“Rent for $2,200 a month or buy and have a mortgage of $4,310 per month. Why would anyone buy?”

7541 Kerr Street, East Vancouver (Fraserview)
2518 sqft SFH on 45×110 lot

“We considered renting this SFH a few months ago. It stayed on the market for a few months, looks like the landlord never got any tenants (rent went from $2500 to $2200) and today when I walked by – – it’s for sale for $999,999! Gee… tough choice, rent for $2200 a month or… buy and have a mortgage of $4,310 per month (based on 3.09%, 25 year, 100k down). Why would anyone buy?
Thanks, I think we will remain renters until prices come back down to earth. Or never buy in Vancouver.”

pricedoutfornow at VCI 5 Apr 2013 7:38pm

Think of this situation like this:
This landlord can’t find anybody who will pay $2,200 per month to actually use the house as a home, but they are hoping to find somebody who is prepared to pay over $4,310 per month to make use of the house as a financial instrument, by using it to bet on increasing prices.
The house’s fundamental value is that which one could calculate based on a yield of less than $2,200 per month. The speculative market has been valuing it at substantially higher than that. As the speculative mania unwinds prices will fall to reflect fundamental values.
– vreaa

120 responses to ““Rent for $2,200 a month or buy and have a mortgage of $4,310 per month. Why would anyone buy?”

  1. Fundawhat? It’s Vancouver, BPOE!!!

  2. Everyone should know this, but just to make the comparison more realistic add in about $250 property taxes and a decent maintenance allowance to the $4,310 per month cost of buying, plus something for the potential income from the DP. From the look and age of the place there are going to be some big-ticket repairs due, so don’t be too optimistic on the contingency side! Cost of buying is easily over $5K/month.
    By all means take off $1K if you like the thought of a basement dweller beneath you.

    • I am already coming in with costs well in excess of 5000 dollars per month based on the 100k down, Alex. For example, add householders insurance, CMHC fees, loss of use on the 100 thousand down payment, legal fees, utilities, property tax, maintenance and the obligatory upgrades all new owners make to a home purchase and this thing is a pig that can sink any budget. A real pity pit.

      You could not even hope to break it up into 5 single bedrooms for students and make more than 2700 per month with thee all sharing the common rooms. So Ma and Pa buyers….the genius that they are, will be trapped in this crappy asset for the best part of their lives as the price deflates back to reality.

      Hope they enjoy it, Do we have a Darwin award for investing yet?

      • Alexcanuck

        Renters usually pay utilities and should get insurance, so utilities are a wash and only the amount that owners insurance exceeds tenants insurance can be included. But that’s splitting hairs!
        Easily over $5K, and I haven’t even looked at the condition of the roof yet.

      • PS…..BLM, referencing our discussion of earlier today, please try to explain to me how this thing could possibly qualify as a shelter for cash during a tumultous period in the economy. I am not even trying to be irritating but can you not see based on this example what a loser this home is right from the get go?

      • Home owners insurance is a different kettle of fish than what tenants carry to cover loss of contents, theft or water damage, Alex. The owner of the property (unless he is insane) never leaves it up to a tenant to carry a principle policy for fire, sewer, flood and related property damage. So any given rental would carry two separate policies. By the way, business insurance on a rental building is quite a bit coslier than a regular home owners package. Some smart people don’t tell the insurer that they have tenants and they save money.

        They also invalidate their policy by doing so and end up with squat after it goes up in flames.

      • Farmer – my replies to you below. One of which is still stuck in moderation.

  3. 1. Who in their right mind would consider buying a million dollar property with 10% down?

    2. The value of the home is about right. 3% Gross return works out to about $2,500 a month. Keeping in mind Canada’s 30-yr bond yields are at 2.4%. For most individuals, the investment in their home is as safe as their government’s bond.

    3. If someone really wanted to own this as a primary home for the long term and had the money to buy this place with little or no leverage, it would be fair value.

    4. Unrealistic to expect Vancouver real estate yields to generate higher returns by a factor of a 50% drop in property prices when government and mortgage rates are still low (and they will stay low for some time).

    • Vreaa – pls release from moderation.

    • So as long as a moguey bungalow on Kerr street has the theoretical potential of returning the same (gross) yields as a 30-year government bond, it is correctly priced?

      i.e. You see no difference between investing in Government bonds and being a slumlord? The two “investments” are equally secure and should therefore generate exactly the same return?

    • The key is GROSS RETURN. When you consider the maintenance that goes into maintaining that old house, with property taxes and other headaches, I would much rather not invest in real estate, if I had a million bucks to spare. I am a reluctant landlord, already, renting out my basement, and it has been a headache. Once my current tenant moves out, we are not renting out the basement as we don’t really need the money and it really generates too much in terms of time wasted dealing with tenants than it is worth. As two young couples in our late 20s/early 30s, we would much rather have the basement for when the in-laws come over from out of town to take care of our children.

      As for investments, there goes the old mantra of real estate is safe as gov’t bonds. Ask that to any American or Spaniard, or Irish.. And no, Vancouver is not different. If you think Vancouver is different, you are obviously very insular and are very typically Canadian, with no knowledge of the outside world (and we lambast Americans for being patriotic).

    • “For most individuals, the investment in their home is as safe as their government’s bond.”

      Uhh… the risk of loss of principal on real estate is immeasurably higher than the risk of loss of principle in a Government of Canada bond. Period. Not comparable.

      • Andrew, if you hold bonds and sell before maturity, you will lose principle too if rates go up. If rates go down, your principle will go up.

        The same for RE unless you believe RE pricing will defy interest rates.

        Given government bonds are more liquid, RE has the purpose of providing one a roof. Both have its inherent value that is subject to the buyer.

      • OK. Now I see where you are coming from BLM. You agree that a home is shelter and provides a roof. Ergo it is not intended as a speculative investment as we know factually that housing over the long run does not exceed the rate of inflation.

        My problem is that you are mixing this up by making comparisons to bond markets and the rate of return therein. You have argued that a 3% return on a million would yield 2500 monthly but have not given fair consideration to all the other input costs in a home over time that you would never face when owning a 30 year bond issue.

        Secondly, you seem to have neglected that Vancouver is in a housing bubble. Remember the mantra “return of capital versus return on capital”. Losing up to 50% of your investment (if it was mortgage free) plus the consideration for ongoing costs does not equate to owning bonds which in themselves are fairly worry free and can be liquidated quickly depending on what form you actually acquired.

        So put another way, buying into the top of a market that is in the process of deflating does not shelter capital at all if at the end of the day you have suffered outright losses on the original investment plus accumulated costs for maintenance and taxes. Vancouver is not therefore “investment grade’ at this time.

        We cannot meanwhile make a fair comparison to the current bond bubble and an ongoing housing bubble in the Lower Mainland. As I am sure you have noted already, housing prices are falling in the bubbliest areas of town despite low rates. Rates are not currently a factor in the huge decline in sales nor the price correction.

        Your argument holds no water.

      • Farmer –

        “My problem is that you are mixing this up by making comparisons to bond markets………not given fair consideration to all the other input costs in a home over time that you would never face when owning a 30 year bond issue.”

