Welcome!
VancouverPeak.com- admin replied to the forum topic Sandbox. in the group Housing Data
- admin posted an update:
- jesse and Makaya are now friends
- jesse replied to the forum topic Sandbox. in the group Housing Data
- jesse posted an update: CMHC starts, completions and under construction in Vancouver […]
- The Ant started the forum topic BC Population Growth in the group Housing Data
- jesse and The Ant are now friends
- jesse and wreckonomics are now friends
- wreckonomics posted an update: New Year, New HPI. ”Selection Broadens and Demand Eases to […]
- Best place on meth and admin are now friends
Wordpress theme by Abhishek Tripathi of Mediawick Digital Solutions
October 7th, 2009 at 9:39 am
@stockwhisperer: Okay, you’ve shared your OPINION. Now, where’s your ANALYSIS that a 50% drop in prices is improbable?
October 7th, 2009 at 8:59 am
I’ve followed this blog for a while and the analysis is quite good but people that are calling for a 50% drop are just completely out to lunch and are either just simply stupid or have an agenda….
October 7th, 2009 at 8:25 am
Thanks for this thread and for the discussion.
Thus far it appears that ALL additional considerations that have been posted are arguments for a significantly greater than 30% price drop.
So, it doesn’t look like RE will become an attractive investment at 30% off, and hordes of investors will NOT be stepping in to buy at that point.
In fact, I’d say that the 20-30% price drop range will be where we see hordes of amateur speculators ‘seeing the light’ and deciding to sell their cash-flow-negative ‘investments’ that were purchased purely for price appreciation and with no consideration for the metrics that we’re studying here. The result will be a massive increase in supply (possibly 10,000 condos coming onto the market?) and this’ll be one of the catalysts to take us past ’50%-off’ pricing.
October 7th, 2009 at 6:28 am
Also take a look at this from page 9 of the Boardwalk report:
They had planned to acquire 1000-2000 units in 2008 but only bought 298 because they found that yields were too low.
Now “cap rate” means net yield, which is gross yield minus all property expenses (taxes, maintenance, utilities etc. but not financing). Their target cap rate is 8% which means a gross yield (rent/price) of over 10%. That’s that kind of yield that professionals who know what they’re doing want when buying investment RE.
http://en.wikipedia.org/wiki/Cap_rate
October 7th, 2009 at 2:11 am
@realpaul:
It’s not a promise, it’s a “goal” as they put it. The City has neither the mandated responsibility nor the fiscal resources to handle social welfare problems. That is the primary responsibility of the provincial government. That said the City can and should lobby senior governments to do more and this is what Vision says they will do.
One criticism I can make is that Vision appears to be viewing homelessness as a housing market problem, rather than a symptom of other problems (mental illness, drug addiction, etc). They are not alone in this of course.
You have to address the primary problems to get rid of the symptoms. Increasing shelter capacity, etc. is OK in the short term but is just a band-aid solution so to speak.
http://www.visionvancouver.ca/solving-homelessness
October 7th, 2009 at 12:15 am
@GG: Interesting analysis GG. Despites criticisms i find it an interesting take on the subject. It would be interesting to take an inventory of all the different pricing methods on here and other sides to get a comparison given that they use different variables for their calculations. You could even take this a step further an use an aglgorithm to create weights for a pricing model. Housing analysis touched on this briefly with their liniar regression models i believe.
October 6th, 2009 at 11:10 pm
Off topic but:
Robertson: Strong real estate market needed for Olympic Village to break even
http://www.news1130.com/news/l.....61819_6192
October 6th, 2009 at 11:02 pm
You have to make more than your cost of capital or else it isn’t a sensible investment at all. If you assume mortgage rates are 6% you need to get north of 6% yield or you would be better off in the mortgage business. The numbers for real estate as an investment don’t come close to working in this city.
October 6th, 2009 at 10:45 pm
@GG:
You shouldn’t put N = 25 if you are assuming the income is in perpetuity.
As was pointed out before, if you assume interest rates are higher, you must start to take into consideration opportunity cost on your down payment.
If you aren’t able to answer what the PV of your income stream of 12,000 per year at 6% interest rate, then I think you have missed the very point you are trying to make!
