Spot The Speculators #88 – “My girlfriend and I just put an offer on a condo by Gilmore station for 430K. It looks like we’re going to get it. We plan for this condo to be both an investment and a home for at least the next 7 years.”

“I graduated last year and got a stable government job and my gf is a chef. We’ve saved up about 50K for downpayment, and we just put an offer on a condo by Gilmore station for 430K. It looks like we’re going to get it. We plan for this condo to be both an investment and a home for at least the next 7 years.
We both grew up in Richmond, and as much as we love the place, there are inherent issues with the city. Most importantly, its housing market is based on one factor – Chinese investors.
The housing market in Vancouver is strongly influenced by investors from overseas, mainly China, Hong Kong, Taiwan. Earlier this year, policies were tightened for foreign investors, in most cases from China. Money was actually returned to them. This means that the development on River Road in Richmond by the Olympic Oval is undersold. Now housing prices are dropping like crazy in Richmond after a 5 year boom, not to mention the crawling speed of the market as well.
My company will be moving next to Brentwood mall soon, and this is one of the reason why we’ve decided to move there.
More importantly, the plan to develop and rebuild and revamp Brentwood mall is a good sign, including the three phase project – the first of which includes an ultra high rise. Needless to say, with an increase in population in the area, housing prices are expected to go up in the future.
We almost bought a similar place for 20K more last month, I’m so glad we didn’t because the prices has dropped a little. But there are not a lot of options because sellers who are not in rush simply took their property off the market.
Here are the questions I have:
Is it possible that there will be too much property for sale that dilutes the value of property as a whole in the future? For example, both Brentwood and Oakridge malls have plans for a ton of new homes in the future (both 3 stage projects).
What are other factors that might affect property value in Burnaby and in Greater Vancouver as a whole?
Finally, I’ve heard that housing in Vancouver, as long as it is close to Downtown, UBC, or Vancouver itself, will always be saturated. Can this always remain true if there is such an abundance of developers creating new condos?
Everything considered – what do you expect a 400k-ish condo in Burnaby to be worth on the market in 5-10 years?”

‘Reddit, I need your opinion about something as I’m about to make the biggest purchase of my life’, shaozhen, reddit.com, 31 Oct 2012

The fact that they see the home, even in part, as “an investment” makes them speculators.
They are buying on the premise that prices will rise or at the very least remain strong.
To answer their last question: I would say that their $400K condo will touch a market price of $220K (real) well before it ever hits $440K.
Would they be buying if they saw that possibility?
Precisely.
– vreaa

47 responses to “Spot The Speculators #88 – “My girlfriend and I just put an offer on a condo by Gilmore station for 430K. It looks like we’re going to get it. We plan for this condo to be both an investment and a home for at least the next 7 years.”

  1. By the strict definition owners are all speculators.

    • I disagree. A speculator is someone who is expecting a (capital) gain in the future from his/her investment. Not everybody fits in that category.
      When my mom bought her property in a small village, she couldn’t care less about what the future value of her property will be, she wanted to live close to her grand-children. This is by far more valuable to her than the fluctuations of the value of her house, which are meaningless to her and don’t affect her lifestyle in any way…

      • By strict definition speculation is expecting return of capital. Real estate investment necessitates speculation by this definition.

      • Here is the definition of Speculation from Investopedia:

        Definition of ‘Speculation’
        The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate. While it is often confused with gambling, the key difference is that speculation is generally tantamount to taking a calculated risk and is not dependent on pure chance, whereas gambling depends on totally random outcomes or chance

        By the speculation definition above, anybody that is buying a home without expecting any gain upon resale is NOT a speculator.

        Vreaa’s example is a speculator: he is expecting the value of his property to increase and make a profit out of it. My mom is not a speculator, as she doesn’t care at all whether she’ll resell her home at a profit or at a loss. She sees her home as a shelter that fits her needs, not as an investment vehicle.

      • UBCghettodweller

        YVR Housing Analyst- what if you see housing as a service that you pay for and in some situations (maybe not in Vancouver) the benefits of owning over renting, albeit not financial, are something that person is willing to pay for? Are they speculators?

        In markets where cost to rent and cost to own are nearly the same, this then becomes a decision making process where the best reasons to buy real estate have nothing to do with making a quick buck.

      • “what if you see housing as a service that you pay for and in some situations (maybe not in Vancouver) the benefits of owning over renting, albeit not financial, are something that person is willing to pay for?”

