This house was featured in a recent post.
Kerrisdale SFH, 2,200sqft, built 1955, 56 foot lot.
Purchased after the price pullback in early 2009 for $920K, now assessed at $1.859M, reflecting estimated Jun 2011 market value.
Here’s the question: “If you knew you’d be holding this house for at least 5 years, would you buy it, today, for $920K?”
[The question is framed with the 5 year 'clause' to take out the obvious "Sure, I'd buy it and sell it" answer. -ed.]
If you don’t want to own it for 10 years, don’t own it for 10 minutes. Is this a million dollar home? No.
It would be really cool to know what % of Lower Mainland condo buyers from the past year see themselves living in the unit they bought a decade from now (or even 5 years from now).
A house’s true market value is somewhere between 10 to 15 times the annual rental revenue it can generate. Below 10 it’s a great deal. Above 15 it’s overpriced. This is assuming normal, balanced credit conditions. The problem is, fifteen years of easy credit has created artificial and unsustainable demand. The housing “market” has ceased to exist as such. It is now merely a collection of increasingly distorted pricing signals driven by low interest rates and extreme leverage (i.e. 5% down).
Without knowing anything about Vancouver rents, I’m going to assume this thing would rent for $2900 per month. I reached that figure merely by doubling what I’m renting a 3BR townhome for in Ottawa right now. Like I said, I don’t know Van. That’s $34,800 per year. That means the true value of this house under normal credit conditions should fluctuate between $348,000 and $522,000.
Below $348,000 you’d probably be wise buying a half-dozen of these and renting them out. Above $522,000 you shouldn’t touch even one of them. At $952,000 you’d have to go back and fail Grade 4 math. At $1.8 million you need professional help – from a psychiatrist, not a realtor.
Interestingly, the same bank that would lend you $1.8 million at 5% down to buy this place wouldn’t dream of lending you that same amount to purchase 5 of these properties if they were selling at the bottom of their natural market value ($348,000). Probably not even if you had 20% down. Did I mention how completely screwed up things are?
Very good post..Thanks
If the bank was to loan $ 500K to buy really expensive car, would most people do it ? Probably not. There is no greed factor about selling it again in year for a profit..
Vancouver is “greed central”. A good study in mass delusion, in a city with no real industry or a cultural foundation.
Valuations are so detached from rents I don’t think anyone knows where “fundamental” value is. Given other houses on the street are being redeveloped into larger properties I would expect a healthy premium on the land. I wouldn’t pay it personally but I don’t need a geant hoose!
But good analysis (I’m biased of course
)
When valuations become completely detached from rent, therein lies the first warning sign that something is amiss.
Nice, lots of us are quoting half a mil, and I like that you value it under my $500k bid. Half a mil seems like a rather fair price.
Its so nice to see some sensible comment. Well done ragingranter
Would I buy this place at $920k? No. As a family, we do not have the income to pay a mortgage on $920k, let alone $1.8m.
When this house was purchased in 2009, it was already/still overpriced.
All of this truly baffles my mind some days.
There is one idea that hasn’t been tied to this housing bubble, however, the Whitehorse thread is coming close to it.
When will a realtor go up north and get creative building igloos? An igloo has the perfect selling features… Can’t you see it? They aren’t making any more land, free open spaces, the value will only go up as the poles melt, (global warming anyone)? Make a killing selling them for $920K
Perhaps the owner (Elvis) bought their first place for $250,000, sold it for $750,000 and only added $250,000 more to get this place. This seems like a typical bubble market “move-up” scenario. Of course this can’t last forever once all the pool of move-up buyers have been exhausted. But I’m preaching to choir here.
the assessment and ask are nonsense but that alone doesn’t deter. assessment is correct on one pt, however. forget the dwelling, teardown – it’s a pure land spec. bid <$500k. doesn't mean it gets to that, just what would work for me.
