“He has decided to put one of his 2 townhouses back on the market. If he loses quite a bit on it, I wouldn’t be surprised if he and his dad put the other 5 units on the market as well.”

“As the negative real estate headlines are now appearing daily, it seems that I’ve become the “go to” guy when it comes to discussing real estate with the people around me (friends or at work).
A couple of anecdotes showing that panic among sellers has already started…

#1. I told you about a good friend of mine who bought 2 townhouses, along with his dad who bought 4 of them, in Langley earlier this year. They bought these places because dad’s very good friend advised them to do so (great location (Langley???), great price, great potential for future price increase, and all the usual BS…). It turns out that the “good friend” is also a realtor and “helped” them close the deals (they didn’t even got discount on the realtor fees!!!).
After talking to me a few times, and I guess after countless of sleepless nights (my friend is currently unemployed and has not been able to get a new job in the past couple of month), he has decided to put one of his two townhouses back on the market, hopeful that he can get a good price for it. We’ll see what happens, but if he loses quite a bit of money on it, I wouldn’t be surprised if he and his dad put the other 5 units on the market as well… How many people are there like them in the lower mainland?

#2. A colleague at work (late 20s) bought a townhouse in Ladner a couple of years ago (5%/35y) with his wife. After several discussions with me, he’s decided to put his property for sale (for $10K more than they paid for…) and move to a condo in Richmond, closer to work, bigger, cheaper. I think they’ll lose quite a bit in the process, but all in all, it’s a wise decision to make and they’ll recover fast. What made them change their mind? The fact that so little of their monthly payment went to pay for the principal and so much went to pay for the interest. I could see the disgust on his face when he saw the numbers after I did a simulation for him…

I’m really surprised at people’s ignorance regarding the costs involved when buying a property and how little they know about the market in general when they decide to speculate.
Anyway, I can see the general mood is shifting. I no longer hear around me the classic “market only goes up in Vancouver” and that alone is good news!”

Makaya at VCI 21 Aug 2012 1:44pm

Lower prices will beget selling, and lower prices still.
– vreaa

46 responses to ““He has decided to put one of his 2 townhouses back on the market. If he loses quite a bit on it, I wouldn’t be surprised if he and his dad put the other 5 units on the market as well.”

  1. “I’m really surprised at people’s ignorance regarding the costs involved when buying a property”

    I am not. It became clear to me soon after I arrived in Canada and someone told me I should buy the condo I was renting as I could get a mortgage for my rent. When I started deducting things like the Condo fees, property taxes and a repair fund and then asked what bank would finance this for $500/month I was told that I am doing it wrong and that’s not how I should calculate it I already had a sinking feeling. That was more than a decade ago.

    Guess reality is a harsh teacher, personally, I’ll just watch the fireworks.

  2. What exactly do you use for your simulations?

    • hahaha; thanks, MLK.

      ‘Housing crash fears overblown: CIBC’
      [great choice of words; ‘overblown’]
      from the article:
      “It turns out that those fears are highly exaggerated and very premature,” CIBC economist Benjamin Tal says in a report. “In fact, demographic forces will be as supportive to real estate markets in the coming decade as they were in the past decade.”

      1. Love the ‘premature’ bit — when do you start worrying, once prices are 25% down and falling?

      2. ‘Demographics’ (real demand) didn’t cause the spec mania, speculation and free money did; when the speculation ends, the markets will crash regardless of ‘Demographics’. There is fresh air between current price levels and those determined by real demand, far below. (For real demand levels, see rents).

    • Tal probably makes more money than most each of us reading here.

  3. I think the second anecdote clearly states how I feel about purchasing real estate. Work in the interest that you pay as well to get the true cost of how much you paid. Whether or not you continue to live in it or sell the place you have to work the interest into your overall costs, among other items.

