Laying Bets On Vancouver Realty

This from jmb at ‘nobody important’, a local blog:

“Let’s consider this house below, currently for sale. I know this house very well, for I lived in the house two doors to the left of it for 14 years before moving to the larger house where I live now. The grey house you see to the right is owned by someone in my Thursday walking group.

The house itself is over 60 years old and very ordinary. A tiny 800 square feet stucco bungalow with two bedrooms and an unfinished basement. Not a family home, maybe for a couple, as lived there when we were neighbours. The lot is not bad, 53 by 130 foot. It’s been rented so probably not in great condition. It’s a nice location but a fair way from the bus and the shops. The school is very close but then you can’t have children in this house for it’s too small. In fact it is probably a knock down. Why they even suggest it. Build your dream house.

So the asking price is $1,700,000. Yes, ladies and gentlemen, one million seven hundred thousand dollars, for basically a standard block of land, about 9 km from downtown. Now how is that for a downside to this city? One of the most expensive cities in North America for real estate. In fact prices have almost doubled in the last five years.


4035 W 37TH AV, Dunbar, Vancouver West,

Excellent location, steps to Pacific Spirit Park, close to UBC. Build your dream house on large 53 x 130 south facing lot. Needs 48 hours to show as tenanted. All sizes and ages are approx only, buyer to verify if important to buyer.

Finished Floor Area: 800.0 sq ft. Property Type: House, Lot Frontage: 53 ft. Basement: Unfinished, Lot Depth: 130 ft. Bedrooms: 2, Age: 66, Bathrooms: (Full:2, Half:0)

Update: Today I found out from my friend who lives in the grey house next door that the above house has just sold for $1.8 million dollars, $100,000 over the asking price. It will continue to be rented for two years when it will be demolished to make way for a new one.


vreaa comment:

This will now be a markedly cash-flow-negative property. One presumes that the new owner is very confident that house and land prices will be going up over the next two years. We also presume that the new owner plans to demolish and build in 2 years.

The property’s numbers look roughly like this: Purchase price $1.8 million, Rent (estimated) $1,800-$2,200 per month. Cost of $1.8 million mortgage, at 7.3%, 25 year amortization, 5% down: monthly payment >$13,000. Thus the property will be costing about net $11,000 per month to carry, or $254,000 for the 2 year period. To be more accurate, one would also have to add property taxes and maintenance costs to that.

This purchase is a bet on property price direction.

30 responses to “Laying Bets On Vancouver Realty

  1. So you are thinking that this house might be flipped?

    I posted this on my own blog originally and cross posted it at Wet Coast Women. A real estate agent commented at my site that there was a lot of interest in the house.

    My question would be how much are you going to spend building a house on a lot for which you have paid that price. It’s a quite nice block with half the houses having been rebuilt. But last year these rebuilts on the block were selling for 1.4 and 1.6 million for two examples. Now the land is 1.8 million? This is just absurd.

    How long can this go on, one asks.

  2. By the way would you mind changing the acknowledgment to me at my blog? It would be appreciated. Thanks.

  3. It is really overestimated. The house is nothing extra, moreover, it’s not suitable for a young family, so it doesn’t matter where the school is situated. I live in Toronto and I am glad to see that prices here hasn’t gone up that much. If you look at e.g. Toronto MLS listings and compare them to houses in Vancouver, it is quite interesting.

  4. I have to agree with MLS. We are dealing with real estate Vancouver BC but have also good contacts in Toronto. We are neighbours with US, so it’s matter of time, when their real estate problems spread. But I believe the bubble is not so big in Canada and that no “shock” will come. However, two millions for such a tiny house…

  5. jmb –
    Thanks for your original post and for your comments. I have changed the blog link as requested.

    Regardless of whether the new owner attempts to flip this property soon, or whether they intend to develop it in two years time (for resale at that time, or even for personal use), they are still speculating that Vancouver RE prices will continue to increase.

    I note on your blog you see this as an ‘interesting way’ of looking at this sale. Well, this is the way we should all be thinking about Vancouver RE prices. When you actually do the numbers, you’ll see that the prices just don’t hold up to any logical test. Vancouver RE is overvalued by a factor of two, or perhaps even three, based on the historical relationships between prices and fundamentals (such as rent or income). This sounds preposterous, I know, but that is indeed the case.