ps. @agsage. re: teranet charts. not a RE guy but i look at a lot of data and the 16 city vs 11 city are just too close. they're statistically identical, not just in value but also detail. whatever it is, the data is capturing the same underlying feature (could be artifact of teranet method). does not necessarily mean this feature is market-wide, which is what we're conjecturing. the fact that the bc curve lags the others prior to 2005 also doesn't seem to make sense – the slope is complete different. again, i suspect this related to the baseline reference – not that you're doing something odd with the data. i'm imagining if the baseline were taken such that the bc component was more coincident (in value and derivative) with the others at the beginning of the period. then, what effect would that adjustment have on the c11 vs c16? so you're saying, 1 in 8 ppties ( from vague memory, can't find comment) are excluded due to renos/teardowns? that's still a big component, and also perhaps the most significant component to capture. i understand the rationale for c-s and similar. but, a lot of times it's just best to look at raw data without any model assumptions. pure nominal price trends, avg with quantile error bars would more than enough get the picture, imo.
LOL $500k is what three of us have said on this house now in this thread, seems like a fair market value, at least in the VREAA marketplace where we imagine fair prices return. But now I see you outbid me just below, by a grand :-O.
Correction, at least four now, seems like lots here value this at half a mil.
It’s funny because when I saw the headline and picture, my immediate thought was 450-500. That’s about what it should fetch here in Calgary, although even that figure is probably inflated (even given our higher “average income” around here).
So, that probably means that Vancouver, in general, is probably looking at a HUGE correction. And, by that I mean EPIC!!!
Yeah, but will it ever happen to the epic proportion that is needed is the question. Continued 1% target interest rate from the spineless Bank of Canada with no end in sight casts some doubt on that. They are doing all they can to keep this bubble afloat.
Not a chance. I think we’re currently on the way to a 50% pullback in areas such as this (more in some areas, less in others), but even at 50% off, an grungy old money pit like this on a small lot simply isn’t worth a million dollars. Not to me. No way. Never.
Now, if I did happen to have a spare $1.859 mil kicking around, maybe I’d think differently. Indeed, I *would* think differently. I’d head immediately to the Okanagan and buy a great place overlooking Okanagan Lake for $400,000. Then I’d head to Fountain Hills or Cave Creek or Carefree or Scottsdale and buy a gorgeous winter home where I’d overlook the desert and have fun in the sun for six months a year. Price? $300,000. I’d then stick the remaining $1.2 mil into low-risk investments and kiss-off this ridiculous rainforest.
To answer, no.
I cannot afford a million dollar home, regardless of being able to obtain a million dollar mortgage.
However, if I was to consider liquidating all my investments, tie down all my money, qualify dual income, and end up buying this for $920,000 it makes my head ache.
To be frank, my parents did briefly look around the West Side when they were buying a house in Vancouver in 1998/99, even then most of the West Side was expensive. Houses they were looking at were in the half million dollar range, severely underwhelming, probably much like the bungalow above. To me, and to them, that was exuberantly expensive.
I just don’t understand the allure of the West Side, not now, not 12 years ago.
Fraser Institute school rankings and cachet. A marked premium for having a “W” in your mailing address.
forgot about the W. up my bid to $501k.
Just imagine the premium if you successfully lobbied the city to have ‘W’ changed to ’8′.
Why do people paying $2 million for a house give a rats ass about public schools?
I wouldn’t touch it with a barge pole. However, I would definitely sell for 1.86 million.
Just on the face of it — and mind you, practically everything I know about economics has been derived from this website (thank you to the many commenters who have provided analysis!) — I could say confidently that almost under any circumstances, you’d have to be very far out of your very tiny mind to fork over $1.8 million for this domicile.
