ZRH2YVR is a regular poster who recently revealed that they will be leaving Vancouver for a job to Switzerland. Their story was headlined 28 Jan 2012.
On that thread, ZRH2YVR added this useful analysis [VREAA 29 Jan 2012]:
“Here are the economics of my renting since arriving and how this would have compared to buying. You know real estate always go up so this renting thing must have been a real bust.
Property info – 1400 sq ft unobstructed 270% view of English Bay south down granville street and up and around to the mountains east approx to My. Seymour. New building 2007.
Rent paid from move in to June 2012: $196,000
This is a true consumption cost and was well within our means.
Value of property in 2007 on move-in – approx 1.4M.
Value today – estimated – 1.4-1.5M . Let’s say 1.5M just to be conservative.
Cost of ownership – Assume 100% leverage and ignore investment opportunity cost.
Interest rate – Let’s sat 5% even though in 2007, it may have been more.
Strata and property taxes amount to approx $1050-1100 per month.
So – Cost of ownership over this period is $395,000. But wait – the property went up in value right? !!! Well
Purchase cost would have been approx $1,430,000 with all up front costs.
Selling at 1.5M and subtracting costs would net say- $1,450,000 – so there is a gain of $20,000. Fantastic . . . Offset this against the cost of ownership of $395,000 – that gives you net $375,000 (ignore taxes). Compare this to cost of renting of $196,000 – we are up approx $200,000 – Believe me we notice this!!!
So – – For all you property virgins out there – the numbers above may be outside your normal range but divide this by 3 for a $500K property and you will be in about the same place – – up by $60,000 over 5 years. I would never buy in the current market.
Now the funny thing is that in order for us to have broken even, the purchase price would have been close to $600K initially -and that is over 50% fall from where we are. Good luck to all of you. A house is a place to live first – invest second and anyone who is investing right now is completely out of their mind. You would have much more fun going to Vegas for a month – and would probably be better off.”
—
Notice how often different methods of calculating the fundamental values of different properties come up with a “over 50%-off” conclusion.
Add bad sentiment on the downside and you can see one source of our 50%-66%-off estimate.
- vreaa
Add in tail risk and things look even more glum.
Surprising, perhaps, that values haven’t increased much since 2007.
That’s why you don’t buy expensive condos with no land and maint fees at $1000. If you spent 1.5 in the west side and sold several months ago at say, mmmmm, 3.5 mil. So just say, you’re up at least 1.5 mil. Condos are a dumb investments and much more vulnerable to a major correction.
I think the land value is more volatile and has less direct utility. The more land value as % of total value, the more beta to the mania. One strategy in this market would be to own as little land as possible (the structure value won’t go down that much).
Don’t think people are spending $1000/month on insurance, maintenance, landscaping, depreciation in a SFH? Those condo fees just make it more transparent. A big part of the mania is pulling a veil over real costs.
(In fairness lots of people prefer houses, myself included, but I don’t pretend that they are better investments. I just like ground orientation and quiet streets.)
It’s called “go with the flow”. Why would you buy a condo when you can afford 1.5 mil? If you have 1.5 mil to buy, of course the house is the better buy. Condos are much more at risk than a house. There are houses being torn down to build more condos. Long term, Vancouver houses are far better investment than a condo. Your comment is absurd.
Condos are almost always highest and best use. That is all you need to know.
indeed – this is a fairly carefully cherry-picked example of how renting over the last 5 years in Vancouver comes out ahead of owning. I personally don’t recall anything selling for 1000/sf back in 2007, even downtown…however, one thing missing from ZRH’s comparison is that the owner of the condo also earned nearly 200K in rental income over that period. From ZRH. Depending on how much this purchase was leveraged, this could have been a very good use of the owner’s downpayment money over those 5 years.
If the same comparison was done on pretty much an SFH in Richmond/Burnaby/Vancouver/New West over the last 5 years, I suspect that “costs of ownership” would look a lot different.
I think the writer is assuming the purchased home was owner-occupied in his comparison. You point out that the owner collected 200k of rent, but you are ignoring the fact that the owner still had to live somewhere. Either live in the unit, or rent out and pay to live elsewhere. When you’re working out “shelter” costs you have to consider that.
Agree. 100% leverage? Rent collected by owner? No information on owner, simply assumptions. Flawed analysis.
“You point out that the owner collected 200k of rent, but you are ignoring the fact that the owner still had to live somewhere”
agreed – but did the owner rent something that cost the same? More? Less? There is no way to tell, unless ZRH knows and tells us.
@nuxfan
“If the same comparison was done on pretty much an SFH in Richmond/Burnaby/Vancouver/New West over the last 5 years, I suspect that “costs of ownership” would look a lot different.”
