DM at VREAA 2 Jun 2011 10:31 am – “My mother owns a condo in White Rock which she bought in 1995 for $144K. It is now assessed in 2011 at $275,000. Looks like it almost doubled in price right? It is now at the stage when it requires a renovation and realtors have suggested it its current state it may sell for around $239,000.
Purchase price $144,000
Leaky condo repair $42,000
Additional condo fees/repairs $6,000
Condo fees over 17 years approx $39,000
Taxes $23,600
Estimated renovation cost $40,000
Total cost, not including property transfer taxes, other repairs, mortgage interest and realtor’s fees: $294,600.
A loss for holding the property for 16 years of more than $20,000.”
Common scenario. Many RE investors use fudged headline ‘numbers’ to kid themselves and others that they have done better than is actually the case. They don’t bother to do the back-of-the-envelope math which shows different. DM’s example shows that, even through a rabid mania, RE can have very ordinary returns. In normal times, it can be a money sink. And, needless to add, in bear markets it can wipe people out. It’s just shelter, folks, it should be priced accordingly. – vreaa
Vancouver Real Estate Anecdote Archive 
stupid renters! a home is what we investors call ‘an investment vehicle’
How does the assessed value compare to inflation?
If you take full costs (including financing costs) and benefits (shelter, non taxed) into account how does that compare to renting? Other investments?
It all depends. How much mortgage did they have, how much time was spent repairing the unit, attending strata meetings and doing other common tasks. From what I’ve seen very few do the math “properly” first because it requires putting a value on their “free” time and all sorts of costs associated with ownership are not segregated from what would be spent renting.
For anyone who has owned, they know costs are higher than they budget because ownership is such a complex business. Professional landlords typically want 7% cap. I doubt an amateur could do better.
With a condo you own nothing other than a bundle of rights.
I bought my first condo when I determined my mortgage payment would be somewhat less than my rent. that was in 1980. After that brief dissapointing episode I switched to land based, then rental properties and have not looked bak.
Don’t every buy a condo. Ever. If you want to live in a condo,and own something, buy a sfh where you can afford it,-Kelowna? Rent it out and then rent a condo for yourself. Land appreciates (sometimes), buildings almost always depreciate.
Cost over 20 years, $100 per month. Sounds cheap to me.
Well, the prices back then weren’t that far out of whack.
As someone once told me when I was doing the math for him in the same way:
“You’re doing it wrong.”
Which eventually softened to: “Well, but if I had rented then I would have lost all the money, now at least I have them. It’s like forced savings”.
The cult of real estate
My brother in law desperately wants in. After fully paying off their car, student loans, other debts, holidays, and their impending very expensive wedding, they will be back to financial square zero. But, they believe they can save 50k a year for their downpayment. I advised saving up for 6-10 years and then paying cash. He thinks I am crazy; asked me if I had ever heard of “leverage”. He says as soon as enough downpayment is in place, they will buy a condo, and rent it out. And as long as the rent payment covers the mortgage payment he thinks they will be making money and will be protected against declines in the market. I pointed out some of the other costs like fees, taxes, maintenance – he says he will just find a condo that does not require repairs. I tried explaining cap rates to him and how he would be lucky to get 3% even in the lower mainland, but he insists that he will buy that first condo, flip it, buy a bigger one, flip it, buy a house, and then another investment house, and maximise his leverage by borrowing as big as he can and buying up as much property as he can. He thinks of me as an idiot with paranoid delusions about the risks inherent in real estate. He is in his mid twenties, so has only seen real estate go up since old enough to care or notice. (Me too for that matter).
I sent him the above post. I doubt it will do any good. On the other hand, falling prices if and when they materialise might come in time to save him.
your brother will never do it.
Saving just 50K/year will not keep up with appreciation in this city. He’ll be further away each year he delays.
Yeah, because, real estate capital appreciation is only a positive linear or exponential function.
