Housing

[Bonam]

Houses in Vancouver have been far above the market norm for decades. If someone looked at the cost/income back in the 90s and decided to wait, they would only have ended up either paying more or still not having a house. Bubbles are easy to spot. What is hard to say is just when they will pop. The Vancouver housing bubble could burst tomorrow, or it could slowly deflate, or it could keep inflating for decades more. If you really knew how to time the markets and predict bubble bursts, you would be a billionaire msj.

[msj]

Bonam and Tim G:

I have not ignored any of this.

Once again - it always depends on the timing and the market. And, no, I am not expecting anyone to time any markets perfectly.

We know, based on historical metrics, that home prices are extremely valued in certain markets in Canada.

We know that home prices cannot appreciate faster than incomes for indefinite periods of time.

I mean, think about that for even a second.

We also know that Canada has a zero savings rate and that BC has a had a negative savings rate for a very long time (I believe since about 2003 or so).

Yes, housing markets can be propped up for many years thanks to low interest rates and debt being shoveled off the back of a truck (especially when that debt is backed by the government).

Eventually, the debt growth slows if only because lenders would be nuts to continue to lend at the pace that they are lending.

And that sets into motion the pause and the fall in house prices in these over priced house markets.

Eventually, people realize that fundamentals do matter although often they don't really learn this lesson as prices swing the other way and remain there for far too long.

It's basic history repeating itself again and even though I have linked to some very interesting articles that spell this out in convincing arguments and pretty pictures, still the herd instinct is to defend bubble markets.

Go figure.

[msj]

And one more thing, Bonam.

If one were to look at those links already provided, one would know that there was a decrease to the price/personal disposable income from 1994 through 2002.

An opportunity to buy a house in Vancouver during that time (although I would also like to know what the price to rent ratio was - I bet it was in the high teens/low 20's range - i.e. okay to buy a house).

No, it is only within the last four or five years that the metrics have gone completely insane.

We are talking about buying right now which in these markets make little sense.

[Bonam]

Bonam and Tim G:

I have not ignored any of this.

Once again - it always depends on the timing and the market. And, no, I am not expecting anyone to time any markets perfectly.

We know, based on historical metrics, that home prices are extremely valued in certain markets in Canada.

We know that home prices cannot appreciate faster than incomes for indefinite periods of time.

I agree fully. But just because something can't continue indefinitely, doesn't mean it might not yet continue for a long time. Someone who wants a house in Vancouver might wait decades before the market finally comes down, for example. Would that have been a good life choice if in the meantime they went through the whole stage of their life where it makes sense to own a house (raising a family, etc)?

Your advice is this: buy a house if it looks like a good investment on the fundamentals. That's sound advice for investors. My advice is this: buy a house if you want one and can afford it. That's sound advice for people living their lives.

Not everything is about how good of an investment it is. A car can only go down in value (except very rare cases where it becomes a collectors item). Does that mean you should never buy a car? No. If your lifestyle would benefit from a car, if you want one, and you can afford it, then you should go ahead and buy a car. Same goes for houses. Coming from a financial background, I guess you have simply forgotten how to fathom that things can be evaluated on criteria besides just their investment value.

[msj]

I agree fully. But just because something can't continue indefinitely, doesn't mean it might not yet continue for a long time. Someone who wants a house in Vancouver might wait decades before the market finally comes down, for example. Would that have been a good life choice if in the meantime they went through the whole stage of their life where it makes sense to own a house (raising a family, etc)?

Your advice is this: buy a house if it looks like a good investment on the fundamentals. That's sound advice for investors. My advice is this: buy a house if you want one and can afford it. That's sound advice for people living their lives.

I think the point you're missing is that there are far too many people in Vancouver who are paying 50%+ of their net income on mortgage payments.

It is terrible advice to tell these people to pay way beyond their means to buy something because they could be priced out of the market for a long time.

These people could be paying 30% of their income on rent and save the rest of their income (or even afford a vacation from time to time - how's that for appreciating intangibles?).

In the mean time, that person struggling to make ends to meet could "own" that house only to accrue little to no savings in retirement and then sell at whatever the going market price is just to rub enough money together to retire.