  6. I have to agree with MLS Listings Toronto. That house is nothing special, however also jmb is right. Prices of houses as well as lands have still increasing tendency and as it is written in the article it is one of the most expensive cities in North America for real estate.

  7. A friend who just moved from his 840 sq ft condo that he sold for $610,000 so he could move into a $520,000, 1100 sq ft “townhouse” spread over 3 floors is excited because his realtor has told him there are lots of assignments for sale by cash strapped US investors who bought in Vancouver and now “have” to sell way below market. It’s a sure deal because there are so many Americans selling so far below market that even if our market declines and even after capital gains tax a profit is in the bag. I urged caution but got the usual “You don’t know what you’re talking about” attitude. Sigh.

  8. perhaps you should presume a 5% downpayment on this house….your numbers could way off.

  9. sorry, i meant that should NOT presume a 5% downpayment when crunching your numbers and also remember that when purchasing real estate for as an investment property, all interest is tax deductible. So, although the carrying costs would still be high in this particular case, it may not be as high as you think

  10. Gabby –

    Thanks for your thoughts. And thanks for highlighting a popular misconception when calculating the cost of RE.

    It may seem surprising, but the exact amount of the downpayment makes very little difference to the overall numbers.

    The crucial point is that you have to take into account the opportunity cost of the downpayment.

    Regardless of exact downpayment, this property is ‘costing’ the new owner $1.8 million going forward, whether he/she borrowed it all, or whether they paid cash, or anything in-between.

  11. Gabby –

    You are correct re tax implications if this is an investment property.
    Of course, if this is an investment property, it also means that any profit from resale will be taxed, too.

  12. Markoz –

    So, was your friend considering buying some of these ‘bargain’ assignments? Or is that what the townhouse was in the first place?

  13. vreaa –

    The townhouse is to live in. He was thinking of investing in the bargain assignments. Interestingly, he said the townhouse was a good deal because the original owner had purchased it as an assignment but had “waited too long” to sell it so had started to pay real money like property tax, mortgage etc. and so was desperate to sell. He doesn’t seem to see the parallel between that and the situation he is proposing to get himself into. He has done well with his real estate purchases over the years so I guess he figures he can’t lose.

  14. Its not the house that commands the value, its the dirt. Sells for 1.8 with the house. Remove the house and it will sell for $1,800,050.

  15. You are absolutely correct rob.
    But that doesn’t make this any less of a gamble.

  16. I guess the most depressing thing about $1.8 million for dirt is that it demonstrates just how much money (some) people have and how little they expect in return for it. The rest of us either have to compete by spending more, accepting less or just abandoning the market entirely.

  17. Who told you that it was sold for 1.8M?

    The MLS system indicates that it was sold at $1,701,500. Can any realtor double check the MLS system? Thanks.

  18. whitebear – You may be correct. The $1.8 million figure is via word of mouth, from the neighbour. (See the source blog).

  19. You will be suprised but… the house was sold much below the market value. That was a good investment for the buyer.

    • No, it was sold at market value, in March 2008, very near the 2008 summer peak.
      As I said back then “This purchase is a bet on property price direction.”
      And it was.
      The ‘investor’ got very lucky: If the Vancouver market hadn’t perversely been bailed-out by the zero interest rates brought on by the fall 2008 global financial crisis, this property would have tanked into early 2009, and then tanked even further.
      As it is, we all know we rallied miraculously, and, yes, this property now very likely has a market ‘value’ of above the 2008 sales price.
      The investor did well by luck rather than foresight, and let’s not use this as a reason to coax ‘investors’ into the market now.

      This property will revisit its 2008 price, and then drop well below that.
      So, unless this investor is selling now, this ain’t over.
      Stay tuned.

  20. vreaa comment:

    “This will now be a markedly cash-flow-negative property. One presumes that the new owner is very confident that house and land prices will be going up over the next two years”

    better yet vreaa.
    How cash flow negative is this house now? Sold in 2008 for 1.8 Million and now BC Assessed at nearly 4M – with a likely market value in the 4.5 range. That’s 2.7 Million.

    this nearly 7000sqft lot was a steal in 2008.