However, at the risk of repeating myself, I think we have to keep looking at not only the insanity of speculative manias and the phenomenon of momentum investing, but at another reality that from my own experience I know has played a huge role in this Pacific-Rim city: the willingness of parents to spend and sacrifice almost anything to ensure their childrens’ future well-being. As I’ve mentioned, I’ve spent years now teaching the children of immigrants, and I can say that no matter how rich one is, emigrating to another culture quite different from one’s own is challenging for anybody. So many families I know from other cultures who have bought in the last two decades on the West Side did it so their children could grow up in a stable democracy and have access to good education. I’m not saying what’s happened to housing prices overall here isn’t destructive to Vancouver; it is and will be, if so many who live here now can’t afford housing. I’m just saying that, in many cases evoked by this absurdly overpriced house on the West Side, and as other commenters have pointed out here too, it’s really not always just all about greed and fads.
Agreed, what could be more important than security and education for one’s children?
But why pay millions for benefits that you can get for tens- or hundreds-of-thousands of dollars elsewhere in Canada, and for even less in some other countries?
Think about it: If you start equating housing prices with love for children, you can justify any level of pricing; absolutely any.
But that’s not the whole equation. Your child’s future well-being is also related to your own future fiscal well-being.
I think you’ll be surprised as to how much all of this reduces back to momentum price-chasing.
When prices dropped 15%-20% in 2008-2009, where were the off-shore buyers snapping up Canada at a reduced price: They disappeared.
When prices drop, that appearance of security and future well being can instantly evaporate.
Vreaa host: excellent points about fiscal prudence, even if some buying here are so wealthy they’re not going to get too upset about even large price drops. I’m reminded by your cogent argument here why it’s good to have people with so many different types of expertise contributing to this blog.
Just one point/query about why some of the immigrant families I referred to don’t go elsewhere in Canada: 1). Vancouver’s obviously closest to their countries of origin; 2). Are there cities in elsewhere in Canada with Asian populations this large?
Vesta -> Toronto has a very large Asian population, and many other centres have big enough Asian communities: we’ll leave it to others for details. But, same question again: just how valuable is that to people?
If you make the argument that there is a limitless amount of people with limitless wealth who see Vancouver as the only city in which they can live, the only place where their children can be safe and educated, the only place where they can be in a community of their choice, then, yes, it follows that RE prices in Vancouver will go up and up, relentlessly, forever. But is that really what you believe?
Meanwhile in Australia:
There is more: http://globaleconomicanalysis.blogspot.com/2012/01/australia-roundup-oceanfront-homes-for.html
Sure, all the facts point to a big slump. Yet fluff pieces like the following are still appearing on Saturdays:
http://smh.domain.com.au/real-estate-news/strong-january-sales-point-to-housing-rebound-20120120-1qa41.html
”We have rarely seen so many truly qualified and cashed-up buyers”
Of course, all those cashed-up buyers were just waiting for Sydney prices to fall 2% before jumping in!
What else could you do with a million dollars? Pretty much anything for a good long while. You could do everything the bank commercials tell you you can do in retirement but nobody ever does as “ragingranter” hilariously pointed out the other day. I’m always wanting to learn and try new things so I would have no shortage of interests to keep me busy. I don’t know what other people dream of and perhaps that’s part of the problem. Sheeple may or may not have dreams of “retirement” but most don’t have the courage to realize their dreams. For these folks it is easier and safer to plunk 1 mill into a house, keep working the job and updating the kitchen and complaining about your life than to get out and live something different.
This house would not fetch anything close to $1.8 million anymore. That was last year.
I could list a lot of ways to take $1m and put it to productive economic use, this house would not even come close to making that list.
In two years this property is easily in the 75% off category.
“In two years this property is easily in the 75% off category.”
75% off is exactly what I said in the other thread this lovely home appears in. I like it at half a million.
Im bearish On Van RE too. But 75% is not happening buddy. To want or wish or that is absurd. Move to Surrey then if you want cheaper prices. You’ll be a renter for life if you wait for a massive crash like that. And half the province will be jobless.
“And half the province will be jobless.”
Yeah all the realtors will be jobless.
To pretend to be bearish and yet defend current valuations or say that 40% off is about right, is what is absurd. It ignores the run-up from 2000 to 2009, when this house was still “valued” at a million said the other post. Your 40% off figure you mentioned in the other thread puts this house well *above* its 2009 price tag even after a “correction”. That just ain’t gonna do it.