October 6th, 2009 at 10:27 pm
Ahh I see Patriotz already beat me to it. That’s what I get for not being a regular anymore…
October 6th, 2009 at 10:26 pm
@GG: Did you answer my question about the PV of your future income streams (in perpetuity) assuming an interest rate of 6%? The answer should be a number.
October 6th, 2009 at 10:25 pm
Median S&P return is 10.88% from ’88 to ’07 and 10.36% from 1957 to 2007. Where does 3.8% come from? I highly doubt it’s accurate.
(Wikipedia and imarc.org for the stats)
Given that the rate of return is nearly triple what you were calculating it stands to reason that all your figures are out in your calculations by about 3x.
Does that cover it?
October 6th, 2009 at 10:16 pm
As pointed out by others, you don’t seem to be taking wear and tear and extra maintenance into account. A brand new condo may rent for a premium, but even without a big assesment for repairs think about upkeep on the interior. Once the appliances start breaking down and the laminate is scuffed up its going to be a lot harder to get a premium rent.
October 6th, 2009 at 9:56 pm
This thread is full of dumb.
October 6th, 2009 at 9:51 pm
@GG: Could you explain how your calculation disproves what I wrote? Maybe I am missing something…
October 6th, 2009 at 9:47 pm
Isn’t the breakeven cost of the Olympic Village units now over $1.2 million each? I think Boobie is going to have to travel a lot further than 100 miles to find that many fools.
Great units for social housing though. The Vision team would be able to fulfill their campaign promise of eliminating homelessness by 2015. as a society we should all be proud to be rich enough to donate this project to the poor. Now excuse me while I get this tongue out of my cheek.
October 6th, 2009 at 9:39 pm
Observer & Brad:
PV = (R, N, NOI, FV)
where,
R = 3.4%
N = 25
NOI = $12K
FV = $350K
This gives PV = $350K
This result can also be obtained by:
PV = NOI/R.
This is because rent is assumed to be collected forever (perpetuity) either by you, or those you sell the property to.
October 6th, 2009 at 9:27 pm
Or, n’other words, everyone’s trying to rent to yuppies, and we don’t have the industry to create enough yuppies for all those investors.
So if you can find a yuppie to make your scenario work, it makes sense.
But there is a demographic yuppie shortage, in Vancouver, which most investors are blind to, because everything, everything, everything has been marketed to “living the lifestyle”.
October 6th, 2009 at 9:23 pm
@observer:
The question I am asking in my analysis is for the situation when you buy after a 30% price drop (ie. at $245K). Only then can you earn a 6% yield. And at $245K, chances are decent that you will recover at least your purchase price after 25 years.
Yes, its obvious that yields go up when prices drop. That’s not my thesis. I am trying to raise a question of why prices should drop by 30% or higher.
October 6th, 2009 at 9:12 pm
GG – This is my point: the going rate for both in your downtown neighbourhood isn’t as stable as you’d think. Advertised prices went up quite a bit downtown over the past few years – and were being taken, sure! – but it’s showing. There is a higher level of vacancy than traditional downtown. This increase is based on gentrification, not on higher incomes.
Rents overall haven’t been shooting upward, but there has been price compression; your numbers might represent a good deal for an owner on the top tier – ie: renting to the majority of the bears on this blog – depending on quality and location. Only there’s a lot of competition out there on that tier, as anyone on this blog who’s renegotiated their rent can tell you.
Where there is less stock is in the low and middle tier places. They’re trying to get that high end money.
Only, rental HAS to be based toward income.
What I’m saying is your scenario may work for a very few places, but *based on income*, $1300 for anything less than 2 bedrooms is necessarily priced to the higher end of the market. I agree that in adverts, that end is currently seeming like the only tier out there. (In fact, $1300 seemed to be the point of maximum price compression over the summer, from bachelors to two bedrooms, regardless of quality.)
So $1300 is a bit of a unicorn number.
If rents are actually lower than $1300 for bachelors and one bedrooms, then your scenario is not overall market reflective.
October 6th, 2009 at 9:08 pm
@observer: Exactly!
October 6th, 2009 at 9:03 pm
@GG: I think what Brad is pointing out is the first part of the analysis when you assume the mortgage rate equals the annual return rate of 3.4%. In that case, you’ve only balanced your NOI to cover interest payments only. You need more NOI to cover the principal repayments or you need to assume the interest rate is lower than 3.4%.