        The US Treasury bond markets are the clearest benchmark for all pricing of risk in the world. US Treasuries are the safest investments in the world today because it is implied that in an armageddon scenario, they can count on the US repaying that bond more so than anyone else on this earth. Therefore, where they are priced today indirectly affects, a) the appeal b) money available for, Van RE prices (for a rough picture of how so: http://useconomy.about.com/od/bondsfaq/f/Bonds_Mortgages.htm)

        Input costs into something you ‘own’ is different from input costs into something you ‘rent’. If you own something, you take pride and care in it. Not everyone cares to own their own home, which is fine. But to say someone who aspires to ultimately own their own home should not buy now if they require little or no leverage is like saying someone should never buy fine wine or cheese or better quality toilet paper if they can afford it. (We can speculate prices will fall by 50% but we could do that even at the bottom).

        Owning bonds have its costs too. Banks charge a fee (sometimes hidden) to hold the bonds for you. If you buy a fund, there is a management fee. Yes, the fees are minimal (yet so are the rates) but they are not physical and have no utility value to them.

        “owning bonds which in themselves are fairly worry free and can be liquidated quickly”

        Yes fairly worry free if held to maturity but if liquidated prior to maturity date, the principle is subject to a loss too, just like RE. If held until maturity, one risks inflation obliterating the ‘real return’ of the investment – and without the utility value of RE.

        RE just skews the argument because some abuse the ability to borrow to buy (in good and bad times). Few retail investors borrow money to buy bonds or dividend stocks.

        Of course, RE can diverge from rates from time to time. But of all the factors that can influence RE – immigration, regional fundamentals, HAM – it is a combination of falling bond yields (hence cost of money) and foreign money that has been the main driving force behind high Van RE prices in the past few years.

      • I think I am beginning to see why some posters get a little frustrated with you. You had said you considered Vancouver housing was acceptable to purchase at current highs by making an (invalid) comparison to bond markets and then added that it was a way to shelter money.

        Then you went on and mixed up the ideas of buying a home as an investment versus buying for the utility purpose of its value as a home for shelter. Apples and oranges.

        Here is one of your comments from this thread:

        “The value of the home is about right. 3% Gross return works out to about $2,500 a month. Keeping in mind Canada’s 30-yr bond yields are at 2.4%. For most individuals, the investment in their home is as safe as their government’s bond”.

        I am betting you have no idea what percent of return you actually need from this home after subtracting away expenses to honestly equal the worry free 2.4% yield on a GOC 30 year bond.

        Obviously I am in disagreement with you. There is nothing “about right” when it comes to the asking price of this home. There is in fact no “gross return” that you refer to unless your calculator is broken and your brain is disengaged.

        First of all, nobody in the rental business makes a calculation for rental revenue streams based on 100% occupancy so on that point alone there is a great big hole in your thesis. Try 75 to 80% occupancy with contingency for damages, legal fees for evictions, insurance, storage and disposal of tenant goods and related professional fees.

        Do you face that with a bond purchase?

        Next, we were discussing a leveraged purchase of real estate based on 10% down. Again, no comparison to bonds where the majority are all cash purchases. You know….real money that is being sheltered and saved versus levered bets on a risky investment.

        I am hoping that just as a starting point you understand the risk in a leveraged bet coming off a bubble top in real estate prices can result in a 100% loss of the contributed capital. Stack that up against your theoretical 3% gain please and then get back to me. In the meantime try to stick to the subject instead of throwing out Red Herring and distractions all the time.

    • BLM, I have a rental condo in LA with a gross return of 6.6% and a SFH in the Phoenix area that has a gross return of 10.1%. Considering that mortgage rates in the US are similar to rates in Canada, I fail to see how 2.6% return for a home in Vancouver is “about right”.

      • Michael Wilson – Vancouver is a gateway to Asia which makes it more susceptible as a safe haven for money (Hong Kong has the 2nd largest population of Canadians after the US). LA and Phoenix are much more national markets. The yield between LA and Phoenix shows how a more international city generates lower yields. When did you buy? When the Canadian dollar was stronger or weaker?

      • Vancouver is more international than LA? I disagree very strongly. So do 99% of non-Vancouverites.

        That 6.6% yield for LA is if you bought today. Same with Phoenix. The idea that Vancouver is “different” is ridiculous.

    • Washed up Canadian

      That’s baloney, BLM. Just look at the shack. No one in their right mind would buy it or rent it to live.

  4. Cyril Tourneur

    This article makes me really mad! I’m paying about the same rent but my house is only “worth” $700k! I’m calling the landlord to renegotiate the rent as soon as I get home.

  5. More on point 4 as to why rates will stay low for a long time.

    Look at what Japan’s money printing last Thursday immediately did to Canadian debt (and in effect for mortgage rates). Click on 1-month:

    Now to understand the correlation and why mortgage rates in Canada may well go lower still and asset prices like Van RE have support:

    We’re in a globalized world now. Local fundamentals paint only part of the picture. Vancouver, with so many immigrants and links to Asia, is very susceptible to global economics. More so than say Calgary, Winnepeg and Ottawa.

    Everything is inflated and in a bubble now. Even a loaf of bread is inflated in value due to QE’s effect on energy and commodity prices.

    Deflation is one way prices will come down but Van RE will be the least of our worries if that happens in a prolonged manner.

    • You are wrong about how rates impact housing, BLM. Take note that US Housing both rose and fell during a time when rates were declining for example.

      If you take a look at a 30 year chart of interest rates you can quickly see that interest rates have on average been in decline since they peaked in 1982 (the smoothed chart). During that time the bond bubble was created but more notably US housing both boomed and bust depriving anyone of the crutch that housing was really all that coorelated to rates in the first place. At times, house prices actually rose together with rates while at others homes declined.

      Have a look at a helpful chart I picked up to draw conclusions about Vancouvers current disconnect between rents and ownership costs. It is American of course but I am using it to make a point about mean reversions versus rent and how that unfolded down South. Look at the second of the two graphs titled “US House Prices Versus Owner Equivalent Rent”.

      Do you see what I see?

      What is most notable is how home prices eventually came back in line with the long term average rent figures. This represents a mean reversion in home prices that is illustrative of what we will see unfold in Vancouver over time before bringing us back in line with fundamentals.

      It is inevitable as I see it that our market must correct and it tells us unequivocally that our probable correction will be very deep give the huge disconnect we currently see between rent costs and home purchase prices.

      So that is my answer.

  6. But you own land….

  7. The property is due to be redeveloped, while $1m looks too high they are selling an option; if it can be redeveloped into a multi the price may be partially justified.

    Although that part of town is, um, mixed. Champlain, not Fraserview, really. (holds up nose)

  8. BLM sees nothing wrong with that price.

    • BLM is a troll. Ignore.

    • Correction:

      BLM will not actually state that there is nothing wrong with that price, but he will tell you about the price of Guaranteed Covered Short Lithium Bonds in Kazakhstan and the fact that we have no idea whether Ecuador’s sovereign debt will trigger a collapse in Cambodia, then make an ambiguous reference to our new global economy, and leave you to draw your own conclusions.