“75% off is not happening” – famous last words. I heard a bunch of traders saying that WTI wouldn’t drop below $100 after it’s run to nearly $150. Limitless Chinese demand, they aren’t making the big finds anymore, mess in the Middle East, blah, blah, blah.
Within a year, WTI hit 30$ – ie. 75%+ drop. Who would’ve thunk?
“you’ll be a renter for life”
And I’m happy with that as long as I can keep finding amateur debt-laden landlords foolish enough to subsidize my housing costs.
And I’m happy with that as long as I can keep finding amateur debt-laden landlords foolish enough to subsidize my housing costs.
HAHAHAHA. Good answer. When did ‘renter’ become synonymous with second class citizen anyway? “Renter for life” makes it sound like a life unfulfilled. Just one more example of our twisted and unhealthy relationship with real estate I guess. We are somehow less than whole if we do not own a home.
I would consider it for $500k.
You guys say the same thing every time a question like this is posed. If this house was listed at 920k and I had the ability to buy it, I would in a heartbeat. Then again, I would buy it because I know a lot of people who would want it.
I truly believe that this house will not drop in value in the next 5 years.
could be right. there’s a decent chance of profitable flip for teardown at 920k, but it’s far from risk-free. risk/reward@price vs alternates is the exercise. commenters are just more risk-averse, perceive risks others do not, and/or have got better options.
now, keep in mind australia is a completely different story due to lack of snow and mountains
http://tinyurl.com/7z44f5v
SimeonG -> Thanks for the prediction, please clarify:
What exactly do you mean when you say “I truly believe that this house will not drop in value in the next 5 years” ?
What is mean is that I believe that there are more than enough people who would be willing to pay that price for this house at current. From what I can see based on my work experience is that the demand will grow strong for at least the next five years. I draw comparisons from the Chinese pre-ipo market, which I also give another 5 solid years of large profitability. Having spoken with numerous buyers, investors and new immigrants from China, the money isn’t the deciding factor as we’ve said many times.
If i can clarify any of these points further let me know.
Yes, please clarify further:
You’re saying you can’t see this property dropping below $1.859M?
This property in this state could drop below 1.859M, the question was posed as ‘would you buy this house for half the price’ and to answer that, I can’t see this property dropping below 920k.
However, this land with a new house on it won’t drop below 1.859M.
Cam must be very proud.
Why, because I haven’t worked for him for over 6 months?
SimeonG, you worked for Cam Good? *Now* you’re perspectives make perfect sense.
How’s the helicopter biz these days? I hear Cam’s taken his fleet to Arizona – where, BTW, you can buy a half dozen or more houses of this ilk, in decent neighbourhoods, for that same $920K.
Simeon -> Okay now I understand.
You can’t foresee a 50% price drop.
Your statement was ambiguous, because you said:
“I truly believe that this house will not drop in value in the next 5 years”,
not, “I can’t see this property dropping below 920k.”
OK, this property aside, do you foresee the possibility of ANY drop in prices?
Demographia has a new 2012 report on global housing affordability. Interesting to see Dublin now reaching “affordable” house price levels (up to 3 times median income). Interestingly LA went from 11.5 at its peak to its current level around 6 times.
http://www.demographia.com/dhi.pdf
Ireland, the Celtic Tiger, the Sillicon Valley of Europe, one of the most dynamic economies where ‘everyone’ in EU wanted to move…
Dublin house prices ‘down almost 65% since 2006′
VREAA host, you wrote: “Vesta -> Toronto has a very large Asian population, and many other centres have big enough Asian communities: we’ll leave it to others for details. But, same question again: just how valuable is that to people?
If you make the argument that there is a limitless amount of people with limitless wealth who see Vancouver as the only city in which they can live, the only place where their children can be safe and educated, the only place where they can be in a community of their choice, then, yes, it follows that RE prices in Vancouver will go up and up, relentlessly, forever. But is that really what you believe?”
