It’s the yield, dude

Where are real estate prices headed? If you agree with me, down. In fact, price reductions across Canada over the last six months represent just a taste of what’s to come.

That’s my opinion, and I’ve expressed my reasons for this belief many times over.

But, maybe I’m full of it. Wouldn’t be the only time. So what this country really needs is a tool real estate junkies can use on their own to determine if a property’s over-valued.

Fortunately, it exists, at least in rough form: The P/R ratio.

This is the Price-to-Rent ratio, which has been used for some time to figure out if a piece of real estate is fairly valued relative to its ability to earn income in the marketplace. It operates on the same principle as a stock’s P/E ratio (no, that does not mean how much you wet your shorts when opening your latest mutual fund statement).

With stocks, investors can judge if the price being asked is worth paying based on what a single share yields. If the price is expensive and the earnings low, then the P/E is high – not a good thing for short-term capital gains.

With a house, same thing. If the asking price or current market valuation bears an unrealistic relationship to what it can be rented for, well, it’s probably not worth what the vendor is asking. Here’s how to determine that:

Simply take the annual rental income and divide it into the property’s price tag, and then measure it against an historic norm. One good benchmark, according to Moody’s Economy.com, is a P/R of 16 – which is a long-term average.

So, let’s take a subdivision home in a western suburb of Toronto built three years ago, sitting on a 36-foot-wide lot with a double car garage, and currently on the market for $460,000. You can rent that three-bedroom home today (or a mess of others just like it) for $1,800 a month.

So, that’s a yearly rental income of $21,600, divided into an asking price of $460,000, for a P/R ratio of 21.2. Ouch! This baby is overpriced, especially so because comparable houses can be leased for up to $300 a month less in the same general area.

So, let’s ask a final question: Is it better financially (i.e. cheaper) to buy or to rent this particular house?

Well, let’s do the math on 20% down (that’s $92,000) and a mortgage of $368,000, plus maintenance costs, insurance and property taxes (charges not incurred by a tenant).

Downpayment cost (what $92,000 a year would earn in a 3% GIC): $2,760

Mortgage payments ($368,000 at 5-yr rate of 7.2%, 25-year am): $31,477

Maintenance (new house, virtually nothing): $1,000

Insurance: $1,700

Property tax (in this area, average on 3-bedroom, 2,000 sq ft home): $5,400

Total annual ownership cost: $42,377

Rental cost for the same house: $21,600

Cost of being a Greater Fool: $20,737

This post: Priceless.

Meanwhile on Hornby…

  • 933 Hornby St., Unit 504
  • Asking price: $509,000
  • Selling price: $485,000
  • Previous selling price: $265,900 (January 2005)
  • Taxes: $2,033 (2007)
  • Days on market: 53
  • Listing agent: Sue Johnson and Sarah Thompson, Dexter Realty

98 comments ↓

#1 JO on 11.01.08 at 10:10 pm

Right on. Housing’s PE ratio on display and what an ugly picture indeed. If the long term average is 16, the coorection this time should easily snap about 25-30 % below 16 considering the size of the move on the way up, amount of credit growth supporting the asset, and extrem optimism of the public and economics industry toward the housing market. As i said in my last post, i am guessing we will not see 2007 prices until the 2020’s if this bubble behaves anything like other asset bubbles of significance. The sheer amount of debt being destroyed is astonishing and housing is at the core of much of it. Deflation is here and looks set to change our world. How long it stays is hard to say, but even a 2 year brush with deflation will hurt. The prevailing sentiment among the average layman is that housing is still a great long term investment that “everyone knows always go up” and that this downtrend is only temporary. More than any chart or statistic, the fact that the average J6P and average economist and analysts believes this view is by far the most valuable tool to suggest that the most likely course over the next 3-4 years will be a nasty decline. Canada is not immune to this. Vancouver is our California and Toronto should feel the pain too. As hard as the next 3-4 years will be, the correction is needed and very healthy indeed. And i said this for existing homeowners as well as potential buyers. No asset class can sustain a rise that has lasted 7-8 years and which has increased at 3-4 times its long term average. This kind of market is not good for anyone.
JO

#2 damian on 11.01.08 at 10:26 pm

This is a grossly oversimplified calculation designed to support your point.

You chose to overlook: taxes, sunk cost, inflation and house appreciation (buying a house with 1yr horizon would be insane), leverage.

You would be a fool to buy a house to live in just a year.

So let’s have a five-year calc from you, buying now. — Garth

#3 Andre on 11.01.08 at 10:34 pm

“Cost of being a Greater Fool: $20,737”
What would the split in equity and interest be in this?

#4 charliegosurf on 11.01.08 at 10:54 pm

Duh!

#5 Mitchell Cardno on 11.01.08 at 11:02 pm

#3 – Andre. Using Garth’s numbers ($368k, 25 yrs, 7.2%), your equity contribution would look like:

Month / Principle / Interest
1 / $440 / $2208
2 / $443 / $2205
3 / $445 / $2203
4 / $448 / $2200
5 / $451 / $2197
6 / $453 / $2195
7 / $456 / $2192
8 / $459 / $2189
9 / $462 / $2186
10 / $464 / $2184
11 / $467 / $2181
12 / $470 / $2178

Total ($31,777) / $5,459 / $26,318

Assuming that house value stayed constant (did not decrease / inflate), you put $5,459 into your home equity. So the cost of being a greater fool assuming stagnant housing prices is really $15,278. But according to Garth’s prediction (and I agree), housing will decrease in prices, so that equity will just evaporate.

Interest rate is pretty high at 7.2%… But Garth’s numbers do illustrate a point

#6 CTA on 11.01.08 at 11:35 pm

I lost a lot of non-real money wealth from my real estate. Non-real being that the temporary wealth came from an artificial creation of perceived wealth based on an asset that does not produce anything of value to the economy. But, most people bought into it, so I don’t feel so bad. At least I do not have any mortgage to pay. I can always rent out my property.

#7 SoWhat on 11.01.08 at 11:59 pm

I have done the same calculation but for 10 years and with the interset equal to 6% for the same price and same down payment, the endd result was that in 10 years I will pay almost 250,000 with only 95,000 is in principle , if we add taxes and heating costs,, thy will erase the 95,000 of equity and what you are really left with is the increse of the house price, which I doubt it will be much, because of the affordability issue, if we already are suffering an affordability crunch as of now and really there isn’t a massive lay off yet to take place, waht will happen when things get really ugly, if they ever do, for 10 year horizon it might be bettter to rent and invest the money some where else, if possible.
invest in core needs (Energy, utilities, food) and most probably you will be safe.

#8 Wesley Moxam on 11.02.08 at 12:15 am

It would cost more to own the home at ‘normal’ a P/R ratio.

Cost of home at ‘normal’ P/R ratio of 16: $345,600
Downpayment cost (what $61,120 a year would earn in a 3% GIC): $1,833
Mortgage payments ($276,500 at 5-yr rate of 7.2%, 25-year am): $23,600
Maintenance (new house, virtually nothing): $1,000
Insurance: $1,700
Property tax (in this area, average on 3-bedroom, 2,000 sq ft home): $5,400

Total annual ownership cost at today’s prices: $42,377
Total annual ownership cost at ‘normal’ long term price: $33,533

Rental cost for the same house: $21,600
Cost of being a an owner: $11,933

Cost of being a greater fool: $8,794 / year

#9 Mark on 11.02.08 at 12:40 am

Garth, the ‘cost’ of downpayment funds should be considerably higher than ‘just’ what you’d be able to ‘get’ in a 3% GIC. Why? Because a downpayment constitutes equity, and highly leveraged equity is subject to enormous volatility (in nominal dollars).

More appropriately, you should be pricing that equity close to the earnings yield on the Toronto Stock Exchange — around 12% right now (and that’s after-tax).

So the cost of ‘owning’ (‘owning’ being a relative term, unless the property is completely paid-up) is considerably higher than what you write.

#10 Mike.Slobodan on 11.02.08 at 12:50 am

Protectionist fears waft from U.S.

With a deepening financial crisis and a recession to worry about, Canada probably falls nowhere on the list of concerns for the next president of the United States.