October 6th, 2009 at 8:59 pm
I am talking about your example with 3.4%
In that example, your mortgage is $350k at 3.4% and your monthly payment matches the rent of $1300. The condo fees are $200/mo, taxes are $100/mo – that leaves $1000 for the mortgage payment. If that’s the case, then you are only paying interest. There is no space for principal in your example and your total debt stays constant.
The 6% example does include the principal in the payments, though.
October 6th, 2009 at 8:53 pm
A couple of remarks (the usual ones).
You have assumed a certain figure for the down payment which is arbitrary. Obviously, the more down payment you put down, the greater the return. If you buy cash, your return would achieve the current 3.4% annually
You have assumed that RE prices will never go down in the long term and so in 25 years you can at least expect to sell it for 350K. In the past, this assumption was probably correct because credit was given to the right economic players in society and housing prices were close to fundamental values. But now prices are so far above fundamental prices, it is entirely possible that housing prices will fall to fundamental prices and stay there. Period. So you may only be able to sell your place for $200,000 in the long term. Period.
You do make the point that if prices correct, the yields on RE investments will go up. This is obvious. The other obvious point you did not make is that you can only get these higher yields if you buy after the correction. The point about room for price appreciation is not correct because as I mentioned above, it is entirely possible prices will simply correct to fundamental values and stay there (so no growth in real prices after prices correct to fundamental values).
By the way, can you tell me what is the present value of your hypothetical apartment at a historical interest rate of 6% based your future stream of constant annual cash flows?
I ask this because you use the jargon term above but don’t actually calculate it (instead you are essentially calculating a cap rate).
October 6th, 2009 at 8:51 pm
@GG: #24 – sorry, i think you were referring to GIC’s when you said “basically no risk”
October 6th, 2009 at 8:47 pm
#21: Opportunity cost is the reason I’m comparing the absolute RE yield with an alternative investment such as the S&P500. Ideally, I would make the comparison on a risk-adjusted basis (divide the yields by their historical standard deviations). And yes, maintenance fees and rents will rise with time. But factoring this in will only increase the RE yield and the question remains: “Why should we expect a significant drop in prices?”
#22: The analysis assumes you sell the property after 25 years and recover your $350K. You are not on the hook for anything after 25 yrs. The monthly payments include principal + interest.
#23: In the analysis, I mentioned property damage as a risk with real estate when I was comparing today’s yield with the risk-free return. Regarding the price & rent value – That’s the approx going rate in my downtown neighbourhood. Prices and rents can be varied slightly in the analysis, but the end question remains the same – “why should we have a large correction?”
#24: You said “There is basically no risk.” As I pointed out in the analysis, RE has lots of risk. There’s liquidity risk, high leverage, property damage, missed rent income, and chances of market prices falling.
October 6th, 2009 at 8:19 pm
#20: Calculation for the 1.1%:
PV = -$100K
FV = +$350K
PMT = -$629×12
N = 25
Solve for the rate (using Excel or financial calc). You get 1.15%
October 6th, 2009 at 8:18 pm
I would agree with Patriotz that 3.8% is far too low of a yeild to use as a comparison. In March of this year, (just before the BoC crashed interest rates further) I got a 2 year GIC at 3% (thats per year). And that is with historically low interest rates.
It is very reasonable to assume that when this mess is over I would have no problem getting a GIC at 4-5%. Hell in 82 they were giving GICs away at 16%!
There is basically no risk, no work and no headache involved in getting a better yield than what real estate could deliver with only a 19% correction.
Also on a purly psychological basis when prices do start to fall again there will be overshoot on the downside. I believe we will get to a point where it will make sense to invest but prices will continue to fall as everyone will be scared to invest in an asset that is falling in price.
October 6th, 2009 at 8:12 pm
There’s no contingency here for basic upkeep in your scenario, here: vacancy loss, damage, upkeep & updating, (unforeseen rainscreening needs!), and the time it takes to do all landlord related activities.
Just a wee pet peeve of mine. There’s a lot of amateur landlords out there now who think it’s space->money, and it certainly can be for a time, but there is more to the business (for it isn’t a one time investment, but an ongoing business), than buying something and watching the returns roll in.
