‘The Fortunate Few’ – Taking Profits; Cashing Out

“What if you bought a home many years ago and had the opportunity to lock in a great profit while the market is still buoyant? A Vancouver woman and her husband answered this question recently by selling the family home and signing a one-year lease on a rental.
“We bailed,” said Ms. Bold. She and her husband have been having annual talks about whether to sell since 2008, when the housing market briefly plunged. This year, they agreed it’s time.
“When you look at all the statistics, it just doesn’t make sense,” Ms. Bold said of the Vancouver market. “Who’s kidding who? The cost of living here is so outrageously expensive and incomes are not keeping pace.”
Ms. Bold and her spouse have been thinking. They’re in their mid-40s, she a professional coach and her husband an entrepreneur. They have two kids, aged 12 and 7. They bought a $275,000 home in 2003 and sold three years later for $375,000. Purchased for $445,000, their most recent North Vancouver home sold in March for over $1-million after attracting three bids from interested buyers. Time on the market: Less than a week.
“Let me put this in perspective – this is a 100-year-old home, 2,400 square feet on a 50-foot lot,” Ms. Bold said of her just-sold home. “We do not even have a bathroom upstairs with our bedroom.”
More than a million for a non-monster home? “That’s nothing,” she said. “This same home on the west side of Vancouver would sell at $1.5-million.”
The Vancouver housing market looked a little shaky in March. While average prices moved higher, sales fell sharply. Ms. Bold’s sense is that some parts of the city are holding up, but her confidence level in the market is near zero right now.
At first, she and her husband thought about selling in the traditionally strong spring market, and then buying another home during the traditional summer slowdown. Now, they see no rush to buy back in. Instead, they will rent a four-bedroom house for a one-year period in which they’ll look at their options.
One option is to continue renting in Canada, at least for a few years, and buy a house in the United States. …
For now, Ms. Bold and her husband are content to enjoy their debt-free status and the extra cash flow that comes from renting. In fact, their monthly rental costs are only a little less than their mortgage payments, which were set at a high level to speed up the repayment process. But they estimate they’ll save thousands by not paying property taxes and home maintenance costs.
It’s not an easy emotional transition to go from owning a home to renting, but there are compensations.
“The part I’m struggling with is the idea of living in a house that doesn’t look and feel the way I want it to,” Ms. Bold said. “My husband just keeps saying, wait until you see our bank account balance. We’re going to be debt-free with a big wad of cash.”

– from ‘Ready to be bold? Sell the house and rent’, Rob Carrick, Globe and Mail, 30 Apr 2012 who also comments:
“After a long rally in housing prices, concern about a correction of some sort is growing. For a majority of people, the idea of selling now to preserve their gain in the housing market will seem crazy. They like their homes, they like the homeowner’s lifestyle and they abhor renting. Let the housing market rise and fall – they plan to own for the duration. Still, there’s a case to be made for getting your money out of a house now if you’ve done very well over the years.”

From the comment section of the same article:

“Just listed my Vancouver home this week to do the exact same thing. Made huge gains over the past 10 years but never felt like the money really belonged to me, when it sells and the money is in the bank it will, because it is. I will be renting for a quarter of the price of owning with a huge smile on my face waiting for the correction.” – mootumbo

“My husband and I did exactly the same thing, and are really glad we did. I do think the Vancouver market is really overpriced. When and if we buy back in, we will downsize considerably, and will end up owning a condo/townhouse outright with enough savings to help to continue building for our retirement, which is still 15+ years away. In the meantime, even with very low returns, we are making enough to make it worthwhile to wait and see for at least another year or two.” – Just my opinion in BC

These individuals will, in years to come, be viewed as ‘the Fortunate Few’, those who cashed out in the vague vicinity of the top of the ‘Great Vancouver RE Mania of the early 2000s’.
In a speculative mania, only a surprisingly small percentage of participants end up profiting.
Another thing: we fully believe that even those who sell, and who now think that they are planning to buy on a pull-back, will largely sit on their hands when the time comes.. “Why buy an asset whose price is falling?” (they will reason).
– vreaa

122 responses to “‘The Fortunate Few’ – Taking Profits; Cashing Out

  1. Thai-born Chinese Canuck

    Congratulations! Good luck to HAMs.

  2. Yes it does turn out that relatively few will cash out at the peak. The irony of being unable to buy low and sell high.

    I’m glad to hear of a few success stories though. Inspiring stuff!

    • Howdy There

      Of course for every person that gets out at the top, there is another person getting in. Zero sum at the top.

    • if few cash out at peak why does vreaa think they’ll be a stampede to sell when priced drop?

      • Greed and Fear.
        Near the top, the vast majority of owners remain convinced that prices will increase; even if they’ve heard of the possibility of a mania, they stay put out of desire for future gains.
        It’s only when prices start to fall in earnest that they will have the experience of watching paper gains evaporate; they will then sell out of fear of further losses.
        This is why the vast majority of amateur market participants tend to buy high and sell low. It seems bizarre, but crowds of people do the same thing, over and over, in various markets, over time, and in different places. What’s really remarkable about our mania is that we have literally been watching a movie of what’s going to happen (US, Spain, Ireland, etc), before it happens, and yet the majority of players aren’t taking any action!

      • Another answer to your question, f1:
        Have you ever held a very large investment that has fallen 10%, then 15%, then 25%? If you know the emotion experienced at that point, then you’ll know why many will be queuing to sell in the coming price collapse.
        Of course, in housing you can’t liquidate your position quickly with the simple push of a button: the experience of putting an asset up for sale in an illiquid market that is falling each day, and then watching it sit, week after week, must be a special kind of fear. Add to this the math of leverage on the downside, and you have what must be a very unpleasant experience.