But whether Democrat Barack Obama or Republican John McCain, how the winner handles the financial-market meltdown and worsening economic woes is bound to pose big implications for Canada.

“The agenda of the next president is going to be daunting, to put it mildly,” said Roger Gibbins, president of the Canada West Foundation, an Alberta think-tank. “If the American economy remains bad or worsens, then there’s a very real risk of a protectionist stance. We may end up being a bystander victim.”

The U. S. Congress, regardless of its political stripe, has a history of putting up trade barriers in tough economic times.

“Trying to protect American interests can get folded into an energy-security and a protectionist sentiment,” said Mr. Gibbins. “I probably sound overly alarmist, but these policy files are hugely important to our own economic recovery, and how they’re handled in the United States is going to be terribly important.”

http://www.financialpost.com/news/story.html?id=925435

COMMENT ON US DOLLAR PARADOX

http://www.321gold.com/editorials/willie/willie103108.html

Great Depression in Canada was worst than in US

Canada was hit hard by the Great Depression. Between 1929 and 1933, the gross national product dropped 40% (compared to 37% in the US). Unemployment reached 27% at the depth of the Depression in 1933.
Families saw most or all of their assets disappear, and their debts become heavier as prices fell. Canadian exports shrank by 50% from 1929 to 1933.

http://en.wikipedia.org/wiki/Great_Depression_in_Canada

#11 $fromA$ia on 11.02.08 at 1:59 am

I am renting for $1100 a month in Vancouver.

I sleep well knowing that every month I am guaranteed in the plus.

Economy slow down? Won’t hurt me any. Lets see who’s lucky enough to get out now and lock their equity in the bank in cash. All those people riding high on equity are all going to take a hit.

Have a nice ride, the pigs aren’t flying anymore.

#12 JET on 11.02.08 at 2:28 am

Another way to look at it at (using Garth’s parameters), is to see what return one would get on the initial costs, if that property was rented:

House Price: $460,000
Interest Rate: 7.2%
Amortization: 25 years
Downpayment: 20%

INITIAL INVESTMENT:
——————————————-
Lawyer/Disbursements: 1,200.00
Land Transfer Taxes: 10,600.00
Other Costs: 500.00
Downpayment Amount: 92,000.00
——————————————-
TOTAL INITIAL INVESTMENT: $104,300.00
===========================

Mortgage Amount: $368,000.00

MONTHLY OUTLAYS:
Interest+Principle: 2,623.13
Insurance: 141.67
Property Tax: 450.00
——————————————-
TOTAL MONTHLY OUTLAYS: $2,764.80
===========================

RENT RECEIVABLE: $1800

NET MONTHLY INCOME: -$964.80

NET ANNUAL INCOME: -$11,577.57

ANNUAL RETURN ON INITIAL INVESTMENT: -11%

If the principal portion is removed from the mortgage outlay (average of $500/mo. for the first 5 years), assuming the equity doesn’t get wiped out, the return is -5%

If that same house can be bought for $360,000 with the same initial investment, the returns would be -3% if the principal is included in outlay and +3% if it isn’t.

Garth’s calculation is more brutal: a P/R ratio of 16 applied to a rent of $1,800 gives a house price of $288,800!

#13 David on 11.02.08 at 3:13 am

Every fundamental indicator and metric will lead to the same conclusion about how unaffordable housing has become for middle class families. The total disconnect from reality occurred in 2007.
Tell a realtor that you want to buy a home priced in line with fundamentals and you most likely will get icy stares or be given the THINA argument, “there is no alternative”! Calling the current conditions a buyers market is laughable, since so may homes are vastly overpriced and financial institutions are being careful about any form of lending.
The probability of a housing price rebound in most of our lifetimes is next to zero. The real economic damage from the housing bubble has already been done.

http://www.decisionaide.com/mpcalculators/AffordabilityCalculator/Affordability2e.asp

#14 Alan Yeung on 11.02.08 at 3:28 am

This is a good post but it’s worth expanding it to take into account equity.

It’s also worth discussing price appreciation/drops. Though long term housing only appreciates 0.3%-0.6% over the rate of inflation (far less than people have come to expect), the capital gains deduction converts some of the rate of inflation to effective income. That said, given the way the market is going, one would have to intend to sit on a home for at least 10 years to rationally expect this to work out in their favour (and even then it may not).

#15 thriller on 11.02.08 at 4:07 am

Well… If you count in average, lets count the average property appreciation of 5% per year (BTW, mentioned by you). That works out +23K a year. Deduct your “fool” cost and you still see the positive number. Sorry, Garth, I did not invade this discussion for a long time, just being a listener, but your last statement is horribly wrong. Please, count all variables, not just negative ones, which you highly wish. I usually love to hear your opinion, because you mostly right, but not this time. Sorry, you lost a score.

#16 David on 11.02.08 at 4:50 am

Garth, your estimate is still probably too cautious, since one has to factor in the cost of utilities overhead associated with home ownership like cable, Internet, electricity, natural gas, phone and water. Every functioning household in Canada has those associated overhead costs attached, so the full costs of being a greater fool might be much higher yet. McMansion owners seldom post their utility bills on the blogs, but I am quite sure all these minor overhead costs could easily amount to another $1K a month.
Here is a fun cap rate calculator for both the fundamentalists and doubters out there. It really does not matter what metric one chooses, the bubble produced unaffordable and unsustainable housing for middle class Canadian families.

http://www.forbes.com/tools/calculator/buy_vs_rent.jhtml

#17 islander on 11.02.08 at 5:18 am

Actually, you might be underestimating the cost of ownership by quite a bit:

Property Transfer Tax in BC: 1% on first $200K, 2% on balance (first-time buyers enjoy an exemption).

GST: 5% on new or substantially improved homes. 5% on realtors’ commissions.

Maintenance: New homes don’t always (and on the Prairies almost never) come with fences, lawns/landscaping, finished basements. Add tens of thousands of dollars for those items.

Depreciation: An expensive house as a bigger drop to its utility value than does a less expensive house.

Disposal costs: Regardless whether you sell your house yourself or use a realtor, it costs something to dispose of your property. Renters just move.

#18 Nick Rowe on 11.02.08 at 8:14 am

Good post Garth. People ought to make this sort of calculation when deciding whether to buy or rent a house (and whether the price is too high or too low).

One mistake in your calculation is that you treat all mortgage payments as a cost, whereas part of the mortgage payment is repayment of principle, which is a form of savings. The true interest cost on the mortgage is 7.2% x $368,000 = $26,496 (not the $31,477 you assume).

As damian above notes, you ignore income taxes and inflation (on rents and house prices). Here is a simple way to include taxes and inflation in the calculation:

Taxes: If you rented, and invested the $92,000 downpayment into a GIC at 3%, you would get taxed on your interest income, and your after-tax return would be less than 3%. If you have a 50% marginal tax rate, for example, you would only earn 1.5% after tax, so your downpayment cost would be $1,380, rather than $2,760.

Inflation: rents, taxes, and house prices, may rise or fall over time, and the exact calculation of the costs of buying vs renting will depend on the assumptions you make about each, over the time period you plan to own the house. So it can be complicated. But a simple assumption would be that rents rise at 2% per year, which is the Bank of Canada’s target for CPI inflation, and that the fundamental value (as opposed to the bubble price) of a house also rises at that same 2%. In this case, we can simply subtract 2% inflation from the 7.2% nominal interest rate on the mortgage to get a real interest rate of 5.2%. So the real interest cost on the mortgage would be 5.2% x $368,000 = $19,136.

Note that we should also adjust the downpayment cost for inflation. Interestingly, if we assume a 3% interest on a GIC, a marginal tax rate of 50%, and a 2% inflation rate, the downpayment cost is actually NEGATIVE! The real after tax rate of interest becomes MINUS 0.5%. What this means is that someone who didn’t need a mortgage, who could only earn 3% on his money elsewhere, and who faced a 50% marginal tax rate on interest income, who assumed that house prices would rise with inflation at 2%, would actually do better by buying a house even if he could live elsewhere rent-free! Maybe that’s the fundamental reason why we (and so many countries around the world) had a house price bubble!

