Vancouver Condo Info » renting

The Renting Option

wreckonomics — Wed, 12 Oct 2011 07:01:52 +0000

Well Global is certainly getting a lot of attention on this blog with their ‘Generation How’ series. This is an interesting one though, all about the renting choice and how much cheaper it is in Vancouver than buying.

Are young families in Vancouver better off renting?

During the height of the US bubble, many of the most expensive cities had prices that outran rental values. That trend has flipped now with the correction and it’s cheaper to buy in many US cities. It’s been cheaper to buy in the past here, will Vancouver ever see that again?

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Maintenance and safety standards for rentals

ttul — Tue, 27 Sep 2011 14:45:51 +0000

Like many VCI readers, I have been shorting the Vancouver property market by renting. And, like many renters, I have had to contend occasionally with landlords who take an all-to-casual approach to property maintenance. In this post, I’m going to describe a new legal method I have discovered which combines the Residential Tenancy Act and a Vancouver By-law to force landlords to fix certain maintenance and building quality standards that you may not have thought were “mandatory”. This includes things like ensuring there are enough electrical outlets in each room of a suite, or that the floors be properly levelled.

It all starts with the Residential Tenancy Act (RTA), which says in section 32 that

A landlord must provide and maintain residential property in a state of decoration and repair that (a) complies with the health, safety and housing standards required by law…

This is a very powerful statement, because it forces landlords to ensure that their properties conform to every building code, electrical code, maintenance code, etc.. in effect within the jurisdiction where the property is located. In the case of Vancouver tenants, this refers to any and all building maintenance by-laws, fire safety by-laws, electrical by-laws, etc.. as well as province-wide rules and regulations concerning buildings.

The City of Vancouver has an omnibus By-law simply titled, “Standards of Maintenance” (https://vancouver.ca/bylaws/5462c.PDF), which is “A By-law for prescribing standards for the
maintenance and occupancy of building sites within the City of Vancouver to ensure that such buildings and sites are free from hazard and are maintained continuously in conformity with accepted health, fire and building requirements.” This bylaw applies to, “all land and all buildings in the City, and, unless otherwise specified, the owner of said land and/or buildings shall be responsible for carrying out the work or having the work carried out in accordance with the requirements of this By-law.”

With that out of the way, let’s see how the RTA can be combined with By-law 5642 to force your landlord to fix certain things that you may never have thought needed to be fixed:

– Electrical Safety (see 5642 section 19)

+ Yes: Plenty of electrical outlets! “Every habitable room in a dwelling shall have at least one electrical duplex outlet for each 120 square feet (11.2m5) of the floor space; for each additional 100 square feet (9.3 m5) of floor space a second duplex outlet shall be provided. Every kitchen shall have at least two electrical duplex outlets which shall be on separate circuits.”

+ Lots of light! “Adequate levels of artificial lighting shall be maintained in good working order at all times as in Table 19A” — this includes specific lumens of light output in each type of room.

– Landlord storing his old junk in the back yard? Section 4 says, “All land shall be kept clean and free from rubbish or debris”

– Walkway old and cracked? Section 4 says, “Suitably surfaced walks shall be available on all land leading from the main entrance of each building to the street or driveway”

– Bed bug infestation? “If pests have infested land, or any building or accessory building on it, the owner of the land must eliminate the infestation”

– Breezy doors or windows? “Exterior doors, windows, skylights, and hatchways shall be maintained in good repair and weathertight.”

– Crappy floors? “Floors shall be maintained in a clean and sanitary condition, reasonably smooth and level and free of loose, warped or decayed boards, depressions, protrusions, deterioration or other defects which are health, fire or accident hazards.”

– Crappy walls or ceilings? “Interior walls and ceilings shall be maintained in good repair and free from holes, or loose or broken plaster that may create health, fire or accident hazards.”

The laws are there to protect us all. Don’t let your landlord convince you that he doesn’t have to fix the flaking plaster in your character living room just because “it’s an old house”. Show him the law, and get some fixing going on!

This post was submitted by ttul.

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Global Price to Rent Ratio

Starving Artist — Mon, 22 Aug 2011 08:19:29 +0000

According to fundamentals, Canadian RE ownership continues to be significantly overvalued compared to rental cashflow. Even the bubbly Australian market has started to correct, but with interest rates low for at least 2 more years, who can predict how long the plates can continue spinning?

