“We spoke to a friend of ours yesterday. Even though she has purchased a house, she wants to keep (and rent out) the condo she’s living in, because she thinks prices will only go up.”

“We spoke to a friend of ours yesterday. Even though she has purchased a house, she wants to keep (and rent out) the condo she’s living in, because she thinks prices will only go up. She estimates her condo to be worth $530K, and rent she would receive to be $1800/mo. After taxes and condo fees, this appears to be a yield of 3%, without taking into account repairs/upkeep on the unit itself. She’s getting a one-year fixed rate of one point something percent to finance the thing. Sounds crazy to me!”
– from ‘s’ via e-mail to VREAA 13 Jun 2013

34 responses to ““We spoke to a friend of ours yesterday. Even though she has purchased a house, she wants to keep (and rent out) the condo she’s living in, because she thinks prices will only go up.”

  1. Condos and real estate are poor investments in my mind. One, is the carrying costs. Two, is the maintenance and annoying tenants you get.Three, is that the yield (rent) is limited in that you can only raise the rent so much due to many tenant friendly laws. And four, perhaps the most important, is the lack of diversification in a condo purchase. A 10% dp on a 500K condo is 50K and you’re putting that all in one basket, in one city, in one economy.

    I’m well diversified in stocks, and the dividends I get amounts to about 3% without the headaches. The thing is, with stocks, dividends tend to increase. Average dividends have increased about 15% annually, while some companies increase their dividends 20-30%. Compounded this is way better financially than anything you get from RE in this city. The only downside is the volatility but I ignore that. Stocks, especially in good multinationals, increase in general over time, more so than RE. And I don’t have to deal with annoying tenants, tenants destroying my home and having to pay to fix it up, paying property taxes, etc. Yes, stocks drop, sometimes by 50%, but ignore the urge to sell and in general, over long-term is a much better wealth creation vehicle than RE

    • Your post looks like the same argument that most RE bulls make about RE:

      – generally goes up over time
      – sure it can drop by x%, but as long as you ignore the urge to sell you’ll be fine in the long run.
      – dividends (or rent) tend to increase over time.

      “The thing is, with stocks, dividends tend to increase. Average dividends have increased about 15% annually, while some companies increase their dividends 20-30%. Compounded this is way better financially than anything you get from RE in this city”

      Compounded, a 15% gain in dividends every year is as unsustainable as RE prices in Vancouver. The average dividend growth for the S&P is 5% (http://www.multpl.com/s-p-500-dividend-growth). The most it has risen in a 12 month period is… 2012, at 18%. However, in 2009 the average div yield dropped 21%. While I agree that stocks will give you a better return than Vancouver RE, there is no risk free investment that will always go up.

      If you have only been investing over the last 2 or 3 years (which it sounds like you have), you probably have a very unrealistic impression of how stocks and dividends increase over time. Much like a RE investor who has only bought RE for the last decade.

  2. 4SlicesofCheese

    I have a friend who is about to move into a newly completed condo she bought presale, and has the exact roadmap as the person in the anecdote. Well, her and probably everyone else in Vancouver has the same roadmap.

  3. The property bubble in China can never end…..therefore the one in Vancouver will carry on forever. We already know the two markets are somewhat linked from past research on the correlations. Preposterous idea of course, is it not? Bu that is the pickle the Chinese now face as the first signs of credit stress have appeared in their system and the government attempts to wrestle the genie of excess back into the bottle. Their bubble cannot end. ……… if it does, the collateral backing much of the credit that has been issued will crumble and with it bring on a financial crisis that cannot possibly be anything less than epic. Even the three trillion in FX reserves are not enough to patch over the amount of loans that could be at risk and even if it were, selling all of them in a hurry would devastate the economy and currency. You only get to do that once anyway. What exists for an encore after the treasury gets drained to resolve the biggest, most wobbly bubble in recorded history? Nothing else even compares. Not Japan of 20 years back and not the US either when its housing market turned to rubble on the back of high risk lending that flew out of control. Why is it everyone is so quick to forget that the underlying asset must have value to adequately support the iissuance of credit upon which it relies? These are tied together intimately. And that is why the housing bubble in China can never end because if it does the collateral itself that underpins the entire system will whither taking down some of the biggest and most strung-out of their banks. We all know how this story ends because it is always the same. Assets are valued only according to what others will pay. Sometimes they can even fall to zero regardless of how much was spent creating them. The money is not real until sales are made and deals crystalized. Systemic leverage over there is now at epic proportions. Even the myth that houses cannot be owned without 40% cash down (or more) is fairly meaningless when that same property now has a value 10 to 20 times what was originally paid. The problem is that it is the new magnified property price levels that are being used to expand credit in the system and further leverage the bubble up, not the original purchase price. The original price is long in the past and that 40% contribution might only amount to 3 or 4% of the current valuation. If housing, commercial property or the many other kinds of land deals begin to run into snags the edifice comes down. It really is that simple. Only the guys who cashed out and converted their money to an asset that will survive the calamity will be winners. Current owners meanwhile need to be able to service their debts to keep what they have bought. Same in China as it is in Canada or the US. That is how the system is designed. The laws of banking fundamentals have not been repealed in China. Collateral matters there too. Somewhere in the past somebody came up with the nutty idea that China’s revenues from its export markets could save its hide no matter what happened. The Peoples Bank and Government there are considered bulletproof based on all the national production. But those people don’t understand it does not work like that. You can’t just sell off all your Treasuries and FX overnight to save your own economy. Nobody would buy them all up on short order anyway without crashing their own markets. Unless the Chinese are going to flood their system with US dollars the idea has little merit but it keeps getting recycled anyway. Truth is the Chinese economy is going to have a hard landing. It is going to crash in time. There is not enough demand in the world to supply their growing financial needs at this stage of the game and so the only direction to go is down. And when the assets fall, the economy goes with it. And that is why Vancouver is probably doomed. Depression 2.0 is just a matter of time.