        If you want to convince yourself that you are using housing only as utility and that any capital spent is sunk, fine, but that’s simply not the case from an investment perspective. Land has residual value that factors into any investment decision. The mistake made, in my view, is thinking that someone buying for personal use is not speculating because of some perceived internal thought structure, often morally-driven, that absolves them of not treating the property as an investment.

        From what I’ve seen, frankly, people confuse their personal consumption of housing with financial investment. There is, at the core, no difference between the two except by how people choose to perceive it. Perception does not change the business case.

        I argue the distinction between “speculators” and “non-speculators” is fuzzy enough I will not discriminate between them. Some will be more “speculator-y” than others, granted, but to think this is a “us and them” scenario is missing a big part of the puzzle of what’s going on right now. If we use my old favourite country — the US — as an example, people who convinced themselves they bought only for personal reasons and were willing to treat their investment as sunk, when prices started falling and were thought unlikely to recover in a very very long time, that mindset changed.

        The Graham-Dodd definition of speculation is: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

        Holding land carries risks, as does everything for that matter. It’s a matter of defining where one draws the line, as we have seen even with certain sovereign debt instruments once thought to “promise safety”.

      • yes Makaya, the words “speculating” and leveraging” are used by hard core renters to sensationalize the discussion. The vast majority of land owners are providing stability and predictability for thier families. They are not “speculating” on future gains, nor are they “leveraging” a mortgage for the purpose of profits.

      • “In markets where cost to rent and cost to own are nearly the same, this then becomes a decision making process where the best reasons to buy real estate have nothing to do with making a quick buck.”

        If an investment is mis-priced I disagree “making a quick buck” is a derogatory undertaking, I would jump at the opportunity.

        The cost to rent should be more expensive than the cost to own because landlords need to make a profit. In the current state of things, I see people like this anecdote’s subject excusing overpaying under the guise of personal reasons and hand-waving away the important details, including the potential endgame if things don’t go exactly according to plan and failing to understand his logic structure is based on relative market movements (comparing Brentwood to Richmond, looking at Chinese capital as a driver of prices) instead of absolute ones.

        As I’ve stated dozens of times on this blog, people like this should admit to overpaying. My two cents!

      • yltnboomerang

        It’s funny, I rent rather than own after selling in 2007 because it just made sense financially. If I am able to make this assessment, why the heck do I buy new vehicles instead of lease them? I extract only utility out of shelter as a renter however would prefer to own if it was financially equal because I could customize my living quarters (bigger kitchen for example as I love to cook). I don’t modify my vehicle in any way so in fact it should be an easier decision for me to lease a vehicle. Is it the size of the price that is making me look closer at the home lease versus vehicle lease? The leverage? (I can buy the vehicle outright, though I will finance as 0.9% is lower than the 3% on my margin account)

      • Rusty's ghost

        @dbag

        “hardcore renters”

        As opposed to soft core renters?

        No Greek, right?

      • F1: The “vast majority”? Please provide evidence. “Stability” for one’s family? Please explain how tying up a majority of a household’s net worth in a single asset enhances stability.

  2. First off let me say I am a recent buyer in 2010 on the west side of Vancouver. Second, to answer your question, undoubtedly, more developments equal downward pressure on prices. I can’t tell you how much the property will be worth in 10 years, but for me, I am bracing for at least a 40-50% drop. For me, this is horrible but i can weather the storm as i have paid off about 50% of my mortgage already. I have even calculated that were rates to rise to 20-30% i can still afford the place, provided I am still working, which I will be as I’m self employed in a profession. I suggest you do some math and look at the worst case scenario to see if you guys can weather this out.

    • The mistake that’s made is translating a personal situation onto a market that is, at the core, driven by investors. If you’re suggesting readers make a bad financial investment in lieu of some intangible benefit, bravo.

    • Is this the same Dave who kept saying how good the RE market is and wouldn’t drop more than 10% and all other bull excrements in the last 2 years I have been reading this blog??

      • No it’s not. I’ve been a bear and always has been. I only bought because I got married and the wife wanted our own place. I am trying to delay paying the mortgage as long as rates are low and have money invested elsewhere. I would never dump that much of my money into real estate, an illiquid, dangerous investment.

  3. To answer their last question: I would say that their $400K condo will touch a market price of $220K (real) well before it ever hits $440K.

    What matters is the nominal price, not real. If nominal price stayed at $440k, but inflation pushed the “real” price to $220K, then their loan would become much cheaper. They would be still ahead of savers whose savings would be cut in half.

    In other words, it is only worth waiting for lower prices, if the decline is nominal.

    • You’re assuming that inflation could push their real home price from $440K to $220K, without mortgage rates changing?