You can play with The Economist’s house prices chart yourself here:

http://www.economist.com/blogs/freeexchange/2011/03/global_house_prices

© Starving Artist for Vancouver Condo Info, 2011. | Permalink | 111 comments | Add to del.icio.us
Post tags: Canada, compare

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The City wants to drive down the price of your condo

The Pope — Tue, 26 Jul 2011 14:19:52 +0000

Got an investment condo or two? It might be a good time to sell because the City of Vancouver has just unveiled it’s plan to drive down property prices and rents.

In a plan that goes before council today, the city proposes to provide $42 million in land and capital grants over 10 years to create 38,000 new affordable homes, including 7,900 supportive and social-housing units, 11,000 market rental units and 20,000 new condo and “ownership” units by 2021.

Coun. Raymond Louie said in an interview that strategies may include:

• A “rent bank” where tenants facing eviction for not paying their rent can apply for either a loan or a grant, which is then paid directly to the landlord.

• Long-term leases, where the city maintains ownership of the land, which is leased at preferred rates for a defined term but is always owned by the city.

• Units that have fixed limits on the profits that homeowners can make when selling, which would end property speculation; any rise in property value beyond the set limit could be directed to the city for other social-housing projects.

• Limits to the profits that developers can make on the land speculation in projects; special consideration for a project’s approval may be based on the developer making a lower profit.

• Increasing co-op ownership and rentals, where a financial institution or the government makes the initial outlay of cash and is repaid over a long period of time.

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Toronto more expensive?

wreckonomics — Wed, 13 Jul 2011 08:01:13 +0000

Hey guess what everyone, Toronto is now more expensive than Vancouver.

..Or at least it’s more expensive to rent there if your paying with US currency. Don’t worry, we still have the most overpriced real estate.

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More Uncertainty for Millennium Water

jesse — Thu, 07 Jul 2011 16:42:34 +0000

Georgia Strait is reporting some tenants in the ex-Olympic Village are encountering higher than expected utility bills:

The group managing two City of Vancouver–owned housing properties at the Olympic Village is hearing complaints from residents about excessive energy bills.

Thom Armstrong, executive director of the COHO Management Services Society, admitted that his group also wants some answers.

“As to the level of the invoices, we have some questions about that ourselves,” Armstrong told the Georgia Straight in a phone interview.

Unlike many residents outside the Olympic Village, which has been touted as a model of a sustainable neighbourhood, residents of the Southeast False Creek development are charged two bills for energy.

One is for electricity consumption, and this bill comes from B.C. Hydro. Then there’s a bill from Enerpro Systems Corp., a North Vancouver–based company. According to information that Enerpro put out about its billing, the charges cover “heating, cooling, hot water, and cold water”.

It’s not necessarily that utility bills are higher than other units — though they may well be — but the uncertainty for future owners and tenants make this development all the more the black sheep. We already know the current rental environment is a “renter’s market” so to ensure that units can be filled the City may find it needs to take on more utility liability. But in terms of reducing energy consumption…

Armstrong said, “… I still very much support the notion of individual energy metering, because that’s the only way to create any incentive to lower energy use and lower the carbon footprint. So I think, on principle, it’s what we want to do. We just want to make sure that the system is working the way it should be.”

Indeed. When economic and carbon footprints collide, who pays, exactly?

© jesse for Vancouver Condo Info, 2011. | Permalink | 107 comments | Add to del.icio.us
Post tags: millennium, rental, utilities, vancouver

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My $370,909 Dream Home

patriotz — Wed, 15 Jun 2011 03:06:23 +0000

I’m getting settled into my new home, a newly renovated duplex in a great neighbourhood near recreation and transit. It’s got all the features I’ve been looking for – 3 bedrooms, 1 1/2 bathrooms, stainless steel appliances, fireplace, garage, you name it.

But the best thing about it is the price. I got it for a one-time payment of $370,909 – including all future taxes and maintenance.