      • 4SlicesofCheese

        Human nature.

      • f1, most won’t sell at all and will “chase the market down” due to unrealistic expectations. High inventory levels indicate the clearing price is lower than what owners expect. My bet is most are waiting for a rebound and fear selling in a trough. I mean look at the volumes at the trough in early 2009 — paltry! How many people who sold in that dip are kicking themselves?

      • jesse: “I mean look at the volumes at the trough in early 2009 — paltry!”

        Exactly – and strong evidence that that was not a ‘bottom’ of any significance… Before we get a bottom of significance, we’ll see panic and high volumes of sales.

      • “Have you ever held a very large investment that has fallen 10%, then 15%, then 25%”?

        vreaa,

        I’m guessing my home has lost about 10% since last year. So yes. So what?
        I still make the same payments, earn the same salary.
        The majority of homeowners are not as greedy or fearful and you contend. Your world is greedy and fearful vreaa – this is not a widely shared experience.

      • jesse,

        detached volume is very low.
        Must be condo or suburbs clogging inventory.

        “I mean look at the volumes at the trough in early 2009 — paltry! How many people who sold in that dip are kicking themselves”?

        every single person. This is why there won’t be willing sellers “chasing the market down”. Owners have learned from recent history how resilient this market is.

      • f1 (or should we call you ‘Spock’?):
        Humans experience, and are influenced by, greed and fear.
        This is not an opinion, it is fact.
        Do you really want to try to argue that, if your home’s market price were to drop 25%, or 50%, or more, that you’ll simply sit and watch with absolutely no emotion, telling yourself, “my payments are the same; my income is the same”?
        Some may believe that contention, but most won’t, and I certainly don’t.
        Aren’t you the same guy who said that Vancouver SFHs can’t possibly drop more than 10%-15%? How does one feel when things that you thought couldn’t possibly happen start happening?

      • Basement Suite

        In 2008/2009 I experienced being down about 40% in my mutual funds, which is basically my net worth. This was a sickening feeling, but no way was I going to sell then, it was way too late for that. I held my nose and bought. Today, I’m actually above 0, not much, but what a recovery. Selling into the pit of despair is pointless if you’re already way down. On the other hand, many long time homeowners may stil be up substantially even after a modest 20% decline, and want to lock that gain in while they still can. Those people may legitimately want to sell if the market starts tumbling. How many owners will want to sell if they are down 30% and lock in that loss? Hence stickiness on the way down.

      • “Owners have learned from recent history how resilient this market is.”

        Well I can agree that owners have learned from recent history how resilient the market has been. Just be sure you know how you’re making your money!

      • “…you’ll simply sit and watch with absolutely no emotion, telling yourself, “my payments are the same; my income is the same”?

        my motivation is to provide stability for my family.
        The short term dips in the market are of little consequence. My affordability
        has not changed. Same with most homeowners in Vancouver – they don’t care if there home will sell for increasingly more money – they’re in it for the long haul and are providing a home and security for their family.
        Don’t project your own values on others vreaa – most are not as greedy or fearful.

      • Remember that snowballs start small and then get bigger.

        Rising prices increased demand, so why shouldn’t falling prices reduce it?

      • Don’t you know, vreaa? If you don’t buy your home you are a transient deadbeat that doesn’t love his family.

      • reality check

        vreaa, you just sank your own argument. People are very reluctant to sell as prices on their stocks tank. The common feeling is that there will be a rebound and they haven’t really lost anything until they sell as it is just a paper loss at that point. I don’t think the psychology is in your favor.

      • reality check ->
        You don’t have much experience in the stock markets, do you?

        Most folks steeped in RE don’t, so okay to admit it.
        Most current Vancouver RE players have very very little experience of any markets other than one that appears to go up all the time.

  3. Maybe smart, maybe not.

    The security of simply having cash in the bank is as psychological as having it stored in a hard asset.

    Assuming they are soley selling to lock in gains, when they are sitting pretty, aren’t they just betting (shorting) with their life savings on the the RE market with their primary home? Could we argue that if they were prudent that they would not be risking their home no matter how likely an investment is likely to generate a return?

    In effect they are taking out a ‘managable’ second mortgage for a lucrative venture and the fallback plan is downsizing. In the end when they buy again, as they’ve stated, their bank account will re-shrink.

    • Renters Revenge

      Rent money from the bank, or rent from a landlord – either way a home is where you live, not what you own.

      • Quite right! The natives were dumbfounded by the Europeans when they told them a price of paper dictated ownership of land. Instead, they saw themselves as people (subservient) of the land.

    • BLM: Please tell us you are not in charge of anyone’s money but your own.

    • “aren’t they just betting (shorting) with their life savings on the the RE market with their primary home”

      Renting is not the same as having a short position.

      “In effect they are taking out a ‘managable’ second mortgage for a lucrative venture and the fallback plan is downsizing.”

      There are other possible fallback plans, such as renting in Vancouver permanently, or moving to another city.

  4. Renters Revenge

    Wow, well played!
    However, if too many get this idea it will get real ugly real quick. Rush for the exits.

  5. Beyond Debt

    Not only did they know when to sell but they bought at exactly the right time as well (assuming this is a truthful anecdote despite the fake names). Perfect timing.

    • Minor calculation differences aside, they made 100K on the first sale and 550K on the second, for a profit of 650K from buying fairly low and selling high.
      The one ‘move up’ trade worked for them; they took on more RE and prices rose.
      If, however, the bubble had popped shortly after the 445K purchase (which it could have done), their 100K profit from the first sale could have evaporated overnight.
      The point being that many who have profited on paper on the way up can see those gains disappear very rapidly.

