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March 8th, 2010 at 11:17 am
Ashes to ashes, dust to dust.
The real estate bubble is now a bust.
~ R.I.P. 2002 – 2008 ~
March 8th, 2010 at 11:00 am
@BoB:
“Are we seriously looking for a 50 – 60% reduction in prices?”
This seems like a ridiculous idea from where we’re standing right now, doesn’t it? However, I don’t believe that it’s beyond the realm of possibility. People in Phoenix also thought that RE couldn’t possibly go down that much. Now look at it, I know Canadians who are eagerly buying up the RE there for at least 50% off. I know people who are buying 3 bedroom houses for $115k that were over $300k a few years ago. So really, you never know, do you? We can hope…
March 8th, 2010 at 10:52 am
@Mr. Reasonable:
You will lose your shirt and T Back again and again.
Vancouver RE is well supported by wealthy Chinese Officials and their offspring and concubines who is seeking a safe place for their new-found wealth under the back door.Recently, I discovered on every weekend ,bus load of mainland Chinese herding three million plus house like buying toys.
March 8th, 2010 at 10:49 am
@realpaul:
I’m not the one who decided to use gross income in the mortgage calculation. I’m just following the rules that the banks/CMHC use, as far as I understand them.
March 8th, 2010 at 10:42 am
#6 VHB after taxes a 100K income is only going to net 6200 and change. Don’t forget the parasites in Ottawa. Property taxes and utilities are all fixed costs as well. 8300 p/m is gross income.
18-24 yr olds ‘likely to buy’. 91% think house will be maajority of retirement ‘income’. Thats a lot of 18-24 tr olds selling 40+ yr old houses at the same time isn’t it. Won’t that replicate the problem thats moving in right now?
http://network.nationalpost.co.....homes.aspx
March 8th, 2010 at 10:42 am
@BoB:
“I do have to point out that VHB after about 8 years of being wrong, will finally get it right!”
We were right then and we are right now. The fact that the market remains overvalued for longer than many thought possible does not mean it is at the correct valuation. It is the extreme failure of minds like yours to understand such a simple concept that has led to this situation.
Further. I say the market has been significantly overpriced since the early 1990′s, wow, 20 years! It hasn’t fallen back in line with fundamentals. Am I wrong? How can you tell by looking to the past? Can’t you see how wrong-headed it is to say that predictions of the future are wrong if they aren’t correct today? It doesn’t even make any sense.
March 8th, 2010 at 10:35 am
@Dave:
“I have always backed up my claims and assertions. Can you say the same?”
Sure, anyone can SAY that. Especially if they’re deluded or lying like you.
Where’s your back-up for the statement that apartment buildings as an investment will go up in value over time?
Answer: It’s an unprovable proposition, yet you stated it like it was a fact, therefore you CAN’T back up that claim can you? This is only the most recent in a pathological string of such statements from you.
Conclusion: You are deluded or a liar.
March 8th, 2010 at 10:28 am
I agree this will cause an impact to prices. I do have to point out that VHB after about 8 years of being wrong, will finally get it right! Nice work! Now what? Is there a valuation that will make sense for you to buy? The prices back when you started your blog look amazingly cheap now but I guess those levels are still too high in your books? Maybe your looking for prices like $275,000 for a 1000 square foot, 2 bedroom, 2 bath in downtown Vancouver? As mentioned I agree the changes will have an impact on prices but to what effect? 20% off results in prices that are still out of whack to the historical norms. Are we seriously looking for a 50 – 60% reduction in prices?
March 8th, 2010 at 10:23 am
@Dave: Risk cuts both ways and in an efficient market, the price reflects the markets best discounting of risk with all known factors accounted for.
IMHO the Efficient Market Theory is total crap. It says that all information available is immediately acted upon by investors, and no investment strategy is better than a coin toss. If you believe in it, you also have to believe that Warren Buffett has merely been lucky. You also would have to believe that Robert Shiller was lucky when he correctly called the dot-com and housing bubbles in the US.
People with enough skill are able to consistently outperform the market. This would not be possible if markets were efficient. BTW, Shiller calls Vancouver the bubbliest market on the planet.
March 8th, 2010 at 10:21 am
@Purp:
Your link shows rents going up in nominal dollars, which is what I have been saying all along. Drachen even agreed that I was correct on this point previously.