Sounds like your brother-in-law hasn’t done the math for himself. If valuations were reasonable, that’d be a good passive-income strategy. I believe valuations are way out of whack currently, making that a poor passive-income strategy.
yeah, I know. I try to tell him to do the math based on today’s valuations, but he is blindly insistent that it’s still a good strategy and refuses to look at the calculations.
yeah, the condo thing sucks. That’s not news
My sister in law has a similar scenario. She always lords over me the fact that she “owns” a condo in Whistler that has appreciated in value. She thinks she’s doing great! However, here are the facts:
purchase price (2000): $250k
rental loss every year: $10k (this includes mortgage interest, strata fees, property management fees, property taxes etc)
renovations required to keep rental pool status: average $2000/year
current assessed value: $300k
Last year, the Olympics year, the suite was rented for a grand total of….80 days! (out of 365). This is about average over the past ten years (no Olympic windfall, apparently). The property management company takes 40% of every dollar they receive in rent (ouch) and also mandates they must make improvements to the suite in order to stay in the rental pool. According to my calculations, even if they didn’t have a mortgage, their expenses eat up 94% of their revenues.
This is a great investment!!!!! (And she thinks I’M the idiot for not “investing” in real estate). This is all I need to know that people have lost their minds over real estate.
That’s a cheap price to pay for social status!
What’s with the hate for condos? Many of them are well managed and sustainable, just not all of them, and you can often figure out which is which by spending few hours reading strata minutes and looking at how well maintained they are. Maybe the hate is on because prices are soft?
Let me guess… in a few years’ time people will pour hate all over housing due to the continuous yard work, four exterior walls that need maintenance, snow shoveling in the winter, dealing with screwball pot smoking basement suite dwellers who keep your kids up at night, and having to give up half your weekends just trying to keep the thing from falling down. Nope, that’ll never happen.
Because you do not really own anything but the idea that you own something.
You do not own the building, you do not own the land (well, technically I guess a postage stamp sized area is yours, enjoy moving your furniture there) and you have to rely on others to keep the building in good shape.
SFHs…. Well, at least you (should) own the land the building is on, if all else fails you can tear down the house and pitch a tent.
144k for a condo in White Rock sounds pretty reasonable to me…20k overall housing cost for 16 years sounds more than reasonable to me…I get what you are saying about how the industry spins the numbers…in this case, I bet the owner is coming out exactly how one should come out of 16 years being an owner…with an asset that is payed for and the potential for a lowered future cost of living because of it (providing she continues to live in it). That, after all, should be the real reason to buy a primary residence.
If the cost to buy that residence only make sense if it continues to appreciate in value, then you shouldn’t be buying it. Vancouver is in a state of complete speculative mania…if the current buyers ever thought that they would actually have to pay their mortgages in full without walking away with price gains they wouldn’t be buying at all. The only reason people are willing to mortgage up for such large sums is because they think that when they sell, their properties will have doubled in value allowing them to pay off the mortgage and walk away with the same amount of money as the place originally cost. Best of luck with that plan!
You need to take into account the value of the shelter provided by the condo as well. ie: How much they would have paid in rent if they’d lived there, but didn’t own it.
Cost of ownership – Value of Rent = Net Value.
As the saying goes : You are entitled to your own opinion, but not your own facts.
Facts : Over the past 100 years, house prices in the US and elsewhere have, on average, increased by zero.
http://www.ritholtz.com/blog/2011/04/case-shiller-100-year-chart-2011-update/
So there you go : Home prices follow inflation.
I will repeat this one more time for Rusty : Home prices follow inflation.
If you spot a different senario, there are two (2) options :
1) There is a temporary speculative phase going on, more often than not characterized by unusual and unsustainable access to credit.
2) This time is different.
If you want to grab the This time is different ball and run with it, fine. You’re in the company of every US bull circa 2005, Ben Bernanke, Alan Greenspan and countless others. I wish you luck.
“Facts : Over the past 100 years, house prices in the US and elsewhere have, on average, increased by zero”
So whaddareya complaining about?
Also, if house prices always follow inflation why do we have some markets higher priced than others? That is, if national inflation rates were always the same in Vancouver and Moose Jaw, why aren’t Moose Jaw prices the same as this city? That is, if speculators drive prices up, why do they never return to Moose Jaw levels when prices retreat? Let me know when the light bulb goes on
BREAKING : Some areas are more expensive than others.
Please tell me you are a teenager ravaging your dad’s computer.
dunno, but it will be interesting to see if Vancouver returns to Honolulu prices.
If prices go down 15% in Vancouver, how many home owners will be underwater?
