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
August 10th, 2010 at 5:19 pm
@ 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.
August 10th, 2010 at 3:02 pm
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.
August 10th, 2010 at 4:27 am
@Anoymous:
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.
August 10th, 2010 at 4:19 am
@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.
August 10th, 2010 at 4:17 am
@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 market. I say roughly in line because their are fixed monthly costs that obviously won't change no matter how great a deal an investor manages to scoop up a post-crash condo for.
Am I alone in thinking that rents HAVE to fall after prices?
August 10th, 2010 at 3:35 am
@fatjay: Yes, you're right. Thanks for the correction.
August 10th, 2010 at 2:14 am
@ 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 Montreal's Big Owe…
August 10th, 2010 at 2:01 am
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 a lid on the C dollar? So goes the extent of truth availability in Canada
http://ca.reuters.com/article/domesticNews/idCATR…
August 10th, 2010 at 1:50 am
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/…
August 10th, 2010 at 1:37 am
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. The asking price was 1.2 Million plus HST. I wish them luck, but unless buyers do not look at any other area, or do not care about value for the $, I just could not see anyone even considering the place for this price – even if you think Vancouver real estate is fair value. Anyone who has bought at these prices will lose most of their money without a crash.
At some point they will have to cut prices and the shxt will hit the fan as the City finally will have to accept the massive losses. My guess this will not happen until after the next election. And of course it will be blamed on the unforeseen ___________ (fill in the blank) which no economist could see coming.
August 10th, 2010 at 1:21 am
@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.
August 10th, 2010 at 1:14 am
@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.
August 10th, 2010 at 1:09 am
@Girlbear:
In other words, upper-middle class white people. Not you-know-who.
August 10th, 2010 at 12:57 am
"Buy and Bail"…
http://www.bloomberg.com/news/2010-08-10/-buy-and…
August 10th, 2010 at 12:52 am
@fatjay:
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.
August 10th, 2010 at 12:47 am
“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.
August 10th, 2010 at 12:44 am
@Anonymous:
Anonymous said:
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 then some investors would consider cap rate for a quick estimate (the value of the property compared to the net operating income). For a 120k property to achieve a cap rate of 6% it requires net operating income of $600 per month (120,000 * 6% / 12). So you would need a rent of $600 + all your expenses (strata, maintenance, etc. but not counting mortgage).
Cap rate is just a high level view – probably best for qualifying properties, and then a more in depth analysis would be required. Cap rate might give you a basic idea if a condo provides good value, but it doesn't account for:
Financing costs
Changes in future rent
Vacany rates
Capital expenses (major repairs)
Improvement costs (renos)
Commissions (renting and/or selling)
Appreciation (or depreciation) of the property
August 10th, 2010 at 12:41 am
@oneangryslav2:
You are calculating the yield based on the debt of $96,000 instead of the actual cost to they buyer.
In the above scenario your initial outlay would only be $24000 down, so if your rent was $100 more than costs then the yield would actually be 5% (1200/year divided by 24,000). If the rent was $1300 (i.e. $400 positive cash flow) then your yield would be 20%.
There would also be the value of the property after 30 years (which would be paid off in the above scenario.
But remember that whenever you account for the cost of the mortgage then you are essentially investing with leverage so your gains (or losses) are magnified.
August 10th, 2010 at 12:29 am
@fixie guy:
You voted for it, you got it.
http://www.nytimes.com/2010/01/31/sports/olympics…
August 10th, 2010 at 12:10 am
@ 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 be inclined to follow your direction and cut the cord too. Without really knowing all the details (current market price, price paid, comparable listings etc…) it's tough to say anything more. Logic would suggest that letting the units go at insane liquidation prices may be a bad move, however, if they can still squeak out a small profit or come close to breakeven then perhaps doing so would wipe out the balance on the LOC, top up the bank acct somewhat and most importantly, alleviate the stress. If they are hugely underwater on these units, they'll have to pony up more dough if they want to sell, which could be problematic. The rental income will not cover all costs involved, but it will most definitely make a big dent into that $2500 payment. If taxes, maintenance, insurance are not incl in this figure, then their situation is a little more difficult. What else is there to say? Two spouses not communicating with one another who have chomped off way more than they can swallow. I bet there are thousands of other families in the very same situation (or worse) and most figure out a way to deal with their issues.
August 10th, 2010 at 12:08 am
@ 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.
August 9th, 2010 at 11:59 pm
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.
August 9th, 2010 at 11:47 pm
@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.
August 9th, 2010 at 10:39 pm
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,”
August 9th, 2010 at 10:20 pm
It's OVER.
Global housing rebound loses steam
And they still can't talk about the real reason why prices are falling – they are simply too high.
August 9th, 2010 at 8:02 pm
@Devore:
Canada extends east of the Rockies, you know. I know that's a hard concept to grasp in the "Best Place on Earth", but give it a try.