Also, if that $350K is one bedroom and is renting at $1300, that’s a high end rental price overall, and I’m not sure if the comp justifies that (although the location may). I know the rental market in the downtown area quite well, and I know that there’s quite a bit of vacancy loss being absorbed because everyone’s competing at the high end regardless of what they’re offering.
Statscan median incomes from 2006:
Family (ie: 2 bedroom and up) – $62,900
Single (bachelor, 1 bed) – $24,100
At around 30%, then, you have 2 bed and up being priced to median (with local incomes still supporting local economy) being $1600, and bachelor/1 bed coming in at $600.
Since the curve of incomes in the rental population will likely skew lower than the population as a whole, putting the renter’s median income at beneath the general population’s median, a healthy and sustainable (not credit based) local economy will fix rents around these numbers. Of course, arguably, you have to take the GVRD as a whole into consideration, rather than Vancouver proper, as many commute from suburbs; so location and quality matter.
So, to sum up: it is possible that some $350K condos will garner $1300/month rents over the long term without exposure to the usual costs of business, but I very much doubt this represents anything but a minority of places on the market.
October 6th, 2009 at 8:07 pm
GG, in your analysis, the mortgage payments are interest only and nothing goes towards the principal. In other words, after 25 years, you would still be on the hook for the whole mortgage…
October 6th, 2009 at 7:58 pm
Maybe I’ve missed something, but I don’t see how you’ve accounted for the opportunity cost (i.e., forgone investment income) for the down payment in the scenario that uses one.
Another omitted cost is special assessments and increased maintenance fees. It’s just about impossible that the very conservative maintenance fee of $200/month would apply for the whole amortization period in the absence of repeated and substantial special assessments. Our building has seen one special assessment after another since we’ve lived in it, and these have been substantial. From what I see, the assessments in our building are about par for the course, adding up to a major expense that probably exceeds the standard maintenance fee.
Also, while price appreciation over the full 25 years of the amortization may be a safe assumption, can you assume that the price will have appreciated over the near term, say, by the time the mortgage comes up for renewal the first time? At that time relatively little principal will have been paid off, and the possibility of trying to renew an underwater mortgage ups the risk a lot.
October 6th, 2009 at 7:55 pm
can someone show me how the 1.1% yield was calculated? thx
October 6th, 2009 at 7:35 pm
“he was asked who the buyers were” re: Bob Rennie/6 o’clock News
Didn’t he say something about a “100 mile radius” they would cast for buyers?
Whatever that means.
October 6th, 2009 at 7:08 pm
#15 – Patriotz
The fact that I used the US-wide correction value of 30% makes my analysis conservative. Why should we even expect 30%?
Also, thanks for your comments on the historical S&P500 yield. Some more reasons why it doesn’t make a good comparison is that RE has a very different risk profile and may therefore command a different yield.
October 6th, 2009 at 6:59 pm
#14 – Patriotz
You are correct about rents being established by the supply-demand of rental units. However, as prices fall there is some downward pressure on the demand side, as some renters will find it more affordable to become buyers. But the main reason for my expectation of falling rents is because I hold a deflationary outlook.
October 6th, 2009 at 6:50 pm
@GG:
Las Vegas and Phoenix are already down over 50% from peak. San Francisco and LA are close to it.
And please, don’t use any US-wide (or Canada-wide) figures to make projections for possible declines in Vancouver. This city is practically on its own planet.
October 6th, 2009 at 6:43 pm
@GG:
Rents are in no way dependent on the market price of RE. You have the functional relationship backwards – the market price must adjust to rental value in the long run. Rents are determined by actual demand for and supply of housing.
In particular, Vancouver rents continued to rise during the great bust of 1981-82. That was because nominal wages kept rising (general inflation was still rather high), and also because the preceding bubble was so short that it did not result in significant oversupply. They also kept rising during the bear market of the late 90′s.
That said, nominal rents appear to be declining now (as they are in many US markets) and will probably continue to do so for some time. But that is not correlated with prices, which of course have staged a strong recovery since the bottom last winter.
October 6th, 2009 at 6:42 pm
#8:
Considering prices have almost doubled since ’02, a 50% crash would bring us to pre-bubble levels and would represent a worst-case scenario.