Now wait a minute you say, nobody can get a deal like that. Well here’s how. I figure I get an after tax cash yield of about 5.5% on my investments. If I set aside $370,909 worth of my investments, I get $1700/month, which is what I pay for rent. My name is on my brokerage statement rather than on the deed, but I get the same shelter.

So what if I bought a similar property? I’d have to pay taxes, maintenance and insurance. Say these total $5K/year. Again using the 5.5% yield I’d have to set aside $90,909 more of my investments to pay these. So I figure the property would be a decent buy at $280,000.

Which gives a price/rent of 165. I’m quite willing to wait for that to buy – in the meantime I’m doing just fine.

patriotz

(hat tip to M-)

This post was submitted by patriotz.

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That’s a bit dramatic isn’t it?

Wed, 18 May 2011 08:45:43 +0000

This piece is hardly a revelation to anyone familiar with a calculator, but it’s refreshing to see such title on Business Insider: Why I Would Rather Shoot Myself In the Head Than Own a Home.

How do banks make money? Very simple. They borrow from you at cheap interest rates and then lend to you at higher interest rates. What? How do they do that? Well, when they pay you 0.5% on your checking account its as if they are borrowing from you at a very cheap interest rate. When they then turn around and give you a 6% mortgage loan, they are lending to you. They make money on the difference between the 6% and the 0.5%. It’s a great business and I often advise people to become the bank when they have that opportunity.
It’s such a great business, in fact, that banks have spent 200 years drilling it into us with billions in advertising that the “American Dream” is to own the white picket fence, the paved driveway, maybe borrow more to make an extension to the house. Put in a swimming pool. Tear down some walls. Nobody can ever kick you out. You’re not flushing your rent down the toilet. You’re owning! You’re keeping up with the Joneses (the most successful, yet mysterious, family in American mythology, that we all have to keep up with. What happens behind closed doors when the beatings occur, when little Bobby Jones cries himself to sleep, the Joneses will never tell us) At least, in 30 years you will own. But at least you’ve fixed in a mortgage rate so inflation won’t kill you. And having your own home means you now have “roots”.

Read the full article over at Business Insider.

This post was submitted by Mansur al-Hallaj.

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Rob Carrick wants you to rent

The Ant — Tue, 19 Apr 2011 08:01:20 +0000

Actually I don’t know that he wants you to rent, but over at the Globe and Mail he’s got a column that compares owning to renting and it doesn’t make buying at these prices look so hot.

Do not base your thinking about your ability to afford a house strictly on what lenders or real estate agents tell you. They may have useful guidance, but their goal is to sell mortgages and houses. That’s why the affordability measures they use pretend you live a world where there are no claims on your household cash flow other than those related to your home and other debts.

Being able to amass the minimum 5-per-cent down payment on a house does not mean you’re ready to buy, either. In the real world of home ownership, 5 per cent is peanuts. By some estimates, the costs of buying a home – mover, property taxes and utility bill adjustments, legal fees and repeated trips to Canadian Tire or Rona could cost an additional 2 to 4 per cent of the value of your home.

I’m guessing the Globe and Mail doesn’t make as much ad revenue from real estate agents and mortgage brokers as the Vancouver Sun?

This post was submitted by The Ant.

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City Coming to Terms with Vancouver Secondary Suites

jesse — Tue, 01 Feb 2011 09:00:06 +0000

The report entitled THE ROLE OF SECONDARY SUITES: RENTAL HOUSING STRATEGY – STUDY 4 published by the City of Vancouver’s Community Services Group is about a year old but nonetheless contains some interesting data on the state of Vancouver’s secondary suite rental accommodations. Here are excerpts from the executive summary:

The market-rental housing stock is usually divided into two segments – the primary or conventional rental stock, consisting mainly of purpose-built rental apartments, and the secondary rental stock made up of rented houses, secondary suites, individually rented condo units, and units in multiple conversion dwellings and SROs. Over the last three decades, the secondary rental sector has played an increasingly important role in meeting rental housing demand. This increased role reflects the decline in the construction of new purpose-built rental and the redevelopment and conversion of the existing rental stock.

…

Using 2009 BCA data, this report estimates that there are at least 25,000 properties with secondary suites in the city’s single-family zoned areas. The proportion of properties with suites ranges from 6% in Oakridge to 59% in Grandview-Woodlands. On the west-side as a whole, less than one in five properties have suites; on the east-side, almost one in two properties have suites. Six local areas on the east side account for three quarters of the city’s single-family zoned secondary suite properties.

