Saturday, January 26, 2008

pinch me

Oh me, oh my. I did a Realty Link search tonight, just to see what is up. Lotsa listings for East Van., but the range of properties in the same price range is surreal.

eg:


$725,000 on a 36x108 lot,

or,


$725,000 on a 33x110 lot.

Personally, I would rather have the first house. It is older, and most probably better built (if you can get around lead paint and lead solder in the plumbing, and the fact that it is on a very busy street - 41st Avenue.)

But the second one looks so...Mediterranean, what with the palm trees, and warm sunlight, and the coral stucco. (still, the realtors take pictures like drunken sailors on leave)

But really, what kind of choice is it at almost 3/4 of a million flipping dollars? Either one of these places will require (at 5% down):

TOTAL Monthly Payment $ 5,495
Household Income Required $ 206,064


If you go up to a 25% down payment, you would only need an income of $160,000...in Rast Vancouver... (I decided to leave that Rast Van. typo in. Somebody must be smoking a lot of weed!)

It really is not even surreal anymore, it's more like a really bad f***ing dream. So many of us expecting to see the dam break, but there is no apparent sign of that.

There are desperate attempts to avoid recession afoot, but will they work? I do not think so. I think that it will just ensnare a few more suckers, and make the fall even harder.

I have made several references to Garth Turner lately, and it has nothing to do with politics. Turner reminds me of a badger, or another member of the Family Mustelidae. He has been writing of economics for many years, and is very concerned about the RE bubble. He is promising to write more on that in the coming days. It is worth reading to see what a Member of Parliament has to say specifically on the topic.

One more thing:

This place that I have been watching for a while now, has been on the market for a solid 7 months. The price has been at $799k for about 4 months. They change the picture every once in a while to keep it fresh.



I believe that price is their break-even point. Trouble is, the carrying costs must be really biting hard. I reckon at least $20k has been paid to those costs already - net of property taxes.

34 comments:

Drachen said...

At least on that last place they managed to take a level picture. Unfortunately the power lines are running exactly along the roof line from the position they chose which makes the place look uglier than it actually is.

solipsist said...

I agree drachen. I have a feeling that they have seen this humble little bog, er, blog, because the original pic' was as slanted as most are, but they took a straighter one after I harped about pictures.

It is a pure speculation property, and is not someone's principle residence. That means that they have to sell. Unless they are extremely wealthy. That is why I have been watching the place for so long.

Will said...

I love that they lined up the powerlines... I mean, that's like going the extra half mile to get a better shot. Now if they had just airbrushed out the rest on the edges they would have completed their thought. Oh well... give them another 7 months :)

BTW, I've a new blog/site built at www.agentwill.com. Stats are there for you junkies (REBGV stats will be posted as well with no sign in required as before) and weekly numbers are posted.

jesse said...

For the first place, your visiting friends and family will love the no stopping during rush hour sign. But I'm sure it's a nice quiet street ;)

jesse said...

"TOTAL Monthly Payment $ 5,495
Household Income Required $ 206,064"


Most buyers are not 5% down. Look at the yield for a better idea on how good an investment this is. I think the top place can fetch around $2500/month so the yield is about 4% gross. Not a good investment based on cash flow so any buyer must be speculating to make up the shortfall.

solipsist said...

Most buyers are not 5% down. Look at the yield

Do you think most buyers put more than 5% down, or less? Interesting to me that when you use the mortgage calculator on these sites, they default at 5% down. I assume that is the "norm".

Regarding the yield, I don't really understand the concept. I usually just think of houses as a place for me to live and do my thing. What would a good yield be? And what is the relevance of %age?

patriotz said...

Yield is very simple. Its the payout you get from any asset over a year.

If you buy a GIC that pays 4% interest, your yield is.... 4% !

If you buy a house for 800K, which rents (or could rent in the case of an occupier) for 2000/month, and has expenses (taxes etc) of 400/month, your yield is (1600*12)/800K = 2.4% !

Note I'm not including financing costs because those are determined by the buyer's situation and are not an attribute of the house itself.

Now the fundamental rule of investing is that an investment with non-guaranteed return, like a house, has to yield more than one with a guaranteed return, like that GIC.

If it doesn't, you have something called a "bubble".

Of course the bulls will just say that "fundamentals don't matter" and talk about stuff like mountains, Olympics, etc.

Heard that before?

solipsist said...