Here is an interesting comment at Greater Fool:
emphasis mine
“And while I am at it I could easily take money from the line of credit and make the mortgage payment. Ain’t it sweet? No one need never have a problem repaying debt as long as the they can keep borrowing new money to make the payments”
Yes, good point. I was wondering something along the same lines recently, as only now are we seeing some clients approaching us for bankruptcy advice. Why now? Why so many of them, at basically the same time? Because, as you’ve suggested, they’ve all been living the happy life for the past 5 years racking up all the debt they could get their hands on. So life is good, things look good, the economy looks good. Unfortunately, as we are now seeing, more of our clients are completely tapped out and the next couple years are going to be tough. I would assume we are going to see a wave of bankruptcies.
PS-And yes, I did have a client earlier this year admit that he was using his credit cards to make his mortgage payments, while he awaited financing on a second mortgage. Yikes!
I’m not familiar with the inside track on bank lending but as of 6 weeks ago, there are no longer government guarantees on insurance of HELOC financing. It could be banks are simply telling people the bar is closed.
Why? Here’s one for Nemesis to decypher: underneath ordinance.
“there are no longer government guarantees on insurance of HELOC financing”
Yep. In my opinion, this was a very significant change in Canadian mortgage/banking regulations.
Nick,
What is the answer? Why are some real estate markets more expensive than others? Let’s pretend I’m a teenager at my Dad’s computer and give me an answer an idiot can understand. Have at ‘er
Nah – the question is:
Why is Vancouver the least affordable city in the Anglo world?
Looking at average salaries – more then London, NYC, Chicago, Sydney, LA.
Y’all ain’t anywhere close to a discussion of Red Deer vs. Vancouver. You need to justify NYC prices vs. Vancouver.
http://www.cbc.ca/news/story/2010/01/26/consumer-home-affordability.html
Is Vancouver world class? It better be to sustain those prices in the next decade.
we are consistently ranked far ahead of London, NYC and LA in desired places to live – and at least on par with Sydney.
But those ain’t cheap places either. Why did prices in these cities not also track inflation? Why is NYC more expensive than Cleveland. Or why is LA more expensive than St. Louis? I’m a little lost here – if prices always track inflation and national inflation was the same in each place, how did these cities get to be more expensive. Should they not have returned to fundamentals. I’m not understanding this…help me on this one
here’s a question for you,
WHY is vancouver so desirable to live in? could it have anything to do with the ‘real estate keeps going up!’ phenomena they’ve all been chatting about?
“we are consistently ranked far ahead of London, NYC and LA in desired places to live – and at least on par with Sydney.
But those ain’t cheap places either. Why did prices in these cities not also track inflation? Why is NYC more expensive than Cleveland. Or why is LA more expensive than St. Louis? I’m a little lost here – if prices always track inflation and national inflation was the same in each place, how did these cities get to be more expensive. Should they not have returned to fundamentals. I’m not understanding this…help me on this one”
LA is much bigger then St. Louis. The major difference is income, population base, and job possibilities. There is a huge population base that surrounds NYC and LA (and I would guess Sydney & Hong Kong) in addition to the higher average incomes. Major corporations are based in those cities. Lawyers, IT people, ect. can start at very high incomes. Vancouver is not in the same class.
Cities like Vancouver, Seattle, Portland, Cleveland, and St. Louis do not possess the same numbers of population, income levels, or GDP. For example, I’ve been told one of the major employers in Vancouver is University of British Columbia. That’s very different from NYC. Columbia and New York University are most definitely NOT one of the major employers of the city, because they are dwarfed by the other corporate and institutional entities. Or, to give another example — LA is the major city of California. The GDP of California is about equal to the GDP of Canada.
California was also in a housing bubble, mostly due to speculation. If you look at the US housing bubble, you will see that land restriction was one of the drivers of the speculative bubble in California. I see similar trends in Vancouver. Despite the U.S. housing bubble, on the fundamentals I would expect both San Francisco and L.A. to have higher housing prices then Vancouver based on average incomes available to the upper-middle-class.
There is one wild card in my understanding of Vancouver’s housing fundamentals. Citizenship is a valuable thing to possess. If a large number of investor class people from a totalitarian country are coming to Vancouver to essentially purchase citizenship status, this may change the fundamentals in a new way. As comparative note, it is faster and easier for foreign nationals to gain citizenship from Canada versus the U.S. The pursuit of Canadian citizenship may be changing fundamentals in a new way that needs to be calculated to understand the market. I’m inclined to think that HAM is over-estimated and Vancouver is in a serious bubble, but citizenship status is very valuable, and this is the one element that falls outside of my calculations.