Thanks to all I have learned from this blog, and not least you, I don’t think I actually did make an argument suggesting that “there is a limitless amount of people with limitless wealth who see Vancouver as the only city in which they can live, the only place where their children can be safe and educated, the only place where they can be in a community of their choice, then, yes, it follows that RE prices in Vancouver will go up and up, relentlessly, forever.” “Limitless” and “only” and “forever” imply extremes and are not words I’d use. Perhaps you envision that’s where my argument might lead, but after reading this blog I hope I wouldn’t be such a fool as to prognosticate prices will go up and up here forever. (Again, my thanks for the education I’ve received!) I firmly believe we’re in the middle of a ridiculous bubble that’s going to pop and splatter somehow.
My arguing what I did — that there are very human reasons for why people are willing to pay huge amounts for properties like this one — was posted because I do believe there are other very significant factors playing into what’s happening in Vancouver beyond greed and trendiness, and that that affects what seems to us like both crazy prices and buying patterns. I was responding more to posts today and elsewhere that expressed bewilderment (which I think we all feel)
over how on earth Vancouver could have gotten this expensive. And, I hasten to add, I don’t attribute that fact only to immigration! I agree that longtime locals have jumped into the quagmire everywhere too.
Vesta -> Thanks for the discussion.
I realize you didn’t make the extreme “limitless” argument. The point I am making by bringing that argument up is that these price driving concepts (children, security, community, etc) may seem to justify extreme (even “limitless”) pricing, but they don’t — there are thresholds above which people simply go elsewhere.
What would a house like this (similar size / age / features in the same neighbourhood) rent for today? What would it have rented for in 2009?
http://vancouver.en.craigslist.ca/van/apa/2793307186.html
Rents for just short of $2,000 today.
That’s a cap rate of less than 1.5% today. Even after a 50% drop, the opportunity cost of a down payment is worth a lot more than 3%
$3,000 pm rental would likely be more typical for this type of house currently. (the craigslist example is for a duplex. theragingrenter’s numbers above are likely pretty close).
Regardless, the yield remains very poor, even at 50% off.
Oh god. I thought it would have to be 4k/mo. We’re doomed.
I’m a buyer at 920K provided Canada doesn’t change it’s immigration policy and China doesn’t crack down on stolen loan money. A great flip prospect before the Chinese credit bubble implodes. If I had to hold for 20 years, I’m a seller.
Then get at it.
“China’s credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC’s dream that is at last coming down to earth with a thud.”
http://www.telegraph.co.uk/finance/china-business/8957289/Chinas-epic-hangover-begins.html
Actually Calgary has a strong Asian population, and it seems to be increasing. We have 2 TNT markets now!!
That house in Calgary would be 400-450K in a nice neighborhood.
My wife and I have started watching this HGTV show called Selling LA. We actually have commented on some of the homes being sold for 2-3 million, saying “not bad, when you compare it to Vancouver!” Seriously, we are talking gorgeous mansions by the beach or with ocean views, not a dump like that one shown above.
At some point there will be density on these lots, hence the wacky price/rent. However we can look at price/rent on that density. Rents are about $2 /sqft for something nice (I pay closer to $1, but it’s not that nice). Multiply this by 12 months and p/r of 15 to get $360 /sqft total new value. now construction costs more like $200, so the lot is worth $160/ sqft of future townhouses or condos or whatever.
At 1.6 million the transaction would therefore suppose 10,000 sqft of density in the fairly near future. That is probably 3 big units and 4 smaller ones (none under 1000 sqft, who actually wants them?) Seven households.
Great reasoning; gets at some things I’ve been wrestling with regarding densification ‘value’.
As you seem to imply, no way is densification of that degree about to happen on these lots, though.