Based on the fundamentals of the past few years, it is far likelier for a person buying a home in Vancouver to see the real price of their home (whether they treat it as an investment or, as it should be treated, as a commodity) go down.

So, many are going to struggle to make ends meet for nothing.

All because they are afraid that they could be priced out of the market.

Just like millions of Americans who find themselves underwater.

Which is not to say that it will be as bad in Canada - those Americans committed far more fraud than we have when it comes to taking out loans.

Not everything is about how good of an investment it is. A car can only go down in value (except very rare cases where it becomes a collectors item). Does that mean you should never buy a car? No. If your lifestyle would benefit from a car, if you want one, and you can afford it, then you should go ahead and buy a car. Same goes for houses. Coming from a financial background, I guess you have simply forgotten how to fathom that things can be evaluated on criteria besides just their investment value.

Oh, so it's all about the intagibles, is it?

If people understood the amount that they are over-paying on the tangible houses they are buying then maybe I would take this line of argument seriously.

[Thorn]

Yes, there are times it makes sense to buy.

When the market you're living in is selling at 32 times annual rent, well, that is not a smart time to buy a house.

If I lived in a market that was selling at 15 to 20 times annual rent then I would be an owner.

That`s the distinction that you house nuts aren't getting.

I'm not sure how well you can asses the rental value of a detached house since there aren't a whole lot of them out there for rent at any given time in good neighborhoods. But I had a skim through an online site offering rental houses and find that to get a house like mine in town I'd probably have to pay something like $2,000 a month. So my place probably is about 14 x annual rent. People talking about rent of $850 or $1000 a month are talking about apartments, and a fair comparison would be equivalent housing.

[msj]

I'm not sure how well you can asses the rental value of a detached house since there aren't a whole lot of them out there for rent at any given time in good neighborhoods. But I had a skim through an online site offering rental houses and find that to get a house like mine in town I'd probably have to pay something like $2,000 a month. So my place probably is about 14 x annual rent. People talking about rent of $850 or $1000 a month are talking about apartments, and a fair comparison would be equivalent housing.

And that's probably why there isn't much to rent: because where you live it is reasonable to buy so people are buying rather than renting.

Where I live the rental market versus buying is in the 25 to 32+ range which is historically high.

[msj]

Way back when Kimmy asked or stats related to cities.

Well, Ben has produced this first part of two about how vulnerable Canadian cities may be to a downturn in real estate and related economic activity.

I am looking forward to part two tomorrow because that will show Vancouver and possibly Victoria.

[msj]

I have already stated my skepticism for the "foreign buyer raising prices in Vancouver" as a justification for home prices in Vancouver.

Even the BC Real Estate Association appears to agree when he admits that foreign buyers amount to no more than 2-3% of Vancouver's real estate market.

I didn't think foreign investors were as foolish as the typical Vancouverite (or Canadian, for that matter).

One day Vancouver will run out of "greater fools" and the result isn't going to be pretty.

[blueblood]

I have already stated my skepticism for the "foreign buyer raising prices in Vancouver" as a justification for home prices in Vancouver.

Even the BC Real Estate Association appears to agree when he admits that foreign buyers amount to no more than 2-3% of Vancouver's real estate market.

I didn't think foreign investors were as foolish as the typical Vancouverite (or Canadian, for that matter).

One day Vancouver will run out of "greater fools" and the result isn't going to be pretty.

That's interesting. From what I heard there was some foreign money going into van city, but with your stats it looks like people were looking for a scapegoat.

If you want to see results of a property bubble popping in canada, I recommend doing some reading up on the prairie farmland values of the late 1970s vs. The 1980's and the aftermath. Oh and it wasn't pretty. Your situation in BC is worse because a typical city dweller doesn't have as much assets as those folks in the prairies did.

[fellowtraveller]

What people often forget is that money that is spent paying real-estate fees, taxes, and interest is just as lost as money that is spent on rent.

Not really. If you rent, you are paying for all those things too, contained in the rental amount.

The landlord does not donate any of them.

Real estate is somewhat unique in that it is about the only heavily leveraged investment available to the middle class everyman.

With just a few thousand bucks you can control an investment worth hundreds of thousands.