      But if you ask him whether he is saying that that is a million-dollar house, he’ll tell us that he hasn’t actually told us anything.

      And he’ll be right.

      • Burnabonian – Just have a look at the chart and article I link to above. You can draw your own conclusions. If there is a bubble in bond markets then it would only be reasonable to expect a bubble in all fixed income assets, including Van RE.

        I’m open to counter views but all I’m hearing is that Van RE do not match local fundamentals.

        Is it not possible Van RE prices will remain in bubble territory as long as bonds and lending rates do to? Or is it reasonable to expect Van RE prices fall by 50% when all other assets remain elevated by cheap money?

      • Burnabonian

        BLM quote: “Is it not possible Van RE prices will remain in bubble territory as long as bonds and lending rates do to? Or is it reasonable to expect Van RE prices fall by 50% when all other assets remain elevated by cheap money?”

        As you point out tirelessly, anything is possible.

        The difference between the market-traded securities that you love to use for examples and residential real estate is that real estate is uniquely a retail investment.

        Gold and Kazakhstanian Lithium Pork Belly Future ETF’s can be traded 100MM times per second by a computer that knows that the spread between that yield and the cost of capital is a sufficient number of thousandths of a percent to turn a profit. Retail investors make up a tiny fraction of that market and their sentiment has essentially no effect on prices.

        Residential RE, on the other hand, is never traded by algorithm. It’s never owned for a few seconds and then sold for a penny’s profit.

        It’s purchased on emotion by irrational retail investors (and speculators) who are generally financially unsophisticated or totally financially illiterate. Their sentiment matters more than the price of tea in China.

        Just ask every other G20 country whose real estate crash was not correlated to a sudden shift in market fundamentals: only to a sudden shift in sentiment.

        Anyway I have to get back to my job. Don’t you as well?

      • “Guaranteed Covered Short Lithium Bonds in Kazakhstan ”
        MAJOR LOLs

    • Ouch, guys. Can I not share my views?

      • Burnabonian

        Does the moon not control the tides, and the tides the ships, and the ships the fish that we all love to eat?

        Will cargo come from China and the containers be sent back empty? Has tea changed in price in India more or less than in Mainland China, where they do not keep statistics?

        A poster named BLM was banned from a message board in Ukraine for posting too many links to adorable kittens. They told him that he was a troll and a nuisance but he wouldn’t get the message.

        He was frustrated and angry about something else in his life (possibly lack of employment) so he spent all day antagonizing anonymous strangers who were just interested in having an open-minded, facts-based debate.

        It’s a global comment system. I’m not saying that you should share your so-called “views” and I’m not saying that you shouldn’t.

        Anyway I think I’ve made my point clear. Go ahead and engage me in a debate about any of the clearly-articulated arguments above.

      • Yellow Helicopter

        BLM, I like having you as a contributor. I hope you continue to share your views, and that you get a more welcome reception.
        To be fair to VREAA and everyone who disagrees with you, I think you should probably state a firm opinion as to what you think will happen with Van RE, jus to cool some of the brewing upset around here, but personally, I think it’s perfectly fine to say you don’t know. Not all of us are sure. And truthfully, I think that’s okay.

      • Yellow Helicopter

        Burnabonian, are you seriously making linkages between this BLM and another in the Ukraine that posted photos of kittens?
        And you took time to find this???
        I think I’ve heard it all now.

      • HaHaHa. I thought he was just kidding about the kitten pics!

      • Yellow helicopter – I seem to be quite divisive but thank you for being kind.

        My position is that as long as rates (interest and bond rates) in the US and the broader developed world stay low, Van RE will stay lofty. There might be a correction now but it will be limited and I would not be surprised if prices surpass previous highs if more QE is released by the Fed – a real possibility. The best outcome, for the sake of everyone, is for rates to rise slightly and stay there for a prolonged period so the government and private sector can catch up on their debt.

        I’m getting a lot of flack these days but I hope readers here will look to the bond markets to understand why Van RE are priced where it is now (yes speculation played a part too).

        Van RE is not completely out of whack when compared to bond rates.

        To understand the bond market is equivalent to being enlightened to the price of all risk, Van RE included.

        (PS the US market blew up after rates were raised revealing all sorts of dislocation. Similar blow ups will happen when rates raise again in the developed world but my bet is they won’t/can’t raise rates to norms perhaps for the rest of our lifetime. )

      • Please do, much appreciated.

      • +1 Burnabonian

        BLM has said that Vancouver RE will depend on future interest rates. Interest rates, in turn, can be predicted by no one. Ergo, BLM has said nothing of any tangible value.

      • El Ninja – no one can predict Van RE prices either. Definitely not any better than interest rates. So, we can say nothing discussed on this blog is of any true tangible value, but it is good fun.

  9. West Van Tree Dweller

    Please continue sharing your views, BLM. I don’t disagree with your premise that global economic forces have an effect on local RE markets. However, I believe the effects are insignificant when compared to the growing realization in the Canadian RE market in general and the Vancouver market in particular that we are JUST LIKE THE AMERICANS, only a few years delayed because of short sighted manipulation of interest rates by the BoC and the gov’t back in 2009.

    Many believe the gov’t will again act, this time to soften the housing market landing. I believe that the gov’t basically emptied all the chambers in 2009, and now only have the ability to stand and watch the market unfold, just like the rest of us. Because once the prices begin to fall in earnest, playing with interest rates and mortgage terms will have little or no effect – many people will want out , and only a brave, well-heeled few will want in.

    • West Van Tree Dweller – I appreciate you being open to my views despite yours differing.

      The key to my argument is that the Bank of Canada does not have full control over interest rates. They can’t raise rates when our largest trading partner, the US, and the developed world, is still in a low rate environment. Higher interest rates will 1) kill our exports and our economy, 2) attract even more money investing into our bonds (see my link above) 3) attract even more investments into our assets like Van RE.

      Look at it this way. If Japanese and US investors can borrow money at 1% to invest in Canada’s bonds (or even in a savings account) to earn 3%, why wouldn’t they do it?

      • I see your point BLM (and I would guess most of the regulars do too) but I just don’t think interest rates are the primary driver of house prices. I think that availability of cheap and easy credit is. Not quite the same thing…without the CMHC the banks would never lend $$$ to people without solid incomes.

        Recently the CMHC has curtailed the availability of insurance and the banks have been forced to make more reasonable assessments of risk. The amount of credit available is consequently lower and thus the amount people can pay for houses is less. Prices have gone down.

        We are at an interesting juncture for a speculative bubble. There is a general realisation that house prices can go down and a somewhat general suspicion they will. Once the chance of large price gains is taken out of the equation there is a lot less incentive to pay substantially more to buy than to rent. Or to “move up” the housing ladder with all the extra costs that entails.

        I do agree that if interest rates stay low the downturn will be less severe but I think we’re going to get to the same place eventually. Fundamentals matter more than opinions in the long run.

      • “Higher interest rates will 1) kill our exports and our economy”

        Can you elaborate on this? I’m curious because if the economy goe down, doesnt the cad$ go down, and there fore exports go up? Ie: Its cheaper to purchase from Canada then when the cad$ is high.