Thanks for clearing that up patriotz. I have always had the view of an occupier of RE, and never given consideration to yield. My view has always been a percentage of income to housing, with the distinct possibility of lesser income in the future, and the probability of interest rate increases.

OMFG! Does that make me a conservative?

But I heard that we are running out of land. Does that matter?

patriotz said...

Well it does to some extent. It makes it more likely that at some point in the future the current structure on the property will be replaced by a bigger one, which of course means that it will bring in a higher income. So higher yields in the future will compensate for lower yields today.

The easiest way to look at this is the little shacks on full sized lots which used to be common on the East Side but are fast disappearing. You would not expect to get the same yield for this property as you would for a full sized house, because you can build a full sized house on it later.

Or a vacant lot which has zero yield (actually negative after taxes) but it's worth something because you can build a house on it which then gives a yield.

That said, I can't see any scenario where the current prices in the GVRD could be justified by future density increases. For example NYC has 8 million people in 322 square miles, while the GVRD covers 1096 square miles, of which perhaps 25% is mountains or ALR.

Anonymous said...

wow the 'green monster' is still on the market! LOL

i love seeing it - its a nice reminder that not all people are stupid.

but then again i have been proven wrong many times - ask my wife. ;)

spark

Anonymous said...

almost no one will be buying a $725k home with 5% down. the typical buyer of a $725k will be a) someone already in the housing market, b) someone upgrading from a smaller property, c) someone overseas..... in which case, the $725k price tag is a non issue.

the fact that the real estate market is still robust, and the fact that very few individuals rake in $200k+/year indicates to me that your assumptions are incorrect, and that buyers in today's market are not the first time buyers you presume them to be.

burlivespipe said...

certainly, the percentage of detached homes sold are not going to first time buyers as they did 10-25 years ago. Speculators and newcomers are dominating the marketplace.

One observation - from the tri-cities' detached listings, i'm curious as to what looks like an increase in unoccupied houses on the market. Of course its an unscientific observation, since the majority of listings still do not display anything more than an exterior shot, but i'm wondering if it is a sign that more speculators are trying to get out...

solipsist said...

almost no one will be buying a $725k home with 5% down. the typical buyer of a $725k will be a) someone already in the housing market, b) someone upgrading from a smaller property, c) someone overseas..... in which case, the $725k price tag is a non issue.

I would tend to agree with a lot of that, but the house beside me (new construction) was bought for $799k by someone living down the street (RE agent). As the house is being rented (with a couple of illegal suites), I would say that none of the above would apply in this one case.

the fact that the real estate market is still robust, and the fact that very few individuals rake in $200k+/year indicates to me that your assumptions are incorrect, and that buyers in today's market are not the first time buyers you presume them to be.

Pardon my pedantry, but I make no assumptions, or presumptions.

All of that aside, I believe that this market is still insane, still beyond any reason, and will crash hard.

Anonymous said...

"All of that aside, I believe that this market is still insane, still beyond any reason, and will crash hard."

Certainly, no one will argue with you that this market is insane and that prices are way out of wack with internal fundamentals. Personally, I would never claim that a crash is impossible, but I would certainly hesitate to believe it is as imminent as you believe it to be.

There are plenty of external sources to continue to drive this market - the same external forces that have brought us to this point.

Drachen said...

External forces like a recession in the US?

Asian stock markets collapsing?

European stock markets collapsing?

Perhaps you meant external forces in the same way that Scientologists do? Is it Thetans? Tell us, inquiring minds want to know.

Anonymous said...

Perhaps you did not read my post correctly. I am not denying that prices in Vancouver are extraordinarily high, and that the average born-in-Vancouver citizen cannot afford a home in Vancouver. I'm a 28 year old who just purchased a townhouse in Richmond. I'm paying way too much for it, but what can you do? I sense the frustration of this very fact everywhere I go in the city. You think that I don't snicker at how these houses are asking $725k and will probably sell? This frustration you have is the very reason a website/blog such as this exists. We're all fed up with high prices. We all love this city because it's a great city to live in. However, we're not the only ones who realize this - and so people from other places in the world will ALWAYS want to live here. THIS is the external force which I speak of. People want to live here.

Anyways, onto your questions. Quite simple to answer actually.

"External forces like a recession in the US?"

Despite massive volatility in the Dow Jones, massive foreclosures, and plummeting housing prices & starts in the US, the Vancouver market has not budged an inch. Again, I don't claim that we're immune. I don't claim the the mountains and the water will protect us from volatility. I simply say that the doom and gloom south of the border hasn't affected us one bit. I think it's safe to say that the American boom this decade has played little role in our local real estate market, and will not cause our demise in the short term.