O rly? Not in my 800,000 assessed Burnaby SFH where I have been for 4.5 years. it looks rather similar in fact. Property has barely appreciated according to assessments and owner (a realtor) while he is about to face huge repair costs or write the house off as a teardown (basement leaks, roof leaks… )
All the while his cap ratio is something only a renterbear would smile about.
“Property has barely appreciated according to assessments and owner (a realtor) while he is about to face huge repair costs or write the house off as a teardown (basement leaks, roof leaks… )”
I did repairs for landlord, he kept the rent low. If a SF home owner doesn’t do monthly maintenance in this climate, it can cost big time very soon. Add $500 a month to keep the ship afloat.
Our rent is market rent. I do minor maintenance to keep it that way. My mandate doesn’t stretch to digging out draintiles and patching cracks 6 foot deep in the foundation, nor re-roofing 30 year old roofs, funnily enough
I wonder if anyone will step in and pay $500 over market for a leaky house? If not, he will have to fix first and then seek tenants… (vacancy costs as well as monster repair bill with no guarantee of recouping from tenants, will also face the bad tenant/grow-op risk…). Not an enviable position. No wonder he is applying bandaid fixes for now.
Tolerating leaks and bandaid fixes is of course part of ensuring rent stays at or close to market rate.
if you spend that much on a condo you deserve what you get.
No shortage of vertical properties. Value is in the horizontal
How does this square with your “buy a condo and move up” theory? If there is no shortage of “vertical properties” and the “value is in the horizontal”, won’t my condo decline in value relative to the SFH I want to buy?? HELP!! PLEASE LEND ME YOUR FINANCIAL EXPERTISE!!
Giggity
You are assuming 100% financial cost. A more conservative and more bull accepting comparison would be to assume the condo is bought with 100% cash and then look at it that way. Purchasing financing should be look at it afterward if it boosted returns.
Vreaa, you’ll like that one:
Canada’s Subprime Crisis Seen With U.S.-Styled Loans: Mortgages
[This article also made it in the US below are abstracts from the SF Chronicle]
We have a Canadian version of all the wrong doings that occured in the US and put their economy down. You want to profit from the bust? Short Canadian banks…
They are a few years too late and they did not mention the NINJAs.
Sorry, interest rates for the owner is not 5%. Say he is locked in variable prime minus 1% in 2007. Then do your math again.
Instead of a condo on Granville, it is a SFH. He probably doubles his money in last 6 month.
I am not a bull, but this is the realty of a flipper in Van. I think your government has abandoned you. During this time, cash is the worst class of asset. When holding cash, the gov can rob your family’s future in the time to provide a press release. No need to plan a gun or a get-away car.
Sorry for the reality on Monday morning.
Sadly, you are absolutely correct. It should be no great surprise that parties trying to merely hold value end up taking a lot of misunderstood (at the time) risks.
I have been an interested reader of this (and a few other blogs) for a long time now. Partly because I’m curious to know how others view real estate investments and partly because I’ve been concerned about our economy generally, and real estate valuations specifically.
You can make statistics say anything you like by cherry picking the time frame, but here’s our family real estate history in Vancouver. I suspect we are not atypical.
House 1, Kits
1985 purchase price: $180K
Renovations, over 10 years: $150K
Mortgage & Taxes: $130K
Subtotal: $460K
Rental income (basement suite)over 14 years of ownership: $140K
Value of Occupancy over 14 years: $450K
Subtotal: $590K
Sale price after commission, 1999: $580K
What’s my profit: ?
House 2, Point Grey
1999 purchase price (land only): $450K
Building and landscaping cost: $450K
Mortgage & Taxes: $200K
Subtotal: $1.1M
Value of Occupancy over 12 years: $700K
(3 blocks from beach, water & mountain view)
Current value (based on recent sales in neighbourhood): $3.8M
What’s my (potential) profit: ?
I purchased both homes during a time when prices were flat or depressed. Definitely a buyers market which gave me some room to negotiate the purchase price.
These two homes have gone a long way to helping provide financial security for my family. Yes, a substantial part of our net worth is tied up in real estate, but how else could I essentially triple (quadruple?) my investment in around 10-12 years while providing a decent roof over our heads?
Our mutual funds have come in at around 6% the last 15 years in comparison.
Having said that, I don’t think I would be a buyer in this market. The numbers don’t make sense. And I’m often tempted to cash out and rent.
However, I’ve been thinking this for a good 10 years now. I could still live to regret my decision not to sell, but at this point my worst decision was selling our place in Kits. The place next door sold for over $1.8M in 2010.
“The most powerful force in the universe is compound interest”. Albert Einstein
“how else could I essentially triple (quadruple?) my investment in around 10-12 years while providing a decent roof over our heads?”
To triple your investment in 12 years, all you need is a annual return on your investment of 9.5%. While this is a good return, this is not exceptional. In 2000, the gold was at $300. Today, it’s at 5.6 times that, at about $1,700.