#19 Growling Dog on 11.02.08 at 9:35 am

From the Liberal candidate in Oshawa:
A few thoughts on how the Liberals must face some inconvenient truths
To members of Sean Godfrey for Oshawa
Sean Godfrey

October 26 at 12:12am

A few thoughts on how the Liberals must face some inconvenient truths… if we are to become a relevant political force in 21st century Canada.

1) A Liberal Party Leader:
We need to pick a leader who can work with others, who can listen, will respect their opinions but who also has charisma, intelligence and can communicate ideas well. He or she must be likeable in the public’s eyes, a good salesman and a great communicator – to get the message across to the public.

2) The Machine:
Here, the Liberals have their greatest lessons to learn, from of all people, the Conservatives.
This is the 21st century. So, let’s start to use 21st century techniques and every possible modern media tool to maximal advantage.
We need to include the internet, TV marketing, telephone marketing, focus groups and professional PR firms to create…a successful brand.
We must build a successful brand from both top down… and bottom up.
The message to the public must, of course, be exceptionally good from the central leadership; but the creation and execution of political momentum must be at both riding and national level.

According to the Toronto Star last week, only 36,000 individuals across Canada contributed last year to the Liberals.
The Conservatives had five times that number of contributors, and as a result had a national database of identified Conservatives to approach, not just for money, but for votes, taking signs, recruiting volunteers and grassroots organization.
They also outgunned us by five times in terms of money raised from individual donations. We must learn how to play the ‘new’ game.
We need to create that kind of database and those kinds of numbers of supporters consistently across this country, from year to year, and not just hope we can gain enough national support in an Election period.
The Conservatives also targeted specific groups such as middle class married women very successfully, in terms of policy and propaganda. For the Conservatives, each riding had thousands of identified supporters from the national database who could then be plugged into each local campaign.

3) Each Liberal riding must become a fully functioning cell of political action:
during writ but also between writs, more importantly. The Liberal Party needs to wake up to the simple fact that if each riding association were to become a supported hotbed of local political activity, then the Liberal brand would resonate in every riding across the country with the electorate in every Election.
Right now, Liberal riding associations – especially in un-held ridings – are aimless, impoverished and have no true political activity, except by accident.
The Liberals centrally spent no concerted effort, time or money going after un-held ridings, and ignored their issues in strategy and policy approaches.
No wonder almost no ridings were taken back and several “stronghold” ridings were lost.

The Liberals have believed arrogantly, for too long, that just showing up to an Election should be sufficient to win.
We need to take serious stock: the Liberals have lost the confidence of this nation.
We simply don’t resonate with enough people anymore in this country.

4) Political structure:
Currently, we have an archaic and seemingly inept structure in place, in terms of central, regional and local organizations, when it comes to effective political activity.
LPCO is my local provincial example. It acheives very little effective political activity that I can determine. Since I was a candidate, if it’s not apparent to me that they are doing anything in terms of political action, then it’s even more embarrassing to consider just how ineffective they really must be… as far as stimulating the general public to turn to the Liberals.

There seem to be more people interested in holding titular positions in these organizations than there are people actually orchestrating political action… and engaging the public to become Liberals or to hear the Liberal message.

During the Election period, I must have received hundreds of emails from the central Party and LPCO extolling the virtues of the Liberal campaign …but absolutely nothing was being done to communicate these messages effectively to the electorate. Very little of any real use was forthcoming either to candidates in un-held ridings in terms of help or assistance, except very outdated ideas and techniques, such as forcing candidates to buy a useless riding package which contained, amongst other things, dozens of posters of Mr Dion.
The tools provided, if they could be called that, were old fashioned, ineffective and a waste of valuable resouces and money.

Strategic targeting of specific ridings in a more intelligent ‘hands on’ fashion is what’s required.
What’s also required is an understanding of modern political warfare and the tools that are required. The Liberal Party doesn’t appear to understand, in terms of its own regional and central organizations, how to wage the war, riding by riding.

Fascinatingly, as soon as the Election was over, I received not one email, message or telephone call from LPCO or the central Party apparatus to thank me for the time, effort, money and sacrifices that I, and so many others, had undertaken on their behalf as Liberal candidates. We took the fall for the Liberal Party’s ineptitude, poor organization and a badly communicated, misguided central Party message that simply lost us thousands of Liberal voters in every riding across the country.

When I close my eyes at night, the lasting memory of our canvassing during the campaign is the recurring refrain heard too often to count at the doorsteps, ” I can’t vote Liberal this time, your leader is terrible…and I hate the carbon tax!”

To not even acknowledge the candidates and their loyal volunteers who slogged their guts out for the cause and who were mown down like cannon fodder in the Election debacle, is just insulting to so many who were brave enough to hoist the Liberal banner high and demonstrates a shocking lack of intelligence and empathy when applied to team building.

Many candidates are shell shocked by what happened, many are openly angry and will never run again for the Liberals, because of how let down they feel because of their regional and central Party’s indifference and ineptitude.

5) We cannot afford another divisive and expensive leadership struggle:
This needs to be put very quickly behind us, if any momentum can be created – especially since there is a very good chance we will face another election within the next few years.
Surely we don’t want to return to Parliament, again afraid to challenge the increasingly swaggering Conservatives because we cannot afford to fight another election and know internally we are still divided?
Enough is enough.
It’s time to learn some hard lessons and get back into the game we need to win.

If we really want to win, we must first learn from our mistakes of how we lost.
If we fail to learn from our mistakes, we are certain to repeat them.
Leadership contenders please note this last point.

So, it seems clear that in very short order, we must have a much briefer, affordable and much more sensible leadership convention.

Liberals cannot wait until May, with Mr. Dion hanging painfully on to be further ridiculed by the Conservatives, at will, in Parliament.

All that achieves is further Conservative brainwashing of the Electorate that the Liberals cannot get their act together and shouldn’t be trusted as being credible.
The Liberals should view choosing a new leader as our first and immediately vital PR exercise in regaining public confidence in the Liberal brand.
This can and should really be done before Christmas, if we are to have any real chance of unifying support initially within the Liberals and then, much more importantly, within the general electorate.

The Tories planned their election two years ahead. We are already behind the clock – given that the most likely election time line is just two years away.

6) Cooperation and unity:
Now more than ever, the team of key Liberals must realize that they must work together, if we are to succeed.
We have absolutely brilliant, talented, capable people in place within the Liberals. But, we have not learned to play as a unified team.
Place each person at their strongest positions, cover each other’s areas of weakness, and move as one smooth and coherent force.
The public are desperate for the Liberals to rise from the ashes and deliver something worth believing in, again.

7) The ‘Kingston’ effect:
It is absolutely necessary to take the brightest and the best in this Party and sequester them until they thrash out both a winning team approach and an effective policy strategy that the electorate will get behind in droves.

That policy strategy must be clear, easy to grasp and resonate with this 21st century electorate.
Remember, we have one huge advantage over the Conservatives: we are the good guys!

We actually believe in human rights, social progress, democracy and freedom of speech, equality and fairness.
The public know that…and they want to see those principles front and centre, so they can willingly back the Liberal brand again.

The team approach is critical, but of course, we need a captain – who must lead by example and must have the loyalty of all those who play on the team.
Or we shall simply repeat what we just all painfully witnessed – and lose not only the next Election, but the permanent confidence of the people of this nation.

Sean Godfrey.
Unrepentant Liberal

Hey, dude, this is a real estate forum. I am moving this comment to garth.ca. — Garth

#20 Valerie on 11.02.08 at 10:27 am

what if someone can afford to buy a property outright? is real estate paid for in full a good way to diversify a portfolio during the stock market meltdown?

#21 Sheldon on 11.02.08 at 11:07 am

I agree home prices our too high at the moment and likely to come down. I have recently purchased an overpriced home outside of Toronto and fear what the price of similiar homes will be in a year. One thing that is not factored into your calculation though is the emotional attachement with a home that is yours. You can decorate it as you want. You can build a deck and enjoy the outdoors with friends. Your kids can enjoy and grow in a home that is yours. When you rent you cannot do these things and the emotional attachement is not there. What happens when the owner doesnt pay his mortgage and the bank forecloses? You have to uproot everything and start somewhere else. What damage can this do to a family. I would rather be in control of my destiny, and that can’t be captured in any calculation.

