Vexed in Vancouver

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Garth,
I read your article in today’s Vancouver Sun and intend on buying your book this week.

I own a downtown [westend] Vancouver condo in a very good building within 3 blocks of the seawall and many other amenities. At 750 sq ft. it is pefect for a young couple or retirees. The market value is currently about 440K and I have about 110K equity. Is this type of property going to be affected to the same degree as other properties? Would you advise to sell now and wait out the coming crash?
Thank you in advance,
Al

You have a condo the size of my garage, worth $440,000, with condo fees, property taxes and other carrying costs, and you ask if this is a solid long-term investment in an over-valued market teetering at the tipping point of unaffordability? Are you serious?

This is exactly the kind of unit which has an uncertain future since there are scads of competing condos in the area, and a limited universe of “young couples or retirees” able or silly enough to buy one of them. Unless your unit is unique, with a full water view or the latest in amenities, or on the trendiest block, then there’s no reason to believe it will escape the coming correction in Vancouver prices. Get used to it. Or get out.

Garth, I read with some interest an article authored by you and reprinted in the Vancouver Sun regarding the predicted correction in residential real estate values. I was disappointed after finishing your piece because it didn’t address the situation that my wife and I find ourselves in. We live in Vancouver and owe $45,000 on a home that is ‘valued’ at approximately $495,000. The home is located on a very busy street and has limited potential for improvements (expansion). We would like to purchase a larger home in a better location for our family and are considering assuming an additional 200-300K in debt to achieve this. My concern is that we don’t want to purchase a home and then experience a drastic decline in it’s value. My wife and I have very secure jobs (teacher and police officer) and will qualify for our pensions in 10-12 years. We are quite conservative with our money and our stock portfolio’s have achieved marginal gains over the years (approx value $80,000). Real estate seemed to be the last ‘safe’ option for us.

Any suggestions?

Rich and Karen

Suggestion? Yeah, don’t do it. You now have gobs of equity in your home – more than $400,000, which is five times more than the amount of financial investments you hold. In other words, if you stay where you are, then you have a secure place to live, but risk seeing equity decline in the unstable market now developing.

If you move, borrow $300,000 more, pay $40,000 in real estate commissions and moving costs, end up in a house worth $800,000, pay $30,000 in land transfer costs, and have a $350,000 mortgage with no savings, you are probably screwed. And for what? A bigger house? Is that the goal of life?

Move now and roll the dice if you want. I sure wouldn’t.

Hello sir i was reading the vancouver sun today and read ur article in it. I agree with most of what you had to say but just a question , i hear that its harder to get home loans in canada than it was in the states wich lead to the sub prime crisis.Ur thoughts on that if you have time
Garry

The global credit crunch and US subprime market mess, which most Canadian thinks is someone else’s problem, has infected this country’s financial markets and institutions. As a result, people taking out new mortgages are already paying more, since the banks are not discounting from posted rates as heavily as in the past. In addition, many borrowers with little or nothing down are finding money is certainly more scarce.

Expect this to continue, which will affect the housing market in general, and reduce the pool of glassy-eyed, innocent, vulnerable young buyers which constitute the red meat the real estate market consumes daily. This will reduce the legions of youngsters to be talked into buying 500-foot condos with no future. And from that, we ultimately will all benefit – especially the kids.

18 comments ↓

#1 shoutoutoutout! on 04.01.08 at 11:18 am

Hi Garth, I am selling condos in downtown big canadian western city. The market is flooded, but we are selling just fine. 4 weeks on market and almost everyone who bought put only say average $5000 down on condos between 230,000 (480sq ft 1 br 1 bath) and 340,000 ( 840sq ft 2 br 1 bath). They all have almost 100% financing. They dont seem to be having any trouble getting this money/type of financing. So, my question is, where is the proof that this type of lending will not continue (because it is still happening right now before my eyes) and therefore prop up the market with first time buyers?

#2 jas on 04.01.08 at 11:46 am

Hi Rich and Karen:
If you need bigger house, one option you have is to move farther out from vancouver. For example consider Surrey or North Delta. From there commute to Vancouver is easy using syktrain and once you arrive in Vancouver, there is frequent bus service. There are tons of houses in the Surrey and North Delta for $450,000 (lot size approx 60 ft x 110 ft, with good accommodation + back yard to enjoy in summer ! As Garth has said, don’t take on more debt…No no..no.
I’m not a realtor but if you decide to go ahead in the above area you can contact me on [email protected], I can make you aware of the pitfalls of this area as I live in this area.