March 8th, 2010 at 10:20 am
@Anonymous:
https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?lang=en&cat=59&itm=19&sid=f58e37cfa9454d1f8aa428902e877b16&fr=1268068800139
March 8th, 2010 at 10:13 am
The rising/fall rent question is interesting, because we’ve got Dave claiming rents are going up and Patriotz and others claiming that rents are falling. There’s data out there which supports both positions:
Sauder Business School Data (falling rents) : http://cuer.sauder.ubc.ca/cma/index.html
CMHC Data (rising rents ~1%/yr) : http://vancouver.ca/commsvcs/h.....hcdata.pdf
So it seems to depend on assumptions used, showing either a slight increase rents or a slight decrease…..
March 8th, 2010 at 10:04 am
@Dave:
“And finally, the value of the investment will go up over time.”
No. It won’t. Historically apartment buildings drop in value except during bubble periods.
But again, I love how you spew these incorrect statements as though they were fact without even bothering to find out the truth. Of course never-mind that you’re making predictions about the future as though they were absolutes.
March 8th, 2010 at 9:56 am
@Dave: @Dave:
Rents going up?
Which data? Can you give us a link? A document? Something?
All I hear and see is an oversupply of rentals which cost as much as they did 3 years ago, sometimes even less.
Prove me wrong by providing some hard evidence.
As for rates, we will see. People are so squeezed that really small changes in interest payments will bear big effects.
March 8th, 2010 at 9:48 am
@logic:
1. Rents are still going up. All the data supports my position.
2. Risk cuts both ways and in an efficient market, the price reflects the markets best discounting of risk with all known factors accounted for. It’s your speculation that there is more risk at this point. The market does not agree with you. It may come as a surprise, but I am on your side of the risk equation. I think there is more downside risk than upside and I think we are nearing another pricing peak. Where we probably don’t see eye to eye is downside risk. I imagine you foresee nothing short of devastation and completely collapse. I foresee single digit drops (this Fall) after we reach another peak (this Summer).
3. Five year rates are highly unlikely to be at 8% in five years. If they are, then we will have experienced significant inflation. Significant inflation would carry over to rent, so the income on this property would be much higher. The relative level of debt would also be deflated.
4. Who’s the troll? I have been pretty cordial in the face of persistent bear anger. I have always stuck to the debate and I have always backed up my claims and assertions. Can you say the same?
March 8th, 2010 at 9:25 am
dave…. (how is your day today mr troll?)
[1] rents have been decreasing
[2] prices have more downside risk than up at this point in the cycle
[3] what happens after yr 5 year fixed rate runs out and you refi at 8%?
[4] stop being a troll.
March 8th, 2010 at 9:24 am
As long as people can still get a contract rate on the 5-year for less than 4%, I’m not sure it will make that big of a difference. But since we’re already on the edge, it could be just enough to finally end this thing.
@Rocker Guy: Question: would it be worth it to buy this building?
We need more details. (Dave doesn’t because he’s a realtor and knows real estate is always a great investment).
The current yields on the downtown condo I’m renting are 3.12% gross, 2.22% including expenses and 5% vacancy.
My old place is rented out at maximum possible rent, and yields 3.3% net.
Then again, the additional details on your building probably don’t matter. Vancouver real estate is headed for a crash and most of us know it. Since an ebbing tide sinks all ships, it’s most definitely not worth it to buy in your building. Try plugging in 30%+ depreciation in your investment decision calculator and see what it says.
March 8th, 2010 at 9:16 am
Dave
Ten years ago that would be sound advice today I am not so sure. But keep cheerleading. No one can rock pom poms and a little skirt like you.
March 8th, 2010 at 9:00 am
@Dave: Also, if you leave a bottle of milk on the front doorstep, then pixies will come in the night and take care of all the building maintenance for free!
March 8th, 2010 at 8:42 am
@Rocker Guy:
Because you can borrow money for less than that. Five year rates can be had for less than 4%. Not only that, your income will increase each and every year as rent goes up. On top of that, you are building equity with each and every payment made. And finally, the value of the investment will go up over time.
New Mortgage Rules Will Result In 20-25% Drop In Purchasing Power For Most FTBs « Vancouver Real Estate Anecdote Archive Says:
March 8th, 2010 at 7:42 am
[...] The Pope, at vancouvercondo.info, 7 Mar 2010 – [...]