Stop being emotional. You can decorate a leased home and build a deck if you want, and your kids won’t know you don’t have a mortgage if you don’t tell them. If the investor/owner abandons the house (about a one in a million chance on an income property) then you can buy it cheap, or move. I hear people who own houses actually move sometimes, too! If you think the difference between living in a house the bank owns (though a mortgage) or that someone else is subsidizing you (through rent) is enough to ‘damage’ a family, then you’ve lost all perspective. — Garth

#22 Brian on 11.02.08 at 12:04 pm

I currently pay $1400 to rent a place that is on the market for $519k. I knew it was on the market when I moved in (the listing was sitting on the counter at the showing) but I moved in anyway knowing it will never sell.

Garth: Don’t forget the intangible value of having your total housing costs fixed at a low and stable number indefinitely. In the rent-plus-invest model, you are free to take more risks in your career and on the stock market. You can also weather illness, economic downturns, family emergencies, etc. without breaking a sweat.

When 45% of your family’s total take-home is due to lenders every month, you are living on the edge all the time. All it takes is for one spouse to have a car accident, a sick Mother, a company reorganization, to be the victim of the recession, or even break a wrist to put your behind on the payments and make you homeless. Meaning that you have to have a big buffer fund, conservatively invested, waiting to tide you over. (Never mind the fact that houses themselves sometimes throw $10k, $20k, and $30k repair bills at you out of nowhere!)

I, on the other hand, add thousands to my savings every month and invest a good portion of it very aggressively. I am accumulating wealth at least as quickly as a homedebtor would, but the difference is that I could lose my job or get in an accident and survive by working minimum wage if I had to. You can’t put a price on that kind of security.

Brian

#23 Mini-Garth on 11.02.08 at 12:06 pm

I didn’t get the “Meanwhile on Hornby” part of the blog post.

That it sold for a little bit less than the asking price?

What’s so special about that unit?

Checkout the 2005 price and the current sale price – for a unit and building that sustained no improvement. This should tell you something. — Garth

#24 David on 11.02.08 at 12:46 pm

Valerie, ALL the same fundamentals apply to those rare few people who own their properties outright with no mortgage. A person with free and clear title to a home is renting from himself instead of renting money from a bank.
The initial price of the asset is the principal determinant of the stream of value into the future, if one looks at it through the eyes as a rental property.
It would be nearly impossible to find so much as ONE solitary fundamental indicator to support the bubble prices in the housing market. Ask your favourite realtor to provide you with one scintilla of evidence based on fundamentals to support current house prices. The expectation that home prices will outstrip the rate of inflation, local median family incomes or ANY fundamental measure of value for housing is complete nonsense. When prices outstrip fundamentals the result is a bubble.

#25 Brian on 11.02.08 at 12:49 pm

“I would rather be in control of my destiny, and that can’t be captured in any calculation.” -Sheldon, above

I feel exactly the same way Sheldon. Let’s see who’s more “in control” in my situation:

Monthly cost:

LEASE = $1400+utilities, guaranteed by law never to increase by more than the rate of inflation annually

MORTGAGE = ~$3000+utilities+insurance+CMHC ins.+sinking fund for roof/plumbing/foundation repairs. Monthly costs are variable based on mortgage rates, insurance rates, the economy at large, and the state of decay of the property

That leaves me at least $25k per *year* of *my* after-tax dollars to invest as a big fat security buffer.

In your model, your destiny is controlled by the US Federal Reserve and the VP of Risk Management at your bank and your boss and your wife’s boss and the stoned guy coming up behind you at a red light. Any one of those players can easily make you homeless, just by changing a few numbers in the financial “fine balance” you walk as a homedebtor.

Further: If I decide one day that I don’t like the neighbors, have a surprise new baby, change jobs, change cities, change spouses, get a taste for something more urban, decide to live in the country, want to move closer to a school, or have a mid-life crisis, my moving costs are:

1) the cost of the truck, and
2) 30 days’ notice.

If you want to make any change, your moving costs are maybe $20k++ and your time horizon is anything from a month to several years. And if you change at the wrong part of the market cycle, you can easily lose a hundred grand in equity.

So which one of us is more in control of his destiny?

#26 WetCoaster on 11.02.08 at 12:55 pm

“Meanwhile on Hornby”

This is a true testament to the ‘Greater Fool’ theory.

A run-up of almost 100% in less than four years – and there is someone that thinks that condo is a good deal.

This, is spite of facing a global economic meltdown, doesn’t deter this individual from thinking that RE is just going along … business as usual.

That’s how toxic our flavour of kool-aid really is. Scary.

#27 patriotz on 11.02.08 at 1:07 pm

Well… If you count in average, lets count the average property appreciation of 5% per year (BTW, mentioned by you).

That’s like counting the average appreciation of Nortel in deciding whether to buy in 2000.

Get the point?

#28 Peter on 11.02.08 at 1:08 pm

I am confused, I thought you were trying to illustrate a point to the negative with”Meanwhile on Hornby”. Whats the downside of a $220,000 net gain? Your comment ” This should tell you something” what are YOU saying? Thanks for the response.

#29 outtacontrol on 11.02.08 at 1:16 pm

Intersting calculation but it’s based on “normal” economic assumptions. Suppose there’s a depression. Millions of people out of work, much reduced access to credit, poverty everywhere.

People will be sharing their resources like they used to many, many years ago. The average number of housing square feet per person has tripled in the last 55 years. Once all the plastic crap from China is cleaned out of the suburban “bonus rooms”, basements and dens, the typical McMansion will probably hold not only the grandparents (who will wish they had downsized a while ago) but at least one of the kids, his/her spouse and the grandkid(s). This will further increase the supply of empty homes.

And this will also lower rents, which is why we can all count on house prices falling much further than Garth’s analysis suggests. It will be a race of falling prices, not unlike the “bargain” p/e and dividend yield you see on lots of stocks these days, which use the current price but a somewhat out-of-date earnings or dividend value for each of those calculations. These days you really have to pay attention not to the last reported earnings or dividend but to the expected values in the future.

And, like stocks and profits, home values and rents are on their way down.

#30 wealthy renter on 11.02.08 at 1:27 pm

I understand the use of the P/R ratio as means of determining the affordability of housing, but like many, I think that Mr. Turner has understated the costs of being a greater fool.

1) I work in one of the Toronto suburbs (Georgetown) where a very large percentage of the homebuyers in these suburbs are young FTBs. None of my young colleagues have put 20% down. Not even close to that amount.

2) Thousands in closing costs have been ignored.

3) Hundreds of material & immaterial costs have been ignored: ladders, snow blowers, lawnmowers, gardening equipment, the new deck, new blinds, drapes, decorating accents, paint, new high end furniture, the new big screen TVs (standard with every new home,) new appliances (since the POS builder appliances are probably starting to kick out after 3 years.) I have never met a first time buyer that didn’t grossly underestimate the hidden costs of home ownership.

4) The maintenance expenses might be low for the first few years, BUT there has been no account for the deprecation of the “assets” of the house. Some money needs to be socked away for any of the following that will need to be replaced within 5-20 years: all appliances, faucets, air conditioners, hot water tanks, the furnace, roof shingles, garage door openers, a driveway that sinks 3 feet (like my parents’.) Add the ten other major costs you didn’t consider in your wildest dreams (my parents’ whole front yard was back hoed due a piping issues 6 inches from city property,) and house ownership is expensive. This is especially if the house is old!

5) Taxes (which I do realize are baked into rent)

6) The whole exercise compares renting and buying the same house. Unless the house is located in Milton, Acton or Georgetown (with virtually no rental housing, or industry/transportation to support mass rental housing,) there will be a very large amount of cheaper and decent quality alternative rentals for family in that suburb. With a little work, a small family can easily trim ¼ off that rental bill, and not live in squalour.

At least in the urban areas of southern Ontario, rents have not really gone up in real terms since 2000. In absolute terms, I pay less now than I did 2000.