      • Arshes76 – Higher interest rates to slow our economy, when our largest trading partner down south has a sluggish economy with super low rates, will lead to a more expensive CDN$. It would draw huge demand from US investors/funds to park their money in Canada (which is already happening) to earn higher interest rates. With a higher CDN$ that comes with higher interest rates, eventually, our economy will be in such a state, we will have no choice but to lower rates again to stimulate economic activity – right back to square one.

        Does that help? I’m typing from my phone.

      • “We are at an interesting juncture for a speculative bubble.”

        Elsewhere on this blog BLM has predicted a peak-to-trough decline in Vancouver RE of 15%. Yet here BLM acknowledges that we are in fact in a bubble. I call BS.

      • Nobody is arguing that the Bank of Canada interest rate policy could have a detrimental effect on the economy if rates rose too fast, BLM. What is being pointed out is that at this stage of exhuberance in the local market that rates no longer play a significant role where housing declines are concerned. That is to say that a low rate environment does not offer a sefety net for prospective buyers as we are already undergoing a collapse in sales DESPITE some of the lowest rates in history.

        What have triggered falling sales is a combination of events:

        1) The market has run out of qualified first time buyers.
        2) Regulatory changes have increased down payment requirements.
        3) CMHC has withdrawn from its easy policies.
        4) Prices are out of line with both rental rates and incomes.
        5) The market no longer offers investment opportunity for landlords.
        6) Sentiment has clearly turned negative on Vancouver housing.
        7) There are already extremely high ownership rates.
        8) Credit conditions are tightening (Brokerages are being closed).
        9) Disposable income and savings are at all time lows.
        10) Debt/Income ratios are at all time highs.
        11) The government is telegraphing the dangers of debt to the public.
        12) Prices are no longer rising. Speculative interest is waning.

        So that’s the dirty dozen of why the market has tipped down even in the face of low rates. Note that bond rates are not a direct factor in any of this currently although I would agree they played a role in the rise.

        What takes a market up will not necessarily be what sends it back down again.

      • Farmer – Yes, while rates brought prices up, it may not bring it down to an equilibrium. But there is inherent value in RE based off of the cost of fiat currency which I believe will be a strong support for Van RE prices despite of falling transactions.

      • Again, I disagree with your assessment.

        There is no inherent value in a home. Not as a general rule anyway. If there were then you might explain how I can buy a house worth in excess of 150,000 dollars replacement cost for a mere 10,000 dollars on the Prairies.

        If there is inherent value in homes then why is it still possible to bid a dollar for a nice place in Detroit? How about parts of California and Florida where perfectly good homes went unloved until squatters took them over thus destroying any remaining value?

        What you might not appreciate is that any home that sells for taxes has effectively fallen to zero and has no value whatsoever! We know very well that tax sales take place all over Canada and the US particularly as economies cool and foreclosures and bankruptcies rise.

        So I am not making an exceptional statement by suggesting housing can drop until it has no bid and no residual value. We have seen this in Vancouver itself both during the 1980’s recession and of course during the Great Depression. It is not an unknown and even today a legal department exists at Vancouver City Hall to deal with tax delinquencies.

        There is therefore no inherent value in real estate especially if sentiment changes and economic conditions emerge that skew known dynamics and cause unemployment to rise thus hurting the ability of owners to service debt.

        By the way, Canada lost 55,000 jobs according the most recent jobs report. That is the equivalent of the US losing a half million positions and should be seen as a huge red flag for real estate across the country. Remember, we have 70% ownership rates in Canada so in theory as many as 38,500 homeowners are now in deep waters on their debt.

        Where is value if those people cannot pay their mortgages?

  10. I always think it is interesting that bulls imply that it’s real money that is being used to purchase Vancouver real estate, ignoring the fact that the average down payment in Canada is 7%— point 1 BLM

    I also like how bulls compare the gross yields of real estate with the net yields of financial assets— point 2 BLM

    Why do bulls often ignore opportunity cost and risk? If a person has $1,000,000 in cash they could buy that 2.7% bond and pay for their rent, living in that east van palace with no risk— point 3 BLM

    And can bulls explain why real estate Vancouver yields should be any lower than any other middling city? —- point 4BLM

    • 1) I refer to west side Vancouver and core downtown with my assessments.
      2) There is a premium for the utility of owning a real asset.
      3) Why do people earn money with investments in the first place? If it is to buy a home, then what is the point to further invest when you have the money to buy already? Better than locking in your money in investments. If someone wants to buy a Porsche, should he/she wait and invest longer if he/she can afford it already (debatable, I suppose but not for us to judge)?
      4) More connections to booming Asia which is flooded with money (HK has the second largest population of Canadians after the US).

  11. As the peak of delusion breaks the absurdity of it all becomes obvious, and this property shows that.

    The game works until there is no sucker on the other end willing (or in some cases even able) to play it. It looks like that point is now being reached.

  12. One symptom of a bubble is a belief that “fundamentals don’t matter”. This is usually rationalized with some story about mysterious external forces which have brought an irreversible change to the market.
    If the Dutch RE market can crash despite low rates, why can’t Vancouver’s? Canada has not been an attractive destination for capital for going on 2 years now. Don’t count on it to sustain the RE bubble.

    • PS Since April 2011 the RMB has appreciated 12% vs CAD. Little wonder HAM doesn’t come here anymore.

    • Dutch’s currency is Euro. Few investors see that as desirable. Foreign money from US and Japan won’t make it’s way there in droves.

      As for the CNY appreciation, it does not matter because the currency is not convertible. People and investors in China can not legitimately take it out of the country. Most HAM is offshore already in USD. So CNY appreciation will not correlate to increased capital flows into Van RE but should have an impact longer term.

      It’s important to note that money is flowing into Van RE through indirect means too. Through bond investments of our banks, through savings which banks are forced to lend out, through their oil sands investments in Albert but Vancouver as a beachhead, through their discreet investments into our gold courses, vineyards, commercial properties etc which all stimulate our economy and make some locals wealthy.

      • Yesterday’s news brought to you today by BLM.
        If the unattractive Euro is the reason for the Dutch crash, why are RE bubbles forming in German cities?
        Capital is not flowing into Canada, either directly or indirectly. It may have been in 2010 and 2011 but that is over. Canada is considered relatively overpriced with little prospect for returns. Of course our bonds yields are low. Everybody’s bond yields are low.
        Since April 2011 USD has appreciated 8% vs CAD, with more to come.

  13. BLM quote “Look at it this way. If Japanese and US investors can borrow money at 1% to invest in Canada’s bonds (or even in a savings account) to earn 3%, why wouldn’t they do it?”

    Oh, I understand now.

    Come to think of it, my cousin Sally the community shuttle driver and my uncle Earl Howmuchamonth were just telling me exactly the same thing last night over a plate of 25 cent wings at The Great Bear.

    They’ve each planned to buy an additional condo at $1200/square foot because of the facts laid out by BLM above.

  14. 1. Shouldn’t we be comparing yield on Vancouver residential RE to yield on US residential RE, rather than to bond yields?
    2. Historically, how do the yields investors seek on RE compare with yields on government bonds?