Asian stock markets collapsing?

Collapsing? The HKSE is up %250 in the past 5 years. Singapore up %250 in 5 years. CSI300 up over %400 over 5 years. Bottom line: Asia is rich. Asia has money to spend. Asians like Vancouver. (believe, me, i'm Asian)

European stock markets collapsing?

Really? FTSE100. May 2003: 4000. Today: 6000

DaMann said...

Ha Ha! So that fact that stock markets did well over the last 5 years means that any losses now are irrelivant? So the markets could drop 20% overnight and that wouldn't be a crash cause they are up 250% over the last 5 years? Wow great logic. That's akin to saying if the Van RE market dropeed 40% this year it wouldn't be a crash cause it went up 100% in 5 years.

Calgary, Edmonton is dropping like a rock, all of the US is dropping. UK dropping. Seattle was one of the last hold outs in the US market, it is now year over year negative. How on earth can you think we are immune?
It's just a bubble, nothing more, nothing less.It's not the greatest place on earth, Olympics were priced in 3 years ago.

It's all psycology, there isn't that much real demand to live here, you are confusing it with speculative demand. Once the appreciation stops, the specualtors will dump and run and it will all fall appart. It' estimated that 50% of the condos baught in the last 2-3 years are speculators. That's not demand to live here, it's bubble demand

There is no economy here outside of building and selling RE. Movie industry is well on it's way to being toast, tourism? Not much going on with our dollar higher than the yanks. Forestry? castrated!

I have the feeling you haven't lived in Vancouver very long, the only reason I say that is thet Vancouver is notorious for being a boom and bust town.

Why do people have such short memories I will never figure out. As soon as an economy booms they totally forget about recessions and think it's all rosy forever. RE is just like economies in general, they work in cycles and ALWAYS ALWAYS adhere to market fundamentals, always. People tried the "it's a new pardigm" "new age" with the tech boom,we all know waht happened there, fundamentals took over.

Anyways there isn't much more to say thaqt hasn't been said before. People will wake up one day and think what the hell just happened? The papers said it will always go up here?!?!?

Drachen said...

Wow. Just wow.

I know you 'bought in' so you're predisposed to shun the idea of a bubble burst but I have some news for you.

"Global stock markets extended their shakeout into a second day Tuesday, plunging amid fears that a possible U.S. recession will cause a worldwide economic slowdown.

Onlookers watch share prices on a screen on the facade of the Bombay Stock Exchange in Mumbai on Tuesday.Onlookers watch share prices on a screen on the facade of the Bombay Stock Exchange in Mumbai on Tuesday.
(Gautam Singh/Associated Press)

The dramatic declines in Asia and Europe were expected to spread to Wall Street, where stock index futures were already down sharply hours before the trading day began.

Japan's Nikkei 225 index nosedived 5.7 per cent — its biggest percentage drop in nearly 10 years — to 12,573.05, a day after falling 3.9 per cent. Australia's benchmark index sank 7.1 per cent, its steepest slide in nearly 20 years. Hong Kong's Hang Seng index, which slumped 5.5 per cent Monday, was down 8.2 per cent in afternoon trading.

In China, the Shanghai Composite index lost 7.2 per cent to close at its lowest level since August."

Vancouver is one of the top 10 least affordable cities in the world.

Contrary to popular belief rich asians are NOT flocking to our shores. There are stats but you can look them up for yourself. Immigrants, as a rule are poor.

EVERY time in the recorded history of real estate that prices have shot up without an equivalent increase in wages the market has collapsed. Not most times EVERY time.

I know you people think "well we're different" (said in nasal superior voice). We're not. Certainly not that different that we're going to buck over 400 years of recorded history. Get real.

Bring me 1 shred of tangible evidence that actually supports your argument and I *MIGHT* give you a second thought. But you don't have any do you? Your pie in the sky bullshit is exactly the kind of crap that's gotten us into this mess and when you lose your shirt I'll be laughing all the way to the bank to buy your home at 1/3 of what you paid.

patriotz said...

I'm a 28 year old who just purchased a townhouse in Richmond. I'm paying way too much for it, but what can you do?

How about renting the same place for less than 1/2 the price and putting the difference into something safe like GIC's or government bonds?