[msj]

Not really. If you rent, you are paying for all those things too, contained in the rental amount.

The landlord does not donate any of them.

This has already been dealt with before in this thread and I will add this to the mix: House prices and rents: Why they should track each other and why it should concern us that they haven't

The point is simple - it is possible to overpay for a house.

And, yes, the cost of a house includes the cost, legal fees, yearly property tax, yearly interest, yearly maintenance, and opportunity cost on the down payment.

Just look at the US for some recent disastrous examples.

The only reason "investing" in real estate looks so smart right now is because property values are bubbly.

That will subside eventually and, unfortunately, not everyone will be fortunate enough to extract "their equity" in time.

Edited October 15, 2011 by msj

[fellowtraveller]

The only reason "investing" in real estate looks so smart right now is because property values are bubbly

Ah, no. That overlooks the most compelling reason to invest in real esate for the average person: they need a place to live.

There is no compelling or universal need for anybody to buy stocks or bonds or commodities or bury your pennies in the garden. There is definitely a compelling need to have a roof over your head, a central reality overlooked in investment discussions. If that 'investment ' also increases your net worth, it is a bonus and not the original intent of the investment.

[msj]

Ah, no. That overlooks the most compelling reason to invest in real esate for the average person: they need a place to live.

There is no compelling or universal need for anybody to buy stocks or bonds or commodities or bury your pennies in the garden. There is definitely a compelling need to have a roof over your head, a central reality overlooked in investment discussions. If that 'investment ' also increases your net worth, it is a bonus and not the original intent of the investment.

Sure, and one can rent a place to live if that makes sense.

There are times to buy and times to rent and it all depends on where one is at in life.

There are several advantages to renting, such as the freedom to move, the ability to save due to better cash flow (at least where I'm renting right now - I'm saving at least $2,500/month and likely more like $3,000 - but then the place I'm renting costs about 32 times my annual rent so of course it's working out for me), no need to come up with the money to fix the leak in the bathroom (this is a brand new building but the R&M bill is already approaching 5 figures) etc...

I like the liquidity of socking that money away. Yes, it goes up and down with the market.

But as we will find out soon enough, so do real estate values - going down that is.

Edit - typo - changed 35 to 32.

Edited October 17, 2011 by msj

[fellowtraveller]

There are times to buy and times to rent and it all depends on where one is at in life.

no doubt. I am simply saying that buying a house is not the same as any other investment for at least two very significant reaons: leverage and the absolute necessity of having shelter

[fellowtraveller]

at least where I'm renting right now - I'm saving at least $2,500/month and likely more like $3,000

that is an extraordinary and unsustainable difference unless you are living in your parents basement.

It is also extremely unusual to be able to save lots of money when renting, assuming that the rental and purchase markets are normal. Enjoy it while it lasts.

[msj]

that is an extraordinary and unsustainable difference unless you are living in your parents basement.

It is also extremely unusual to be able to save lots of money when renting, assuming that the rental and purchase markets are normal. Enjoy it while it lasts.

Of course it's unsustainable!

That's why it's called a bubble.

Of course, if you bothered to look at that link that I have already provided then you would already know that prices have outpaced rents in many markets.

Many people have been going into debt which has only fueled higher house prices.

In fact, the typical Canadian is about as indebted as the typical American back in 2005 (the peak of their housing bubble/credit bubble).

Yet we continue to ignore this fact and the fact that house prices have outpaced rents and outpaced income and outpaced inflation (which real estate tends to track over the long run).

Go ahead and continue to ignore these facts because one day you will find something called "reversion to the mean" and that isn't going to be pretty.

[August1991]

There are several advantages to renting, such as the freedom to move, the ability to save due to better cash flow (at least where I'm renting right now - I'm saving at least $2,500/month and likely more like $3,000 - but then the place I'm renting costs about 35 times my annual rent so of course it's working out for me), no need to come up with the money to fix the leak in the bathroom (this is a brand new building but the R&M bill is already approaching 5 figures) etc...