I’m not a gold bug, I don’t own any, but my point is that RE, over the past 12 years, was not the best possible investment.
Now let’s wait for the next 12 years and we’ll see how RE will do. My guess is that it will look nothing like the previous 12…
By the way, until you have sold your house, this wealth is virtual.
It was the best investment because of readily available leverage.
Kautious, if I were in your position I would cash out – a 3 million profit is a game changer.
Kautious, it is true that the best ROI out there can be found if you time a bubble well. You got in pre-bubble, so if you sell soon, you’ve realized some ridiculous returns on housing compared to the long term averages.
Indeed, of your generation & class, your results may not be atypical. Your numbers look reasonable to me even even if the market implodes by half, compared to historical housing returns. But your story is atypical for people who got in after 2002, including all of those too young to purchase real estate in the sane years, which is why people of my generation are leaving or are struggling with house poverty. Your story might well also be atypical for those who’ve flipped to bigger-places on the way up, after 2002, especially those with dodgy mortgage products. And so, even though you’re okay (and I’m okay, as a renter), the city we’re living in is being hurt by unnatural froth, because smart young folks are packing and leaving or refusing to come here, and others of their age range are drowning in housing so there’s not much left after for supporting local culture or taking entrepreneurial risks.
Canadian lenders are loosening standards on mortgages that are similar to U.S. subprime loans, posing an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions.
http://www.vancouversun.com/business/Looser+lending+standards+Canadian+banks+raise+concern/6073311/story.html
Spamming the news on every blog eh Hazu? Next for u is at Larry’s blog
A 9.5% return sounds wonderful, Makaya except we have been with one of the top investment firms in Canada (PHN) for over 20 years and our returns are in the 6% range. Half that for our kids RESPs the last 12 years.
Making investments with the benefit of hindsight is easy. It’s not so easy when the future is unknown/uncertain. That’s why I’m torn between staying the course and cashing out — like a lot of us probably are.
kautious, I agree with you that in the current environment, 6% annual interest rate is great, and 9.5% would be fantastic. The point of my message was just to tell you that you weren’t wise when you bought your house and that the fantastic return that you got on your “investment” is the result of pure luck (location, timing). Same goes for the gold bugs that invested in 2000 and kept it until today.
This is your investment and I’m not a financial advisor. If I were in you shoes, I would not hesitate one second and would try to cash it out now. There is no way that the future returns that you’re gonna get on your house will match what you have enjoyed over the past 12 years and the downside risk (aka losing a big chunk of your equity) has never been as high as it is now. If your house loses 10% of its value, that’s $380K gone down the drain. How long would it take you to save that kind of money just from your salary and investments? How much, as a percentage, would that wipe out of your total net worth? Think about it…
I like the rule of Garth Turner. Take the number 90 – your age and that should be your maximal exposure to RE in percentage of your total Net worth. It would be wise to follow that rule.
Just curious but does your 6% return on RESP’s also include the government’s contribution?
With respect to your RE gains, do you really think capital appreciation in the order of 4 to 5 times the inflation rate is sustainable for an asset class that has forever returned inflation over the long run. Remember, this capital appreciation is not based on increased earnings – it’s a massive P/E expansion. If you hold long enough, you will eventually sample the long run along with both sides of the recent cycle. All markets are mean-reverting despite their speeds being different.
Airedales, our RESPs have actually been earning half our other investments, around 3%. The point I was trying to make is that there aren’t necessarily a ton of options for people. Handing your money over to someone, no matter how reputable, to invest for you is risky. Just as home ownership is risky. Just as buying gold is risky.
Up until a few years ago, investing in real estate made some sense to me. However, I think it’s highly unlikely that the returns of the past 25 years are going to be replicated again anytime soon. I can’t imagine how current prices can be sustained at least in the medium term. However, I’m not convinced there are a lot of viable alternatives for many people.
I understand completely where you are coming from and my question was based on genuine curiousity as we’ve also had a very low risk / low return exposure for our RESP investments. That said, these “low” return investments look very good compared to much riskier alternatives available today in this zero rate bound world. I think you are rightfully concerned about today’s investment climate just as I am. I’m often frustrated by the constant push into riskier assets just to get a return above inflation. If it’s any consolation, Bill Gross at PIMCO is also very frustrated in today’s investment climate as well so you are not alone. You have the added burden of owning a home in Vancouver but a successful sale should give you and your family a lot of low risk options. For what it’s worth, selling Vancouver and leaving has worked extremely well for some of my family in-law. But it meant leaving, twice, in fact. The second time was much easier as they realized that life can be better elsewhere. Best of luck to you.
@ VREAA
Check out this article from CBC…:
http://www.cbc.ca/news/business/story/2012/01/30/bmo-housing-real-estate.html
I see someone already found that story.