  6. specialfx3000

    Rather than calling them the ‘fortunate few’, I would prefer to call them the ‘savvy few’. Other than those that bought in recent years, any existing home owner here can make a savvy choice even today (little less profit than the peak) but still run away with a nice jackpot. Of course most will choose not to.

    • We still prefer ‘fortunate’ to ‘savvy’… the truly savvy saw this for a bubble years ago and have not been risking (net-worth with leverage) on a mania getting more manic.

      • I think the savvy saw the government back-stop for what it was and increased their bet.

      • A fair position to take (but we would still disagree; we think those with large exposure have been playing with fire).
        In retrospect they certainly look ‘savvy’, but that’s always the way, in markets, isn’t it?

      • Buffett famously pulled out of the .bomb bubble years before the peak. What a maroon!

      • I think Mark Cuban managed the early dotcom infinitely better than Buffet.

  7. There was a discussion in the past few days at one of the blogs asking how best to short the bursting bubble that is the BPOE housing market. If you’ve owned for awhile, this is it. I did it (bought in 1999, sold in 2010) and don’t regret a thing. There’s been no price appreciation in our old neighbourhood since we sold, and our day-to-day money situation has never been better.

    Not to mention that I don’t spend my weekends at Home Depot and behind my gas-guzzling lawn mower. Moreover, when the sliding glass door in our kitchen recently blew up, we didn’t dip into our pockets – we merely called our landlord. A new set of French doors arrive tomorrow. Yay!

    And hey, just how bearish has Rob Carrick grown over the course of the last year or two? Answer: A ton.

    • Hey Gord, that’s not a short, really, because you have discretion whether or not to buy.

      But I am so with you on the weekends spending repairing and maintaining a property. I always scratch my head about how people account for their free time, and fail to account for gas and other expenses when running to Home Despot for overpriced supplies.

      But then I decided one day to go for the $1 breakfast at Ikea (I included the gas in the calculation and it was still cheaper than eating anywhere else) and there was a huge lineup for a dresser that was on sale. That wasn’t the worst I’ve seen in Vancouver, though; a few years ago at Crappy Tire, BC Hydro was giving out free fluorescent light bulbs and the lineup went out the door. Vancouver is so underemployed some days it boggles my mind.

      • Yes, you have the choice to stay short your entire life (renting) paying someone else’s dividend.

        Unlike the stock market, which you can avoid completely, you have a lifelong position in real estate. With the usual caveats; children, Bedouins, etc.

      • I can’t get how that can be a short? If anything it’s insurance. Everyone pays something for shelter, and the chunk that is supposed to be the profit, which may not be present in a lot of rentals in bubble areas right now, but lets assume the norm. You pay the profit to the landlord in return for isolation from repair bill shock and carrying the depreciation on your books.

        That’s not a short bet. For one thing there is zero leverage. Contrast that with any average buyer purchasing only shelter. Loads of leverage that puts the entire cash outlay instantly at risk. One could also try to argue that buyers are shorting landlords. That’s how little sense it makes.

      • A homeowner is a margined long (usually), correct.

        The renter is not leveraged, also correct.

        However, the net effect is equivalent to being short a dividend paying stock that you will inevitably have to cover (w/ leverage) at some point in time or continue to pay the dividend to your landlord ad infinitum.

        And then your children will have to continue to pay the inflated dividends rather than enjoy the fruits of your investment.

        You may say that stocks in our local market are overpriced. I am not arguing that.

        Some stocks pay 4.5% which is 2% over their carrying costs. Some don’t pay that. Not all are equal.

        But whatever your first/next PR purchase is, for better or worse, you are short that prop as long as you pay rent.

      • Maybe this will work:

        The day you first start paying rent, you pay (or pocket) the difference between the current price of your next PR and it’s future price.

      • blammo, that’s an interesting angle. By that argument an owner is short maintenance, depreciation, and risk, no?

      • Are we all short food?

      • I’m short oxygen. My azalea is short carbon dioxide.

      • Jesse, an owner definitely carries risk but that is self-evident.

        The house as stock metaphor is admittedly not 100% but for me (as a homeowner), it is a way of viewing/managing risk. And in my mind renting carries it’s own risk that most do not perceive/calculate.

        Over the last 12 yrs I have witnessed people; buy, sell, rent, sell/rent and sell/buy. All of those transactions/positions carry risk.

        The person that only rents or sells then rents is taking on risk they just aren’t usually aware of it.

        VREAA, I am definitely short coffee futures.

      • you know how to bait me … of course i’m long hard assets

      • “The person that only rents or sells then rents is taking on risk they just aren’t usually aware of it.”

        I think a few are, every time they see a report that house prices rise they get the sinking feeling they left a couple of hundred big boys on the table.

        I always get flack for this one but here goes: “we’re all speculators now”.

      • >However, the net effect is equivalent to being short a dividend paying stock that you will inevitably have to cover (w/ leverage) at some point in time or continue to pay the dividend to your landlord ad infinitum.

        Okay, this I get. However, the percent of the population that actually stays put long enough in the modern era for this to be relevant . . . ehhh. (We’re in this position. And we may have to rent this place out for two years while we work out of the country. So I guess I’m about to find out the actual market priced dividend on the place. I’m estimating its $400 a month based on rent on similar properties and 15 years of cost records.)

        But my labor (I’m currently covered in wallboard primer from the upstairs bath) is barely getting covered if I paid myself with the dividend. Heck I AM paying myself with the dividend. Not sure what hourly rate that’s working out to. Let me take a stab. I’ve spent about 2 hours a day every other day the last month. That’s 30 hours. Yeah. I’m cheap.