#3 VancouverCon do on 04.01.08 at 12:08 pm

Thanks for the voice of reason in an unreasonable market. Vancouver real estate is likely one of the riskiest ‘investments’ in Canada, with many buyers speculating on future price gains to justify 40 year loans with very low or zero down. These are the buyers that will end up owing more than their homes are worth. Anyone that bought years ago, has a financial buffer and isn’t highly leveraged will do fine.

http://vancouvercondo.info

#4 Dan on 04.01.08 at 2:57 pm

To Rich and Karen:
I would disagree with Garth’s response in one aspect: don’t sit in your current house; sell it, put your equity into the bank, then rent for a few years. Sure, you probably don’t like the idea of renting after being a homeowner for several years, but bear with me for a second.

One of the biggest problems with real estate is that homeowners in rising markets count their chickens before they hatch; you don’t have the money from your house until AFTER you sell it. You say you owe $45k on a house valued at $495k. If you sell it now, you get about $450k to put in the bank earning at least 3% annually. That’s not bad.

If the market here drops 30% like it’s in process of doing in Phoenix, Miami and huge swaths of California (and no, this is not impossible even in the self-titled Best Place on Earth; read some of the Vancouver area real estate blogs that have actual analysis on them, like vancouvercondo.info or Langley Financial Planning), you will sell it for $345k minus whatever is left on the mortgage. That’s a rough 25% loss versus selling now.

If you sell now and roll your $450k in gains plus another $300k of borrowed money into a $750k home and THEN the market tanks 30%, your home will be worth $525k. You owe about $300k of that to the bank (your initial loan amount), leaving you with about $225k of your initial $450k equity. That’s a 50% equity loss due to a 30% market drop, and the realtors and province haven’t even taken their bite yet. Not good.

Now try to divorce yourself from the emotions of selling your home and think about it for what it truly is: selling an asset. For any other commodity, the best thing to do is buy low and sell high. Why is a house any different? I don’t think things are going to get much higher in Vancouver than they are now, so get out while the getting is good.

#5 Woodenhorse on 04.01.08 at 3:04 pm

Why can’t Rich and Karen consider selling and renting?

400K in the bank would have to mean something to a teacher and a police officer.

Even if it was only earning 4% (what ING currently pays on GICs) it would cover their housing rental costs for the rest of their lives.

#6 Sophia on 04.01.08 at 3:58 pm

Hi Garth,

I was very glad to see the Vancouver Sun article yesterday. I hope Canadians realize that our real estate market is not sustainable and that we will most likely end up with a housing down turn in the near future. It is very disconcerting to see in Vancouver “crack shacks” on a standard lot selling for over a million dollars! I’m looking forward to see this madness end.

Thanks for your candid insights,
Sophia.

#7 Al on 04.01.08 at 11:59 pm

If I had 400K sitting around I sure as hell wouldn’t let it waste way in a loser savings account. With 400K down, you would have a substantial down payment on an apartment building or revenue property that generates POSITIVE cash flow each and every month. And when all these spec buyers will be losing their houses/condos, it will bring a flood of renters to the market. 4% interest? After inflation of 2%? What is left? Sounds to me like the riskiest investment of all.
What happens when the global credit bubble collapses and the dollar goes to zippo?
I’d sell the over-valued house and cash in, invest the money, and rent! The cash flow from the investment would easily cover the rent and more, depending on the down payment. Talk about semi-retirement!

Just my .02

#8 Resident on 04.02.08 at 1:45 am

Garth,

Please pass a bill or something to get ride of CMHC. It does more hard than good.

#9 cyrus on 04.02.08 at 11:17 am

“With 400K down, you would have a substantial down payment on an apartment building or revenue property that generates POSITIVE cash flow each and every month”

Not in Vancouver you don’t. Income on savings accounts exceeds net cash flow on rental properties by a significant margin for most Vancouver properties at current prices. It’s why many are convinced the market’s unsustainable. It’s hard not to agree.

#10 Drachen on 04.02.08 at 12:32 pm

Mr. Turner

I’ve been curious about something for a while now. I know you could get in political hot water for answering the question I really want to ask so take the following as merely a theoretical question.

Could the government, say for purposes of delaying a crash until after the next election, ‘lean on’ the CMHC to encourage them into more and more reckless insurance policies to protect the banks and ensure a free flow of money to the people who still think buying is a good idea?

I ask because it’s the only scenario I can come up with where the CMHC shows any competence whatsoever at understanding the fundamentals of the housing market.

#11 Drachen on 04.02.08 at 12:45 pm

Resident

The CMHC was at one time an agent of good. IMO they shouldn’t be abolished, rather the government should seek to return them to their roots.