    • Exactly Vreaa. Referring to your second point…….The issue here is that there is no yield on Vancouver real estate right now. None…zero…nada. So it is not even a worthy discussion as I see it because nobody invests with so much loss already built into the equation. There is no rationale comparison between real estate returns at these levels and long bonds offering low rates. I have not even bothered mentioning to BLM that if the house in question was a genuine “investment” by an overseas investor that they would also be paying a monthly fee to a Realtor or broker for management in their absence. That is another 7 to 15% off the top.

      • Real Estate Tsunami

        Management fees?
        Not if it is a vacation home, left empty for most of the year.
        Remember, they are deep pocketed HAM, who don’t care if the property depreciates substantially. 🙂

    • Vreaa –
      1) Canadian RE yield is not a good comparable to US RE yield. The demographics, tax, economy and financial system make it a different beast. Canadian bond yields are not perfectly correlated to Can RE but it is a key driving force. It also tells us what professional money thinks the future holds and gives us a reference how risk should be priced.

      2) Elam (one of your readers) can probably answer that. Keep in mind coordinated printing of money across the world and a globalized financial network have changed the markets profoundly over the last 10 years.

  15. @blm … exactly … there IS a bubble in the bond market … and that is why the price of almost everything, vcr RE included, is mismatched to fundamentals

    • Rod – the trillion dollar question is, will the bond market bubble end? Will governments stop printing money if push came to shove?

  16. BLM a lot of the points you make are valid, but the key here is that a lot of what you say is framed incorrectly. To clarify here’s my comments on one of your posts:

    1. Who in their right mind would consider buying a million dollar property with 10% down?–>>> a very good point, although I think you’ll find that there are lots of people who do, and is 25% down any better really?

    2. The value of the home is about right. 3% Gross return works out to about $2,500 a month. Keeping in mind Canada’s 30-yr bond yields are at 2.4%. For most individuals, the investment in their home is as safe as their government’s bond.—->>>>why is a 3% gross return “about right”? Personally with Canada bonds at 2.4% an “investment” that is illiquid (with very high transactions costs), asset class and geographically concentrated, and expensive to maintain should be priced at much higher than 3%. Not to mention the fact that to compare these two asset classes properly you really should use net returns, which for the house would be much lower than 3%

    3. If someone really wanted to own this as a primary home for the long term and had the money to buy this place with little or no leverage, it would be fair value.—>>> if you are rich and/or were lucky enough to buy many years ago and currently own a $1mm house with little or no leverage then this statement MAY be true (depending on how big your total portfolio is) as it is a way of accessing housing in a tax efficient manner. But for many people buying is just a way of paying more for housing in expectation/hope of a capital gain.

    4. Unrealistic to expect Vancouver real estate yields to generate higher returns by a factor of a 50% drop in property prices when government and mortgage rates are still low (and they will stay low for some time).—>>> not sure what you mean by this, but you do say in other comments above that houses are “fair value” when compared bonds, and although they may look expensive they aren’t because the irrationally low level of interest rates is likely (hopefully) to continue. Now there is more than a little truth in that statement although also lots of room for debate (I agree with some of the points, but all in all it is tangential to the point I’m trying to make) but I’ll leave you with this:

    All rate sensitive asset classes have been affected by the fall in rates over the last generation, for example if you had simply put all your money in a 30 year Canada bond for the last 10 years you would have had an annualized return of about 9% per annum, or more than a double. If you had levered that up by even a modest 2x, which is a fraction of what people who own houses do, you would have had a phenomenal return of high teens annually over 10 years. However I think that we can both agree that with long rates at 2.4%, the chances of these sorts of returns repeating themselves over the next 10 years is mathematically slim.

    In fact if you were an investment advisor, it would be dubious at best to be advising clients to leverage up and buy long bonds at all time low yields don’t you think? But that would be much more defensible than telling someone to lever up and buy real estate here. I mean does this sound like a good pitch to you?

    “Well this asset class is very illiquid and has risen a long way because of the macroeconomic backdrop of falling rates over the last few years, which is now running out of room to continue to drop. At best I can say that it is fair value and has zero or slightly negative income. But regardless of those facts, I think you should take your life’s savings up till now, borrow another 3x (25% down) to 9x (10% down) and hope that rates improbably continue to drop.”

    • Elam101 – thank you for that. I am overwhelmed and can’t articulate everything you’ve written but I agree with most of your points including my context can be sometimes out of place at times due to writing from my phone – so we agree on more points than you think.

      I’ll say that I’ve never advocated that people should buy property now with any leverage (or at most with at least 75% down). But if one ultimately wishes to be a home owner and have 75% or more up front then a home, even in Van RE, is not a terrible investment. (Guaranteed return from saving rent)

      Is it the best? No. But compared to other principle guaranteed investment it is fair value. No leverage, straight up.

      As for maintenance, it is the cost of ownership even in the best of time. Cars are money pits too but yet ppl still happily pay for one.

      Not everyone views buying a home simply a matter of investment that needs to be maximized to the brim with returns. There is psychological value to home ownership that is equal to buying a car over hiring a taxi/public transit even though the latter is much better for finances.

  17. West Van Tree Dweller

    At the risk of sounding like the village idiot, I think all markets are made by individuals. And at this time, if there was pile of money on the ground, and the owner of that money said “take it, do what you want with it, pay me back whenever…”, I would hope that YOU would take that money and buy MY house at today’s prices. I wouldn’t want to take that money and buy YOUR house at today’s prices. Even at 0% interest, I still think I would lose money.

    This is over simplified, but – even though I COULD (gulp!) borrow to buy a (bigger / newer / better location ) house in Vancouver today, I just don’t want to – I see better places to invest what little disposable income the gov’t leaves me on my paycheque, instead of paying back a house loan I just don’t think that acquiring or even holding Vancouver property at this time is a good idea (although I think that everybody should want to buy MY house! 🙂 )

    A few years ago, if someone I knew bought a brand new monument to stainless steel and granite, I’d think, “nice, they’re doing alright!” – now I think, “Wow, how much of your life are you giving up to cover the payments?”

    And I think that more and more people in this city are thinking the same thing – and that, much more than anything the gov’t does or world debt markets do, will eventually force the prices back towards the mean. Even if money is flowing into Vancouver from a bunch of offshore sources, it isn’t stupid money – why would Asians/Euros want to pay a price for something that we locals just don’t want to pay anymore?

    • You hit it on the nail. I could have borrowed a ton of money and bought a 2 million dollar monstrosity on the east side or a modest house on the west side. Thing is, to pay that back quickly, I would have to pay myself out of my corporation a ton of money, I.e., my gross income would need to be a lot higher than if I bought a more modest home. It’s just not worth it for me to invest in these multimillion dollar homes because, even though I have the money to do it. I’d have to take money out in the form of a salary and pay much higher taxes. Instead, my money is in other investments, yielding 3-5% dividends along with capital appreciation.