      • UBCghettodweller

        Excellent point about the mortgage rates.

        My parents remind me about the days where housing prices were cheap, but mortgage rates ran well in to the double digits. If you could make a large downpayment, you’d be in good shape… but this was also an era when many people were walking away from their properties in Alberta.

      • Good point, however, if the mortgage is locked for 5 or 10 years, it could make a difference. Also, even if the rates go up, the real principal goes down.

        Inflation is a net loss for the saver and a net gain for the borrower (assuming a general inflation where incomes go up along with everything else).

      • And inflation is a net loss to banks and the financial sector, which is why I don’t think we’re going to get it outside of a sovereign debt crisis.

  4. A 400k condo dropping to 220k, would mean we need to see levels decline back to 2003 levels. Ain’t happening. Maybe 2005-06 levels. So 280k would be more possible.

    • “Ain’t happening.”
      Based on… what?

    • Whenever I hear the phrase ‘ain’t gonna happen’ I immediately raise my expectations of the event in question actually happening.

    • Let’s see now… How far back in history shall we go?… Here’s your ThursdayMorning InNoParticularOrder MixTape ‘o “Ain’tGonnaHappen!”….

      “There is no reason anyone would want a computer in their home.” — Ken Olson, president, chairman and founder of Digital Equipment Corp. (DEC), maker of big business mainframe computers, arguing against the PC, 1977

      “The horse is here to stay, the automobile is only a fad.” – — Advice of President of Michigan Savings Bank to Horace Rackham, lawyer for
      Henry Ford, 1903 (Rackham ignored the advice and invested $5000 in Ford stock, selling it later for $12.5 million)

      “The idea that cavalry will be replaced by these iron coaches is absurd. It is little short of treasonous.” – Comment of Aide-de-camp to Field Marshal Haig, at tank demonstration, 1916

      “The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” — David Sarnoff’s associates in response to his urgings for investment in radio, 1920s

      “Who the hell wants to hear actors talk?” — H.M. Warner, Warner Brothers, maker of silent movies, 1927

      “You better learn secretarial work or else get married.” — Director of the Blue Book Modeling Agency, advising Marilyn Monroe, 1944

      “What, sir, would you make a ship sail against the wind and currents by lighting a bonfire under her deck? I pray you, excuse me, I have not the time to listen to such nonsense.” – Napoleon Bonaparte, when told of Robert Fulton’s steamboat, 1800s

      “Drill for oil? You mean drill into the ground to try and find oil? You’re crazy.” — Drillers whom Edwin L. Drake tried to enlist to his project to drill for oil, 1859

      • reader shall now identify extent to which examples provided demonstrate incredulity or denial

      • Yeah, good examples, but none of them are about real estate. And even if they were, they’re not about *Vancouver* real estate. Real estate is special, and Vancouver RE is even more so! And even if the far-flung suburbs drop, the core will never drop, because it’s magical– hemmed in by water, mountains, farmland, and suburbs, insatiable demand will prevent valuations from ever falling!

        (sarc off)

      • Someone said, “I want a RE ‘Ain’tGonnaHappen’!”… Here’s one…

        …”He had sought an audience from the monarchs King Ferdinand II of Aragon and Queen Isabella I of Castile, who had informally united the largest kingdoms of Spain through marriage, and while ruling their kingdoms independently, their internal and foreign policies were coordinated as one. On May 1, 1489, permission having been granted, Columbus presented his plans to Queen Isabella, who, in turn, referred it to a committee. After the passing of much time, these savants of Castile, like their counterparts in Portugal, reported back that Columbus had judged the distance to Asia much too short. They pronounced the idea impractical, and advised their Royal Highnesses to pass on the proposed venture.[7]”…

    • I think people will be surprised at how weak condo prices can become. Once the expenses become more prominent than the upside, those things will look like losing bets. Already we are hearing stories starting to permeate the MSM through huge assessments, more leaks, and dysfunctional strata. The ground is already filled with little tidbits of doubt and negativity, people are ignoring them.

      Houses… I think the drop will be less severe; that does not mean houses are a preferred investment because yields are lower.