[Yank, very well put, thanks. The “one element that falls outside of my calculations”, as you so elegantly put it, is the bit that has led us to say that there is a perhaps 3% chance of Vancouver gaining some kind of ‘new Monaco’ status, and continuing into the stratosphere. We don’t think it’s going to happen, but it is sensible to acknowledge that there is a small possibility of something of that nature occurring. – vreaa]
Rusty, do not feed the trolls. And that goes for everyone else too.
Jesse,
actually, I’m not clear on which discourse you think is inappropriate for the blog.
Yank:
jesse very likely meant ‘Yank, do not feed….etc.’
Incomes and/or speculation. See how easy that was?
I don’t expect you to understand because you would have to sober up to be an idiot.
so greater wealth (i.e incomes or other) created higher prices? Because there was less land in the city than rural was there more demand for property, thus higher prices? Let me see…is this why prices are greater in urban than rural? I think you might be on to something JRoss – please go on, I’m listening.
My parents poodle’s name is Rusty. He is ancient (19), blind, deaf, pees on the carpet, and was castrated many years ago. But I’d sooner take real estate advice from that Rusty any day.
People make a big deal of the “desirable places to live” rankings, but I doubt that the people who come up with those rankings live in Vancouver. They’re looking at stats. And Vancouver has looked good on paper last several years, but I suspect that we’ll go down in the rankings. Any place where ambitious, talented, high-income earning people are not able to afford decent accommodation is not a desirable place to live.
Rusty,
I’ve read a lot of your posts and I find them odd. It seems you don’t really process what others are saying. I think the point originally made was that real estate prices track inflation. This is a general trend, which means that there are exceptions. Real estate prices in some cities have jumped higher, and this is an interesting thing. It is the result of high demand and/or short supply. Supply is straightforward enough, but demand is tricky. Demand is high in places like New York because there are lots of jobs there and people want those jobs and want to be close to their work. Same with all the major economic centres of the world. Real estate prices will reflect the increase in value generated in that city. And by “value”, I mean non-real estate GDP – I mean the kind of economic activity generated by people working and employing capital to provide goods and services. I’m sure you can see how higher value economic activity in some cities will support real estate price rises that still track inflation, but at a higher price level as a result of some jumps here and there when things are going really well. Look at Fort McMurray. Then there are speculative bubbles. You seem to think that Vancouver prices are sustainable at this level, even though there’s little growth in economic activity here. And you can’t say that there has been by citing real estate development. You can’t argue that. The only reason why real estate prices are high in Vancouver is because of the availability of cheap money. And cheap money is not sustainable.
Well put, but I don’t agree with your argument. Yes, prices are lofty here in Vancouver and probably should shed a bit. But denying that there is a huge amount of wealth coming into a city with zero developable land isn’t going to change the fact. Real estate prices do not track inflation, it tracks supply and demand. The only evidence you need is that each real estate market is different. If each tracked inflation in a predicatable way, then prices would be the exact same in every market.
JRoss pointed this out in a very indirect way. People travelled to the city for work – probably because there was demand for their skill and they were being paid more than could be made in their previous location. So supply and demand play a huge role in local markets, in terms of labour and in terms of housing. As a city evolves and becomes established the demand for housing toward the city core increases – creating mroe supply and demand pressure. Vancouver has made this leap in a very short period. We know have housing and commuting out to Fraser Valley. Our supply is so constrained that we have a radius of more than an hour commute to work for some. What has this done to city core pricing? You guessed it. The closer to the core the higher the prices. This has been offset somewhat by the birth of the condo unit. Without this strata introduction each detached home here would be worth several millions dollars. But this only delays the inevitable – that is, most people want a detached home with property. All condo buyers have done is delay their eventual purchase. I know some folks who are now stuck at this property class because they put their eggs in the wrong basket.
Sooner or later you need to admit that there just isn’t enough detached units for the demand. Supply and demand, not inflation. Get used to it.