I love the clowns that maintain that housing will go up 5% per year in perpetuity. Really? With all things being equal, that would mean the 460K house will double in 14 years? Really? So a 15 year-old sitting in grade 10 suburban high school will pay a $1,000000 when they are ready to buy the 20 y/o entry level home in the middle of nowhere?

Right! Dream on.

#31 lgre on 11.02.08 at 1:31 pm

check it out!

http://www.myreinspace.com/forums/index.php?showtopic=8100

#32 Jeff on 11.02.08 at 2:03 pm

For an update on 933 Hornby… it sold on Aug 28… that same suite would be lucky to fetch $460k today.

#33 buy_canned_goods on 11.02.08 at 2:40 pm

(i’m a renter) but along the lines of #21 Sheldon:

When renting there are random intrusions into your place for inspections of the gas fire place, water heater, furnace, dish and clothes washers, dryer, smoke detectors etc. and then a mad scramble to clean up to make the place ‘less embarrassing’.

Also, who is that strange man wandering around our backyard, oh, it is someone carrying out an unannounced inspection of the exterior/lawn/fencing/hedges etc.

Renters also may worry about banging up the place, did the animals cause too much damage to the carpet and screens, will there be extra charges when I move out, gotta repaint the walls that we painted, etc.

Not trying to sound like a paranoid renter, but I feel there is a certain ‘pride of ownership’ and ‘control’ one would have if not renting. It is hard to put a price on these ‘extra’ rental stresses.

I liked your post though (as well as your radio interview the other day), informative and priceless, keep it coming!

#34 Popping Bubbles on 11.02.08 at 3:10 pm

According to the OECD, the ratio of housing price-to-rents in Canada is off the charts, up 90% from 1991 AND higher than any other country save for bubbly Spain. In other words, relative to renting, the cost of purchasing a home is way too high!

The OECD also shows that Canadian housing prices relative to incomes are over 30% higher than the long-term trends AND that our housing prices are substantially higer (relative to incomes) than those in the U.S. ever were.

For the data, see the “Housing” tab of the following spreadsheet:

http://www.oecd.org/dataoecd/6/5/2483894.xls

Funny how the mainstream Canadian media has never reported this data but the dumbass IMF report which essential said “Canadian housing is undervalued” still receives tons of citations.

#35 buy_canned_goods on 11.02.08 at 3:13 pm

ps. with renting, one can be ‘stuck’ in a rental agreement for months much the same way owners can be ‘stuck’ not able to sell

pps. we’re currently renting @ $1315/mo, and can buy a similar unit for $230,000, a P/R ratio of 14.6, thus we’re seriously considering buying sometime within the next year (in Ottawa).

#36 nonplused on 11.02.08 at 4:13 pm

The P/R on the price I’m renting is 36 based on what the house was listed for last spring!

But amazingly, some other homes in the area have sold for not much less recently.

I sold my old house for a P/R of only 22, so I guess my landlord has the better investment.

re: the advangates of owning. I did a lot of fixing up and renovating and replacing appliances and furnaces and such on my last owned house. Probably dedicated 8 months of my life to it. Netted me a nice round number (nothing) when I went to sell. Now that I rent, I have much more time to read real estate blogs.

#37 wealthy renter on 11.02.08 at 4:15 pm

pps. we’re currently renting @ $1315/mo, and can buy a similar unit for $230,000, a P/R ratio of 14.6, thus we’re seriously considering buying sometime within the next year (in Ottawa).

Hi buy_canned_ goods,

It is sounds like you are interested in purchasing a condo at the price you are mentioning (a unit.) All of those “rental stresses” are the exact same in a condo.

To the very best of my knowledge, Condo managment in Ontario can make you surrender keys, so that they can enter your unit (without permission) in an “emergency.” My building, has a safe full of owner keys and they have entered my unit without notice.

You can only be stuck in a lease for 12 months, but severing the relationship with a landlord is much easier. If you own a condo and have horrible neighbours, or idiot managers, it costs thousands in fees to leave the unit.

You will also pay an ownership premium of taxes and the condo fee. If the building is an old one, you may well get whacked capital improvement costs. The buidling I live in has decent reserve fund, but the elevators are breaking down. Everybody knows they need to be replaced, it is only a question of when. The owners will get whacked with the bill. The underground parking is crumbling too.

I don’t mean to be disrespectful about your decision to buy. The numbers you cite make a lot of sense and are much better than those in many cities. However, a lot of the reasons you mention for buying are non-financial and personal which is fair enough. For many of us in this blog, the costs of ownership far outweigh any inconvenience of renting, nor is owning the sure path to riches when costs are fully accounted for.

#38 charliegosurf on 11.02.08 at 4:16 pm

life on wheels in Americanna

it’s a funny reality to see so many boomers sell their So precious house to get into a r.v., man, those are real estate, you can bring them where ever, your neighbours suck, well lets drive away honey.

no grass to cut, hot tub, pool, happy people included for a pad rent of 10 $ a day…they are probably more luxurious than lots of these houses build yestedrday and today, not as spacious but really how much space you really need!

outdoors is where the space is, it’s good for you too, the fresh air, walking… helps reduce our health cost…imagine you live all your life paying that mortage and then sell it away for a set of wheels, the american dream, keep on rollin…

and when youre out of luck with the Driver licensing thing you end up in the very real state of a folks home, then yur really stuck. life on planet earth $, keep on payin…heck even when you passed away you will fork it out for a while, so you can get wheelled to the burners in style!

it’s the yieldin way of life i guess, dont take me too seriously, or maybe yu should, so long, dudes and dudettes!

#39 Rhonda on 11.02.08 at 4:29 pm

I am just wondering what your thoughts are on the real estate in Fort McMurray, AB? I have lived here since ’05 and the cost of housing here seems ridiculous. I went from paying (in 2005) $1500 a month for a 2 bedroom apartment to now (2008) paying $2800 a month for 3 bedrooms on the main floor of a house. People have said that is a lot to put out a month, but I’ve said that’s cheap because the ‘market rent’ is $3200 and up. The average price for single family homes in Fort McMurray has been sitting at $650,000. Just wondering what your thoughts are on this? Thanks.

#40 anonymous on 11.02.08 at 4:59 pm

Valerie,

What you say makes no sense. Whether or not you can afford to purchase the property outright is irrelevant. It doesn’t matter whether you borrow money or pay cash if the asset is depreciating.

Guess what? You lose. Thanks for playing.

#41 jazzguy on 11.02.08 at 5:00 pm

Here’s an interesting article:

Young Canadians take on record debt

(what a surprise eh?)

http://straight.com/article-167960/financing-their-futures?rotator=1

“Young Canadians are taking on record levels of personal debt just as the world is waking up to the credit crunch….”

#42 anonymous on 11.02.08 at 5:06 pm

Rhonda,

You are forbidden from buying anything in Ft. Mac for at least five years. If you don’t know what you are doing you will lose everything you’ve ever worked for.

A $400,000 home is worth $100,000.

Also, you may have not have noticed, since Ft. Mac seems to be oblivious to what is happening in the rest of the world.

Watch a little US news once in a while. You will soon realize that $3200 a month in rent is a great big joke on you.

The world is headed toward a recession. And guess how boomtowns respond to recessions? That’s right. It’s over.

#43 GEEBEE on 11.02.08 at 5:10 pm

Just wondering, how many people have 10% down in this market? Let’s say on a 550K or 600K home.

I have been working these numbers for the core of Toronto based on what the new MLS system shows. IE: Not much around for under 500K.

I must not understand how things are financed. If a duplex in Davisville and Yonge can fetch 628,000 what are people using as a down payment?

RRSP’s and stock conversions?

#44 nonplused on 11.02.08 at 6:13 pm

You would think that with world finacial markets imploding somebody would get a little panicy out there, but appearently not. Maybe Calgary really is in it’s own little world. Not even imploding oil prices can break the optimism anymore! And houses are still selling, although at a snail’s pace. We get newspapers and stuff in Calgary but I guess nobody reads them.

#45 My_view on 11.02.08 at 7:19 pm

That hornby example is perfect, how can these prices be sustained? Lowing interest rates, cash backs, 40 yr morts, etc and etc. Those vehicles all ran out of gas. Not being offered, now banks are pulling all the stops. The only were to sustain this market is significant wage increases. That won’t happen, employees will be lucky to get a raise or a bonus. I think that hornby home will very easily fall back to that 2005 selling price.