  4. For homeowners, total cost of ownership is composed of the following elements:

    • mortgage principal (i.e., the purchase price of a house, amortized over the length of the mortgage)
    • mortgage interest
    • property tax
    • house insurance
    • utility bills
    • repair and maintenance costs
    • in many cases, major renovation expenses
    • in some cases, major landscaping expenses

    Mortgage interest is a huge factor, even in the current low-interest-rate era. Not understanding how much interest you pay on money borrowed to buy a house, and thinking that a nominal price gain between purchase price and sale price is equivalent to profit, are probably the two most pervasive misunderstandings when it comes to the finances associated with houses. And during a housing bubble, financially dangerous misunderstandings.

    • You left off a big one that most people don’t consider and that is the transactional cost of buying and selling the property. Add a good 7 or 8% combined for those 2 transactions

      • Froogle Scott

        Yup, true enough. Those should also be on the list above. In BC, Property Transfer Tax is the major cost associated with buying. The realtor’s commission is the major cost associated with selling, assuming you’ve got an open or protable mortgage. If a closed mortgage, then add those nasty fees for breaking the mortgage.

    • Property transfer tax too.
      Don’t forget capital gains for the quick flips and secondaries.

      • Surely Capital Gains Tax only applies if there was a capital gain?

      • Froogle Scott

        Definitely PTT, see above.

        I’m not really thinking about quick flips, or secondary or investment properties, but rather primary residences, which are exempt from capital gains tax.

        And, yes, Anonymouse is right, no capital gains tax if there was no capital gain. Perhaps this is the big silver lining if the bubble truly bursts — all the amateur speculators who bought second and third properties will be able to claim a capital loss when they are forced to sell for less than what they paid!

    • It’s rare I see those who are honest with their total ownership costs, or at least honest they don’t have a handle on total ownership costs. I’d be happy with either.

      On an unrelated related note is it considered ethical for a psychiatrist to accept keeping someone’s fantasy world intact to avoid the pain of reality? Asking for a friend.

      • The fantasy can be seen as a form of ego defence against the distress of seeing reality for what it is. It protects the individual against facing distressing emotions.
        The psychiatrist has to make a judgment call about whether the individual can handle the challenging of that defence in a therapy.
        If they judge them to be capable, they may try insight-oriented interventions, aiming to deconstruct the defence in the hope that the individual will then see reality more clearly (there will be associated distress).
        If the psychiatrist judges that the individual cannot handle (or is not asking for) such a challenge, they may rather use a supportive type of therapy, where the defence essentially remains largely intact.
        Note how this can hinge on a judgement call. And it is all the more arbitrary when you consider that different psychiatrists may have different opinions about the same individual.

        So, to answer your question, you can’t really say it is unethical for a therapist to not force a patient to face reality.
        Interestingly, the whole defence can be danced around (rather than faced) in therapies where the therapist buys into the patient’s fantasy. This isn’t an ‘ethical’ problem per se.

        Seeing reality for what it is is healthier than not doing so, but it is likely fair to say that individuals have different capacities to face reality.
        (Cue Jack Nicholson: “You can’t handle….”)

        Above answer for your friend, from ‘a friend’.

      • I’ll let Julian know. Thanks vreaa.

    • I don’t consider mortgage principal to be a cost of ownership per se. It certainly is from a cash flow perspective, but from a balance sheet perspective, it’s just your own capital which you (hopefully) get back when you sell. It is tied up, and the opportunity cost of not investing it elsewhere is the cost of ownership that balances, hopefully, the net appreciaton you may or may not get over your term of ow(n?)ership.

      Transaction costs, too. They form a small percentage of overall costs for people with long holding periods, but a shockingly large part for the young’uns buying starter condos with a holding period of 4-6 years and maybe a mortgage break fee at the end due to poor timing/planning.

      • Froogle Scott

        I guess it depends on how you define ‘total cost of ownership’. I’ve been working on the numbers for our house, and I am taking a ‘cash flow’, or an ‘actual dollars’ or ‘explicit cost’, approach. But sure, out of that total cost you’re likely going to recoup at least the principal (maybe not in the US at the moment, depending on when someone bought), and offset more of the total cost with any appreciation on the principal. What I’m finding, however, is that you may not recoup all the other costs, with mortgage interest being the biggest culprit when it comes to unbalancing the balance sheet.