        And there are other components, the insurance against large expenses, the flexibility to relocate, and other things mentioned in the thread that would be deducted from that $400 in the renter’s case. I suspect it’s a wash.

      • “I think a few are, every time they see a report that house prices rise they get the sinking feeling they left a couple of hundred big boys on the table”.

        better to sell too soon and leave a couple hundred “big boys” on the table then to never bought and leave it all “hang out”.

    • well, your position is neutral, not short. prices up, prices down and your net worth is not directly afflicted. to short, in the strict trade sense would mean to borrow title to a house, sell it to pocket the proceeds and sit owing the title. presumably, you’d then buy back at a later date and return title to cover and close the transaction. but even if a bizarre arrangement like this were possible, titles are not fungible. so, it’s effectively impossible to short a house. gartman short idea was a generalization on how to shift from a neutral position to betting more aggressively on a down market. there were some ideas. probably none good. you need something fairly liquid, fungible, tradeable (i.e. there exists a market) that will be impacted significantly by reversal in house prices.
      differences with the us case … market is much smaller, roughly the size of a large state … banks, insurance cos, etc. already plugged into boc should need arise – i.e. the bailout is pre-approved by the public (f*ck-yeah) … one would need to do something activist in order to prevent it from happening … the poor peeps in the maple kingdom are in a much weaker position relative to the banks … so if anyone is looking to short (get more aggressive on the downside), perhaps think what will happen to the peeps and how will they conduct their lives different (eg. discretionary spend, blah-blah) … oh and this too …

  8. 4SlicesofCheese

    Friends did just that, finally sold their 1 br condo that I mentioned earlier where no one showed up to the open houses even after 2 price drops.

    They were really hesitant to sell, they felt moving was such a big hassle, and were not 100% convinced at the time prices would go down. But after they tested the water and put the place on the market and saw the prices they had to compete with and the frigid response they knew they had to get out asap.

    They close today and already have found a rental that I would estimate to be 500 dollar less than their current carrying costs. After closing costs they probably cleared a couple thousand dollars. They bought in 08.

    The kicker, sold to the agents coworker, so another agent.

  9. My husband and I did sell our house after it tripled in worth and never bought back in. We sold years ago, when our kids were in elementary school, and rented a house in the same neighbourhood. The cash we had (and invested/lost) enabled us to take vacations every year around the world and also to pay for our kids’ university education (still paying, btw). We didn’t have to worry about maintenance and were able to enjoy our lives debt-free. Of course, if we had held on, we would have made a pile more money on the sale of the house but we wouldn’t have had the experiences that we were lucky enough to enjoy. We consider ourselves fortunate that we have had the opportunities we’ve had and look forward to many more years of travel. Some people have their entire self-worth rolled up into their possessions, to us, travelling throughout the world have given us more pleasure than granite counter-tops ever could, but “to each his own”.

    • You sold and went short. Now if you are to buy back your position you will have to pay more. It’s a risk. A bet. A position.

      I’m glad that you’re happy with your decision. I am just using your example to illustrate my point.

      If you are patient, you still might “win.”

      Others with strong hand status will choose to ride out the volatility, collect their 4.5% dividend and possibly add to their positions during price weakness.

      Different approaches.

      Personally, if I lived on the West Side I too would have sold and bought a more value-oriented structure (East/Burnaby), but would not go fully short.

      • “Now if you are to buy back your position you will have to pay more. It’s a risk. A bet. A position.”

        Nobody has to buy.

        (Except for males in China who want to get married.)

      • Airedales

        Unfortunately, going long Vancouver RE now will likely lead to a capital loss (leveraged as well) and receiving a negative yield as renting is cheaper / alternative investments much better. How do you get a 4.5% cap in Vancouver? The charts and fundamentals indicate that shorting Vancouver RE is the right trade at this point in time.

      • The ‘right trade’ only if you are holding multiple properties or don’t own any at all. Why risk your only home if you are conservatively leveraged? Why trade down from west to east if you eventually want to go back to the west side?

        That’s the difference.

  10. The other part of the “cashing out” equation is what to do with all that money. I know several people who “cashed out at the top” (uhm, that was in 2007) and opted to put a big chunk of the proceeds into the equity markets as they were (and still are) being paid next to nothing by their banks. Obviously, they were mistaken in calling the top (no worries though) while their attempt at managing their respective family hedge funds proved to be disastrous and very short lived. One individual in particular equated the sale of his home to winning the lottery and proceeded to completely alter his spending habits shortly afterwards (new BMW X5 SUV, swanky Yaletown penthouse rental, multiple vacations and so forth…), which is obviously a big no-no IMHO. Yes, all that cash was really easy to spend (and very difficult to make). Now it’s gone forever. He never repurchased a home and is renting a somewhat more modest 1 bdrm apt today. Honestly, anyone with a pulse that bought and sold RE in the last couple of decades should have made plenty of money, however, this success has likely more to do with being in the right place at the right time than one’s financial wherewithal or expertise. Anyhow, some lessons learned by all no doubt.

    It appears in this example that the “Bolds” were lugging around a massive ball and chain mortgage around. Sure, it makes perfect sense to clear this off the books and rid themselves of this problem but I would also argue that all their long term issues are not necessarily solved. Obviously, this family needs a suitable place to live for many more years/decades (well, at least until the kids are gone). While this may cost less than what they were paying to keep the old house, pay the taxes, service the mortgage etc, they are certainly in no position to kick their feet up and put everything on autopilot. What if they are wrong and prices do not collapse overnight (as some here seem to think)? What if, heaven forbid, prices in a few years time are actually higher than they are today? What if the cost to rent skyrockets by 10, 20, 50% over the next decade? What if leaders and central bankers around the world continue on the same course the Japanese embarked on in the 1980’s and simply drag the current predicament out for perhaps a decade or two (while your bank continues to pay you nothing)? When then?