Here’s the actual BMO report to go with it: http://www.bmonesbittburns.com/economics/reports/20120130/sr120130.pdf
“The possible exception is pricey Vancouver…”
Chart #10 is pretty scary if you think about what might happen if rates even just go back up to where they were 5 years ago — and that’s at the national level. Vancouver must be worse. Chart 13 is nice for those that keep repeating the “delinquencies/foreclosures are low” bull excuse and need to be reminded of lagging vs leading indicators.
Just to be clear, I think I’ve been darn lucky rather than smart to have gotten into real estate when I did. And yes, I can’t imagine that returns over the next 25 years are going to be anywhere as good, or even positive.
The problem for many of us is that the alternatives are not that attractive either.
I’ve seen the stock market go down as much as 50% not that long ago. What’s the difference if you loose 50% of your house value or 50% of your investments?
Many of us are neither bulls nor bears. We’re trying to make the best choices for our families without a crystal ball to the future.
This sounds like the position of likely more than 50% who live in Vancouver’s west side. You pretty much don’t wake up each day thinking if it goes up or not. Your not a bull or a bear – you just have a house that you live in and where your timing was great. If it falls by 50%, it actually will not change your life. You may have a look-back and say – “would have and could have” but at the end of it – you still have the same house.
The price in Vancouver was always high but all markets have distributions of pricing that make certain areas only being attainable to a small percentage of the population. For example, if you take the top 5% of income earners in a city, they generally should be able to live “where” they want. Limits only being how much they can have where the want.
What is troubling about where the market is now is that new entrants can not enter at a point commensurate with their income levels. Where 500,000 is needed in income to access the West-side market, this can only result in a missalocation of resources in the long-run or a return to normal prices where access is there for the appropriate percentage of the population. I would say that 500,000 is likely an income which is in the top 0.5%-1% if it is even less.
My parents are in the exact same position. House is really valuable, up 10 times over what they paid. However, it’s not like a simple financial transaction where you hit sell and take the profit. A sale is a life changing event and requires replacement shelter. Regardless of the financial benefits of renting – my parents could not ever fathom renting.
We’ll see where this goes but in no way is purchasing a house on the west-side or in most parts of Vancouver for the first-time buyer a smart move right now at today’s pricing regardless of your downpayment. It would be financial suicide. On a look back basis, people who were in 10 years ago were lucky with timing and don’t have to think about it – and for the most part – really shouldn’t.
ZRH2YVR: The top 1% cutoff across this country is I believe, a paltry $197K+.
Also check this: http://www.cbc.ca/news/interactives/canada-income/
Over on the pricetags blog there was a link to some housing data. In the linked document there is a chart showing income of owners and renters in 2009 (page 1.4). There’s not too much detail in the data there, but it does show that there were more owner families in metro Vancouver in 2009 that had a lower than 70K income than those above that number.
http://public.metrovancouver.org/planning/development/housingdiversity/HousingDataBookDocuments/Metro_Vancouver_Housing_Data_Book_2011.pdf
The same goes for any older areas – the income required is very different from the people living there now
Same goes for the young families currently excluded from the market. I just hope people in your position understand the implications of avoiding a big decline. It won’t exactly stop the exodus of this city’s future.
ZRH2YVR, or should that be… ZRH>YVR>ZRH… I suspect this little ‘burg will miss ya in more ways than one… Bravo Zulu!…
And, as it happens, on your way back over the pond… you might even be able to snag some smashing deals on prime lodgings in OldBlighty… (I recommend TheSavoy)
[UK Independent] – Tourism gold? Olympics set to lose Britain billions
“Unwanted hotel rooms needlessly reserved for dignitaries by Olympic organisers will be a key factor in a tourism slump set to cost Britain billions this summer, top travel industry figures have warned. The organising committee for the London 2012 Games, Locog, revealed yesterday that it had over-estimated by a quarter the number of rooms needed by officials, media and sponsors. It has now handed back 120,000 of the total 600,000 nights booked for the sporting event. The large-scale reservation of rooms in early preparation for the Games has caused increased prices across the capital and has put many regular tourists off visiting this summer.
http://tinyurl.com/7y3gang
ooops… one stuck in the werks again, ED…
I would go to this for a good laugh, but $67? Good lord…
http://www.landrushcanada.com/index.html
Only in Vancouver is a real estate convention called a “Land Rush”. Right along side Vancouver’s many “Gold Rush” (sorry, I meant mining) conventions. Might as well just call it for what it is – Ozzie’s RE Bubble convention. I hear the Sirens calling and I see a wreck in the very near future!
This one in March is free though. I might go to pick up a baseball cap or two from their proud sponsors.
If the chimps don’t come to you, you’ve got to visit the zoo.
http://www.bcrealestateconvention.com/bcrec/main/frame.php?main=81&sub=275