Than take your pickings after the tsunami has come roaring in.

Anonymous said...

My husband and i bought our first home in 1985, at the bottom of that 80's crash that never happened in Vancouver. Mountains were there then too. Less homelessness and drug trade as well.


We are ever amazed by the prices now and refuse to upgrade(want a better neighbourhood for the kids--where's that??) just on principle. Don't care if it's all relative.

My comment is in regards to the US troubles not affecting Vancouver one bit. Well, not yet. There's got to be somewhat of a timelag effect here. Forestry is already starting to suffer.

My concern is that now that the US Fed has dropped the interest rates to 3 %, will that prompt BoCanada to drop our rates by a large amount. The differential is now a whole % point. And if that happens, what does this mean for mortgages?

Drachen said...

Don't worry, bubbles have built while interest rates were going up and bubbles have collapsed while interest rates were falling.

Rates have no real effect on bubbles.

Anonymous said...

Solipsist, from Bloomberg

seems your idea of canned goods and ammo is catching on =)

Anonymous said...

Well, to each his own.

I completely sympathize with your inabilities to enter the market at this point. Everyone wants their piece of the pie, and unfortunately it's just not possible these days. I was fortunate to have my parents help in making my down payment. My goal is to pay off my mortgage as soon as possible. Sure, I could rent now. But I would rather pay down my own mortgage instead of paying down someone else's (i.e., renting).

Anyways, I enjoy this website. Keep it going strong. Maybe I should start a blog about how an earthquake is gonna wipe out this city and mock all those who live here?

Anonymous said...

"Ha Ha! So that fact that stock markets did well over the last 5 years means that any losses now are irrelivant? So the markets could drop 20% overnight and that wouldn't be a crash cause they are up 250% over the last 5 years? Wow great logic."

If you're the type of person who panics on a 20% overnight drop in stocks (which by the way it didn't), then you definitely are not the type who should be buying real estate anyways, my friend.

I am not a speculator. I am a life-long Vancouver resident. My new home will experience many ups and downs, as will the stocks/mutual funds I own. If you panic at 20% drops in real estate or stocks, then may I suggest you don't make those types of investments.

solipsist said...

anon - thanks for the Bloomberg link. I like spooky stuff. I am only slightly facetious with my allusions to the meltdown.

patriotz - I was being absolutely facetious about running out of land.

I completely sympathize with your inabilities to enter the market at this point.

Not all inabilities are monetary. Someone might offer me a miliion bucks to beat me almost to death, but I likely wouldn't find myself able to take them up on the kind offer.

Some of us are codgers who have had to try to work through recessions, and have seen more than one cycle of boom and bust. My own inability is to throw common sense out.

I would suggest that the fact that your parents coughed up the down-payment might indicate an inability on your part to save your own. Do you have 3 months reserve to make utility, tax, mortgage, insurance, etc. payments, in the event you find yourself unemployed? Things are about to get very ugly.

There is a very big shit storm brewing. I truly hope that you can weather it, and enjoy your home. Insure your mortgage for unemployment, disability and the dirt nap - just to be safe. When it is worth half of what you paid for it, I might pick it up as an "investment".

Anonymous said...

"I would suggest that the fact that your parents coughed up the down-payment might indicate an inability on your part to save your own. Do you have 3 months reserve to make utility, tax, mortgage, insurance, etc. payments, in the event you find yourself unemployed? Things are about to get very ugly."

I have $25k sitting in my savings account, sir. As well, I have been paying twice my mortgage payments since I purchased my home. But thank you for your concern nonetheless.

"There is a very big shit storm brewing. I truly hope that you can weather it, and enjoy your home. Insure your mortgage for unemployment, disability and the dirt nap - just to be safe. When it is worth half of what you paid for it, I might pick it up as an "investment"."

Only an idiot would sell their house when/if it is worth 1/2 of the purchase price. But thanks for your offer anyways. Perhaps we could be neighbors?

Anonymous said...

Anyways, enough of my ramblings. I will leave you boys alone to discuss *when* the market will crash, as you all have been for the past few years. Must be like waiting for paint to dry, eh?

Anonymous said...

PS: Please remember my posts. Really. Please do. My name's Bill. I will check back in the summertime, when things get *ugly*, as you say. Haha. In the meantime, keep posting, keep the ideas flowing, and never forget - there's two sides to every coin.

solipsist said...

Thanks for being a good sport Bill. And please do check back.

