End of the Canadian RE bull market

ReadytoPop posted a link to this Financial Post article that portrays what it looks like when a real estate bet turns bad:

Erica and Jeff Manger never thought the price of their house could drop.

The Alberta couple bought a condominium in the Rockies resort town of Canmore three years ago and when they decided to move in 2008 to Sylvan Lake in Alberta, where they could afford a detached home, they kept the condo as an investment.

“It never occurred to us that we wouldn’t be able to sell for what we paid,” says Ms. Manger. “People were making $100,000 [on paper] a year on their condos.”

Now they’d be lucky to get the $315,000 they paid for their condo, even though it may have fetched $345,000 in 2008 when they were thinking about selling it to help pay for their new home. Instead, they’re getting $1,100 a month in rent for an investment that costs them $1,800 a month to carry and isn’t going up in value.

It gets worse. They have to sell the house in Sylvan Lake because Jeff, who is a helicopter pilot, is looking for a better location for work. They paid $375,000 for the house and fixed it up. Not even counting Jeff’s labour, the couple spent another $30,000 on supplies.

“We tried to sell it and put it up for $409,000. We lowered it to $385,000 when we hired a realtor, but that didn’t work,” says Ms. Manger.

Read the full article over at the Financial Post

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Anonymous(GStrader)

@ patriotz: It's possible for rents to decline in Vancouver, but I agree the cause won't be the decline in real estate prices. For example, rents in NYC declined in 2008 much more than RE prices did. This again had to do with the decline in incomes due to the financial and legal sector meltdown. The same may happen in Vancouver. The run-up to the Olympics provided a lot of decent-paying jobs that aren't here anymore. Just a thought.

Figaro

more vacant rentals hitting mls today.

watch for "new carpet" or "new hardwood"in the listing an/or "quick possession possible" in the listings.

and another building had an elevator break this week, another had sprinklers go off unannounced.

patriotz

@Anoymous:

Am I alone in thinking that rents HAVE to fall after prices?

Yes.

Rents continued to rise during the 80's bust in Vancouver and the 90's bust in Toronto. Those are the facts. Now go back and fix your theory.

Anoymous

@fatjay:

"How could anyone do that for you if we don’t know your expenses or what you consider an acceptable profit?"

It's hypothetical. Feel free to make up any numbers for unknowns that you think are reasonable.

Anoymous

@Plack: "that’s silly. Presumably an investor wants the most they can get, not to “undercut” other investors. Rents don’t fluctuate wildly like prices because you don’t leverage to rent and there’s no rental speculation." They want to get the most they can, of course, but if their product represents better value than their competitors then they'll have an easier "sell". Which, for a landlord, might hopefully translate into fewer periods of vacancy, or increased competition between tenants allowing the landlord to select those who they feel would be most responsible rather than being forced financially to take the first person who registers interest. Surely one would expect rents to plummet roughly in line with prices after a crash, as competition between landlords (especially those who bought pre- and post-crash) erodes the amount of income they're permitted to make by the… Read more »

oneangryslav2

@fatjay: Yes, you're right. Thanks for the correction.

Anonymous

@ Renting August 10th, 2010 at 9:37 am Although I agree with you 100%, I firmly believe that the key players involved in the OV will NOT liquidate these units until absolutely every other option is explored first…and that includes giving them away if necessary (ie. via lotteries and such) or just simply taking them off the market (very quietly) and using them as subsidized rental units for "friends and family". Total BS no doubt, but too many ppl involved trying to save face. Remember these articles from a few weeks back (which everyone should have read already)? Note the difference in # units available/presold as reported by the authors of these two articles. http://www.cbc.ca/canada/british-columbia/story/2… http://www.bloomberg.com/news/2010-06-25/vancouve… I guess the only thing worse than this would be if these units were somehow totally deficient and required major taxpayer funded upgrades. Think… Read more »