  5. UBCghettodweller

    Also from the thread:

    “Guy in real estate here:
    I spent the better part of a month analyzing the Gilmore Station area back in April as part of a project for work.
    My general feeling is that the Brentwood area is a pretty good location, with proximity to transit being the number one feature. Additionally, with the redevelopment of the mall and at development at SOLO (SW corner of Lougheed and Willingdon) you’ve got good retail, and the selection of restaurants isn’t bad. SOLO is getting a grocery store (I’m hearing Whole Foods) and Save on is just a couple blocks away).
    The Gilmore Station area, while only a couple blocks away is not so good. You’re that much further removed from the amenities that the Lougheed and Willingdon area offer. There will not be any further development residential/retail development to the west, so all the focus will be around Brentwood.
    Most importantly, I think the area is about to become massively over supplied over the next 5-10 years. Between Brentwood Town Centre, SOLO District and the Gilmore Station Lands (which are currently for sale, along with the two adjacent office buildings), you’re looking at to an estimated 4,000 – 4,500 new units in the area. Granted, the buildout will take at least 15 years, but still. I think it’s too much for the area at once. Don’t forget, this doesn’t include any of the smaller sites also being developed right now in the area, which will add a few hundred more units.
    My advice to you would be to sit tight for a while if you really want to buy in that area. Rent a place for the time being. When all the new supply starts coming on at SOLO and Brentwood, and eventually Gilmore Station, the prices the places built within the last 5-10 years will be hit first. You don’t often hear a guy in real estate tell you it’s not a good time to buy. So, consider that.
    On the other hand, I may be completely wrong.”

    Re-read the third and last lines.

    The times they are a’changin’.

  6. Just go buy, you know you want to, just do it! Fortune favors the bold, He who initiates seizes the day, Carpe Diem. Just do it! Why all this confirmation seeking questions? Don’t you have any trust and confidences in yourself? Low self-esteem? geez…

    Everyone stop “helping”!! These people wants to buy and you should let them. The quicker they buy the better off the rest of us will be. Talking them out of buy the worse you can do because if house prices go up or lending criteria tightens, they blame you. If house prices drops and they end up knife catching, they blame you. If house prices drops and they got too scared to buy until say 10 years after the bottom? They blame you. It’s no win situations so just sit back and let people do what they want. To help is a thankless job 99% of the time and you get the blame 100% of the time.

  7. This is off-topic but amusing (at least to me). I live on the top floor of a high rise in the South Granville area and can see the roofline of the new townhouses at 16th & Granville from my living room. Yesterday, in the teeming rain, I spotted someone tossing a white sheet of plastic over the edge of the facade in what appeared to be an attempt at blocking a leak. The townhouses are for sale from $2 to 6M, they are unsold and, it seems, already in need of repair. This is the state of construction in Vancouver.

    • The Poster Formerly Known As Anonymous

      Laying a white sheet over the building is appropriately metaphoric.

    • I wonder if this will be disclosed to the buyer, or is it non-material information? 😛

    • I make a point of Inquiring about their opinion of the quality of construction with random builders during my day to day walkabouts – once with a Pomeranian!

      They (the honkies) say its all crap.

  8. granite countertop

    Lucky 88!

  9. Before I read VREAA’s comment, my thought was low 200’s. Around $220 or so seems in the ball park.

    The interesting thing is the question of would they buy if they believed that? Simple question with a complex, multi-dimensional answer. The strange thing is that they do contemplate a price drop – they’re already happy to be getting $20k off. It doesn’t stop them however, rather the interpretation of luck and winning a deal. This speaks a lot to emotion. They are just so happy to get a condo, the price is decline prospect is secondary. These people will wake up somewhat older, more mature after finding themselves illiquid, having paid for this move for years. I wouldn’t doubt a 20 yr horizon to return to the mid $400’s – much different than their 5-7 year plan, which no doubt was put out to show how conservative and long term they really think. (not-withstanding that they’re not even married yet making these types of financial moves together..but I digress).

    • I've reported you to my Worshipful Master at the Lodge

      hey, you and our astronomer friend should get together and read the tea leaves for us

  10. You guys HAVE to watch this CBC Vancouver news piece, if you didn’ already see it. It is very bullish.

    It starts off with “Perhaps the real estate slump in Metro Van is turning around. Sales were up in October. But is it really a reversal in fortune?” They were at some townhouse project and boasted how there were 500 pre-sale buyers registered to buy as soon as the units come available. Real estate agents were talking about how sales were great. It was quite a bullish news piece. At one point they had to soften the bull message with the line, “But it is still a buyers’ market.”

    Here is the link:

    http://www.cbc.ca/player/News/Canada/BC/ID/2299315929/

  11. Pingback: Real Estate: More Naive’ Buyers ” Greater Fools “ |

  12. Pingback: ‘The State Of Construction In Vancouver’ – “The townhouses are for sale for $2M to 6M, they are unsold, and, it seems, already in need of repair.” | Vancouver Real Estate Anecdote Archive

  13. Pingback: QUALITY : The State Of Construction In Vancouver’ |

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