        Good point that you, and others above, make about transaction costs. Yes, they can really eat into any built-up equity if people move too often. My accountant neighbour reckons it costs close to $50K to sell and move from the benchmark Vancouver house right now — the bulk of which is the real estate commission. Not so bad if there’s a bidding war and you get $50K over asking. Not so good if prices are collapsing, and you have to accept $50K under asking.

  5. dog chasing his tail here. Demographics indeed are the primary force in compelling the banks and their controllers to loosen lending requirements. The problem with analysis on this site is that people don’t understand why banks would do this and invoke bubbles. Why would they lend the rope to you so that you may hang yourself? Anyone?

    • the simple answer is they get paid per inch of rope … what one does with rope is incidental … that they find ways to distance themselves from the consequences allows for more … but perhaps the darker answer is a culling of the weak

    • First off, bankers are people, too. If it’s been a long time since the last local bust, they convince themselves that they are prudent, their borrowers responsible, and their loan book sound.

      Banks have a lot of overhead, so they need a loan book that, at minimum, isn’t shrinking. An organization that thought the current lending environment too risky for the reward and was content to just run off its current loan portfolio would be a very different looking low overhead organization.

      Banks compete in the capital markets, and their shareholders (who aren’t likely any brighter than the bankers) demand a certain ROE, or the capital will flee elsewhere. A classic quote, in July 2007 from then Chairnan and CEO of Citigroup Chuck Prince: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

      • Maybe our economy is not producing enough business demand for loans to support health bank loan books so the banks have to expand their loan book with housing loans.

    • Because the neck on the other side of the rope is not the bank’s but the tax payer’s. So zero risk for the banks, why wouldn’t they want to keep selling you rope?

  6. We keep trying to pay up in rent to get a bigger, nicer place. They are invariably listed for sale. I’m talking three in the last week that my unsuspecting wife finds on craigslist. Pretty soon this is going to piss her off. I’m scared.

  7. What do you get if you mix Nemesis, Jesse, Jim Grant and the BCREA? Why you get Rudy Nielsen of course. http://t.co/WfwQZKHN

    • “Of the approximately 321 million cubic miles of water on Earth, it’s estimated that 99 percent is ‘unusable’ for humans (salty, frozen etcetera) and remaining water, 99 percent of that one percent is groundwater with the remaining one percent of that one percent held in lakes, rivers, the atmosphere and other reservoirs. In turn, what water humanity can access, 70 percent goes into agriculture and as the hungry world population continues to grow… the math is merciless. It’s estimated by 2025 more than half of humanity will face ‘water vulnerability’ and by 2035, in certain developing regions, water demand will exceed supply by 50 percent. Here in BC, we have more than our fair share of the world’s increasingly finite reserve of potable water. For now.”

      I don’t know if Nielsen is into analogues, but substitute “water” for “land” and the lunacy of the legend that is Vancouver bubbles to the top.

      • Ralph Cramdown

        Unpotable water can always be made potable if we’re willing to expend the energy. Do the authors know that water exists in a CYCLE (i.e. the law of conservation of matter holds)?

      • Also of note, was noting more than a few blackberry patches untapped and withering on my walk yesterday. So much for the food shortage I guess.

        PS I just bought a new higher-flow shower head to make me feel better. As compensation I’m not going to water my lawn for a week.

  8. I almost fell off my chair when I plotted this chart. http://i45.tinypic.com/2urqs6o.jpg

    I’m compiling more listings to confirm this is the same trend in other areas. As for now, it appears many tear-downs plus new homes all came on the market at once, at least for VanWest and Richmond.

    • Wow! Lots of speckers/flippers are going to learn a painful lesson…

    • Any idea on the MOI for that ($3M+ detached houses in VVW/VRI) given a typical sales year/current trends?

    • any idea what’s up with the millenium ‘hole’?

      • I suspect there was a lull in residential construction around the turn of the millennium after the collapse of the speculative bubble catalyzed by our last major wave of capital flight from Asia (i.e. HK-HAM, Japan Inc., ROC).

  9. Pingback: “We keep trying to pay up in rent to get a bigger, nicer place. They are invariably listed for sale.” | Vancouver Real Estate Anecdote Archive

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