Originally it was actually created as a publicly funded mortgage lender and only shifted that role to the banks in 1954 and instead started insuring mortgages. This turned the agency to another, ‘socialization of costs and privatization of profits’ style crown corporation. Gradually from there it appears that the CMHC’s mandate of helping create affordable housing was gradually eroded until we have the CMHC of today which appears to exist entirely to assist the banking sector even at the cost of home affordability.

#12 VancouverCon do on 04.02.08 at 1:00 pm

I doubt Garth has a magic wand to wave and get rid of the CMHC, but I agree that it would be nice to hear some attention focused on their roll in encouraging speculation. Zero down and 40 year mortgage terms don’t help affordability.

#13 VancouverCon do on 04.02.08 at 1:06 pm

Al, are you sure about the flood of renters? Oddly enough rent prices have actually dropped after a housing crash because of economic problems and the lag of completing buildings started during the boom.

#14 Al on 04.02.08 at 6:06 pm

“Not in Vancouver you don’t. Income on savings accounts exceeds net cash flow on rental properties by a significant margin for most Vancouver properties at current prices. It’s why many are convinced the market’s unsustainable. It’s hard not to agree.”

Here in Victoria, you can still buy a 22 unit apartment building for 3.0M that grosses 260K before expenses. There is one such unit for sale right now. With 400K down, you can buy 2 one bedroom condos as well. You’d be surprised what you can do with that amount of money. I guess I should have disclosed I’m a Realtor :0

#15 cyrus on 04.02.08 at 7:01 pm

U.K., Spain housing markets face major corrections – S&P UPDATE
April 01, 2008: 12:55 PM EST

MUMBAI, Apr. 1, 2008 (Thomson Financial delivered by Newstex) — (Updates with further detail)
Standard & Poor’s Ratings Services said Europe’s housing markets are finally, and overwhelmingly, turning down.

‘And in those countries where the housing bubbles have been expanding for longer, Standard & Poor’s (NYSE:MHP) believes the corrections could be severe and painful,’ the agency added.

Particularly at risk are the U.K. housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom, and the Spanish housing market, which is coming to terms with a largess of new homes, S&P said.

http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-24181234.htm

#16 Jeff Riverdale on 04.02.08 at 9:31 pm

Article in Today’s Vancouer Sun: I wonder what the price decline is from the Peak in summer 2007-not since last March.

Greater Vancouver housing sales decline

Vancouver Sun

Wednesday, April 02, 2008

VANCOUVER — Greater Vancouver property sales in March declined for the second month in a row falling 16 per cent below the same month in 2007 while inventories of unsold homes continued to build, the Real Estate Board of Greater Vancouver reported.

Realtors saw 2,997 sales through the Multiple Listing Service in March, compared with 3,582 in March, 2007.

New listings added to the market in March were up four per cent to 5,674 compared with the same month a year ago.

Prices, however, remain elevated with the benchmark price of a so-called typical single-family home hitting $764,616 in March, 12 per cent more than March 2007.

“The market is continuing to balance, with sales and listings beginning to re-align with our 10-year averages,” Dave Watt, incoming president of the Real Estate Board of Greater Vancouver.

In the Fraser Valley, property inventories hit a 10-year high in March, the Fraser Valley Real Estate Board reported, with total active listings up 27 per cent to 9,361 units compared with a year ago.

MLS sales in the Fraser Valley of 1,315 units represented a 25-per-cent decline from the same month a year ago.

“We have a more competitive market for sellers in the Fraser Valley right now,” Kelvin neufeld, president of the Fraser Valley Real Estate Board said in a news release, “yet [there is] enough demand to keep prices trending upwards.”

The March average price for a single-family home was $550,259, which is up 8.1 per cent compared with the same month a year ago.

#17 Another Albertan on 04.03.08 at 3:23 pm

Jeff –

The phrase in the global marketplace for the last year has been “information asymmetry”.

Attempting to extract a broad range of data points for independent analysis is next to impossible in the real estate market, as it was in the CDO market in the US and the ABCP market here in Canada. The information is heavily guarded and, even when published, only offers broad summaries.

It comes down to two simple concepts – “Just trust us” and “The devil is in the details”. The sellers espouse the former and want you to ignore the latter.

The result in many marketplaces of a mark-to-market price reset has been a set of downward slides followed by price shocks. This is what happens when reality intersects with mark-to-model pricing (or as I refer to it in real estate, “mark-to-hope-and-hype”)

#18 Pedro on 04.17.08 at 2:13 pm

Re: Al on 04.02.08 at 6:06 pm

Hmmm, interesting. With the market decline, that 22 unit building avail for 3 Million bucks will also decrease… Not the best route, I would say.

As well, yes, you should have mentioned you are a realtor…. Isn’t this profession one of the few who are self-regulated? Yeah, the market is excellent!!!

Please, give me a break.