It’s a fascinating report, highlighting how the concept of secondary suites is starting to percolate more and more onto the west side of the city and into the hearts and minds of city planners who realize that the term “single family home” is becoming outdated. We can look at all RS-zoned properties with secondary suites. It looks like a Vision/NPA civic election voting map LOL.

A few key facts and insights I picked up in the report:

Data claim only 21% of homes built in the 1990s have secondary suites. (p13) Hogwash. There is something wrong with the data.
There is some natural resistance to secondary suites on the west side because homes are generally of older vintage. That is, it’s less desirable to tear down an older structure that has been well-maintained but not suitable for suiting.
The City is coming to terms with its dirty little secret: people are living in illegal basement suites and their permit officers purposefully turn a blind eye to properties with obvious basement suites installed but without the proper permits in place. According to the permit application data, about 20% detached properties are being fitted with legal suites, yet over 60% of new stock have basement suites. The City is well aware of this and looks poised to start the thin edge of the wedge into the dirty underbelly of the City’s basement suite accommodation.

“Council also approved a post-occupancy inspection program. Under the program, all new single-family houses are inspected a year after being approved for occupancy. Properties found with unauthorised suites are required to either apply for permits or to close the suites. Despite the changes, the proportion of single-family houses being built with approved suites has remained low.”

I commend the City of Vancouver for making this report public and shows, at least to me, they are aware of the problems illegal suites pose to the quality of life in the city, accelerated depreciation of neighbourhoods with slum housing, and (not least I’m sure) the chance for expanding their permit and inspection business unit!

Feel free to post your Vancouver secondary suite stories, good and bad, in the comments section: have you ever dealt with home inspectors overlooking secondary suites? What’s your most bizarre secondary suite experience, either as landlord, renter, or acquaintance?

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Rent VS. Buy Mortgage Calculator

The Pope — Wed, 08 Dec 2010 09:39:17 +0000

There are a lot of Mortgage calculators already out there, but the problem is they don’t necessarily take into consideration all the details that affect the Rent vs. Buy decision. Most of them are overly simplified, or worse – they’re US based and make assumptions on tax write-offs that aren’t available to the Canadian buyer.

With that in mind Joycer has a created a more detailed mortgage calculator that lets you try out a number of situations and variables to factor into your rent vs. buy decision, particularly here in Vancouver. We’ve put the calculator on it’s own page, with all the details.

Go to http://VancouverCondo.info/rentvsbuy to check it out.

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The wealthy move from owning to renting.

The Ant — Thu, 02 Dec 2010 09:57:05 +0000

This is interesting. In the US, the luxury rental market is seeing a bit of a boom as the wealthy move from owning to renting:

So in March he sold the Manhattan apartment he bought in 2008 for about the same price he paid and moved — along with his wife and child — a few steps away into a luxury, two-bedroom rental unit in a brand new building.

Lee wouldn’t disclose what he’s paying, but similar two-bedroom apartments in the building usually rent for $11,000 a month.

“I wanted to protect ourselves from prices going down,” says Lee, who is a managing director at a major bank. “I didn’t want to be an owner anymore.”

Lee has company. Demand for luxury rental units has increased as wealthier individuals who can afford to buy are deciding not to, according to brokers and real estate analysts in affluent areas of the country such as New York City, Chicago and San Francisco.

“More affluent Americans are opting to rent as oppose to buy,” says Jack McCabe, an independent real estate analyst and CEO of McCabe Research and Consulting in Deerfield Beach, Fla. “Within the last year, so many people have seen their family and friends get burned in real estate. They don’t see it as being a risk free investment as they used to.”

Uh… better late than never, eh guys?

This post was submitted by The Ant.

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Sorry Dave, rents are falling.

The Ant — Tue, 30 Nov 2010 09:55:52 +0000

Actually rents are going both down and up, depending on which category. The CMHC report is out and in Metro Vancouver we’re seeing higher vacancy rates that seem to be having some affect on rents.

According to the CMHC, 3 bedroom rents are up, while 2 bedroom rents are down slightly.