    While that $500k or so of cash they have sitting in the bank may seem like an unlimited supply of funds, it isn’t. Anyone that believes this is totally delusional and is only setting themselves up for a rude awakening in the not too distant future. In this case, the Bold’s $500k nest egg won’t even generate enough income to cover most of their rent unless, of course, they opt to do something more risky. More importantly, having that “big wad of cash” just sitting there burning a hole in their wallets will probably get the best of them as it seems to do with most people who ultimately capitulate and wind up either blowing the money on something completely useless, “loaning” it to relative or launching their own cupcake and/or baby accessory boutique.

    This naturally leads me to the question of whether or not keeping the house would have simply been LESS risky in the first place.

    • Haha negative real rates. Invest your capital and hope for the best.

    • ++ … well-conceived – way cool – whip

      • OT here, but Chubster, just wanted to say I don’t want you to muzzle yourself! I enjoy your posts and your poetic prose! It was the Dave Chapelle quote that made me want to say in effect, “Friends, other ladies might not want to post here if we are going to sound too degenerate.” Rock on. Truly, HEV.

      • 🙂 hev … madame, you do not appreciate the horrors which may be unleashed if your wish is to encourage my preversions … in truth, i must seek the balance … you have offered a just moral
        ps. thanx, mom … huggies!

      • “cool – whip”

        Haha cool quip.

        I never remember, do I like++ or ++like?

      • @dr.j. i’m a hack. somehow, the punchlines tend to precede the setups when i do thinks them. my wiring is messed up. or maybe just really weird sh*t happens when keeping too open a mind. jesus must have been a riot … wonder how he kept it altogether. know how pacifiists practice non-violence? well whatever this is, you get to it by practicing non-serious.

      • epte, you need to speak for yourself. The best thing for this blog is chubster to censor himself. I’ve skipped every post he’s ever written after determining he can’t take the time to properly construct his sentences, nevermind the prose being completely unreadable and not understandable.

    • All sensible considerations, bullwhip.
      For some, it may be too tempting to spend the cash (these are the same guys who, in days of old, benefited from housing being a ‘store of wealth’/’forced savings’).
      And we’ll not get into the various ways in which people could make poor investments with the proceeds of a sale.
      So your points are good. If very few people can sell their homes without then destroying the proceeds, it’s better for them to hold and take their chances with the RE market!

      But, to keep it simple, here’s the core of the ‘sell and rent’ contention:
      People who sell their home in Vancouver and simply lock the loonies in a bank vault (or, equivalent, take out GICs with measly yields), will at some point during this decade be able to buy a similar home back for significantly fewer loonies (where ‘significant’ is something in the range of 25%-66%).

      • Sure, I get what you’re saying. If things unfold as per your playbook, I am not so sure I’d want to be 100% invested in Loonies though.

      • I wouldn’t personally recommend holding the proceeds purely in loonies, but that’s getting into the topic of other investments (and this is a Vanc RE blog!).
        The point is that RE prices will drop against the loonie, both real and, we believe, nominal.

      • I also cashed out my SFH. Currently 50% of net worth in Canadian liquid assets, 50% in US liquid assets. Still exploring various ways to deploy the capital. The forex risk doesn’t bother me as I could quite conceivably live either side of the border.

    • Many good points, but I want to point out that in Japan the price drops were 10% per year for over 10 years:

      http://www.debtdeflation.com/blogs/2012/05/01/australian-house-prices-down-10-from-peak/

      If that happened here, the annual loss would be more than 2x the rent. So you’d be paying more on the mortgage to also lose 2x rent every year. If it dropped even 5% per year you would have that kind of scenario, which is “catastrophic” for recent buyers.

      • rp1, good article you linked from Keen, many thanks.
        Will headline two of those charts; very illustrative (and relevant to Vancouver).

      • Makes perfect sense to me. What we don’t know is what it will wind up costing to wait it out for what could be several years, maybe decades. Many believe that the current group of central planners will do everything in their power (and then some) to prevent a Japanese style deflationary collapse, so maybe the full on housing meltdown everyone is (and has been) expecting in Vanc, Toronto etc doesn’t materialize. I am also not so sure your mortgage pmts would necessarily be higher down the road.

      • @ Bulwhip29 Interest rates on going higher so eventually mortgage payments are going to higher. Gov’t cant do anything to keep this bubble going and they arent going to do anything to keep this bubble going. Unless they start giving out mortgages to high school students this RE bubble is gonna pop because its unsustainable.

    • If your thesis is universally true enough to be a compelling argument for all then people sure as heck shouldn’t be allowed the freedom of directing their own retirement savings .

      • Point taken. I’d argue that most financial advisers shouldn’t be allowed the freedom of managing other people’s money too.

        @ Arshes
        Define “eventually”. Everyone on planet earth is predicting an imminent spike in interest rates. ZIRP will last far longer IMHO.

        The inmates are running this asylum. Don’t underestimate what sorts of crazy new policies will be dreamt up in the coming years. I’m sure you read the rehashed story about the Cdn banks receiving bailouts in 2008-09. If they can do it once, they can do it again (and again). They funny thing is that most don’t even realize it happened the first time. Obviously things weren’t as rock solid here as we were all led to believe, were they? I can guarantee you that if it boils down to either hitting the reset button and letting the whole house of cards come tumbling down OR simply hit the EASY button and kicking the can further down the road, the idiots in charge will choose option #2 every time.