The “30%” value was chosen because that the minimum correction the US market has faced according to the Case-Shiller US Home Price Index.
October 6th, 2009 at 6:33 pm
@Anonymous: “i have to say he looked a little haggard on tv. does he normally look like that?”
Maybe the Miami Vice unshaven look is back.
I agree, Rennie looked run down. I wonder why.
October 6th, 2009 at 6:32 pm
Link to above:
http://www.boardwalkreit.com/F.....2008AR.pdf
October 6th, 2009 at 6:31 pm
i still want to know where u can get a 350k condo that rents for 1300! that seems rather cheap (price) to me (not rent).
October 6th, 2009 at 6:31 pm
Faulty comparison. Corporations do not pay out all of their earnings in dividends. They use retained earnings to buy more capital. That is, you are ignoring the capital appreciation of the S&P500. By comparison, your condo will eventually depreciate to zero as the land value is negligible (or require capital injection out of your pocket which amounts to the same thing).
You can see that the historical earnings yield of the S&P500 is far higher:
http://pages.stern.nyu.edu/~ad.....spearn.htm
Dividends+capital appreciation = total return. From the link above the capital appreciation of the S&P500 from 1960 to the end of 2008 (which was near the recent market bottom, it’s gone up 25% since) has been 903.25/58.11=15.54 which is an annual rate of 5.9%. Add the dividend yield (an average of 3% over this period) and you get 8.9% annual total return.
Or compare the yield against an income trust which does pay out all its earnings. Pengrowth Energy (which I own) currently yields 7.8%.
The plain fact is that current yield on Vancouver RE is absolutely dreadful by any investment metric. Take a look at Boardwark REIT’s 2008 annual report. Its properties are valued at $2.2 bn (page 30). Rental revenue is $424 million (page 31). That’s a gross yield of 20%.
October 6th, 2009 at 6:23 pm
GG,
I took the same downpayment (100k), same rate(6%), 25 years.
Without correction: $1,629/month – rent for 1300
With correction: $927/month – rent for ????
But thats not the argument here.
Looks like 19% correction will yield about 3.8%?
Interesting question though. I’m not sure where the 30% came from.
October 6th, 2009 at 6:13 pm
bob rennie was on the 6 o’clock news. it’s ironic vancouver is rushing to rennie to sell millenium underwater at the highest price possible so we can break even on the development costs.
he was asked who the buyers were, and he said west van homoaners. i wonder why he didn’t say rich .
but he’s confident because he’s selling sub zero fridges and hardwood floors over the water in the city that has a $60 million hole in the budget with bigger holes to come.
i have to say he looked a little haggard on tv. does he normally look like that?
October 6th, 2009 at 6:09 pm
#4: I mentioned that the current yield is poor and so we should expect a crash. The question I am posing is: Why should the crash be as large as 30%
October 6th, 2009 at 6:05 pm
#1: Price was based on downtown condos listed on realtylink.org
#2: It’s the latter. If you buy after a 30% drop, you’ll get a higher yield.
#3: Rents will drop with falling home values but not as steep (just like rents didn’t rise as steep as the price increases). Also, you can’t compare $927 with $1300 because the $927 is based on the size of your down payment.
October 6th, 2009 at 6:05 pm
Sorry, didn’t read the additional points about rents.
Is this the general argument?
How can we achieve 6+% yield over 25 years (With a 30% crash) when historical S&P500 avg is 3.8? I guess the opposite question can be asked. How can we maintain 1.1% yield over 25 years (no crash) when historical S&P500 avg is 3.8? Who wants to invest in that?
Be interesting to see at what percentage correction will it yield 3.8%.
October 6th, 2009 at 5:49 pm
I’m a bit confused on how the correction might affect rent.
If there’s a correction of 30%, the monthly payments would be (350k-30% = 245k-100kdownpayment = 145k @6% 25 years) $927/month. How can one rent it out for 1300 still?
October 6th, 2009 at 5:37 pm
If it corrects 30%, the condo purchased for 350k becomes a higher yielding investment? Or once the correction happens, and 30% comes off the 350k, does the condo become a higher yielding investment? confused
October 6th, 2009 at 5:13 pm
[1] find me a condo in a decent area that rents for 1300 and can be bought for 350k.