    • I don’t know what might be idiotic about what you say. I think most people here are fed up with the cost of housing. Even rents are too expensive and they are deep value compared to buying. Attitudes are changing and are going to change a lot more before this is over. I expect we will more than return to the mean.
      I have also had a problem with the belief there is an infinite supply of stupid Chinese with too much money. We have all seen the conspicuous consumption of some of the Chinese who come here but I do not think that is typical of most of that “ethnic” group, whether immigrants or Canadian born. In fact most of my “Chinese” friends are pretty good with their money and tend not to overpay for anything. While there might be a cultural attraction to owning property I do not believe that extends to overpriced property.

  18. Real Estate Tsunami

    Excerpt from Buttonwood, The Economist April 6th, 2013.
    In a free market, like an auction, prices are set by the marginal buyer and seller. If there is an imbalance between willing buyers and sellers (as there was in American, Spanish and Irish housing in the middle of the last decade), then prices will rise sharply. The average homeowner feels wealthier as a result.
    But only a small portion of the housing stock trades on any given day. The price set by the marginal buyers and sellers is not the price that could be realized if all owners of the asset in question tried to sell their holdings at the same time. In such a moment, there will be more willing sellers than buyers and prices will plunge.
    High house prices, relative to personal incomes or profits, represent a bet that incomes and profits (and cash flows in the form of rents) will rise significantly in future.
    When that bet proves wrong, the wealth disappears.

  19. As numerous others have pointed out – the appropriate way to view this is on a cap rate basis. I.e. the yield this property offers after all expenses are paid (rent – property taxes, insurance, maintenance, etc.). Optimistically, that’s probably about $18,000/year in this case. If 5 year mortgages are ~3% then a fair cap rate would probably be more like 4%. From a capital allocation perspective why would you want to take equity risk for less than a 4% cap rate when you could make a secured loan with recourse and generate a 3% return?

    Applying a 4% cap rate to 18k = $450k. On the US gulf coast you can put money to work at 8% cap rates. US 30 year bond = 2.92% today so that’s a 500 basis point spread on a cap rate basis.

    • BWILSON: “Applying a 4% cap rate to 18k = $450k. On the US gulf coast you can put money to work at 8% cap rates. US 30 year bond = 2.92% today so that’s a 500 basis point spread on a cap rate basis.”

      On 30-yr bonds, the difference is the premium placed on the utility value of a home Vs a bond. This is obviously not a direct comparison as they are different asset classes but I refer to the bond markets because they give a ‘reference’ for the price of risk.

      On US gulf coast homes, it’s like bond rates between states differing even though they are in the same country. It is the ‘invisible hand’ that technically should draw more money and development into the areas offering higher cap rates. Another way to look at is, is there’s too much capital in Vancouver but not enough be distributed to regions like the gulf coast.

      • rod_jonsson

        what a hoot … by your logic JGBs must be super low risk – all that excess capital … lol!

      • Rod – would you like me to go into JGBs? 😉

        They are safe for the Japanese. They protect savers from inflation. And for them it is much more than just investments, it is, when it comes down to it, a refusal to allow immigration into the country even if it means a haircut for bond holders at some point. Japanese are happy to take that haircut over allowing immigration!

      • Rod – would you like me to go into JGBs? 😉

        They are safe for the Japanese. They protect savers from deflation. And for them it is much more than just investments, it is, when it comes down to it, a refusal to allow immigration into the country even if it means a haircut for bond holders at some point. Japanese are happy to take that haircut over allowing immigration!

      • rod_jonsson

        they are not safe for the japanese … the risk is mispriced … eventually, the adjustment will come suddenly … 5%-6% moves in USDJPY in 3 days is not a sign of safety

  20. Saw a new one yesterday. Finally got around to laughing over the RE section in Saturdays Vancouver Sun and alongside the “own from $899 a month*” offers noticed a “staggered deposit schedule” offer. Yet another way to let people who can’t afford it get a foot on the property ladder? And still plenty of 0% down ads all over the place.
    Note that the “staggered deposit” was for a new presale offer, while the familiar teaser rate is usually to clear out a finished project.

    *Special financing rate offer, see sales associate for details.
    AKA teaser rate mortgage! Sometimes seen as “mortgage subsidy program”, again nothing more than a teaser rate.

  21. I’d like to see someone put 100K down to buy a 1M house these days. More like 500K minimum but most like all cash. In the first case, the rent nearly covers the mortgage while in the latter case it’s a 3% cap rate. Good if you’re laundering money, bullish bonds, and fulfilling your / front-running others immigration visa requirement. Otherwise, an unattractive investment for most but that’s been the story for Vancouver RE for the past 20 years which is why I know so many lifetime renters in Vancouver and so many super filthy rich landlords.

    It reminds me of a conversation I had with a young Vancouver couple many years ago after they had their first child. Apparently, they did some serious soul searching about the likelihood of having to raise their family in a basement suite before telling family and friends that they were simply leaving in order to provide a better home for their kids. Within a few months, they cobbled together 10K and bought a house in eastern Ontario. They love their new lives and paid off their mortgage years ago having complete freedom to enjoy their kids and community. Vancouver is now completely unrecognizable to them and they can’t believe they actually lived there once.

    • Airedales – that is a good point about immigration visa requirements. Another reason why some properties are bought under company names.

      I have a relative who sold their Richmond home a number of years ago to a Mainland Chinese immigrant who made it clear he was going to sub divide (illegal) the home into 6 units for new fellow immigrants to live in short term ‘at above market rates’. I suspect it was bought under a company name and the revenue from the rental would make his business ‘viable’ and therefore not draw any attention to it. Government and banks rarely look into business activity, they only want to make sure it is not laundered money and that taxes are paid.

      • I well know someone who is renting such a place in Metrotown – a duplex owned by a HK national that has been illegally split into a 4plex complete with DIY plywood sheathing for walls and roof. The owner clears $6000 per month while her tenants live in conditions that are unheard of in a city like Calgary. And I thought East Vancouver was a hole when I lived there!

        I remember renting a leaker townhouse in Fairview Slopes where it was impossible to get anything repaired as the Vancouver based property manager (HK national) had to first clear everything with the HK-based owner. I can honestly say that renting in Vancouver was one of the worst and most expensive experiences of my life. I had better and cheaper accomodation when I lived in Tokyo.

      • 4SlicesofCheese

        I thought all the immigrants were coming here and buying houses, why would they rent in a boarding house?

      • 4SlicesofCheese – Not all of them are wealthy and there are those who need a place to stay until they are comfortable enough to live outside of a support system in a foreign country. Maybe it was for a dodgier reason, I don’t know.

      • 4SlicesofCheese

        Exactly, but you seem to imply, and I think most people believe, immigrants are flying here and paying with cash. No thanks to the media.

      • 4cheese – these examples are of Canadians renting from 1) recent immigrant and 2) offshore investor. I rented 3 different leakers while in metroVancouver – all offshore owners. I believe my landlords used the term “white trash” or “poor inland thug” in describing me. They were probably pretty close to the truth since that’s now what I think of others in the same situation I was in. Thank god I had the good sense to get the hell out of there to really get ahead of the curve.