    Please don’t tell me that you make your living as an investment advisor.

  21. My mind cant comprehend the concept that a 50% reduction in price only brings this back to 2008 prices, still obscenely overpriced.

    Vancouver would literally need to have the worst property crash in the world to make something like this remotely affordable.

    At 75% off this is still a million dollar piece of land. Unbelievable.

    • Yup, this city is lost…

    • We will find out soon enough how much strength and staying power Asian money has. I am betting that Vancouver will wilt badly but at the end of the day will remain one of the worlds costlier cities. That is not going to be good news to those hoping for a mega correction though, the likes of which will bring the city back to 1980’s levels. Won’t happen in my view so be prepared to dig deep when the correction comes if you still want to buy.

      Just don’t count on easy credit. That will be gone.

      By the way, many of you will have been noticing that credit is already in the process of contracting in this country. That is no coincidence and it usually accompanies market peaks as the lenders sharpen up and will only accept the better risks on their books. They are looking to the future already and have the edge here. Remember, they need to behave strategically and cannot be disappointing shareholders. This is actually a big determinant of bank behavior so keep an eye on it.

      Your account fees and bank charges will start to rise soon. Credit cards will become more expensive. Business bank-costs will be going up too while debit withdrawal and transaction costs escalate. The reason is that there really are no more new fish to be pulled in the boat mortgage-wise. Revenues need to be found somewhere…..just part of the cycle.

      The core business, you see, cannot be about mortgage renewals alone. That is treading water, not growth. Remember, banks want to be growing and so you will also begin hearing about foreign acquisitions in a big way. Perhaps even talk of mergers will return (count on it) as the big players seek to grow larger yet.

      More to say but I have blithered long enough.

      • “By the way, many of you will have been noticing that credit is already in the process of contracting in this country”

        BMO 2.99% 5 years fixed.
        Doesn’t look like banks are trying to steer you away from taking out mortgages. What are you referring t?

      • formula1 – BMO wants buyer to eat their own equity before the bank’s. It’s a kinder gentler lending. But you are correct, everyone do please get a mortgage, for love of country.

        Bank of Montreal Chief Executive Officer William Downe said the trend toward longer amortizations coupled with low interest rates on mortgages is causing “risk” to borrowers.
        “In the current low-interest rate environment, there is risk to borrowers, given the national trend toward longer amortization periods,” Mr. Downe said Tuesday in a speech at the bank’s annual general meeting in Halifax. “It is for this reason we are emphasizing a 25-year amortization with a 5-year or 10-year fixed interest rate.”
        The lower rate of these mortgages aims to draw attention to 25-year amortizations as an alternative to longer amortization periods.
        “The logic is this: With a shorter amortization, homeowners are able to build equity faster and have the confidence of knowing what their monthly payments will be, no matter where interest rates go in the future,” Mr. Downe said.
        “We took a long, hard look at the Canadian housing market and concluded, on the one hand, there was a legitimate concern that housing prices — particularly in the largest cities — had been rising at a rate that was simply unsustainable,” Mr. Downe said. “With growing concerns over household debt, a soft landing in housing is in the best interest of our customers and the national economy.”

      • 4SlicesofCheese

        ie CIBC selling First Line.

      • Closure of sub prime lending ops, closure of mortgage brokerages, retrenchment of bank activities within the country, departure of HSBC, tightening of lending regs being imposed by OSFI, suggestions from major banks that amortizations be reduced and down payments increased, sudden media focus on housing and debt loads of Canadians etc etc etc ……all leads to an obvious picture developing.

        All you are seeing is rates F1. That is not the picture anymore and the macro on this is really quite distressing because all of the above events seem to be happening simultaneously. These are resulting in tightened credit conditions although the full impact will not truly be felt until home prices actually begin falling.

        Best get ready while you have time..

      • debtless,

        I heard Michael Levy this morning on CKNW saying the same thing. Yet I don’t see any evidence of it in the market numbers. Sales still strong and detached still selling well. There seems to disconnect between statements and rumours of a credit crunch and what is actually true. Don’t discount the possibility that financial institutions are trying to effect the market with talk only.

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