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
Ready to Pop pointed out this article about Canadians buying property in Hawaii now that the Canadian dollar is strong and some homes and condos are selling for half what they were worth in 2008:
“In some areas prices have dropped 40 to 60% and it’s as bad as Phoenix.”
He gets calls and emails from Canadians daily.
“Some are waiting for a bell to ring that says we have hit absolute bottom,” he jokes. “Others have pulled the trigger because in Maui we’re having a half-off sale.”
The loonie, valued at 62 cents US almost a decade ago, hit $1.05 in April. That means a million-dollar property in Hawaii, that would have cost a Canadian about $1.6 million in 2002, is now under a million.
The best values are on the big island.
“In Maui, you need two wallets — on Hawaii you can survive on one,” Dinits says. “You can get a nice house on Hawaii today, six blocks from the ocean, for $66,000. That would be a bank owned foreclosure, or REO (Real Estate Owned) deal.”
You often hear of high price/rent for SFH in the City of Vancouver being justified because of the scarcity of land. I thought I would do a comparison with the City of San Francisco, which is slightly larger than the CoV and has a population of about 800,000. But the really big difference is that it comprises a little over 1/10 of the metro population compared with 1/4 for the CoV. So you’d expect San Francisco to have a higher scarcity premium. Well no.
Take a look at this listing for the West Portal neighbourhood in San Francisco’s west side for $1,075,000:
http://www.redfin.com/CA/San-Francisco/2531-14th-Ave-94127/home/662192
And here’s the same house for rent for $5200/mo:
http://sfbay.craigslist.org/sfc/apa/2471867467.html
The rest of the neighbourhood:
http://sfbay.craigslist.org/search/apa/sfc?query=west+portal&srchType=A&minAsk=&maxAsk=&bedrooms=3
Price/rent for this property would be 207.
What about the comparable numbers for, say, Dunbar? Maybe $1.5 million and $3500/month? That’s a price/rent of 428.
Now you might say yes but property taxes are higher in SF. That’s true so let’s see how much higher.
This property is assessed at $402,019 and has property taxes of $4,836 /year. That’s because of California’s looney property tax system which taxes at the most recent sale price, not market value. If you bought the house for $1,075,000 you’d pay $1,075,000/$402,019 * $4,836 = $12,931/year.
Total property taxes in CoV are 4.21377 mills, so a $1.5 million property would pay $6320/year.
Calculate price/(rent-property tax) and you get 261 in SF versus 504 in Vancouver.
And I didn’t factor in mortgage interest and property tax deductibility and the ability to lock in low rates long term in the US.
You’d pay more for just a lot in Vancouver than the whole house in San Francisco. What sense does that make? In which city is land really more scarce? What do the rents tell you?
This post was submitted by patriotz.
BOC Governor Mark Carney has made some comments on the Canadian housing market being overheated lately. The first paragraph of this Vancouver Sun article sounds kind of familiar:
The Canadian housing market is overheated, but everything is in place for it to moderate naturally with no further need for government intervention, according to the governor of the Bank of Canada.
It was Patriotz that pointed out this Washington Post article from 2005:
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
Of course where those two articles differ is the comment on local markets. Bernanke specifically did not address local market bubbles, where Carney calls them out specifically:
“Given such developments, one cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand,” Carney’s notes say. “The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear – greed among speculators and investors – and fear among households that getting a foot on the property ladder is a now-or-never proposition.”
But monetary policy is Canada-wide, Carney said.
“We can’t manage monetary policy for a specific housing market or specific province. We’ve got to manage it for the country as a whole to achieve the inflation targets.”
This post was submitted by Karl Marx Carney.
Anybody planning on selling high and buying low? Financial Post says its the perfect time to buy some property down south if you’re a Canadian.