March 8th, 2010 at 7:26 am
Oh BTW I just secured a new rental with a free month of rent. The building (it has two suites) grosses 5.5% before expenses, but when you include taxes and assume 5% vacancy (which is understating things) the return is under 5%.
Question: would it be worth it to buy this building?
March 8th, 2010 at 7:20 am
@Wreckonomics: I think what is important is that the instant drop in purchasing power will cause a sudden change in market psychology. A sudden one month fall in prices has a chilling effect on buyers.
March 8th, 2010 at 4:14 am
Past few years? Didn’t you start your blog way back in 2005 VHB? That’s half a decade ago!
March 8th, 2010 at 3:15 am
This seems like a crafty political move. It appears innocuous on the surface but, in fact, will be the pin that pops the bubble. Yes, blood will flow through the streets of Vancouver, but it will much less dramatic elsewhere, and it will be hard to point the finger of blame at the Conservative government.
March 8th, 2010 at 1:00 am
@VHB:
Yup! I hope that Mortgage Trends is getting it right. If true, then the game is over.
Great post, Pope.
I look forward to more details as they emerge. Very eager to learn more about implementation.
March 8th, 2010 at 12:33 am
@logic: Having reread gonecoastal’s post, I now have the same impression. S/he’s either a moron, or does good snark.
March 8th, 2010 at 12:29 am
@gonecoastal: Hi, gonecoastal. You’re right; you’re not a mathematician. Neither am I, but I do know something about math and you have made a common mistake. The difference between an interest rate of 3.29% and one of 5.39% is a 2.1 percentage-point increase. As a percentage, it is (5.39-3.29)/3.29, or 63.8%!
Look at it like this: Let’s assume you had borrowed 100,000 dollars from your loan-shark brother and he was charging you a monthly interest rate of 3.29%. Your monthly payment would to your brother would be $3,290. If your brother then increase the interest rate that he was charging you to 5.39% per month, you’d be doling out $5,390 dollars a month in interest–a 63.8% increase.
March 8th, 2010 at 12:27 am
Blood in the water?
http://vancouver.en.craigslist.....13668.html
the above listing is from Crosby Management offering 2 weeks rent free in downtown Vancouver!!
March 8th, 2010 at 12:24 am
The Building Bubble in China | Businessweek March 1, 2010
http://tinyurl.com/yd2ngyd
March 8th, 2010 at 12:18 am
@VHB:
If the market was sane and a buyer could qualify for more than enough to buy something, they could qualify for enough at the posted rate and then go variable. Since we aren’t in a sane market, this will probably push everyone into a fixed mortgage because it will allow them to borrow more, which of course is the only thing that counts.
Unfortunately, it also means significantly more money (in the short term) out of peoples pockets to the banks.
For the person who thinks 2% isn’t a lot. Ignore compounding and principle payoff. Multiply $500,000 by 2% and 4% and 6%. You will see that it equals $10,000, $20,000 and $30,000.
If you think $10-$20k per year (thrown away in interest to the bank) isn’t very much you make a lot more money than me.
March 8th, 2010 at 12:17 am
is gonecoastal just pretending to be innumerate?
March 8th, 2010 at 12:11 am
I work for a big bank. Based our internal policy, we will use 5 year posted rate to qualify anyone who apply for a mortgage starting on Apr. 19. CMHC will also use 5 year posted rate. I discussed with my friends in other banks, they haven’t heard anything yet. But at least one credit union already started using 5 posted rate for any mortgage applications.
March 7th, 2010 at 11:25 pm
@acefupn:
Hmm. Reading the Canadian mortgage trends blog entry, it does say the rule applies only to terms <5 years. So, you can still get qualified on a 5 year term.
The best I can see for a 5 year is around 4%.
I crunch that through as a 9.1% drop in bid price, using 3.3% vs. 4.0% interest rates.
Not as big as above, but still relevant.
Question: Is there a reason why someone *wouldn’t* take the 5 year fixed given that you can qualify for it more easily?
March 7th, 2010 at 11:24 pm
Rp makes an important point, and to be fair to ‘gonecoastal’ I think it unfortunately is not understood by the majority. It sounds like a tiny number, but an additional 2% represents a DOUBLING of interest rates if you start from a rock bottom 2%.
Interest rates have to return to normal from their emergency lows. I think these new rules are just the right move to make sure that buyers are ready for that transition.
