Vancouver Condo Info

Some more winter-game accommodation stories in the news:  There appears to be a problem with the plan to house some visitors in a cruise ship.

A plan to berth an 1,100-room cruise ship in North Vancouver for use as a floating hotel during the Olympic Games appears to be in serious danger of sinking.

Edmonton-based Newwest Special Projects – which has marketed the Norwegian Star to Games visitors for the past nine months – said in a statement over the weekend that sales have been disappointing while expenses have increased beyond expectations. It said it is negotiating with its partners to try to lower costs and keep the project alive.

They initial priced rooms at $1,300 a night, dropping that to $500 per night in October and recently lowering starting prices to $275 per night including free meals.  They appear to have removed their booking gateways from the internet as they work out their current problems.

This article is a few days old, but still interesting and worth discussing.  It seems that if you haven’t rented out your home or condo yet for the winter games, you may be facing a lot of competition and have to ramp down your expectations of getting rich off the games.

Metro Vancouver homeowners desperate to rent their properties to Olympic Games visitors have scaled back their golden expectations.

An abundance of Games-time accommodation rental options has forced asking prices down and increased the likelihood that many properties won’t attract any Olympic renters.

“Don’t base your food budget on the prospect of renting your home,” said Mark Szekely, site administrator for listing service rent2010.net. “It’s still a realistic possibility but if you’re outside downtown Vancouver or Whistler, you might not find a renter. It’s an oversupplied market.”

Anyone out there subletting their owned or rented house or apartment for the games (or trying to)?

I received this email from reader ‘GG’ and got their permission to post it for discussion here.  Here it is in its entirety with a couple of extra notes from the author:

Hi,

I’ve been reading your excellent blog for over a year, and today I need your help. I am also bearish on our local housing market as almost every sign points to a correction. I say “almost” because I have one analysis that doesn’t seem to fit the puzzle. I’m hoping you could prove it wrong so I can look forward to cheaper homes in the future.

At today’s prices in Vancouver, a $350K condo can rent for about $1,300. The condo has a monthly maintenance fee of $200 and property tax of $100. The annual Net Operating Income (NOI) is therefore $12,000.

Treating the future stream of constant annual cash flows as a perpetuity, the present value can be calculated as: Price = NOI / Return. So, the annual return on the property is = $12,000 / $350,000 x 100% = 3.4%

The above method assumes the mortgage rate is equal to the calculated return over the life of the mortgage. When this is the case, your investment return is not affected by the size of your down payment. Of course, it’s a major mistake to assume a low mortgage rate of 3.4% over a 25-year period. We must modify the calculation to take into account a more realistic mortgage rate (and include a down payment as well):

Assume the mortgage rate is 6% over 25 years with $100K down. The monthly payment is $1,629. Your net monthly investment is then $1,629 – $1,300 + $200 + $100 = $629. Assuming you sell the home after 25 years for $350K, the return on your investment can be calculated to be 1.1% (This calculation does not take into account price appreciation. Over 25 years, the property should appreciate in real terms and the return will be higher.)

The attached graph shows the yield for different mortgage rates and down payments. Assuming mortgage rates are an average of 6% over the next 25 years, we can see that at today’s prices, Van RE is a poor investment yielding the same as the risk-free return while being significantly riskier (liquidity risk, high leverage, and chances of missed rent payments, property damage, and a massive price correction).

What this graph does not show is that we have a significant bubble and that prices must crash by up to 30%. Because if that were to happen, the yield on the investment would be 6% plus lots of room for price appreciation. A yield of 6% would also be higher than the S&P500’s historical dividend yield of 3.8% (from Dec 1936 to Mar 2009). Why should we expect a significant price correction based on this analysis approach? (Apart from investor psychology driving valuations down below fair value just like valuations overshot on the upside)

Regards,
GG

Some additional points on the analysis from GG:

1. It is taken purely from a Price-to-Rent angle. I am suspecting the trigger for a correction has more to do with leverage ratios, such as Price-to-Income and debt-to-GDP.

2. The yield after a 30% price correction is actually a little less than my calculated 6% – this is because I missed accounting for falling rents. Nonetheless, the yield is still greater than the historical S&P500 yield.