The thing I found most dramatic is the vacancy rate. Last I heard this was around 1 percent, but now its 2.2%.

The increase, compared with 2.1 per cent last fall, represented opposing forces of higher levels of first-time home ownership and job cuts during the recession resulting in young tenants doubling up or moving back home. Both trends helped take renters out of the market, according to, Robyn Adamache, CMHC’s market analyst for Metro Vancouver.

Adamache added that an increase in the supply of rental housing — 2009 saw 915 new rental units added to the overall stock — also helped raise the vacancy rate.

Personally I moved at the beginning of summer and was able to very easily talk $100 off the monthly asking rent for my family, and this is in a professionally managed building with one owner. I’ve rented from amateur landlords before and I never will again after the difference I’ve seen here. It’s incredibly relaxing to have everything in the building well cared for and everything in the suite fixed at a moments notice.

This post was submitted by The Ant.

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The new rentership society.

The Pope — Tue, 16 Nov 2010 08:23:51 +0000

Wired has an editorial about ‘rentership society‘, the growing inclination for people to rent items ranging from houses to cars to music instead of owning.

For renters today, finding a new apartment on craigslist is almost as easy as streaming a movie. (OK, not quite, but you get the point.) Homeowners don’t reside in this frictionless economy: They’re stuck in one place, unable to quickly downgrade to a cheaper residence when times are lean (or upgrade when times are flush). And it costs thousands of dollars in renovations to beat the depreciation curve.

I speak from experience. My wife and I bought and sold two condos during the latter stages of the real-estate boom, escaping both as break-even propositions (after transaction costs). When we moved into a rental apartment a couple of years ago, we realized that ownership had been a burden, a time sink, and a money pit. Now we ask the landlord to fix things when they break, and we don’t mind that the floor is not the one we would have chosen. We pay less each month than we would on a mortgage, and we bank money that once would have gone into installing central air.

As many markets see asset deflation on houses and condos does that affect a societal preference for owning or renting?

..Oh and I’d be very interested in a Vancouver style car rental. If anyone can find out where I can rent a car for half the cost of owning it and leave all the maintenance responsibility up to the owner please let me know!

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Ownership Premium

Tue, 09 Nov 2010 08:36:31 +0000

This is a slightly edited re-post of a piece I wrote on housing-analysis about two years ago. It is a culmination of much of the comments and logic advanced by regular wiley veterans of the local blogosphere — VHB, freako, patriotz, mohican, to name a few. True to form, it is still as true today, two years subsequent to the original post date.

—

No analysis blog would be complete without a paradox and I believe there is none more relevant now than the so-called “ownership premium” that owner-occupiers place on property values. I would like to offer an alternate view of the so-called “ownership premium” that has been discussed on this blog and others in the past years.

The “ownership premium,” sometimes called the “control premium” or “consumer surplus,” is a premium that a potential buyer will pay for the right of owning (and “controlling”) a property compared to renting. Here is an example thought process of how the ownership premium concept works, from a buyer’s perspective:

jesse is renting a condominium for $1200 per month but is on a month-to-month lease. With a wife and young child, jesse does not want the uncertainty of renting month-to-month and his wife wants to customize the suite, something not always possible when renting. jesse looks at the condo for sale next door. If he were to buy it at market rate, the total costs of doing so far exceed that of continuing to rent. After factoring in all expected costs and trade-offs of his specific situation, jesse decides he is willing and able to pay a monetary premium to buy. But — and here’s the thing — he doesn’t have to.
(...)
Read the rest of Ownership Premium (403 words)

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The pick of the litter for renters – Whistler’s rental market swings from brutal to bountiful

Peter Pan — Tue, 02 Nov 2010 18:36:38 +0000

The rental market is open – wide open.

In mid-October 2009, people were lining up at the Pique office first thing Thursday morning to get copies of the paper fresh from the printer to secure one of the few rental units posted. At that time the Pique classifieds included 130 long-term suites, houses and apartments available in Whistler and Pemberton combined.

This October there are 269 long-term rental units available for the same region.

Squamish has stayed steady with 36 rental units available last year and 37 this year, but it is clear the Whistler market favours renters for the first time in years.