        I hope you realize this is more than just a local RE bubble we’re talking about here. The BOC has no choice but to stand pat until many of the dark clouds overhanging global economies start to clear up. This ain’t happening anytime soon. Perhaps some new regulations will be introduced making it more difficult for some to qualify for a mortgage, but interest rates themselves won’t change in any meaningful way in the short to medium term.

      • Don’t trust yourself to invest it, don’t trust others to invest it for you. This would be my mother, who is entirely in CDs.

    • I really hate the bull argument that you risk being priced out forever and rents could go up, financial ruin etc. by selling and renting when they ignore that “when the going gets tough…” leave. Plenty of places out there where $500K gets you an amazing place (paid off with cash to spare) and lots of job opportunities. Nobody is tied to YVR

  11. Cashing out is not for everyone, but it sure as hell was for me. The value of our place had more than doubled in a decade. It was (and is) far from an ordinary market, and common sense dictated it was time to go.

    And as much as I like tinkering, I’d had enough home tinkering to last me a freaking lifetime. Plus, I must say I didn’t fully appreciate how much I’d spent over the years on upkeep/repairs/renos until we’d rented for awhile.
    Even the little things – like lawnmowing – nickel and dime ya.

    One other thing: My GF and I are cheap. And we’re not gamblers. We stuck our proceeds in risk-free and low-risk vehicles. We haven’t splurged on new cars (our current cars are doing just fine), nor did we blow it on an overpriced Vancouver eateries or overpriced Vancouver clothing or overpriced Vancouver drugs.

    It’s not like we walk around looking like we’re on welfare – we’re just not big into needless consumption. Maybe if we were wealthier, we would be. But probably not. 🙂

  12. Happy Renter

    A quick happy renter story:

    Our small family has been renting an entire SFH on a large lot in Douglas Park area for 5 years now at less than $1/Sq Ft (not counting the 2 car garage or the separate storage shop). Taking a 2-month leave this summer to travel, so after much consideration we chose to give notice and put stuff in storage in order to save paying the rent. Called landlord to inform him and he made such a strong offer (free rent, yard maintenance, interior renos) that we decided to stay on after we return.

    This made me think of how different this summer might be if we were owners rather than renters and the tradeoffs of home ownership at current prices.

    • I’ve a similar story. Last year, I was offered a expat position in London, UK, for a few months, with all the goodies that come with these kind of contracts (including free accommodation in central London). I gave notice to my property manager, put all my stuff in a storage room that cost me $80/month and within a month, I was there. Since everything was taken care of locally, I saved my entire salary and more for 5 months.

      That’s one of the good thing about being a renter. You’ve no strings attached and you’re free to pack and go whenever you want. This is why I would trade this freedom for ownership only if it is cheaper to do so.

  13. Vreaa, I heard you disclosing the other day that you’ve been predicting a crash for the past 12 years. Are you serious? While it’s true that there’s no time limit on how long it will take for a crash to happen, there’s a limit on the lifespan of a human being. How long do you think you can live? I don’t think I can sit on the sidelines for over a decade, hoping for a crash so I can get my foot in the door.

    The family featured in the article bought their home much later than the time you started calling for a crash and, like all the other folks who bought at about the same time, have done very well for themselves. I wish I had the means to be able to buy earlier, but I was just a dirt poor student. I only entered the market in the past 6 years, but own multiple properties, sold a few, and made out like bandit.

    Not sure if you’re still following Garth Turner, a renowned real estate bear. I stopped reading his blog after finding out a shocking truth. He’s also been calling for a crash for 5 years now and just listed his house for a cool million after paying only half that in 2009. The most hypocritical thing about him is that back in 2009, whenever people asked him for advice on whether or not they should be buying in this market, his answer always was ”do you want to buy an asset that you can buy in a few year’s time for significantly less”. If he was truly thinking that prices would fall just like what he had been preaching like a broken record, then why did he do the complete opposite.

    I sent him the above query but it never made it to the board. Obviously according to his posting rules, my question was in serious violation.

    • “He’s also been calling for a crash for 5 years now and just listed his house for a cool million after paying only half that in 2009. The most hypocritical thing about him is that back in 2009, whenever people asked him for advice on whether or not they should be buying in this market, his answer always was ”do you want to buy an asset that you can buy in a few year’s time for significantly less”.

      ahhh, the gospil according to Garth.
      I’d call him a modern day Messiah except for one key difference.
      Christ could not heal himself…Garth can only cure himself while making everyone who listens to him sick.

    • The timing of a bubble will burst is hard to predict. He probably purchased thinking it was a good deal and now is gonna get out becuase no way will it be worth that next year. And you have to remember its not just about the drop in value its also having your entire net worth in one asset. Also when this bubble pops, in the near future these homes are gonna be worth what they were 7-10 years ago, so his advice was good advice for the average person.

    • I read a few of Garth’s books (borrowed ’em from the library). His track record of predictions is pretty poor. And, typical of politicians, he flip flops back and forth on numerous topics. His blog is only worth reading for a few chuckles once in a while.

      I’ve followed Vreaa for about 2 years. From what I’ve seen, his (or her?) opinions have been very consistent, with few claims of precise timing.

    • Bryan -> No, even I haven’t been a bear for 12 years.
      But I did think we were frothy by 2003 and very clearly in a bubble by 2006 (and still do (think we were in a bubble by 2006)). So that’s at least 6 years… not that different from 12, it may seem like 12, but still not 12.
      (BTW, in retrospect, our bubble had clearly commenced by 2003).

