Why a home is a bad investment

Those heretics over at Canadian Business magazine have a cover article this month called Why Buying a House is a Bad Investment.

The euphoria around home ownership crowds out some of the unpleasant truths about real estate: mainly, that long-term returns are often modest at best. Some studies have found that stock indexes actually outperform housing. More worrying is that real estate prices can and do fall — and they can take a long time to recover. Canada has not been immune to severe price corrections in the past, and we could be on the verge of another one now. With interest rates set to rise and curb affordability, and with economists speculating about a bubble, staking one’s entire financial future on a home is not necessarily a wise bet. In fact, a house just might be one of the most overrated investments around.

..and it goes on and on.

“There’s a unique confluence of factors that has driven house valuations up this sharply,” says Derek Holt, vice-president of economics at Scotia Capital. “They’re all temporary, and that’s a house price bubble that could be pricked as we go off into the next year.” The rate of growth in home prices for the past 10 years has in fact been out of line with prior decades, pointing to lofty valuations today, according to Holt. Prominent Canadians such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge have also sounded the alarm recently on today’s unusually rich home prices.

You can read the full article at the Canadian Business website, but these people clearly don’t know what they’re talking about.  After all, real estate prices never go down, everybody knows that.

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Ally123
Ally123
10 years ago

For the past year I had been out looking to buy armed with a real estate agent (I was looking for something less than 10 years old (preferebly 5)). Just my preference. It would get to a point where one place seemed interesting..hmmm..seems like an okay place then I would ask the question to the RE agent..What was this purchased for 5, 3 10 etc years ago…Everytime I was absolutely shocked at how much the price had increased over a period of 5 years or less. I could not justify handing over 100000 profit on a 400000 place that was purchased for 300k 5 years ago…To me that is just silly…I just cannot find the logic in that….As an average buyer I was just trying to find a decent place to live (mind you you have to travel outside the… Read more »

Anonymous
Anonymous
10 years ago

You can't afford an apple,doesn't apple is sour;Chinese alone can sustain Van ER.To Chinese is milk and honey.

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[…] March 2010 · Leave a Comment Dorker at vancouvercondo.info 11 Mar 2010 9:07 pm […]

patriotzed
patriotzed
10 years ago

oneangryslav2:

You cannot assume any appreciation or depreciation going forward for a house when estimating returns, because nobody has any obligation to buy it from you at any time for any price. It's not like a bond where the issuer has an obligation to pay you your money back on some date. It's like a stock. Competent stock market investors never assume that they can sell for any given price in the future, rather they look only at earnings.

You have to assume you will own the house forever and compare the present discounted value of future net rental value, i.e. the fundamental value, with the maket price. Needless to say the market price for Vancouver RE at present exceeds fundamental value by a factor of at least 2.

patriotzed
patriotzed
10 years ago

@VRENGD:

Buying a house to live in is just a consumer good, not an investment. You sink money into it and get no financial return: just like Gucci bag or rolex watch.

Patently untrue. Your return is the difference between ownership costs and market rent, as I have already pointed out.

Are you saying that someone who bought a house in the mid-80's, and has been paying monthly costs below rental value for the last 20 years (i.e. net below rental over the whole 25 years), and now has a paid for house, hasn't received any financial return?

Give me a break.

Kite towards moon
Kite towards moon
10 years ago

@Vansanity: I am just wondering how would you compensate your followers?

Don't you see big difference between 60,000 vs 8,000 listings end of 2008?

Only a shoe shine boy could be that much wrong,I don't think window licker could ever beat this shoe shine boy and and.

Do you know the difference between 45% appreciation and 70% crash?

that would make a total of 115% appreciation vs your prediction.Now i want you to pay 115% difference to every single bear on this board and say sorry to all the bulls if you looking for cure for your retard prediction that you were spewing on this forum.

Vansanity
Vansanity
10 years ago

@Kite towards moon: I've got some real expensive italian leather shoes that you should be working on, rather than be on here trying to poke a bear.

You'll be one I'll be looking for when the shit hits the fan. Good luck!

Dave
10 years ago

@doug r:

Or they get a reverse mortgage.

doug r
doug r
10 years ago

@Dorker: We're just almost 3 years behind California, is all.

doug r
doug r
10 years ago

@Dave: It costs money to maintain those massive mcmansions. When they stop working, their income goes down. When the market goes through a contraction, especially if they rely on house flipping for income, they will have to sell. Eventually they will sell to get extra cash or they will default in the 25th year of their 35 year refi.

doug r
doug r
10 years ago
vreaa
10 years ago

@Vansanity: I happen to agree with you re us being in the vicinity of a market top.

However, regarding the 'shoe-shine-boy' indicator, well, shoe-shine boys and equivalents have owned RE in this town for the last 5 years or more.

And, while we're talking indicators, all of the sentiment indicators (pervasive mindless bullishness) topped out years ago and this market still plowed on.

2008 likely would have been the top, but we were perversely bailed out by the stock-market crash. Money went from free to freer, and even more demand got dragged forward (20 year old shoe-shine equivalents buying RE).

Anyway, as it's been said before by many here, the bigger the bubble the bigger the bust. Currently the bubble walls are as 'wafer-thin' as a Mr Creosote mint.

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[…] Anonymous at vancouvercondo.info 11 Mar 2010 3:41 pm – [in response to a renter who enjoys the freedom that comes without a mortgage] “Hey, be sure to enjoy your “freedom” on the streets when you retire, and have no home of your own. Life is not easy, and sometimes it requires commitments like home ownership to get ahead.” […]

scullboy
10 years ago

Hey Kite toward moon and happytimes, here's a little something from Google translate:

现在你的母亲是我的大海洋吮吸阴茎

The rest of you, translate at your own risk. 🙂

kansai_92
kansai_92
10 years ago

It's a great investment in Vancouver for those who are looking for 2% yield over 35 years.

But that's okay because we need more home owners and housing starts.

After all, someone has to pay the city taxes and pay the development fees.

Kite towards moon
Kite towards moon
10 years ago

Human,

We were here to see bears up dating Larry's number in the forum posted by VHB but it seems like bears can't handel sky rocketing sales so there is no update.

Once again everyone,In Vancouver more listings mean more sales.Oppertunities are disappearing so does your chance to enter.

Human
Human
10 years ago

Man there must be something happening in the market because there is a huge uptick in the bull, as well as incomprehensible, postings.

happytimes2
happytimes2
10 years ago

Buy an apartment in Vancouver, so anyone, Nutslappers blog hopes not run. This requirement, Pentup. Pentup beer demand a high price. The best place to live you need to pay if you will, New York, Tokyo, like Los Angeles. Canada is stupid, free medical services, they still wear instead, purchase of real estate, believes that Canada can not lose this reason. No

happytimes
happytimes
10 years ago

Everyone wants to buy real estate in Vancouver even bear blogging nutslappers do. That's pentup demand. Pentup demand means high prices bears. If you want to live in the best place you need to pay money just like New York or Tokyo or LA. Canadians stupid think healthcare is free so they stay here bears and buy real estate instead. That's why you can never lose buying.

VANCOUVER REAL ESTATE NEVER GO DOWN

Anonymous
Anonymous
10 years ago

Is that some sort of joke?

Still waiting
Still waiting
10 years ago

Where is Drachen? … I haven't seen his postings since the new rules came into effect. When he was not into fighting, he provided good arguments to support his theories.

mortgageborker
mortgageborker
10 years ago

@reknab: Well it sounds like one of the big five is about to lose a lot of business. I'm guessing this bank has a red logo and it's name starts with a C.