#46 OntarioHouse on 11.02.08 at 7:32 pm

Hey I have a question for anyone who can answer on this board. What kind of mortgage do you think the average person has been taking out these days? $50,000, $100,000, 200,000 or 300,000? I know it all depends on the individual but what amount have people been willing to take out so they can buy or move up to a larger house? Thanks in advance.

#47 T.O. Girl on 11.02.08 at 8:08 pm

I went to a few open houses Saturday in North Toronto, there were a lot of homes for sale, prices are still too high hardly any people viewing. One house that I was a little intrested in the RE Agent told be it’s being for sale for 3 weeks not one offer and to put in any offer I like!! House was listed at 749,000 needed 80 000$ work to bring it up to date!! Wow if I were to consider this my offer would be aleast 30%!!! About 520 000$ no more!!
Wonder what greater fool will be close to asking for this!! Wake up people, sellers are cashing in!! mostley boomers or speculators, You’re gonna make them rich and you poor!! Keeping paying that mortgage for 25 yrs!!! Don’t put in offers less than 30% cause that’s were prices are headed SOUTH!!!
Nice to see those cocky RE begging for offers!! We have a ways to go but by Jan 09 sellers will hopefully realize that the boom is over nomore 07 prices maybe 2000 prices!!!

#48 POL-CAN on 11.02.08 at 8:16 pm

Garth…

Noticed something very interesting today. I live in C2 and have been watching the market intensly for 6 months now… Today I noticed 2 houses (which have been on the market at least 2 months) raise their asking price by 10 %. What gives? Have they been getting offers way below asking price and this is a gimmick to get what they want?

1. Listed at 725k, reduced to 699K, reduced to 599k, now at 659k?

http://www.realtor.ca/propertyDetails.aspx?propertyId=7700120

2. Listed in the 500s, reduced to 469k, reduced to 399k, now at 449k?

http://www.realtor.ca/propertyDetails.aspx?propertyId=7706572

Your thoughts on this would help :)

#49 POL-CAN on 11.02.08 at 8:26 pm

Garth….

Here is a perfect excample of the difference in rent vs buing. House in High Park can be rented for $ 4000 monthly or can be bought for

Rent

http://www.realtor.ca/propertyDetails.aspx?propertyId=7684047

Buy

http://www.realtor.ca/propertyDetails.aspx?propertyId=7683346

I found a few more excamples like this. Prices will come down 50 % from peak if this is to be corrected.

#50 POL-CAN on 11.02.08 at 8:27 pm

can be bought for 999000 k :)

#51 buy_canned_goods on 11.02.08 at 8:47 pm

RE#37: believe it or not, we live in a townhouse with a garage and 2 car driveway. Just goes to show how some areas of Canada are WAY overpriced (not so much Ottawa)

Funny, I just found two postings of the same townhouse on MLS, $12,000 (~5%) difference between the two:

http://www.realtor.ca/propertyDetails.aspx?propertyId=7706881

http://www.realtor.ca/propertyDetails.aspx?propertyId=7553750

#52 Another Albertan on 11.02.08 at 8:48 pm

I find it quite interesting that NO group out there has created THE spreadsheet for tracking, calculating and prognosticating the REAL “all-in” numbers for a dwelling.

All these online mortgage and expense calculators involve simple and mostly linear assumptions that result in simple and linear projections. Heck, even the Excel files I’ve gotten from bankers make assumptions like a constant interest rate for 25 years!

I mentioned this to a CA/CFA buddy who actually broke Excel (requiring a patch from Microsoft) a few years ago while generating a 100+MB, 100-year bond regression model. I asked why it’s essentially impossible to find an electronic meat grinder for the gamut of housing and household costs. His response was simple: “No ‘regular person’ wants to know the numbers. Most want to create an illusion or delusion about their life situation.”

He then went on to detail how his wife exploded on him when he tried to show her a model that detailed more than just monthly expenses.

“As soon as you start to show the possible implications of spending patterns, people do not act favourably in my experience, especially if the long-term costs are not in line with what people have in their heads.”

The financial institutions have nothing to gain with a customer base with more information due to an eagle eye and a sharpened pencil. It is much more profitable if there is asymmetric public information and lack of consensus of what costs how much where and for whom. This is enhanced even more when marketing has for years pushed people into believing that their actions and consumption makes them a special snowflake and that everything one does is unique.

Sum it all up and you have an egregious case of Divide And Conquor and a public that doesn’t even see it occurring. In fact, the public essentially encourages the behaviour in order to get the constant ego massage of the “You are special!” and “You’re richer than you think” messages.

#53 dotava on 11.02.08 at 9:39 pm

#51 buy_canned_goods on 11.02.08 at 8:47 pm

Those houses where around 80K in 2000.

#54 Nixon's smoking gun on 11.02.08 at 11:02 pm

#25 Brian

You raise some very good points for the rental cause.

But don’t forget you too can get a surprise should the owner decide to sell or return to live from overseas or want to pass property to offspring or in marital split etc.

Still you’re in a position to make a quick move-on.
Just hope its still a renter market and you can find the equivalent and the landlord past/present is ‘el prompto’ with repairs.

#55 Rick on 11.02.08 at 11:18 pm

#52 Good post

#56 WetCoaster on 11.02.08 at 11:41 pm

Jeff on 11.02.08 at 2:03 pm # 32
For an update on 933 Hornby… it sold on Aug 28… that same suite would be lucky to fetch $460k today.

I think you missed the point. It was 265K less than 4 years ago. If you think that 460K represents a buying opportunity, there is nothing to say to you. Period.

#57 Wonnie on 11.02.08 at 11:45 pm

You wanna know the best time to buy a home. Its when everyone think its a bad investment..wait 3-4 years. Right now a big drop might seem seductive this means you think its still a good investment.DONT DO IT. Wait.

You gotta go against your instincts

Garth when did you change about the stock market? I remember the last time I was reading you indicate that market would continue to go up (with some 20% correction).

Tx

#58 dd on 11.03.08 at 12:28 am

Perfect. Putting numbers to the whole thing makes sence.

Thanks,

#59 dd on 11.03.08 at 12:38 am

#2 damian

“This is a grossly oversimplified calculation designed to support your point”.

True enough, however, your rate of return will calculated on what you bought the house for. Higher price = lower rate of return.

You sure cannot predict if there will be a capital gain in x years, however, the lower price you pay for the house the more likely a capital gain could be realized.

Yes this calculation is simple and takes minutes to do. But is sure give an quick and dirty estimate on the relative market.

#60 The Other David on 11.03.08 at 12:42 am

RE in Canada is like buying pig in bag, the whole process is secretive and sketchy, info can probably be gotten, but it isn’t freely offered.

I will keep renting this 280k condo for 1300 until something drastically changes.

#61 dd on 11.03.08 at 12:45 am

#13 David,

I wouldn’t say never … Who knowns, real estate might be really really cheap in 2 years.

#62 dd on 11.03.08 at 12:51 am

#21 Sheldon,

Emotion attachment … that is what real estate agends and the whole industry works on. If I can save $100,000 just renting in this market and waiting until the values are more in line with reality … The is more money in my pocket, less in the banks, and a happier sleep at night.

#63 dd on 11.03.08 at 12:57 am

#39 Rhonda,

Sit tight and rent. The market in Ft Mac might correct. If oil falls and more upgraders are delayed house prices will come down.

Price came down a lot back in 97. Sit tight and save.

#64 Westcoaster on 11.03.08 at 1:57 am

I’ve wondered about the rent vs. buying thing for quite a while since we sold our McMansion 18 months ago for >$1M and have rented since. Currently renting a place in Victoria which was recently for sale for 900,000 – our rent is $2400 which makes for a P/R of about 31.5 but we’re looking at another one currently for sale for 989,000 and the owners are asking $2200 which would give a P/R of 37.4 Wondering what other crazy P/R ratios there are out there. Meanwhile the takings from the house are paying about 3.8%. I’m no math whiz but I’d be hard pressed to jump into the market again for a while. In Victoria reality doesn’t seem to have hit in full force yet but we are seeing a lot of 5-10% reductions in previous asking prices. I suspect spring will be quite telling as the For Sale signs traditionally explode commensurate with the flower count.