      Bryan/all -> I haven’t followed each and every one of Garth Turner’s calls over the years, so I won’t comment on those, but one thing he always seems to be very clear about, time and again, is that it is important to limit the amount of ones net-worth that is in RE. He uses the ’90-minus-your-age-% formula (or less) for how much of your net-worth should be in RE. So, he doesn’t say that nobody should buy or own RE, just that it should make up less than ‘x’ percent of your net-worth.
      This means that it may have been fine for him to buy in 2009; he wasn’t being inconsistent with his own advice in doing that.

      The way I’ve always put it myself is that it’s fine to buy a personal residence if the dropping of that property’s price by 50% (or more) would not result in significant damage to your financial future.
      In other words, somebody with total assets of $2M could perhaps afford to buy a home for $400K, because the drop in value of that home to $200K would be painful but unlikely to cause too much future pain.
      You’ll note that using these parameters we’d judge that the vast majority of Vancouver buyers are taking on too much risk: Most are worth substantially less than $2M and are buying homes worth substantially more than $400K.
      In fact, most have more than their entire net-worth in their homes, and a drop of even 25% will completely wipe out many. Even those who have ‘low ratio’ mortgages are still leveraged to the RE market.

      So, I don’t know of any bears who say that under no circumstances whatsoever should one own RE, just that, if one does, one should be able to afford the consequences of the downturn that is likely coming.

    • Vreaa, in 2009, lots of people came to Garth for advice on buying and they were in a perfect position to do so (i.e. sitting on a large pile of cash, having secure employment with stable income, looking for a primary residence…). Garth advised against buying because he firmly, repeately, and consistently reassured them that prices would come down in a few years. He, on the other hand, went out and loaded more RE on his portfolio. That, to me, is the utmost form of hypocrisy (as defined by someone who acts in contradiction to his or her stated belief and feelings).

      Interest rate significantly fuels hyperinflated RE prices, but there`s another equally important factor: lax immigration criteria. It`s truly hurtly to see so many Canadians who were born here, contribute to our society but are priced out of the community they grew up in because foreigners can easily obtain a passport by acquiring a property on our soil.

      Jeff, Garth`s record of predictions is not poor. It`s outrageous. Horrendous. Unimaginable. The most notable one being (if you go back to his archive) on July, 1st, 2008, he predicted that by Canada Day, July, 1st of 2009, prime will be a whopping 8% (how the hell he came up with this number is beyond my comprehension). Fast forward, almost 4 years later, prime is still at 1%.

      • Bryan ->
        I’ve already commented on not having any desire to defend any of Garth’s calls/timing/etc.
        With regard to what you say about 2009, if he indeed did categorically say that nobody should buy RE under any circumstances, while buying himself, we’d agree that was hypocrisy. But are you sure he was categorically saying that?… or was he simply repeating what he has said in recent years (as I described above, that one shouldn’t be overly invested in RE, that one should keep the 90-age-% limit, etc?). Make sure that wasn’t the case, before you call him hypocritical.

  14. Since people take house as investment rather than home now, it should be treated as such. Take a line of credit or any kind of loan against the house and use the money to short the mortgage insurance company.

    • pretty sure they’re set to suck on the boc pipe … this sort of stuff is probably what is meant by the soundness of can banking system

  15. @bullwhip29. the un-zirpedness of various eu yields despite much central bank industry with the contrary aim is a pretty big signal, imo. this will continue to spread.

  16. Somehow… this just seemed to ‘fit’.

    A Dwelling is just a building… Whereas home is where the heart is… Do the math… do your due diligence… but above all else – remember this Boyz ‘n Girlz… it’s a BigOldUniverse out there… and YVR is just one wrinkle in time. Life is short… (often shorter than you might think)… Be sure you accumulate some good clips for your terminal ShowReel along the way…

  17. VREAA et al:

    Here is an anecdotal view from Asia on how the money here sees Australia (Canada’s cousin): http://bit.ly/II6Le7

    “Local investors in foreign currencies will likely be crestfallen as their favored AUD lost 3/4 of a cent yesterday, following a bigger-than-expected interest cut down under.”

    Highlights my point that raising rates in Canada will only attract MORE money into the country.

    Not saying RE prices would rise further, just saying ther would be a bigger pool of foreign money to support prices.

    Oh, the dramas of being the attractive ones.

    • dude, i must ciao … mmm noodles … but a last blip … why rates rise is key, not if they rise … rates are rising in spain, eg. … rates are up in mongolia – for a very different reason … i’d park money in the latter but not the former … ta ta

    • Noodles? Ipso facto you must be Asian with a degree in literacy? How presumptive of me. LOL

      Back to topic, Canada is in the same basket as Mongolia and Australia. Not Spain or Greece.

      We’re the attractive crowd with brains and beauty.

      • truthfully, well off the mark on at least one of the two 😀 on topic … whether real rates are +ve or -ve. can/aus not bad as piigs but they’re no mongolia … and most likely to worsen -> poor monetary/fiscal policies … not attractive but won’t be the ugliest neither

    • “Not saying RE prices would rise further, just saying ther would be a bigger pool of foreign money to support prices”

      less local and more foreign buyers. If this keeps up all our detached stock will be owned by Chinese

      • It would be prudent for Canada to implement a light dose of foreign restriction on RE.

        Or

        My suggestion is to implement a 5-8% property transfer tax if property is bought and sold within 2 years (from possession, so presales included).

        This would knock out speculators and keep real buyers/long term investors in the market which is needed for a healthy economy.

      • I’m afraid higher stamp duties are not on the current government’s agenda. A tough nut to crack for sure, not all properties one assumes are foreign owned are foreign owned.