Real estate prices track inflation. That argument has been settled.
http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html?scp=2&sq=amsterdam%20real%20estate%20inflation&st=cse
According to the article… a desire to study long-term trends in real estate using a “quality constant” is what interested “Piet Eichholtz, a professor of real-estate finance at Maastricht University in the Netherlands, to study the Herengracht in the 1990s. Eichholtz’s work — the so-called Herengracht index — has become a touchstone in recent discussions about real-estate prices.” He looked at the price of the same house in Amsterdam since 1625 and the price did have periods of “above normal” returns but always reverted back to the rate of inflation.
Rusty, you’re like the blind man who is asked to describe an elephant and who only bothers feeling the trunk. You’re stuck on the short term and don’t see the bigger picture.
Yank,
I agree. Immigration is a key component of our housing prices. But I don’t think it’s going to change, do you?
I can’t predict the future here, and I’d agree with veera that there’s a chance Vancouver becomes Monaco.
I do wonder about these two possibilities for a future outcome:
1) Concern about price drops in Vancouver cause investment immigrants to move to other cities on the west coast.
2) Changes in the economic or regulatory situation in Asia redirects investment $$$ to other areas in Asia or other types of investments.
The 11 times house cost/ income ratio is the number that sticks out to me. Something else to think about — the speculative bubble was the worst in the U.S. where land restrictions existed, either due to land management regulations or geography.
Foreign direct investment and Immigration are extremely volatile as they are subject to a full multitude of global forces both political and economic. Foreign and local demand can evaporate in an instant – ie. demand rules the roost in the short term because at some point all demand curves are elastic while the psychology determing “willingness to pay” can change on a dime. Just have a quick browse of “Extraordinary Popular Delusions and the Madness of Crowds” for an accouint of similar spectacular bubbles.
New immigrants usually do not have the resources (or desire) to buy outright, they may in the long term, but considering that as a new arrival in Canada you have to deal with a lot of Canadian….. well, let’s call it Bullshit this could be years.
It also doesn’t explain why Vancouver would be any more special. As a city it’s a bust compared to places like NYC, Shanghai, Moscow or even Toronto. If the HAM wants to escape Capitalist China then there are many better deals to be had in other places.
HAM may play a tiny roll, but the “rich asians” will not be living in a 500sqft shoe box in yaletown, they will, if anything, be interested in the higher end markets and that always was a thing in and on itself.
Even if you take the high-end market out and just look at condo pricing though you realize quickly that it tracks far above affordability for “first time buyers”.
As for inflation / incrase. Almost a decade ago one guy named Warren Buffet, you may have heard of him, wrote a lengthy article about the Dow Jones and why it was overvalued and could not continue.
Much like the housing prices he showed in his article that the DOW tracks inflation, every time it went above inflation by any margin it sooner or later came crashing back down, usually going through the floor and needing time to recover.
This make sense, the economic system is a “closed loop” system, where we can cheat to some degree by putting more money into the system in order to “stimulate” it, but this sooner or later leads to asset bubbles followed by sharp corrections and re-distribution of the money to other parts.
If the financial crisis in 2008 did two things wrong it was:
a.) The crashing of the interest rates.
b.) The starting of the printing presses.
Generations will find themselves having to deal with the fallout of this unless they decide to say “fuck it” and just restart after a revolution.
Rusty,
I understand what you’re saying. It’s more expensive closer to the core. It’s like that in most cities. And it’s been that way in Vancouver as well. But it’s not as though there’s been a huge spike in population here. And there’s plenty of development going on in Vancouver. In fact, that’s really the main industry here. And there’s plenty of space. Honestly, there’re bigger, more cramped, wealthier cities in world that have experienced speculative bubbles before. I think Vancouver will always be a premium city over the very long term, but I think the current situation will hurt Vancouver in the near term as I think way too many people have gone out on a limb. Thankfully I inherited my house on the west side, but I know people who are severely in debt but don’t realize their precarious situation. You say it’s all about supply and demand. Right. But think a bit more about the quality of the demand. Scratch beneath the surface and there’s not much there. Vancouver’s nice, but not that nice. People are going to figure it out one day when money gets tight. Also, in regard to wealth coming in. That’s not anywhere as sustainable as wealth generated in the city itself.
Peter Pan,
That’s a “cart before the horse” argument. To say that house prices track inflation is to say that home prices rise because of inflation. I got news for you, house prices cause inflation, not the other way around.
PS
This is why real estate is left out of the inflation calculation. If it were included you’d have seen rising interest rates by now. The game is fixed – you can’t win.