#65 [email protected] on 11.03.08 at 2:27 am

I tell everyone:
Prices will drop to 400% X Rent=or 4 GRM aka Gross Rent Multiplier! Annual rents x 400% = price!

I have 25 years experience in Real Estate Investing.
Average return last 200 deals 1165% with a holding time of 2 years. That’s almost 50% per month for Real Estate!

I sold these properties in 2001-2007 and bought them in the late 1990s…

The next Bottom is about 2012-2015 and the next Sell window will be about 5-8 years after that.

Top was 2005 +8 years average cycle up/down=2013 will be the approximate bottom in California!

#66 charliegosurf on 11.03.08 at 3:40 am

52 you are one special albertan, egregriously rigth!

#67 Stu on 11.03.08 at 4:26 am

#52 This is a great tool from the NYT – a rent or buy calculator:

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

#68 Stu on 11.03.08 at 4:34 am

Can those Hornby place figures be right? If so, that has to be one of the bubbliest properties of the whole Vancouver bubble. I love how the text tries to justify the price tag by talking about the local amenities while at the same time talking about the great location downtown – where all the amenities are! I fail to see the attraction of in-building facilities like gyms, meeting rooms and “theatres” when everything is on your doorstop anyhow. Do condo dwellers not like to mix with others?

#69 Stu on 11.03.08 at 4:35 am

Sorry, not “local amenities” – I meant “in-house amenities”.

#70 BOB on 11.03.08 at 7:02 am

I sold my condo in August and am now renting at Yonge and Bloor. Next door to the subway and the heart of downtown Toronto. Five weeks ago my landlord put the condo up for sale. In the last 5 weeks only 2 people have showed up to view the condo. To me that says it all.

#71 David on 11.03.08 at 8:50 am

The Hornby unit has a compounded growth rate of 22% over a three year period. No value added during that time.

#72 Gideon Sword on 11.03.08 at 9:27 am

I’ve been renting for 9 years. Paying around $950 for 3 bedroom house in Eglinton/Allen Road area. I’ve been watching 2 houses for sale in our neighbourhood. One reduced price by $20,000 in a week. ($420,000->$399,900) and second one by $40,000 ($399,000–>$359,000)

#73 buy_canned_goods on 11.03.08 at 9:35 am

To: #53 dotava on 11.02.08 at 9:39 pm:

“Those houses where around 80K in 2000.”
———————————————
Sick. But I would still pay ~$150,000 today for them (they’ll probably never get that low, however).

#74 Al on 11.03.08 at 10:28 am

#20 Valerie, #40 Anon

You can come out ahead buying a depreciating house instead of renting. You just have to include the depreciation in the cost of ownership when comparing it to the cost of renting. With prices today being high it is unlikely that buying will be preferable, but it’s always better to run the numbers than to take general statements like anon make in post #40. That, I believe, is the point of Garth’s original post. DO THE MATH.

#75 Housing Bear on 11.03.08 at 11:24 am

#48 POL-CAN

A realtor friend told me that raising of a previously reduced listing is often done by unethical realtors prior to de-listing a property due to lack of interest. Apparently, if the price of the reduced property is raised prior to de-listing, MLS will not show the price reductions to the price of the property in the property’s listing history (apparently it looks better to be considered not to have compromised on an inflated price, rather than to be seen to have reduced the inflated price and still not have any takers). As a result, other realtors will not see that the property’s price was reduced in the past (with no takers).

Below is an example of a realtor who reduced the listing price from 570K to 558K, had no takers for three months, and increased it back to 570K. I expect this listing to be removed shortly.

http://tinyurl.com/59p5b6

#76 Future Expatriate on 11.03.08 at 11:46 am

On the contrary, #73, they WILL go down to 2000 prices, and even below. If the economy continues on its current track, QUITE below, to 1980 prices.

#77 Valerie on 11.03.08 at 12:04 pm

David
ty … very helpful

Anonymous
…. stock portfolios are depreciating too and renters who lose their fortune in paper will be out on the street whereas investors who have a fully paid property to their name will at least have a roof over their head

#78 POL-CAN on 11.03.08 at 12:26 pm

OT…. A must read…

More from the Front Lines of the Financial Crisis
by Stephen Lendman

http://www.globalresearch.ca/index.php?context=va&aid=10794

The next few years will be ugly.

#79 POL-CAN on 11.03.08 at 12:35 pm

# 75 Housing Bear

Thanks… That actually makes sense…

If you think about it, it depends on weather the MLS system keeps track of all price changes or just the last one…

Also…. There are many houses for sale that are not in the MLS system and many more for sale privetly…. Hence the reported board numbers can not be trusted and we must apply some common sense to them….

I see deflation everywhere and do not have a problem with putting in very low offers (30 % below asking) on places I am interested in. I might not get what I want now, but in a few months I am sure I will….

This crash will be worse then in 90/91 and I belive that homes declined around 40 % back then. Is 50 % off peak unresonable? I do not think so……

#80 POL-CAN on 11.03.08 at 12:43 pm

# 75 Housing Bear

Your link was actually a better deal….

We went to see this property on Saturday:

http://www.realtor.ca/propertyDetails.aspx?propertyId=7658332

The difference is ~ 200k. Your excample is a lot more house for the $$. Mine is arguably a better location (5 to 10 minute walk to Bloor subway), but less house (older) on a smaller lot, etc.

#81 Valerie on 11.03.08 at 12:59 pm

Future Patriot

if the economy continues on its present track everything else will be going down too …. so won’t 1980 prices just be relative to everything else?

#82 Panic Profit on 11.03.08 at 1:39 pm

Garth,

Great post.

I’ve been doing exactly this calculation every time I look at a property and when the numbers don’t work and their is a freakin’ bidding war!

I would have to agree with another poster that you need to factor in utilities to get a more realistic picture.

***

QUESTION: Is it a realistic to use the simple measure “If I rent this property will the income cover my costs?”

#83 O'Ryan on 11.03.08 at 1:54 pm

Well,I guess I’ll continue to rent for the time. I sold the family home here in Kelowna in May and renting a new condo. Our landlady called this weekend offering us ‘the deal of a life time’.Just for us,she has reduced the price of this unit to her cost and she will eat the GST. She lives in Alberta and owns 2 units in this building. The other one is empty(many many rentals here)and needs to ‘liquidate’ to pursue other things…her mortgages come up for renewal soon. I think we will wait it out for a while.

#84 brazer on 11.03.08 at 2:15 pm

Circuit City closing 155 stores in U.S.
http://www.thestar.com/Business/article/529420

The Richmond, Va.-based company said Monday it will shutter 155 of its more than 700 stores in 55 domestic markets by Dec. 31, laying off about 17 per cent of its American workforce…

In addition to its U.S. stores, Circuit City operates 510 retail stores and nearly 300 dealer outlets in Canada through its InterTAN subsidiary, The Source by Circuit City. The company also sells its products and services online.

A Circuit City spokesperson said no Canadian stores are closing as a result of the real estate plans announced Monday.

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not yet…

#85 Dubai Boy on 11.03.08 at 2:17 pm

It’s all about yield – it has always been like that except this crazy period in finance history when people went nuts. Now, we are returning to fundamentals.

#86 brazer on 11.03.08 at 2:17 pm

Conference Board scales back outlook
http://www.thestar.com/Business/article/529418

OTTAWA – The Conference Board of Canada has cut back its outlook for the economy next year, barely a week after issuing its previous prediction.

The think-tank now expects Canada’s economy to grow by a sluggish 1.5 per cent in 2009 – but avoid a recession.

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changing predictions weekly? let’s see if we “avoid a recession”….yeah right.

#87 brazer on 11.03.08 at 2:19 pm

Ford sales plunge 30 per cent
http://www.reportonbusiness.com/servlet/story/RTGAM.20081103.wautos1103/BNStory/Business/home

DETROIT — Ford Motor Co.’s U.S. sales plummeted 30 per cent in October as low consumer confidence and tight credit combined to scare customers away from its showrooms.

