Vancouver Condo Info

Surprisingly affordable to lease retail space that is. Colliers has released their global survey of retail space lease rates and the most expensive places in Canada are in Toronto and Montreal at about $300 us per square foot.

Robson street in Vancouver came in 51st in the survey at a surprisingly affordable $196.08, which looks even cheaper when compared to what I like to refer to as our ’sister cities’ New York and Paris (which are cities just like Vancouver, but bigger with more money.) Both those cities topped $1,250 per square foot, but then they don’t have the HST.

There’s a book excerpt by Moshe Milevsky over at Globe Investor that makes the argument that many people would be better off renting and not buying their first home until age 50.  When housing is a hot investment sector many people overpay and the return to fundamental value hurts many.  In the US about 25% of homeowners owe more on their mortgage than their house is worth.  This is an obvious reason why renting early in life can be a better long term economic move, but it’s not the crux of the authors argument:

So, where does this leave us in terms of practical housing advice? For one, I think that a large proportion of individuals within the population should not own a house, or they should at least push off the purchase as long as possible, and instead rent. Anyone that followed this advice in the U.S. over the last few years, possibly the last few decades, would be much better off today. This is not just me being preachy or dispensing with advice that–with hindsight–proves correct. If you actually go back to one of the first principles I discuss in this book, namely Long Division and the spreading of resources over time, you can arrive at the same conclusion, but the reason is not as simple as you might think. It isn’t because housing is a “bad investment” or has performed poorly relative to other asset classes. Instead, it relates to the investment characteristics of your human capital when you are young and as you age.

In a number of recent studies, a variety of mathematical economists have developed a control theory model to derive the optimal or rational approach to housing over the life cycle. (I discussed Dynamic Control Theory in the Introduction.) You can think of their research as exploring how Mr. Spock (from Star Trek), who knows all the odds and can act completely logically, would behave. According to these researchers, most “typical” people under the age of 40 shouldn’t own a house but should rent, instead. But again, this isn’t recommended for the reasons you might think. Here’s the Spock argument against home ownership early in life: When you are young the vast majority of your true wealth is locked up in human capital, which is illiquid, nondiversified, and definitely nontradable. It therefore makes little sense to invest yet another substantial amount of total wealth in yet another illiquid and nondiversifiable item like a house.

Sure, if you could buy a house that has a bedroom in New York City, a bathroom in Los Angeles, and a kitchen in Chicago and perhaps a garage in Las Vegas, yes, your home would be diversified. Buying a house as an investment has strong similarities to someone being convinced that stocks are good investment in the “long run,” but they decide to buy only one stock for their portfolio. I don’t care how reliable that one stock is, or how large are the dividends, that stock portfolio is not diversified. The same goes for housing.

Read the full excerpt over at the Globe Investor website.

Joycer posted this on the weekend, but it got held up in moderation and is worth a second look.  According to his analysis the new CMHC qualification rules for rental income are going to have a big impact for anyone counting on a ‘mortgage helper’ to qualify for a larger mortgage.  If your eyes don’t glaze over at the math, see if you can see any holes in this reasoning:

Since we’re talking about how the new rules will affect rental income, I thought I’d do some math to see the net result. For those of you who aren’t interested in the math, here’s the punchline:
After April 19th your annual qualifying income is reduced by 30x(monthly rent).

For example, suppose there is a house for sale with a rental suite that generates $1000/month. If the potential buyers need an annual income of 70K to qualify for the loan before April 19th, then they will need to make 100K for the same loan under the new rules.

Here’s the math:
According to CMHC’s website, monthly housing expenses (which include taxes and heating) must not exceed 32% of your gross monthly income.

m = mortgage payment
r = rental income
i = gross monthly income
h = heating expenses
t = taxes

Under the current rules:
(m – 0.8r) + h + t = 0.32i

Under the new rules:
m + h + t = 0.32(i + 0.5r)
m + h + t = 0.32i + 0.16r
(m – 0.16r) + h + t = 0.32i

Comparing the changes, the difference between the old and new rules is (m – 0.8r) vs. (m – 0.16r). To qualify for the equivalent loan under the new rules the rental income would have to increase by 5 times. Since 50% of rental income is added to your gross income, that means your gross monthly income needs to increase by 2.5 times rent. For an annual salary that means 2.5 x 12 = 30 x rent.

You can verify this on the CMHC’s own calculator:
http://www.cmhc-schl.gc.ca/en/co/buho/buho_007.cfm

For example if you are using the $1000/month rent example it will increase your maximum monthly mortgage payment by $800 with the old rules.

If you put in $5000 for the monthly income (does not matter tax/heat you use), then change it to 5000 + 2.5 x 1000 = 7500 you will see the maximum monthly mortgage payment increases by $800 just like under the old rules. The difference though is an income of 60K vs. 90K!

Addendum: Above are the two formulas I came up with, one as change in principle under the new rules, and the other the change in rent. It’s interesting to play around with the numbers, for example a $600,000 mortgage requires $2650/month over 35 years at 4%. Assuming this is a typical detached mortgage for someone with a suite that generates $1250/month, the same people will now qualify for 22% less mortgage or 130K less. In order to make up the gap previously they need to increase their monthly income by $2500.

One change I can see coming from this is how the suites are valued when selling a home. In my example above, the suite adds an extra 130K to the mortgage a potential buyer can qualify for compared to the new rules. The only way around the rules of course is to come up with 20+% down… maybe Flaherty did effectively raise the minimum down payment for homes with suites to 20%.

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.