March 7th, 2010 at 11:20 pm
2% is a tiny change when you’re going from 20% to 22%. 2% is a HUGE change when you’re going from 3% to 5%.
March 7th, 2010 at 11:12 pm
2% a very large *relative* change though. It wouldn’t matter much if rates were 10%. It matters because they are 2%.
March 7th, 2010 at 11:11 pm
@VHB: I don’t know, I’m not a mathematician, frankly that stuff just goes over my head. I just don’t see how you can talk about hundredthousands of dollars dropping in price just because the interest rate changes by 2 percent. 2 percent is just a tiny change.
March 7th, 2010 at 11:08 pm
Craigslist Vancouver has over 1000 suites for rent posted today.
http://vancouver.en.craigslist.ca/apa/
March 7th, 2010 at 10:54 pm
Of course, with a 5-year fixed @4.89% it’s 483k. And at @5.89% it’s $428k. It’s all about the interest rates.
March 7th, 2010 at 10:52 pm
From ING: 100k income, 31k down, 5-year fixed @3.89%, (estimated) $2100 in property tax – you can borrow $550k with 35 year amortization.
March 7th, 2010 at 10:48 pm
#8 @acefupn: I read that too. However, 3.75% is not far from 3.29%. That’s what, a 15% drop in purchasing power?
March 7th, 2010 at 10:42 pm
“Going forward, mortgages with terms of five years or more will use the contract interest rate. This is key because it suggests lenders will still be able to qualify insured 5-year fixed borrowers using heavily discounted contract rates (e.g., 3.75% instead of 5.39%, as of today).”
What about that paragraph from the Canadian Mortgage Trends website? Doesn’t that imply that for terms over 5 years it will be the discounted rate?
I would love it to be the posted rate, I think that would mean insta-crash … but I’m still not convinced.
March 7th, 2010 at 10:39 pm
But the bigger point here is that it underscores the *insanity* of the local market with prices set by the looseness of credit rather than value.
It is loopy that prices are likely so sensitive to arcane rules governing how much rope banks are willing to give you to hang yourself with.
Why one why to shelter yourself (renting) is reasonably prices while the other way of sheltering yourself (owning) requires you to sign your soul to the bank is just silly. But, it ends soon.
March 7th, 2010 at 10:32 pm
@gonecoastal:
I worked through an example with 5% downpayment, 6K/year property taxes and 5.4% vs 3.3%. I get a drop of 23.9% in the price you can pay if you are maxing out.
Here is my example:
income=100K
monthly income=8333
40% TDSR (assume no other debts) = 3333 max payment
500 month for property taxes = 2833 for mortgage.
35 year amm means max loan of 707,875 at 3.3% and 538,797 at 5.4%.
Assume 5% down, so divide loan by 0.95 gives max price at 745,131 for 3.3% and 567,155 for 5.4%. (745131-567155)/745131 = 0.2388
Does that look right?
March 7th, 2010 at 10:30 pm
@gonecoastal: Well as he said, he’s just plunking in some round numbers. But even still, if this hypothetical couple has $30k for a downpayment on April 18, they almost certainly have the same $30k on April 20.
And if you can’t see 2% making that big a difference, can you also not see $100k in mortgage eligibility making a difference?
March 7th, 2010 at 10:16 pm
indeed this lowers what the demand can afford, prices should drop. unless this is some sort of government plot to lower the inflation numbers so that they can lower/maintain current interest rates.
March 7th, 2010 at 10:12 pm
Why $30k down in your example? That’s a different percentage of each loan, shouldn’t it be an even 10% or something? Also people can take out loans for longer than 25 years and afford more. I can’t see 2 percent making a big difference in the market.
March 7th, 2010 at 10:07 pm
OK. If this rule stays in place and the real estate market in Vancouver isn’t lower in 1 year, then I’m willing to believe all the it’s different here/ illegal drugs/ wealthy foreigner arguments.
..even though every other market that’s used those excuses has dropped.
March 7th, 2010 at 10:00 pm
The market is driven right now by people convinced that real estate never goes down. If real estate never goes down, the more you borrow the more you make. Therefore, people want to borrow as much as the bank will let them. Rational metrics may rule in the long run, but for the past few years these guys have been pushing things ever higher.
This reform means they can’t borrow as much as before. That’s why this matters.