August 9th, 2010 at 5:01 pm
Bullwhip,
I totally agree. That said, he seem’s open to the challenge and to putting funds into escrow with a lawyer.
Interesting. But, does not look like any bears are willing to actually put up any $ and challenge him.
Oh well…
August 9th, 2010 at 4:32 pm
@Devore:
Sometimes my running route will pass through the village. It's got allot stacked against it. The rush to build was too fast to build an organic community. The buildings are placed in an odd way and it's isolated from everything else. Time will tell but it sure feels like a ghost town right now.
August 9th, 2010 at 4:23 pm
@stagnate: You are a very rude individual. If you have a point to make, make it, no need to play smart ass.
If you're trying to compare Canada of today to Japan of the 80s, you're delusional. They're nothing alike. In the 80s Japan was an exporting industrial power house, and Japanese savings rate was exceptionally high, and always has been, and they have a hard working, industrious culture.
Any of this the case in Canada? What does Canada produce and export? Raw lumber?
August 9th, 2010 at 4:16 pm
@pricedoutfornow:
$500k for a studio? That's darwin at work for ya. The fixtures better be solid gold for that money, I don't wanna see any chrome.
I've taken to cycling by the olympic village recently, it sure is eye opening to see it first hand. The place is deserted, and that's an understatement. A ghost town. No one around except for looky loos and the black shirted security standing around bored.
Looking in the windows, where the shades aren't down anyways, very very few units have any furniture, or show any signs of occupancy.
That's gonna be a long, slow spectacle there.
August 9th, 2010 at 4:06 pm
@ Stagnate: "unless massive deflation sends the money supply into a vortex capital has to sit somewhere."
I completely agree this is a major issue. There are few place for the average investor to park their money. Banks give 1%, the equities markets are flatlining, durable goods are getting cheaper etc. On the other hand, if the US situation has taught us anything, is that there are "perfect storms" that make all this irrelevant. It hasn't happened here yet, but some of the issues are starting to rear their head. I'll tell you what I think needs to happen for a real (i.e. more than 10-15% correction) crash to occur.
1. The Canadian dollar needs to weaken. Why? Because the strong dollar has made consumers richer by making cars, TVs, gasoline etc effectively cheaper. If the dollar weakens to say .80 US, we will see 3-4% less disposable income for the average Canadian.
2. Unemployment rate cannot decrease. Doesn't need to increase anymore than it is though.
3. Bond yields must increase. This has the effect you described above, as well as affecting bank interest rates (not to be confused with BoC intraday rates).
4. The US economy needs to get healthier. This again will have the effect you described (dollars will be pumped into the US rather than the Canadian "safe-haven") but will also attract skilled labour (and hence high earning population) away from Vancouver again.
5. Credit requirements need to be tightened some more. This is already happening, but there's still too much lending going on for there to be any serious crash. The pool of potential buyers is still far greater than in the past.
Many of these are intertwined (like 1 and 4, or 3 and 5) but I think it's a fair picture of what to look out for. Comments?
August 9th, 2010 at 3:42 pm
Great news…as we speak a shipload of Tamil Tigers has anchored off the coast of Vancouver Island….the navy is rushing in to escort them to Comox. This bunch will surely scoop up a few condos as they glide through customs and immigration with their 'welcome ' cheques.
I have to wonder how these desperate refugees charter disposable ships and fuel for the voyage…is it possible the Canadian Tamils group, funded by the Canadian taxpayer is secretly funding the exodus of terrorists to Canada???
Did anone tell them that the Tamil homeland is barely thirty miles from Sri Lanka in a country called India????? Why do they come to Canada????? Would it be for the free ride they've been promised by the tax payer subsidized mooches who have already snuck in on the coat tails of the bleeding hearts.
It was such a proud moment to see our federal Liberal Mp's dining with the terrorists and their fundraisers in Toronto while the federal Libs were supporting the war in Sri Lanka. The federal Libs seemed to think nothing of harbouring these terrorists in Canada safe from justice elsewhere. The Tamil Tigers were murdering their own people if they didn't send their children to fight, they extorted funds at gunpoint from Toronto residents who'd fled the reign of terror.
And now we're inviting the same scum to come and live with us….I hope the nasty's end up on Bob Raes street. Vote Liberal….Fuck Canada says Bob.
August 9th, 2010 at 3:39 pm
gstrader says: Could you please tell us how the “yields” on Nortel and Japanese real estate are related to our particular situations?
well, it's a factor to consider. as an example, local real estate in 1982 was yielding 1-3%, but you could walk into a bank and get a 90 day gic for 18%. bond and stock yields were high at the time also. unless massive deflation sends the money supply into a vortex capital has to sit somewhere. it's a factor for consideration, no other implication.
August 9th, 2010 at 3:26 pm
@ Stagnate: Could you please tell us how the "yields" on Nortel and Japanese real estate are related to our particular situations? You might be on to something, but without you explaining your argument it is hard to understand where you are going with this. (P.S. The yields on some of the best stocks are often very low, sometimes even zero).