    • Its a ponzi scheme. It’s trying to get more money, more people to buy but the ones who only really prosper are the ones at the top. Chinese (and Canadians and humans in general) are greedy. they see people flipping and not really producing anything of value get rich off of RE. Think about it, real estate, by going up over a short period of time, makes no sense. Over time, yes, RE should go up, because of the increase in productivity in the local economy. Buying land, just flipping it for 30% more in a year, makes absolutely no sense and is unsustainable. Where is the money coming from? China doesn’t have an infinite amount of money. And even if they do, eventually they will run out buying up RE.

      In contrast, if you buy a stock, you are buying a business. If that business produces goods or services that people want, then the value of that business should go up.

      • Agree Brian. The guys who cashed out at the top and bought US housing at the bottom might make out like bandits. The rest will be left holding the bag or go bankrupt. I wonder over the corporate sector there. Debt is staggering and as usuall much of it is also tied to real estate and high rate loans. They have really created a monster over there where property is at the heart of the whole system and yet property is now the most over-valued in the world. Price to income in some cities is now at a ratio of 30/1 which is simply astounding. The popular refrain that most land and homes are paid in cash is so much nonsense too. According to that explanation the country is fortified against failure because housing debt is low. Not quite true though. The part of the narrative that those who argue that line always forget to mention is that price appreciation over the years has made the original down payments look piddling. And what did those land-owners do about that? Same thing as they did here. Folks went out and bought cars and second homes and built business all based on the highly inflated values. They might have put 40% down but later they took 300% out. It is really an explosive situation but one that is made all the worse because now there is a labour shortage, the population is aging, the rural/urban shift has pretty much stalled out due to unfavourable living costs and inflation is high in an environment of falling global demand for goods. How anyone cannot see that China is poised for an epic face-plant is beyond me.

      • Do you think your stocks will be safe when this ponzi scheme is up in china?

      • Real Estate Tsunami

        Nuxfan,
        Nothing is safe in this world.
        No one has any answers, and if anyone approaches you with advice, run for the hills.

      • 4SlicesofCheese

        Your stock may go to zero, but the equity in your home can go negative.
        Spoke with a guy in SanDiego who has a place that he bought for 700k that he bought with 20% down and now is worth 450 at most.

      • “Nothing is safe in this world.
        No one has any answers, and if anyone approaches you with advice, run for the hills.”

        Indeed. I find it somewhat humourous that Brian seems to think he will be safe by “buying a business”, when the manufacturing lifeline to the rest of the world is crashing around us. Everyone can dream I suppose.

        “Your stock may go to zero, but the equity in your home can go negative”

        True. But it is of little comfort to the person who’s stock is at zero…

  4. Real Estate Tsunami

    The fastest growing occupation in Vancouver is Landlord.
    This is the problem with this city. Everything revolves around RE.
    A one trick pony.

  5. Hey u bearrrs were is ur crash?

    haha I am a bull and a very smart one as u can see I put all my money in condos and earn 30% per year and i will kepe doin that entil i retire cuz China!!

    If the sustainability of this new paradigm is not self-evident than u r blind!!