For several years now it seems like the standard real estate investment model of an owner being able to make a profit from rent has been turned on its head.  Recent buyers going the landlord route are paying more in mortgage bills than they can bring in from current rent rates – they’re counting on capitol gains to fill in that hole and hopefully turn a profit in the future.

Hence today’s question for discussion: When will rental rates in Vancouver make sense from an investment perspective?  As I see it there are only a few ways to get there: local incomes rise so that people will pay higher rents, prices drop so that new landlords see a profit margin at current rates, or a combination of the two.

What do you think is the most likely scenario?

Cashisking points out this article in the Wall Street Journal about the history of the North American dream of home ownership and how it’s changed over time.

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words “keep out of debt” or “pay as you go” appeared in countless advice books. As the YMCA told its young charges, “If you can’t pay, don’t buy. Go without. Keep on going without.” Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn’t lose its sweetness because someone else held the title.

The article goes on to cover changes in government policy and lending, from the depression up to the recent housing boom and bust in the US.

Like the US, the Canadian government has policies to encourage home ownership (via the CMHC) based on the assumption that home ownership is good for society, but is it?  Do you as an owner or renter feel that there is a fundamental difference between the two choices?  Are owners more responsible and more involved in their community?  On the flipside, are renters with a higher disposable income more beneficial to a local economy?

The WSJ article ends with an interesting note on the origins of the ‘American Dream’ quote:

James Truslow Adams, the historian who coined the phrase “the American dream,” one that he defined as “a better, richer, and happier life for all our citizens of every rank” also offered a prescient commentary in the midst of the Great Depression. “That dream,” he wrote in 1933, “has always meant more than the accumulation of material goods.” Home should be a place to build a household and a life, a respite from the heartless world, not a pot of gold.

Pani sent in the link to this article at the Wall Street Journal blogs about a recent study claiming that not only are renters happier than owners, they’re also less fat.

The average homeowner, however, consistently derives more pain (but no more joy) from their house and home,” writes Grace Wong Bucchianeri, an assistant professor at Wharton.

The report says that homeowners spend, on average, less time on leisure than those who don’t own homes. And the average homeowner is around 12 pounds heavier that those who rent.

The basis for the research comes from a survey of women in Franklin County, Ohio, which includes Columbus, the state capitol and Ohio’s largest city. And, interestingly, the research took place in 2005–so the recent drop-off in home prices wasn’t an issue.

The study controls for factors including household income, housing quality and health to draw it’s conclusion.  The full paper is available as a PDF on the Wharton School of Business website.

A recent study by BTAworks shows that the common perception of a large number of empty condos in the downtown core is false (unless you consider thousands of empty condos to be a large number).

There has been much public grumbling over the years, with people blaming foreign-owned, empty condos for contributing to the city’s exceptionally tight housing market. Last fall, when Gregor Robertson was campaigning for the mayor’s job, which he eventually won, he briefly suggested the city should consider a speculator tax on empty condos to force owners to either use them for housing or sell them.

But the research done by urban planner Andrew Yan for BTAworks showed only 5.5 per cent of condos, in a representative sample of 2,400 units in 13 buildings, showed electricity use below 75 Kw a month. That kilowatt usage is considered a threshold indicating a unit is vacant, because it’s an amount so low that it would indicate that only enough power to maintain a refrigerator was used. When the threshold was upped to 100 Kw, it indicated a vacancy rate of 8.5 per cent.

It would seem that a large number of those condos are ‘investor owned’.  I wonder how many of them were purchased back when you could actually make money on that investment?

Mr. Yan’s research showed that the vast majority of the condo units are lived in, although at least half are owned by investors and rented out. The statistics from homeowner grants and B.C. Assessment Authority information indicated anywhere from 52 to 61 per cent of downtown condos are investor-owned.

The study also showed that of the investors who rent them out, few were from outside Canada: Eight-seven per cent of the units were owned by investors from Canada and half of those Canadian investors were from the Lower Mainland.

Full article is in the Globe and Mail and wraps up with a point about how recent building and investment styles pose a risk to the local economy.

Mr. Heeney, who is also a member of the Vancouver Economic Development Commission, said the reality of Vancouver’s economy is that it is made up of small-scale entrepreneurs and lacks big head-office-style businesses.

The people who work in those start-ups need the kinds of places to live that they’re not finding, which is inhibiting the city’s economic development, he said.