"...costs about 35 times my annual rent ... " I'll take that claim at face value.

msj, you strike me as a poster who is using this forum to justify publicly their private decisions. If so, consider this: Why would someone rent to you at a 35X price to rent ratio? I think you should ask yourself that question. As they say, if you don't know who the mark at the poker table is, then it's probably you. IOW, when you think that you are smarter than everyone else, then maybe it's time to think again.

-----

1. The US just suffered a real estate bubble. Do you think thousands of other investors in Vancouver, including your landlord, are going to indulge the same? The history of the collapse of speculative bubbles implies that their consequences last for a generation or more. I am willing to concede that time is shorter now, but not that short.

2. Interest rates are unbelievably, incredibly low now. The Fed is shovelling money out the door - assuming that you have the credit rating to borrow it. Canada's "prime" rate is at 3% - but that's open to negotiation. At 3%, it's about a 30 p/e. (Is the Fed fuelling another bubble? Not according to Paul Krugman.)

3. According to you msj, you are smart, and your landlord and thousands of other people in Vancouver are just stupid speculators. msj, have you thought of getting into the condo/real estate business? Maybe you should be selling options on future projects?

Edited October 17, 2011 by August1991

[msj]

"...costs about 35 times my annual rent ... " I'll take that claim at face value.

msj, you strike me as a poster who is using this forum to justify publicly their private decisions. If so, consider this: Why would someone rent to you at a 35X price to rent ratio? I think you should ask yourself that question. As they say, if you don't know who the mark at the poker table is, then it's probably you. IOW, when you think that you are smarter than everyone else, then maybe it's time to think again.

No, I am sharing links to factual information and my own anecdata (as some are calling it now) as evidence that parts of Canada are crazy.

Why is the ratio so high? Because the husband is holding the property for his in-laws who are not ready to move in for another few years due to whatever circumstances they have.

It doesn't matter to me - I'm renting an oceanfront condo and it is costing me less than 12% of my gross income.

This allows me to invest in my business and save a balanced portfolio of investments which is what I prefer to do at this moment.

I know the ratio with a reasonable amount of certainty since the units around me are virtually identical to mine and have sold in the past 6 months.

Of course, I do note that the condos are selling at prices that are less than they sold for 18 months ago when this place was absolutely brand spanking new. And yes, we are talking 6 figure reductions.

But no doubt that skews things a bit - these are luxury oceanfront condos which I choose to live in.

That's the price I'm willing to pay and it's ooh so hard to wake up in the morning with that salty air smell.

1. The US just suffered a real estate bubble. Do you think thousands of other investors in Vancouver, including your landlord, are going to indulge the same? The history of the collapse of speculative bubbles implies that their consequences last for a generation or more. I am willing to concede that time is shorter now, but not that short.

We are hearing the same stories as we heard from the US: RE only goes up in price, demand is the driver, interest rates are low etc...

2. Interest rates are unbelievably, incredibly low now. The Fed is shovelling money out the door - assuming that you have the credit rating to borrow it. Canada's "prime" rate is at 3% - but that's open to negotiation. At 3%, it's about a 30 p/e. (Is the Fed fuelling another bubble? Not according to Paul Krugman.)

And here we go with the low interest rate excuse.

As for Paul Krugman - well, you are wrong about him on Canada. Back in 2010 he had this to say: Uh Oh Canada?

And again in March of this year: Oy, Canada?

3. According to you msj, you are smart, and your landlord and thousands of other people in Vancouver are just stupid speculators. msj, have you thought of getting into the condo/real estate business? Maybe you should be selling options on future projects?

I'm not smart.

Not sure when and where I claimed I was smart.

I have an opinion on RE and that is that it is over-priced and is not supported by the fundamentals.

Price to rent and price to income ratios are hitting levels that are 2+ times the standard of deviation (find the links earlier in this thread for this).

Canadians are as indebted, on average, as Americans were at their peak even though Canada has less subprime activity than they have/had.

Something does not add up here and relying on high commodity prices to maintain the status quo is more hopeful than helpful.

When something is overpriced I do not buy it.

I buy things that I think I can do better at.

For me, I'd rather shovel thousands of dollars into my business and into liquid investments than trap those funds into an illiquid commodity like a house.