Part of the increase in availability over the past year can be attributed to rentals held back by owners who tried their luck in the vacation market during the Winter Olympics. Development and a more accessible ownership market in Whistler has also contributed to the surplus. New, affordable housing at Cheakamus Crossing and Rainbow has encouraged more people to buy, leaving an excess of rentals available in their wake.

Read the full article in the Pique News

This post was submitted by Peter Pan.

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Where does it get you?

gordholio — Tue, 05 Oct 2010 08:00:00 +0000

My girlfriend and I aren’t looking to do anything outrageous. All we want to do is buy a detached home within an hour commute of her Richmond employer. It doesn’t have to be anything fancy. A 25-year-old, 1700 sq ft rancher that needs a little fixing up would be just fine.

Problem is, we want to buy with cash. We just sold our home in Delta for $650,000 because we no longer wanted to make $800 mortgage payments, especially with all the telltale signs of a correction/popping bubble in the air. We walked away with $450,000 cash and no debts.

But what have we been able to find for nearly a half million dollars? In Vancouver/West Van/North Van/Burnaby, nothing. In Richmond, a one-bedroom crack shack tear-down where airplanes fly so close you can count the rivets. In White Rock, $450,000 buys you a either a 600-sq ft “cottage” on its last legs or an empty view lot.

Yes, we can find something in Surrey, but it’s in a neighborhood where you’re scared to walk down the street. So that leaves us with Langley.

Here, $450,000 buys you an old yet serviceable detached home in a bland, distinctly blue-collar neighborhood. Far from what we’d prefer, but at least there’s an iota of hope that something will pop up that isn’t directly across from a school or on a busy, noisy, truck-filled thoroughfare. Of course, we’d then have to sink a few tens of thousands into the place so it doesn’t look like a total relic, but there is hope. Moreover, you can actually see signs of a correction out there. Listings are staying on the market for months at a time and price reductions have begun.
(...)
Read the rest of Where does it get you? (444 words)

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Province rejects OV social housing bids

The Ant — Thu, 30 Sep 2010 06:17:39 +0000

There seems to be no end to problems at the Olympic Village. You’d think there would be lots of demand for luxury affordable housing and having it sitting empty is a bit of an embarrassment:

The province has rejected the only three bids that came in from operators willing to run Vancouver’s much-debated social housing at the Olympic village.

That leaves the city scrambling for a new solution to fill the 252 units in those three buildings, meant to be the city’s legacy from the Olympic Games. They have been sitting empty for six months, after a lengthy negotiation process between the city and province on how to structure the bid process for non-profit operators.

The operators were supposed to provide $48-million in lease money up front, which the city is anxious to get as a down payment for the $110-million buildings – all part of a project that is financially stressed in every direction.

Full article in theGlobe and Mail

This post was submitted by The Ant.

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Site seeks feedback on Vancouver rental situation

The Pope — Tue, 21 Sep 2010 08:03:30 +0000

Metro Vancouver bureaucrat Don Littleford has put together a web site seeking personal stories and anecdotes about a perceived ‘Vancouver rental crisis’. The site is at http://RentersSpeakUp.org and is now starting to collect feedback. Their estimates are that there are 80,000 families here who spend more than 30 percent of their income on rent, and 30,000 households who spend more than 50 percent of their income on rent.

Vancouver falls behind most other Canadian cities when it comes to wages, so it’s not a surprise that financial pressure is put on many household even with our relatively low rents compared to sales price. Here’s a news story about the site with more information, and here’s the site itself if you feel like commenting on the rental situation in Vancouver.

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Robson Street ‘surprisingly affordable’

The Pope — Thu, 10 Jun 2010 09:19:22 +0000

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.

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You should have rented.

The Pope — Thu, 08 Apr 2010 08:22:30 +0000

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.

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You’ll need to earn more money

The Pope — Tue, 30 Mar 2010 09:55:07 +0000

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%.

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Cruise ship hotel plans sinking?

The Pope — Tue, 02 Feb 2010 11:56:31 +0000

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.

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Olympic rental market ‘oversupplied’

The Pope — Thu, 14 Jan 2010 12:18:16 +0000

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)?

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Why expect a significant correction?

The Pope — Tue, 06 Oct 2009 23:54:33 +0000

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.

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