realpaul

I call bullshit on the 'seasonally adjusted' housing numbers just issued by the government. These figures are made up based on historical 'expectations' they have nothing to do with reality. 100% of the time these 'seasonal numbers' are adjusted down when its found that actual permit numbers are worse than anticipated. If they are saying 'this' number…you can guarantee that it is much lower when the real numbers are published two months from now. The government uses these bogus stats to manage the message because in Canada information is kept as a closely guarded political weapon and is not public as it is in most other democracies. Did anyone notice how the sudden jobs numbers release in the US last week led to an even more egregious number released from Canada withinn hours of the American so as to keep… Read more »

realpaul

Nice to see another of my ideas get into the mainstream conciousness. Sloppy fat civil servants, overpaid to an outrageous degree skewing the RE market with careless purchases due to their surety of sloppy fat pensions. People need something to talk about…why not interfere with the propaganda by introducing these juicy unspoken factoids into the mainstream eh?

http://communities.canada.com/VANCOUVERSUN/blogs/

Renting

I did a walk through the Olympic village display suites a few weeks ago. I agree 100% that is a ghost town and the buildings are too close due to them all being low to mid rises. No privacy at all and it has a feel of a low income housing project (I wonder why). All the Concord Pacific developments across the creek are much better planned communities. No comparison IMO. And it will likely take 15 years to get the surrounding areas of the village finished so there is really nothing close by to make this area attractive. Now the good part the pricing. I only got the price on one unit. I was about 980 ft, small balcony, view over looking the street, long skinny floor plan which was a poor use of space IMO with limited windows.… Read more »

Plack

@Anoymous: Presumably somebody buying a condo at a 70% discount in 2 years time would be able to undercut just about any other rental apartment out there whilst still generating revenue

that's silly. Presumably an investor wants the most they can get, not to "undercut" other investors. Rents don't fluctuate wildly like prices because you don't leverage to rent and there's no rental speculation.

Falling prices just mean you get back to decent cashflow instead of losses for investors. It means the return of investment which will be needed to fill in the vacuum left by collapsed speculators.

jesse

@fatjay: "Cap rate might give you a basic idea if a condo provides good value, but it doesn’t account for…"

Cap rate can and does account for maintenance, capital funding, and vacancies. It does not account for rental and capital appreciation however those are inferred based upon what an "acceptable" cap rate is.

I agree there's a lot more to research beyond cap rate and if such a simple calculation doesn't make financial sense it's time to run away. Any efforts to "make the numbers work" with lower cap rate is a fool's game.

patriotz

@Girlbear:

Most likely to walk away are borrowers with the best credit scores and so-called jumbo loans that exceed the caps set for mortgages bought by Fannie Mae and Freddie Mac, which range from $417,000 in most locations to $729,750 in high-cost areas, according to the Morgan Stanley report.

In other words, upper-middle class white people. Not you-know-who.

Girlbear
patriotz

@fatjay:

If the rent was $1300 (i.e. $400 positive cash flow) then your yield would be 20%.

That's not yield, that's return on equity.

Gross yield = rent/price.

Net yield (cap rate) = (rent – property expenses)/price.

The yield on a asset has nothing to do with how you pay for it.

Boombust

“Not one taxpayer has paid one dollar for the Olympic village,” he said. “And they never will.”

Didn't Mayor Drapeau say that the Montreal Olympics would never have a deficit just as a man could not have a baby?

Uh oh.

fatjay

@Anonymous: Anonymous said: I’m hoping at least somebody can actually do the numbers and let me know what I’d need to charge to cover my payments/expenses AND turn a modest profit on a downtown condo which crashes from $350K to $120K How could anyone do that for you if we don't know your expenses or what you consider an acceptable profit? The math is simple, just do it yourself: rent = payments + expenses + "modest" monthly profit As someone mentioned, if your rent is covering mortgage payments and expenses then you're doing fairly well because you are gaining equity in the property. Just try to account for future maintenance and big one time expenses (like special assessments, renos, etc.) and average those out over time. If you're trying to value the property to see if it's a good deal… Read more »