To me, people are paying for a stock that has a P/E ratio of 30+ but only really has a growth rate (estimated, imo) of 0-2% over the next 10+ years.

I wouldn't buy that stock.

Yet others will because it's called "real estate" and interest rates are low, and the rules allow one to leverage up against it at 19 to 1, and real estate never goes down, and they aren't making any more land, whoever they is.

As for "having to live somewhere:"

Well, if I was renting for 15 times rather than 32 then I would stop renting and start buying.

Why?

Because the price would be right and I would come on down and buy.

That doesn't make me smart. It means I'm weighing the odds of various possible things I can do.

As any person should be doing with their own circumstances.

Edited October 17, 2011 by msj

[Guest American Woman]

What people often forget is that money that is spent paying real-estate fees, taxes, and interest is just as lost as money that is spent on rent.

Not sure what "real estate fees" are, but in the U.S., real estate taxes and mortgage interest are tax deductible.

[Guest American Woman]

I went to a mortgage calculator website and took a $200,000 house on a 25 year mortgage at 5% -- and got payments of $1260 per month.

Then I took the same $1260 per month, spent $1000 of it on rent, and saved $260 of it at 4%.

At the end of 25 years, the home owner's $1260 per month has given him a home, and the renter's $1260 per month has given him $134,000 in savings. Who came out ahead depends on the value of the property at the end of that time.

So buy a less expensive house, have a $1000 mortgage payment, and still save the $260.

At the end of the 25 years you have your savings account - and no more $1000 payment. Also, the $1000 rent would not remain $1000 over the course of 25 years. It would most definitely go up - likely considerably, over a 25 year span - while the house payment remained the same.

Edited October 17, 2011 by American Woman

[msj]

So buy a less expensive house, have a $1000 mortgage payment, and still save the $260.

At the end of the 25 years you have your savings account - and no more $1000 payment. Also, the $1000 rent would not remain $1000 over the course of 25 years. It would most definitely go up - likely considerably, over a 25 year span - while the house payment remained the same.

In the US you can get 30 year mortgages so your payment can remain the same if you so choose.

In Canada one could get 10 year mortgages but the rates are such that few would take it.

As such, most people either gamble with variable rates which has done most people well (and likely continue to do them well for a couple of more years if not longer).

Others will reset every few years (usually five). They may lock in or not etc...

So, if interest rates start to go up in Canada in a few years, then mortgage payments will increase for hundreds of thousands (at least) of Canadians.

As Ben talks about here, the problem with going on a debt bender is that if/when interest rates rise then one is really hooped.

Edited October 17, 2011 by msj

[msj]

So buy a less expensive house, have a $1000 mortgage payment, and still save the $260.

At the end of the 25 years you have your savings account - and no more $1000 payment. Also, the $1000 rent would not remain $1000 over the course of 25 years. It would most definitely go up - likely considerably, over a 25 year span - while the house payment remained the same.

The NY Times has a rent vs buy calculator that is interesting to consider.

It's pretty good for Americans to use but not so helpful for us Canadians due to different tax rules.

Nevertheless, many of the same principles apply when one is considering buying versus renting.

I have my own spreadsheet that I use (and update from time to time) but I'm not willing to share with any of the other Canadians on this board.

I find it helps reduce the emotion around whether to buy or rent as the wife and I plug in our best guesses for the future and we see where that leaves us.

[August1991]

Of course, I do note that the condos are selling at prices that are less than they sold for 18 months ago when this place was absolutely brand spanking new. And yes, we are talking 6 figure reductions.

I don't know the BC real estate market. And I am certainly not suggesting that anyone invest in real estate.

But msj, neither am I suggesting that they rent...

[msj]

At the end of the 25 years you have your savings account - and no more $1000 payment. Also, the $1000 rent would not remain $1000 over the course of 25 years. It would most definitely go up - likely considerably, over a 25 year span - while the house payment remained the same.

I find this funny because I am a partner in an accounting firm and one of our offices has been paying the same rent for over 25 years.

In a way its frustrating because we (as in the partners) would like buy commercial space (and this office is located in a RE market where the residential and commercial markets are still quite reasonable).

But when you are paying extraordinary cheap rent it's hard to pick up and move.