  22. whether or not looking at things from pure investment perspective, also need to balance replacement cost….assume that the value of real estate incorporates both land + building value. thus, at today’s construction costs, typical “replacement” of the dwelling itself (2,500 sq.ft. x $275 per sq.ft.) would run you $687,500 regardless of what neighbourhood you built it. and you could easily spend more, this would be a “mid range” product. At $1 million “tear down” value, this owner is asking $200 per sq.ft. for land in fringe Fraserview. including interest and carrying costs, you would need to sell the new house for $1.8 million to breakeven. A joke in the best of times and ludicrously impossible today. Right now, i am pretty sure you can get similar product west of Main street (ie. tear down land on 50′ lot) for $1.3 million. better location in better school districts. In other words also +/- $200 per sq.ft. of land value for a 6,100 sq.ft. lot. And a lot more realistic if you want to have a chance at re-selling the completed product for north of $1.8 million.

    Personally I have no views on short term market fluctuations, but I do think replacement cost is a good tool for benchmarking relative value in a variety of market conditions as well as across neighbourhoods. Also, if you are looking at setting a “floor” for any downturn, my own view is you should jump into the market both feet first anytime you see the chance to grab well located land in the $100-150 psf range. As this relates to the listing described in this post, I wouldn’t pay more than $700k for it…

    • Ten to twenty years ago homes in Vancouver were two to three times more expensive than similar homes in Calgary. Right now, cheap but well-located inner city teardowns in Calgary go for about 75$/sf which would imply 150-200$/sf for desirable areas of Vancouver. East Vancouver should be considerably less given what I know from my own and others experience. Also, generally, cap rates on rental properties are 2 to 3 times higher in Calgary than Vancouver and they’ve held up very well over the past 20 years unlike Vancouver which has seen cap rates continually decrease. This is largely why all my relatives have cashed out of YVR.

  23. The end is nigh. My friend is spamming her boyfriend’s RE listing on her FB everyday, since he’s a RE agent. Everyday on my news feed, I could see her “sharing” her boyfriend’s listings. The most recent one is a 1950’s house in Oak Bay, going for $625,000! Yeah right!

  24. This blog does not belong to vreaa anymore. BLM is taking over. My previous assessment is still valid.

    • Well… someone has to take over for f1…

    • Yeah it seems that way. And in typical troll fashion he does nothing but deny the existence of the forest because there are too many trees.

    • I too am thouroughly sick of BLM. He has no point except that Vancouver is “different” from all other bubbles, and will use anything and everything to justify it in the vaguest way. He doesn’t respond to actual factual argument. For instance, I asked directly to reply and justify his assertion that a dollar of new debt is levered up to $8 of GDP activity and also explain what happens if that debt growth stops.
      So here is a challenge, BLM;
      Answer the following: 1) Cite your source for an 8 to1 leverage of new debt on GDP.
      2) Respond to Farmer at 10:35.
      Don’t just ignore it when somebody pokes a precise hole through the heart of your vague fuzzy “point” if I can stretch that term to cover your truthinesses.

      Vreaa: I’d like to reluctantly suggest you get rid of BLM. He occupies too much attention here, and brings nothing of any substance.
      “Everything anywhere anytime is non-specifically supportive of Vancouver RE”!
      Got it, let’s move on.

  25. Regarding BLM; and An Open Invitation To BLM:

    BLM’s posts do come across as trollish at times, but I don’t believe he’s a troll in the conventional sense of the word.
    BLM appears to be laying the groundwork for himself buying a property in Vancouver (at what he believes will still be high prices). This requires rationalization, and I suspect his posts on these threads are the public manifestations of him doing that personal ‘work’.

    BLM claims that this blog demands some form of pessimistic bearish ‘groupthink’ from all its readers, but we know this is far from the truth. (He has also claimed that the ideas on this blog represent some form of mainstream pessimism about Vancouver RE, which is preposterous to say the least). Most long term readers of the blog know that we are tolerant of all views, that we encourage debate, and that we really appreciate well thought-out arguments from any position. In fact, we particularly appreciate personal anecdotes from Vancouver RE bulls and headline those without fail (although they are surprisingly hard to find!). Censorship is very rare; we occasionally remove expletives or unnecessarily/irrelevant personal comments (for instance, regarding a Realtor’s appearance).

    BLM does take up a large amount of bandwidth here… over the last few months he has posted far more comments than any other poster. In total he’s posted more that 333 comments.
    I’m very happy with him being part of the discussion, provided he discusses in good faith. Mostly he appears to do that, but at times he does irritate by implying that he’s commenting here more as some kind of exercise, or that he’s posting here to do us all favours.
    For instance, these are verbatim quotes from BLM comments:
    1. “don’t take what I say personally. .. above all, I’m just here to play a bit of devil’s advocate”,
    2. “don’t mind me, if I cause you aggravation, I just like to throw in ideas and less melodramatic views out there for discussion sake” ,
    3. “nothing discussed on this blog is of any true tangible value, but it is good fun”,
    4. “I do feel I’m doing this blog a favour by stimulating conversations.”

    The vast majority of commenters on the blog post in good faith in that they believe in their own arguments, and are attempting to learn from the discussion. We’d prefer that BLM did the same.

    As a demonstration of our own good faith in the matter here’s an invitation to BLM:
    Please write a piece that lays out your views on the Vancouver RE market. Make it as broad and as long as you like. Discuss all the factors that you think effect the market, make as many predictions as you like, share your advice to market participants (owners/retirees/FTBs/buyers-in-waiting, etc). If you feel comfortable doing so, share as much of your own story as you like (but a personal anecdote is not a necessary part of this). Add illustrations and images if you like.
    Then, e-mail me this article, and I will headline it.
    We know you have much to say on the matter, so I imagine you will welcome this opportunity. I’m sure that the post will provide a good forum for discussing your views, and the thread would allow for vigorous debate.

    • BLM provides noise with a bullish bias. That’s about it. He came here to “educate” bears that no crash is coming and he wraps it in a LOT of verbal diarrhea. He twists and turns and spews a lot of bs, but the agenda is clear. It is obvious that some people here fell for it.
      He did not come in good faith and he is not interested in real debate.

    • Bubbly +1

      ” BLM provides noise with a bullish bias. That’s about it. He came here to “educate” bears that no crash is coming and he wraps it in a LOT of verbal diarrhea. He twists and turns and spews a lot of bs, but the agenda is clear. “

    • Vreaa – You are correct in that I am doing groundwork here for my eventual entry into Van RE. It is one thing to ‘fathom’ what you would do if you had cash to buy a property outright and to actually ‘have’ the cash in hand to buy a property out right. I face the fortunate dilemma of the latter which may explain why my views differ from most market observers.

      Thank you for the invitation which I will accept. I will need time but I will submit a piece to you. And I will lay out my case, as a buyer, as a bull, for scrutiny in a submissive way.

      • Ralph Cramdown

        Shirtsleeves to shirtsleeves in one generation.

      • I would like to dispel a couple of oft-repeated RE myths, most recently put forward by BLM:

        – Buying a property with “cash” is really no different an investment decision than buying a property with cash + debt. By paying all-cash for something you are just tying up capital that could generate a return elsewhere. It’s called opportunity cost. This foregone return is similar, if not superior to, the cost of interest payments on a mortgage.