fatjay

@oneangryslav2: Okay, let’s do the math: Purchase for 120K (net costs/fees), with 20% down, which means that you’ll have to finance 96K. Assume a 5% 5-year fixed mortgage, amortized over 30 years. This means the mortgage payment will be about $500/month. Add about $300/month for strata fees, about $100/month for taxes/insurance, and you’d need to charge at least (I haven’t included any special assessments, maintenance, repairs, labour, etc.) $900/month to break even on a cash-flow basis. If you rent the place out for $1000/month, the yield would be about 1.25%. (Once again, this is assuming no repairs, not a cent spent on maintenance, apartment is rented every single month, etc.) If you rent the place for %1100/month, your yield is 2.5%. To get a yield of about 5%, you’d need to rent the place out for more than $1300/month. P.S.… Read more »

patriotz

@fixie guy:

(Sam) Sullivan said that about two-thirds of the city’s residents favored the Olympics in a referendum, that money came from the city’s Property Endowment Fund, that the Olympic village would be turned into waterfront condominiums and eventually house 16,000 residents.

“Not one taxpayer has paid one dollar for the Olympic village,” he said. “And they never will.”

You voted for it, you got it.

http://www.nytimes.com/2010/01/31/sports/olympics

bullwhip29

@ pricedoutfornow August 9th, 2010 at 10:32 pm Didn't mean to accuse you of making up your story, but it sounded kind of hokey to me…perhaps I am just ignorant? Anyhow, then you say: "he and his buddy initially put down I dunno, 50k on these condos, and then he maxed out his line of credit (90k) and his buddy did the same ($40k) to get the mortgages. wife tells me that they had a “hell of a time” getting the mortgage." – you mean, HE told his wife after the fact that HE had a hell of time getting the mortgage. She apparently didn't know this was going on, right? She also didn't notice that $50k was missing out of the bank acct and a $90k balance was racked up on the LOC? Well, alrighty then… Generally speaking, I'd… Read more »

fixie guy

@ Nonymouse

Do you run through it? It's last stop on my ride before taking the leg to south Van and for the life of me I can't understand why anyone would want to live there. The entire area is a sunless concrete pad, interior condos – by far the bulk – face same across narrow streets that will amplify noise like horns once the area gets inhabitants; it's the most depressing development I've seen. Future wages in perpetuity should be sequestered from the municipal jackasses who foisted this on Vancouver.

SuperSmartBull

Uh oh bears, ship of Tamil RE tourists arriving as we speak to snap up OV condos. Luckily they're waterfront so the ship will dock right in front. Once other countries hear how easy it is to send ship to buy in BPOE(tm) then bears will become extinct. And hockey season not even start yet. With Canucks upgrade blueline housing will be very very very strong this fall as Leaf fans dump TO condos and move west. Bears always looking at reasons market should fall, look up friends. Let's say RE agents will not have time to climb Grouse Grind 14 times because phone will be ringing off hook.

jesse

@stagnate: My comparison is no to jimtan's bullishness, it's to his patronizing attitude. Just explain to us how and why Japan and Nortel are the same or different than Van RE and be done with it. Don't try to troll away a decent set of comments. It obviously isn't working. You don't have any authority to pass judgement from what I've read.

Jimmy

Canada sees ‘dramatic’ housing slowdown, global report says

http://www.financialpost.com/news/Canada+sees+dra

“The recent slowdown has been most dramatic in Canada,”

patriotz

It's OVER.

Global housing rebound loses steam

The real estate rebound that lifted property values around the world is losing momentum, Bank of Nova Scotia says in a new report.

Housing demand and prices slipped in the second quarter, senior economist Adrienne Warne wrote in the bank's Global Real Estate Trends Report Tuesday. The market was sideswiped by moderating global growth, volatility in financial markets and weak job creatiob.

And they still can't talk about the real reason why prices are falling – they are simply too high.