(Also, can’t we reason that, if a substantial number of lots densified, there’d be increasing supply, with downward pressure on said rents, with decreased yields, etc…?)
not every lot needs to be redeveloped this way, but it provides a marginal buyer. pricing happens at the margin. any taxes or fees taken by the city would lower the current lot value. so would several years of holding it as a bungalow.
Agree with your reasoning here VREAA. City has legalized suites and, on some lots, laneway houses, I suppose primarily on longstanding model of students renting rooms and basements. So all lots are now priced on assumption that they will be densified. But I’m skeptical that if all lots were built out on model currently in use (basement suites), those suites would all be filled. I’m just unsure of when market will reach tipping point where people realize that renting out suite is by no means a sure thing, and assumption of that income will no longer be built into pricing. UBC is racing to add on-campus housing for students, which will weaken market for suites. We had a neighbor who rebuilt with suite and no one ever stayed for long, and there were vacant stretches as well. I think part of the problem here was finding tenants they wanted to accommodate in the basement of a house where they were raising kids. Amateur landlording sounds better in theory than it turns out to be in practice. Another reason why the city’s choice to encourage densification on this model is so misguided.
vesta: the willingness of parents to spend and sacrifice almost anything to ensure their childrens’ future well-being.
vreaa: If you start equating housing prices with love for children, you can justify any level of pricing; absolutely any.
I think you’re both beginning to understand Chinese culture.
Gung hay fat choy to you all.
“If you start equating housing prices with love for children, you can justify any level of pricing; absolutely any.”
So some people love their kids so much that they’re willing to overpay for real estate to such an extent that they will risk their family’s financial well-being. Got it. Guess the folks who really, REALLY love their kids are the ones gambling on real estate to the point that they’re risking their ability to put good clothes on their kids backs and quality food in their bellies.
Good point that both you and VREAA host made about taking risks that might have disastrous consequences for one’s family.
@Vesta: Thanks. I grew up in a household impacted by missteps in Lower Mainland real estate.
I need to preface this by saying my younger brother and I had very happy, enviable childhoods with two incredibly dedicated and loving parents. Growing up, it honestly never felt like we went wanting for anything. My parents definitely lifted us up.
Nonetheless, I can see clearly now how their missteps in real estate in the 1980s (buying at the wrong time in the early 80s and selling at the wrong time in later 80s) had a huge impact on how we lived. I can see now how their poor decisions in this one specific area greatly affected their plans for where we lived, the activities we could do, and their financial goals. Heck, the echoes of their poor real estate choices are still evident in the financial planning they’re doing today. Now, I give my folks credit for acknowledging that what happened to them was of their own doing and for taking full responsibility for their mistakes. And I also credit them with being frank with me about their poor choices as they were trying to teach me about personal finance in the years before I moved out. But there can be no doubt that they took risks regarding their family’s well-being through real estate.
It is that fact that prompted me to start learning more about local real estate a few years back, when it was starting to become clear that we’d be trying to make a life here once my wife and I were both done our studies. That opened up a whole new world of learning to me – and I’m thankful to people like VREAA for the resources they’ve provided for this learning. The way I see it, for a lot of people the most important factors in personal finance are 1) their income and 2) making the right call on when home ownership is appropriate for them. I feel like I’m doing pretty well on both counts, the former in part because of my parents’ teaching and encouragement and the latter because of my parents’ candor about their mistakes.
I just hope there aren’t too many kids who need to learn about family finances the way I did in the years ahead (or through much more extreme circumstances than I faced). When people like F1 celebrate home ownership at any cost as being good for families, they betray how truly ****ing foolish they are.
Does anyone else completely skip past all of chubster’s posts given his lack of capitalization, extreme use of abbreviations, and just general laziness when writing? Following a thread like this would be horrible if you had to stop and parse his terse writing. I hope he can take a hint.
From the outside, this place is nearly identical to our first house…which we bought in 2003 for $180K (in Maple Ridge, but still). And it was a 1/4 acre of land on a very private cul-de-sac, not a crappy Vancouver city lot on a busy main street. $920K??? Who the f*ck would pay that for a dump like this?