        – Buying a house and renovating it does not “add value”. There is no reason for the resale price of a house to be any higher than the original purchase price + plus the cost of materials and labour that went into the reno. An exception is if the renovator does enough volume to achieve cost savings on materials that others cannot achieve, or if they possess some other unique advantage. A rising market creates the illusion that renos add value, when in fact it is underlying price strength that boosts the property–reno or no reno.

  26. @blm … ust yields aren’t a proper ref for risk when bernanke is monetizing 85b/month … however, those 8%-10% (?) rental yields on us re that someone wrote about are probably a better measure … i.e. think ungimmicked cpi ~-6%+, then ust 10yr ~7%, then rental yield 8%-10% would make sense … relevance to vcr re? … canada has iown flag/currency but wrt economic autonomy it is the 51st state … long-term policy and cost structure must realign or capital and talent will drain until it does … cdn re market divergence must eventually readjust to more closely align with us comparables … comps to seattle (eg.) are very relevant for vcr … note us has mortgage interest deduction and 30yr fixed … so cdn equivalent should comp lower … last, huge foreign cap inflows into vcr do not result in record local indebtedness

  27. Carioca Canuck

    El Ninja said……..”-Buying a house and renovating it does not “add value”. There is no reason for the resale price of a house to be any higher than the original purchase price + plus the cost of materials and labour that went into the reno. An exception is if the renovator does enough volume to achieve cost savings on materials that others cannot achieve, or if they possess some other unique advantage. A rising market creates the illusion that renos add value, when in fact it is underlying price strength that boosts the property–reno or no reno”
    This is so true…….and one of the biggest loads of crap put forth by the “REIC”, especially the clown who does the HGTV show called “Income Property”………if your kitchen needs reno’s then the money you spent is gone and your property does not go up in value one cent, simply because it needs a new kitchen just to maintan it’s “fair market value”……..whereas if you renovate a house top to bottom the only “suggested” value increase is exactly as El Ninja said, “potentially” the cost of materials and labor………but then again……..this is also subjective.


    Spending $40K on a bathroom or a kitchen does not add $80K to the value of your property because someone alse could go and spend the same $40K, after buying the property from you for less pre-reno’s.

    • Ralph Cramdown

      I have to categorically disagree with you.

      You forget that there’s a big difference between buying a house that needs renovation versus one that’s done. There’s no cost uncertainty, there’s no delay in getting the finished product, and there’s no question as to the superficial quality of the work. What you see is what you get. Many people will pay a premium for that rather than risk contractor ripoffs, delays and the unpleasantness of living in a reno zone for months to years or carrying two properties for the duration.

      Heck, many homebuyers seem to be so stupid that even ‘staging’ a house (decluttering, moving the owner’s crappy furniture into storage and bringing in the Barcelona chairs and San Pellegrino) seems to add value. And staging is a zero sum game, economically — either the seller is stupidly paying for it needlessly, or the buyer is.

      Further, there’s almost no other way in Canada to do a lot of work, be compensated for it with cold, hard cash and legally pay no tax, other than buying a primary residence and holding it for at least a year while you renovate.

      Caveats: In a rising market with easy credit, you’ll have to bid against the HGTV crowd, who can’t estimate and may settle for low profit margins. In any market, transaction costs are high.

      • Carioca Canuck

        Well, if you strip the emotion and hormones from the argument beforehand……..the fallacy of the REIC imposed “increased value scenario due to renovations” is exposed, because without a rising market caused by a frothy credit fueled bubble, nothing will happen..

      • “There’s no cost uncertainty, there’s no delay in getting the finished product, and there’s no question as to the superficial quality of the work.”

        All of the risks you have identified are also borne by the renovator / flipper. It’s therefore a wash.

      • …And by the same token, the price for a house that needs renovation will be discounted to reflect all of the risks and costs you mention. Everyone knows that cost overruns, delays, and shoddy work can happen. So there is no “premium” so speak of.

      • Ralph Cramdown

        So it would be fair to say that the flipper earns the risk premium, and the buyer of a flipped house pays it. The flipper mitigates the risk by either being the experienced renovator, or knowing trades he can trust, in which case he’s typically the real estate agent, because if he has to pay a profit margin on both the sales function and the trades, it’s unlikely there will be much risk adjusted return left).

        The risk of cost overruns is also quite different for the flipper and the end user. There’s plenty of stuff which you’ll do right if you’re going to be living in the house for ten years, but you’ll drywall right over if it’s a flip. Buyers of flips seem not to discount that at all.

      • I think it’s pretty obvious what is going on here when some idiot says that there’s no increase in property value from properly executed renovations. Despite being a seller of all things Vancouver, I’m starting to think that this is a renters blog.

      • Airedales: look up the difference between the terms “price” and “value”.

      • So value doesn’t have a price. I give up.

      • My point, Airedales, is that renovating a house can add to the resale price, but not its value. Value meaning the bang for your buck. Buying a house for 1M and spending 200K in renos should result in a sale price of 1.2M. The resale price is higher, yes. But has value been added? No.

    • Real Estate Tsunami

      This assumes that buyers are rational.
      A nice shiny granite countertop! No property virgin can resist.

      • Seeking knowledge...

        It’s like adding a toy in the cereal box. I could never resist it and I didn’t care what the cereal was.

  28. El Ninja you are only partially correct when you say that buying a property with cash is no different than buying a property with cash and some portion of debt. I would agree with you if you are buying an investment property that would hold. However if you are buying a property to actually use (ie live in) then how you pay for it does matter, especially when comparing to the alternative which is renting.

    Aside from leverage considerations (very important) and any value to the utility of owning rather than renting (it is real but varies so much from person to person and situation to situation that it is difficult to put a consistent and objective number on it), you have to remember that owning a house gives you essentially a tax free way of paying for housing. Or put another way if you were to rent instead of own, you would first have to pay taxes on whatever income, investment or otherwise and then pay your rent out of that after tax money, whereas your “investment” in your home pays for your rent tax free.

    All that being said, I don’t think that most people are approaching this decision from a “should I invest my $1.5MM and pay rent from that income or just buy a house for cash”, but for those of us who are (looking at you BLM), you do have to take into account the tax component of things.

    • Great comment. This very salient point does not get mentioned enough (ever?) on this blog.

    • Fair enough, but my point was not to compare rent-vs-buy, but buy with cash-vs.-buy with mortgage.

    • elam101 said: “..you have to remember that owning a house gives you essentially a tax free way of paying for housing. Or put another way if you were to rent instead of own, you would first have to pay taxes on whatever income, investment or otherwise and then pay your rent out of that after tax money, whereas your “investment” in your home pays for your rent tax free.”

      Okay, I think I get your point, you’re saying that if you are comparing an alternative investment with an ‘investment’ in your home, you must compare the AFTER tax income/gain from the alternative investment with the rental savings by virtue of owning the home. Fair enough.
      At the same time, let’s not forget that:
      If you buy a home with cash, it’s after tax cash.
      If you have a mortgage, your monthly payments are with after tax cash.

      • (except for the guys who are paying off the house with the undeclared income from the 4 students living like hermits in their basement rooms and the attic……..but we will keep that quiet………shhhhhhh…..people are listening)

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