Ford’s showing, compared with the same month last year, is a strong indication that sales will be poor for nearly all automakers, perhaps the worst in more than 25 years.

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yikes.

#88 Housing Bear on 11.03.08 at 2:24 pm

#80 POL-CAN:

I went to visit the house I linked to. The problem with it is that it literally backs onto the 401. It is very noisy in both the back and front of the home, at all hours. There is also an unsightly green barrier behind the backyard b/c of the 401. I recall that the work in the basement was sloppy and rushed, as well.

#89 POL-CAN on 11.03.08 at 2:41 pm

This is from the comments section of Ilargi’s

http://theautomaticearth.blogspot.com/

The poster was anonymous so credit can not be assigned…… I thought it was worth re-posting….

Martin Weiss posted the following today re housing:

No matter how far home prices in your area have already fallen and no matter how cheap they may appear, they could still fall a lot further.

In the hardest hit regions, an individual home that was once priced for $400,000 at its peak could fall to as low as $200,000 by the end of Phase 1. But don’t blindly assume that’s the bottom. In Phase 2, it could fall in half again, to $100,000. And in Phase 3, it could fall by at least half for a third time, to as low as $50,000 or $40,000.

Homes with peak prices of $1 million could sell for as little as $100,000; some, originally priced for $10 million may have no buyers at all — even with asking prices as low as $1 million.

Nationwide, the median home price will not fall nearly that far. But that factoid alone will do nothing for homeowners in bubble areas like Florida, Nevada or California. Nor will it help those in blighted regions where factories are closed and unemployment rises far above the national average.

Never before in history have we witnessed home price declines of this magnitude! But that fact alone does not make them implausible, let alone impossible.

Remember: Never before in history has so much debt, speculation, government manipulation, fraud, corruption and consumer abuse been heaped onto any housing market! And if there’s one thing that history teaches us, it’s that unprecedented causes lead to unprecedented consequences.

His 3 phases are:
Phase 1. The bust in the subprime mortgage market. This is now history.

Phase 2. A severe U.S. recession. As of this writing, this phase is just beginning.

Phase 3. Depression and deflation. Still ahead.

#90 nonplused on 11.03.08 at 3:18 pm

#75 Housing Bear

Are you suggesting there are unethical realtors who would manipulate data? Shocking.

I would think the MLS system could be easily fixed to prevent exploitation of this loophole, if the desire to fix it was there.

#91 charliegosurf on 11.03.08 at 3:43 pm

http://www.cbc.ca/canada/british-columbia/story/2008/11/01/bc-campbell-pledge.html#articlecomments

man, this guy is one special liberal bird, you got to explain me garth, coz im….

typical convention location for the lavish lifestyle of the liberals, hope he wasnt too drunk when he drove back to the four seasons….

he’s got a nice pad on the sunshine coast yu should learn the scam is tryin to pull there, and on, and on… his days are numbered, he’s like paul martin mixed with sarah palin, scary, lol.

pauvre liberal, they’re goin through dark days. politics and real estate go hand in hand all the way to the banker.

#92 Rhonda on 11.03.08 at 5:07 pm

dd

Thanks for the advice. We do plan to ‘sit tight’ and wait and see if the prices do come down. I wonder what happened in ’97 that made the prices come down in Ft Mac? Anyhow, although we are paying ridiculous rent, we have however been able to save money and put it away at the same time. Back a few years ago, I had so many people say we should buy. I guess I just always had an uneasy feeling about this place and the price of housing. They aren’t even worth it! I’ve seen much nicer houses in Ontario than anything out here…

#93 anonymous on 11.03.08 at 10:06 pm

Al,

I don’t make general statements. I’m got a computer-brain and a time machine in my garage.

My statements are exact and correct.

#94 Marcus Aureilus on 11.04.08 at 1:02 am

TO Girl (#47) is right. (We must be going to the same Open Houses in North Toronto). The problem is that vendors ultimately determine list pricing, not their agent. In fact, agents in a ‘down’ environment are incented to price realistically to move product at a rate that generates target income. They couldn’t care less about material price declines, given the focus on their commission number only, unless they have a larger business interest in assisting the fantasies of vendors (e.g., they ‘work’ an area, represent builders on an ongoing basis in an area, or otherwise have a longer- term interest in ‘making a market’ beyond their current listings). So its usually the vendors who are still in Denial, and stuck on 2006-7 pricing. I agree with TO Girl that the first 2 Quarters of 2009 is when the bite will start to take hold: 3-4 months of little or no activity will turn the agent mafia, and vendors will start to go through Bargaining and finally Acceptance on list price declines. However, even after factoring out the truly dumb tries at setting a false mark for a later churned listing (e.g., an overpriced property on Joicey in C4 that got no takers for months at $1.299M, so they changed the price this month to over $1.4M. Watch this listing disappear in a few weeks, after a laughable try at resetting the ‘benchmark’ list price to set up a future sucker). I’m not sure 30% off 2008 List is where we are going in the shorter term, but you can start knocking at least 15% off today’s list prices before kick-starting a serious search next year.

The longer term demographics for detached freehold houses in the major urban centres are not good. Aging populations, boomers unloading the infills in a few years, the rise and acceptance of the ‘luxury condo alternative’, and fickle trends in ‘offshore investment’ (now that Asian economic flu, commodity problems with Russian oligarchs and less Mid-East money diverting to Canada in anticipation of the USA becomes more ‘welcoming’ to Iranians and others under the new Obama Administration) will contribute to detached freehold house price declines, even in the ‘best’ urban areas.
So the general pricing trend for houses is down over the next decade or so. Best to consider one of those properties as a long-term ‘home’ and not an ‘investment’.

#95 if you don't like it on 11.04.08 at 1:53 pm

We just bought a place. We are getting 555 more square feet, our own washer/dryer, a dishwasher, a yard, and the biggest bonus, not living in a basement apartment for only $167 a month (that includes property tax and utilities)

So it can be done, owning for just a bit more than renting.

#96 if you don't like it on 11.04.08 at 2:41 pm

What was the average price of a home in the 1980’s in some of the major cities??

#97 Stu on 11.05.08 at 11:21 am

“if you don’t like it” – but you didn’t say what your rent was and where you bought? I could buy a place, even today, way out in Nova Scotia for less than my rent in Vancouver. The talk on this thread is of like for like.

If I was buying a place today and found somewhere I really wanted in, say, Vancouver, I’d start by offering the seller 70% of his asking price and provide a folder full of print outs of this and other stories and informed analysis showing how prices are expected to fall by at least 30% over the next few years and why. People who bought before 2007 will still make money off that, assuming they haven’t remortgaged for the new valuation, and could well go for it. At the very least if every buyer did that, sellers would quickly realize it’s a different market from even just a few months ago.

#98 Just a Girl on 11.06.08 at 3:06 am

#52 Another Albertan wrote: “The financial institutions have nothing to gain with a customer base with more information due to an eagle eye and a sharpened pencil. It is much more profitable if there is asymmetric public information and lack of consensus of what costs how much where and for whom.”

AA – I agree with you. This is true for so many industries and their marketing efforts. However the one wave no one can stop is the Technology Wave. Knowledge is the new commodity, and one day in the not-so-distant future, it will be shared instantly, freely, and widely. It’s happening now. We educate/inform/enlighten each other. We also monitor/self-regulate/correct each other.

The old forms of messaging control and/or withholding private information (to maintain power) will not survive in the Knowledge Era.

Thanks for sharing all of your perspectives. The math speaks for itself, but it must be inclusive of all factors measurable, in both scenarios. The elusive factor is that you can’t measure happiness in the same units!

Let’s face it, we’re human beings, we’re complex creatures. We DO make decisions occasionally on emotion, and they don’t always lead to the ideal outcome. Most people are not purely dollar motivated. Otherwise you could erase about 90% of nonprofit work (social value) as it is truly a lifestyle choice, to work for less wages, no pension, and long hours. Just one example. And we can’t escape our ‘biology’. The cost of having children? I won’t go there ;)

It’s all about choices, and values.

Great dialogue here.