Good on you for the savings, and for doubling up on the payments. That is a good thing.

I'm not sure that I made any prognostications about the summer, but I made a couple of doozies in a new post. I posted a few quotes with you in mind too.

patriotz said...

will that prompt BoCanada to drop our rates by a large amount... And if that happens, what does this mean for mortgages?

One thing you have to understand is that the BoC does not set interest rates. It just sets the overnight rate, which is for loans between the BoC and the banks (I think).

The open market sets interest rates, and rates are determined largely by inflationary expectations. Rates are low now because inflationary expectations are low. If the BoC is seen as pursuing a weak dollar (inflationary) policy, rates will go up, not down. Higher interest rates would be ruinous to Canada during a US recession.

Another crucial point. Canada is not "too big to fail". No country depends on Canada as an export market, so they have no interest in buying Canadian bonds to prop up the CAD and keep the Canadian consumer buying. Indeed, such a policy would make their imports of Canadian resources more expensive.

Bottom line is that the BoC has no choice but to continue to target inflation, no matter what the Fed does.

jesse said...

"If the BoC is seen as pursuing a weak dollar (inflationary) policy, rates will go up, not down."

Look at what is happening in the bond market. It's an important point for those looking for future wage and rent inflation to make their mortgages more affordable.

"Only an idiot would sell their house when/if it is worth 1/2 of the purchase price."

It may be the bank will do this for many. And woe be they who are forced to sell because of a new job or divorce. Such situations have happened before in history but I don't think we should portend it will be common, though it must happen even if market prices drop by 50%.

DaMann said...

Anon ( Bill)

You said "I completely sympathize with your inabilities to enter the market at this point"

You make the same mistake a lot of Bulls make that if you're a Bear you're a renter. Some are some aren't. I bought my place 3 years ago and I'm fully confident that I will see my purchase price be in the red once this all falls out.

You also said that you would have to be a moron to sell your place at half price. I can't think of anyone on the planet who would choose to sell their place at a 50% loss, no one would in there right mind. Fact is many do cause they have to. I know so many people that bought more than they could or bought second places, and they almost all said that they can't afford it really. Especially the ones that bought second places that have to add in an extra $800 a month to cover the costs of the place they rent out. There get out was "well we will just sell it next year at a profit and get out when we can no longer make the payments"

You see so many people have bought places they can't afford, all because they KNOW there is free money at the end of the rainbow.

Not all people have parents to fall back on if they get into hardships, it's these people that will most definitely be selling at a loss when they lose their jobs.

So what is so different now compard to the crash of 1981 or teh almost crash ( good correction) of 1995? the only difference i see is that it went up faster and harder, which is even worse.

Anyways good talking with you. We will see who is correct soon enough.

patriotz said...

Only an idiot would sell their house when/if it is worth 1/2 of the purchase price.

What you don't seem to understand is that the most recent seller, whenever they bought and whatever they paid, sets the market price for everyone else.

For example, it could be an estate sale of a house bought in 1958. It could sell for 1/2 or less of what you paid and still come out way ahead.

And don't forget builders will keep on building because that's how they make a living, and they will sell houses for whatever they can get.

Other sellers don't care what you paid for your house.

Scullboy said...

Bill:

The advice to insure against unemployment is a really good one. When you buy your first place you feel pretty incinvible.

Trust me, you aren't. I lost my job and ended up unemployed for almost a *year*. I ended up selling my place at a small profit, but I felt my choices were:

1) Cash in all my investments and keep looking for work in Toronto

or

2) Sell my place, change my location and hope for the best / enjoy the adventure.

I ended up going with option (2), but I learned a lot because of it.

1) Just because *you* feel your home is worth $x doesn't mean that's what you'll get when you sell

2) Even if you have a sterling resume, it's taking longer and longer to get hired to a new job these days. If you own a home, you need to make sure you can cover the payments.

Just some advice. I went through a lot of hardship to learn, so I"m passing it along to you in the hope you won't have to go through the same BS. ;)

I myself am a bear. I've been across the country and I've never seen a real estate market like Vancouvuer's. I'll be holding back on buying until:

1) I feel like there's some value in buying a home in Vancouver

2) The whole "greatest place on earth/ never lose money on RE in Van" thing cools off

3) Van loses the whole "Spend every cent you have and take whatever crappy place you can because it's a good investment and the only way to enter the market" nuttiness.

And if it never does, well beachfront condos in Miami are going pretty cheap these days. :)