        The French tax total wealth, though I think property is exempt. Heck, why not consider it. May Day isn’t over yet!

      • The point is not so much to just restrict foreign owners. But to restrict short term speculatiion.

        There’s a lot of wealth even in Vancouver now that may be driven to speculation. Just refer to the blog post we’re debating.

  18. http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/home-buying/in-vancouver-is-a-500000-fixer-upper-out-of-reach/article2412101/

    Best of luck to Kristin, but if this market goes into meltdown mode there might be more options available. Listings have exploded over the past year. As a piece of general advice I would be in no rush to buy.

  19. http://www.sciencedaily.com/releases/2012/05/120501085556.htm

    Venus to Appear in Once-In-A-Lifetime Event
    On 5 and 6 June this year, millions of people around the world will be able to see Venus pass across the face of the Sun in what will be a once-in-a-lifetime experience.
    It will take Venus about six hours to complete its transit, appearing as a small black dot on the Sun’s surface, in an event that will not happen again until 2117.

    If that isn’t a big fat Vancouver real estate top call I don’t know what is. :mrgreen:

    • recommend basement do a little contract work … then raise his rates a few pts … therapeutix … in pure jest, bud 🙂 look to spain for wormsign now but expect the tptb to fight it all the way

      • Basement Suite

        “then raise his rates a few pts”

        Oh yes ha I get it, bit slow tonight, too full of ginger beef and orange peel chicken 😛

    • Basement Suite

      Chubster – I do a fair amount of contract work, but not enough to buy RE in Vancouver, my rate needs to be MUCH higher for that. Reality check, that story actually makes me LOL, thanks for the chuckles, for example:
      “The east side market is driven by those who can no longer afford the west side — homeowners who want to cash out and get better value on the east side”
      Bwaaahahaaa! Now THAT is funny stuff XD

    • MM -> Absolutely. “Rotten” is an appropriate descriptor.
      This phenomenon, that of being offered better mortgage terms (or, in some cases, easier qualification!) with lower down payments, has been described on Vanc RE blogs for years now.
      All part of the perverse mispricing of risk that has been so central to our mania.

    • Is that Gary Marr again? Is that a nom de plume for Garth Turner? I can’t figure out what he’s going on about. Low ratio loans bundle in MI premia where high ratio ones usually have it paid upfront, explaining some of the difference in rates.

      There is no shock! here, only Gary Marr getting it wrong, even when point blank asking a smart cookie about it.

  20. Sorry, a bit off topic, but some may find interesting. Personal expenditure as a % of GDP is near 64% in Canada but 73% in BC. It was 65% in BC just as recent as 2006. Just think what would happen to the overall economy when the housing bubble pops and we see the wealth effect slide into reverse. Canada and BC to a further extent, are in no mans land right now. Never has the economy relied on the consumer this much and never has the consumer been so bloated with debt.

    • Let me say if I may. Canadian economists have got it wrong by only using Canadian economic data for specifically Vancouver’s economic forecasts.

      As the country’s strategic link to Asia Pacific and it’s heritage links to the Chinese since the gold rush, data from Asia is needed to factor Vancouver’s economics.

      The dynamics of this city’s economics have acquired many characteristics of Asian economies.

      The number of families relying on undeclared income to survive in Vancouver is greater than anywhere else in the country. Then there’s the fresh capital that’s being injected through immigrants. Most of these people are treated to be unemployed in census, contribute little to GDP through labour and skew the ratios.

      Look to the moon to forecast the tide, not the ocean.

      • and to add, should Canada’s economy take a turn for the worse whole Asian economies continue to boom, we could very well see Vancouver less scathed with a higher ability to service debt even in the worst of time.

        Just a devil’s advocate view, not one I would put money on.

      • BLM I think some perspective is warranted here, BC consists of over 4MM people, despite what some specific areas of the province might suggest the majority of its citizens earn money through normal declared means. Immigrant populations retaining strong and large financial ties to Asia are not in the majority.

        That graph should be scary in that context. While certain pockets of BC may rely heavily on direct business and financial ties with Asia, it looks to me like the majority of the province has turned to consumption based on a heavily investment-focused economy. This is borne by the negative trade balance, average debt loads, and above-average dependence on construction jobs for employment. It is unlikely, in my view, that capital flows for a few hundred thousand residents who are wealthy enough to import their monies into BC can support 4 million residents.

        Food for thought.

      • Well put.

        Undoubtedly the charts need to be considered but at the same time taken with a slight grain of salt. The situation is likely to be less dire in reality, though still not healthy.

        Canada’s (more specifically BC’s) trade deficit has always plague us. It is why the BOC are handcuffed from raising rates.

        If the country wants to be able to control its destiny, it needs to move up the value chain. Sell wood furniture, and not lumber.

    • Wow, Kevin: another great chart thanks.
      ‘Scary’, as jesse notes.
      The province is very vulnerable to a large contraction.
      Even ‘undeclared income’ will shrink when the RE engine cranks into reverse.

  21. We sold 6 months ago, started with 50K down 12 years ago and cashed out on the West Side netting out just this side of $2M… been tracking the West Side for almost 2 years and still do.. at best its withering and while its still being goosed by offshore interested its as thin as sheet these days.. (SFH). I am just waiting to grab some popcorn and watch the show soon. Sadly those that will get crunched the most are locals who, fueled but slick bank marketing and a helping hand from the GFC, strapped on a titanic amount of debt and are hoping for best.. which is not what will happen. The offshore money won’t care they are in it for the long haul and the numbers we are talking and negligible in their net worth. Nice work team. lol.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s