Update: Andrew Yan of Bing Thom Architects sent in this PDF press release from the study which includes some other findings including this one:

A family with one child in the City of Vancouver earning the median income of $75,000 a year would have great difficulty in finding and paying for a condo bigger than one bedroom, even if condo prices were to fall 25 percent below 2008 assessment levels.

As we all know, BC has one of the biggest housing bubbles in the world. The collapse of the global housing bubble is directly responsible for the economic crisis we now find ouselves in. So we would expect BC’s political parties to spotlight this to demonstrate their grasp of economic issues, right? Wrong. None of the parties uses the phrase “housing bubble”, or even ventures the thought that maybe housing in BC is too expensive and prices have to come down.

At least the Liberals are giving us what we would expect. They have been cheerleading this bubble all along, so why should they stop now? But why the silence from the other parties?

The housing bubble is the greatest scam ever perpetrated on workers by the rich, yet the party of the workers, the NDP, won’t mention it. It’s also the biggest misallocation of resources ever seen in a market economy, yet the party of sustainable development, the Green Party, has nothing to say either.

What do the party platforms (available on their websites) have to say?

NDP platform:

“Pushing the federal government to change federal tax laws to encourage the development of market rental housing …  Encouraging new market rental and co-op housing through the Market Housing Partnership Program in concert with the private, non-profit and cooperative housing sectors.”

Developers build condos rather then purpose-built rentals because condo owners are willing to pay prices out of line with rental value. They cannot be incented to build rental housing unless the government takes the role of the condo specuvestors by supplying cheap capital. This is a subsidy to land owners and developers. It will not affect market rents.

Green Party platform:

“BC Greens will establish a provincial housing program that works with municipalities to build affordable housing or to purchase existing housing that can be moved into permanent rental housing.”

This is a subsidy to existing property owners and developers. If housing is not affordable prices must fall. The housing has to be rented out at market anyway. Purchasing existing stock does not affect rental supply.

“Commit 1% of the total provincial annual budget to solving the housing crisis.”

The “housing crisis” is simply one of inflated prices due to speculation. The government does not have to spend a dime to end speculation.

“Mandate BC Housing Corp to purchase units of market housing within current or stalled projects to provide an expanding pool of permanent below market and market rental housing”

Can you believe this? An outright handout to the developers. These projects will have to be sold anyway, either to owner-occupiers or landlords at prices they are willing to pay.

I am not trying to pick on the Green Party BTW. They have more policy planks on housing than the NDP so there’s more to criticise.

Both the parties are trying to fix a problem that does not exist. There is not a problem with general rental affordability. The problem is with people with special needs who cannot afford the market rent.

To be fair, both parties do advocate programs to assist those with special needs or to allocate public lands for non-market housing. This is a legitimate role for government. Subsidies for market housing are not. They only make it more expensive.

There is one simple, universal measure the government could take to remedy the discrimination against renters built into the property tax system – a refundable renter’s tax credit equivalent to the homeowner’s grant. This would also be largely self-financing, because by requiring renters to document their rent payments on their income tax returns it would put an end to evasion of rental income by landlords.

How can the provincial government put a stop to speculation so that housing prices reflect rental value and no more? Easy. A speculation tax. For any property sold within, say, 5 years of purchase, all capital gains are taxed 100% by the province. Exempt principal residences and purpose-built rentals. Problem solved.

The provincial government could also increase housing supply at no cost, by assessing for taxation unimproved land that has been approved for development by municipalities as though it already had improvements. This would provide an incentive for municipalities to approve land for development and make it economically unfeasible for owners to sit on raw land, and so increase housing supply.

Revenue from these policies could be earmarked for providing housing for those with special needs.

The Liberals simply want to pretend that the current housing bubble, which is already collapsing, is sustainable. The NDP and Green Party both advocate spending money on schemes that would not make housing more affordable. But effective measures to make housing more affordable could actually bring in money to the government.

What’s the better choice?

As to who to vote for May 12, that’s up to you. I must say that distasteful as it may sound, I would prefer to see the Liberals re-elected. I don’t want to see anyone else blamed for the collapse of Gordo’s house of cards. Perhaps after the “golden decade” has been revealed to be fool’s gold all the parties can start getting serious about what kind of sustainable economic future is possible for BC.

Your comments are welcome as always.

-patriotz