    • Ha! Yes, the new paradigm. But seriously, anybody who has bought in Vancouver in the last few years and is mortgaged to the eyeballs is in such deep shit now it’s not even funny. They should be very, very worried about Asian credit markets that are so far off the charts we ran out of paper to graph them. The early signs of trouble arising now result from the slowing Chinese economy which is at odds with the growth dynamic of the past. Data on electrical consumption as just one example point to troubles that are not consistent with the governments growth claims. Same goes for export data. It is fudged and few doubt that stresses behind the scenes are being magnified by a shadow banking sector that has gone out of control. No bubble sustains forever. We all know that. They all correct eventually bar none and so we need to watch the property sector to get better insights into when the wheels will actually come off that wagon. Everything is about collateral and capital flows and both print up big troubles in the future. The question we really need to ask is when it will happen?

      • http://dizzynomics.wordpress.com/2013/06/27/the-china-premium/

        Having thought about this a lot the last few days, I do think the gold sell-off is now increasingly connected to China. It’s the symptom of real pressure on the exchange.

        When everyone is selling and only one country is buying like crazy… It suggests that country is experiencing some sort of system confidence shock. The china bid isn’t just for gold, it’s been for every type of store of value asset. From London and Canadian property to luxury wine

        Canadian property, luxury wine, and gold. The finer things in life.

      • UBCghettodweller

        >so far off the charts we ran out of paper to graph them.

        Anything plotted on a Log scale for % change is something to take notice of.

      • [NoteToEd: Please don’t ask… AllrightThen, if you simply must know… I BEGGED SantaClaus for one of those when I was all of eleven years old… And thusly, in one fell JingleBell ChimneySwoop, that BeardedBastard – having duly granted my request with a StockingStuffer – as good as guaranteed that chastity would be the ‘hallmark’ of my junior high school endeavors.]

    • Aldus Huxtable

      ” It serves as stark illustration of a housing market that has seemingly defied logic. ”

      Well, logic usually only remains defied for a limited period of time until reality sets back in.

  6. wow, haven’t been here in awhile, a shadow of its former self
    vreaa, maybe you should have gone out with a bang insted of this trite, repetitive whimper

  7. Do you know that all the hardcore participants of this site are now referred to as “huffers” over at RET?

    • We might be “Huffers” Daddy Cool but we are not wrong in the assessment.

      If China goes down (I mean WHEN China goes down) it will put a hole so large in the global economy that no bandage can patch it up. The point that a bursting of the credit bubble there is inevitable as ALL credit bubbles eventually burst cannot be understated. There is no possibility of a soft landing for China under the current circumstances and indeed we conclude it is merely a matter of WHEN and not IF.

      Huge crack are showing up over there right now.

      The past few weeks alone have seen a whirlwind of alarming data, graphs and analysis related to imbalances in credit issuance arising from both conventional and non-conventional lending practices. So-called Shadow banking alone is now creating the conditions for massive systemic risk as these high rate loans are almost entirely predicated on underlying assets that are overvalued by ALL metrics.

      The largest percentage of this credit has been granted based on asset values that are at exceptional highs. That cannot be sustained. It has never been sustained anywhere else in the globe either at any other point in history. This situation is NOT different (it never is).

      When I use the term “exceptional” I am of course referring not to the garden variety valuations in excess of the ability of citizens to service those debts or even buy the assets themselves but rather to world record prices that in some cases have NEVER been so before. Price to rent and price to income ratios have gone off the scales in the large cities. It is all a great idea and works fine until the music stops though.

      This is not a joke. Can all the analysts be wrong here?

      Today we heard that China has missed expectations on exports. Not by a little bit either but by more than 3% which is a slap in the face to those who had estimated guidance of a 3% gain. That means we have a stunning 6% differential in expectations versus facts.

      For the Chinese economy that is pure poison and I am sure most here appreciate that the bread and butter of that nation is its export driven economy. Furthermore they have seen export declines so severe they have never been witnessed in this magnitude in the past FOUR YEARS! That puts us back to the time of the Global Financial Crisis for those who are forgetting their history.

      So exports are down. Electrical consumption is down. Copper, coal, steel and many other commodities in inventory are in a surplus situation that is growing and economic activity is in decline as we note from the recent HSBC PMI readings. Meanwhile we are being flim-flammed by faulty Chinese data suggesting the economy is buoyant when in fact GDP may be in sharp decline.

      If this makes anyone feel optimistic they must be on drugs. If the credit bubble bursts in China (and it will) then you DO NOT WANT to be holding a heavy debt burden on a Vancouver home when that time arrives. I will say without hesitation that the biggest risk to the Vancouver bubble now is the economic distortions currently underway in China.

      So all you bulls had better say a prayer that the Chinese propery bubble never bursts. A prayer is pretty much all you have to protect yourself, your family and your investments.

      But no problem. God loves Vancouver……right?

  8. [NoteToEd: I know, I know… But sometimes the urge is just…. well, irresistible.]

  9. Forgot to mention the risk of having a leaky condo as well that goes along with a purchase.

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