“It’s hard to pick the bottom” says Brian Wruk, a partner in Transition Financial, a cross-border planning firm with offices Arizona. He’s telling clients not to rush to buy, but to have their Canadian dollars converted to U.S. dollars now — at today’s sweet rates — if they’re even thinking of buying.
“You need to get that currency risk out of the picture — get Canadian dollars into U.S. dollars now, so you’re ready to move.”
In Phoenix, Mr. Andersen estimates that about 70% of the mortgages are underwater, which means the amount outstanding on the loan is actually greater than the current value of the house. Competition for these units is fierce and almost everything is bought ‘‘as is’’ and most likely with cash. There are about 40,000 listings in the area, up from a more typical 10,000 units, but still banks generally won’t negotiate the price so most deals are done at list price or higher.
While Western Canadians often buy in Arizona and California, Eastern and Central Canadians favour Florida. And the housing situation is the same there.
“With prices like this it’s crazy not to buy,” says Diana Carter, an Ontario retiree who just had an offer accepted on a single-family house in Florida. Ms. Carter had spent four intense months looking at properties. “We looked at places for US$23,000 or US$24,000 but decided on something so much nicer for US$43,555.”
Why did Canada’s housing market not suffer (yet) as much as the US? The media will tell you it’s our top-notch banks, prudent lending system and strong fundamentals. But take a close look at the graph below:
The US and Canada both had an uninterrupted housing boom that lasted 7 years, with US starting and ending roughly 2 years before Canada. After US banks began failing and world stock markets collapsed in Oct 2008, unprecedented stimulus measures were taken simultaneously by Canada and US.
The key point the above graph illustrates is that by the time stimulus was started, US home prices had already been falling for 3 years while Canada had just started their decline 1 year prior. As a result of the shorter stimulus response time in Canada, our housing prices and banks took a smaller hit.
Notice how similar the effects of this stimulus have been to home prices in both countries. By slamming interest rates to the floor, injecting $110 billion into Canadian banks ($65B from the Insured Mortgage Purchase Program and $45B from Bank of Canada) and creating home buyer incentives (US), housing demand was dragged forward and created a temporary rally in home prices. Even more interesting is how the stimulus effects have started to wear off at the same time in both countries.
And are our banks really more prudent than those in the US? As Ben Rabidoux noted on his blog, take a look at the bank leverage ratios (courtesy of Eric Sprott):
The media is right – it’s different here. It’s worse.
submitted by: crashcow
You hear a lot about the US housing bubble and crash, prices are down all over the US since the peak, but in Manhattan luxury home prices have risen since last year. So what are the wealthy doing? Renting.
Adam Neumann and his wife set out in 2008 to buy an apartment in lower Manhattan, hoping to get a bargain on a 2,500-square-foot (232-square-meter) luxury unit.
Failing to find a deal, they chose an increasingly practical option for the city’s wealthiest residents: renting. They’re paying $300,000 upfront on a five-year lease for an empty TriBeCa loft with almost twice the space that the landlord will outfit to their design.
A price crash does funny things to perception. So why would the well-to-do choose to rent instead of own?
The money he’s not spending to buy “can go into my business,” said Neumann, co-founder of We Work, a New York firm that rents shared office space by the month. “In my business, my cash brings a much higher return than purchasing an apartment,” he said.
“The good times we saw in the past are not coming back anytime soon,” he said. “People are not going to buy a home for $1 million and see it worth $2 million in five years. I see the market going up but nothing like in the past.”
But what about here in Vancouver? Is that $1 million dollar home going to be worth $2 million in five years or are there potentially more lucrative sectors to invest in at this point?
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.
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!
Apparently there’s a city called New York on the East coast of the US that some claim is ‘world class’. Please… Like they could hold a flame to our shops, restaurants and cultural events.
One thing they did have in common with us is some expensive real estate. Did have, because it appears to be getting cheaper. Units in a ‘historic’ upper west side condo conversion are selling for more than 80% off their original prices.
Sounds like they need Bob Rennie.
