can have more children! It’s very common. When we went to China, there are a lot of families at the airport where they parents and oldest kid have Chinese passports but younger kids have Canadian passports. It’s so common the custom officers aren’t even surprised. What’s surprising instead? An entire family like us with all Canadian passports but can speak Mandarin (well, my wife can while I need to ask what this term means or the English equivalent is).