Is Vancouver's Housing Bubble Finally Popping?

[twoNeurons]

Originally Posted by Pinion

You wish for the misery of hundreds of thousands of people in your home town? Really?

It's sad how many people would suffer. That's true. However, I really do think that we got into this mess because of the short-sighted policies allowing cheap money to buy into real estate in the past few years. The economy was being built on the backs of an unsustainable buying frenzy across the nation and you can already see the government doing everything it can to put the brakes on people and their addiction to buying real estate.

The mortgage max term is now 25 years, you now have to re-qualify when you renew your mortgage. The government is trying to soften the landing, though in collaboration with the banks, no one questioned the sense or even the morality of allowing banks to give out 40 year 0 down mortgages to be handed out like candy at a parade. Given that those mortgages are insured by the CMHC, which ultimately is taxpayer backed, we would all suffer if a mass drop happens. I know it has to happen, I just hope it will happen smoothly enough and correct back to 2005 levels or so gradually.

[Alex Mackinnon]

Originally Posted by Pinion

You wish for the misery of hundreds of thousands of people in your home town? Really?

Overvalued is overvalued, anyone who locked in recently only helped to push prices up more and ignored the obvious fact that real estate prices can't grow independent of incomes. Perhaps they should have ignored dogmatic statements from their realtors.

They bought overpriced assets, that's not my problem.

[trofirhen]

Originally Posted by Pinion

You wish for the misery of hundreds of thousands of people in your home town? Really?

Sorry about that oversight; no, of course not. What I was trying to say was that I wish that house / condo prices here were simply more - how can I say it - normal?

Seattle is a booming (or relatively so) city, growing, now a major economic centre (well known), yet housing prices there seem to remain outside the "red zone," unlike Vancouver, where it's astronomical (at least relative to a city of its size).

I know there would (and may be, if it happens) write-downs, losses, and so forth. But if this "major market correction," as another poster termed it, in fact occurs, the financial loss is concommitant, sadly, and yes, people will lose out financially.

However, does this indicate true "misery" (homelessness, welfare, not enough to eat, old clothing, deprivation of most things we take for granted that we pay for.......) to hundreds of thousands? I'm not arguing. I'm just asking if a market "correction" will in fact happen, and said I hoped that prices would come down.

You'll have to excuse my "popping balloon" metaphor. Thank you

@Alex MacKinnon: I think you summed up the dynamic of it very succinctly. Thank you for that.

[Hed Kandi]

Originally Posted by twoNeurons

Let's do the math

Here's a charming place @ $350,000.


Built in 1981 (31 years old).
2 bedrooms, 1 bathroom.

So, say we've saved our pennies and got a chunk of change as a wedding present from the bank of M&D (mom and dad) for a down payment.

We have $50,000 to put down, so that leaves us with a mortgage of about 305,000 after various fees.

$305,000 over 25 years @ 4% (4 year fixed)

Monthly Payment: $1578.06
Maintenance: $427.58/mo
Property Tax: $118 /month ($1417.77 / year)
Misc fees/Utilities: $150/month (conservatively)

Total outlay: $2273.64/month

A bonus is that it has a wood-burning fireplace... so if you can't afford to pay the electric bill, you can go out and collect firewood and keep yourself warm and cook your dinner!

Here's a somewhat comparable rental apartment.


It's also an older building and for a 2 bedroom and 858 sq. ft. it's $1400... including heat and hot water.

Your electric bill will add maybe $50/month.


Let's compare:
Buying: ~$2273 ( after $50,000 deposit)
Renting: $1450.

Assume prices will stay more or less flat for the next 8 years.
The renter saves ~$850/month and puts it in some kind of investment that earns 4%/year on average. he also puts the $50,000 in the same place. Of course, in 8 years, your rent will probably increase. If you're in the same place during that time and the rent is increased substantially, you'd be paying about $400 more 8 years from now. However, chances are you'll also earn more, so you can probably still afford putting away $850/month.

The owner pays off his capital. After 8 years, according to this site the owner has:

Cum. Principal paid: 66,987.05
Cum. Interest paid: 87,563.35
Principal Balance: 238,012.95

Assuming a relatively flat market you sell the house for $375,000. Realty fees are around $15,000

OWNER nets $121,987

The Renter:
After 8 years, the initial $50,000 and monthly deposits of $850 @4% interest


Renter Nets $165,505


source

With less risk, more freedom (to move), even at a relatively low 4%/year, you'd be $45,000 ahead if you rented.

To put it another way, the owner threw away $906/mo ($87000) to the bank in interest (aka renting from the bank). You'd need that 31 year-old property (which will be almost 40-years in 8 years) to be worth over $420,000 to break even. When you consider the risk involved compared to renting right now, I think you'd have to believe it will sell for $460,000 in 8 years for it to be "worth the risk" of being tied a huge asset that has a chance of declining in value within the next few years.

Unless the definition of affordable means: "I can afford to throw money away" Vancouver is NOT affordable, even if you have a combined income of $120,000.

Canadian home prices have grown at an average of 7% per annum over the past 40 years. Assuming that growth stays the same, in 8 years that $350,000 property compounded at 7% interest will be worth $601,000. If however the housing market grew at standard Canadian inflation rates of 3%, the property would then be worth $443,000 in 8 years compounded at 3% annually.

[whatnext]

The National's look at Canada's housing market takes on Vancouver on Thursday. Should be interesting to hear some of the stats.

Speaking of interesting stats, this is from Garth Turner's blog:
...Last month there were about 1,200 houses for sale in Richmond, at an average price of $1,125,000. Of all those, only 60 sold, which means a seller might have to wait a year and a half to find a buyer...
http://www.greaterfool.ca/2012/09/17/the-edible-market/

[Klazu]

Also Huffington Post is writing about this:

"Vancouver Housing Bubble: Prices Decline By 25 Per Cent"

[phesto]

Originally Posted by Klazu

Also Huffington Post is writing about this:

"Vancouver Housing Bubble: Prices Decline By 25 Per Cent"

Very poorly written article and misleading headline.

[twoNeurons]

Originally Posted by Hed Kandi

Canadian home prices have grown at an average of 7% per annum over the past 40 years. Assuming that growth stays the same, in 8 years that $350,000 property compounded at 7% interest will be worth $601,000. If however the housing market grew at standard Canadian inflation rates of 3%, the property would then be worth $443,000 in 8 years compounded at 3% annually.

Problem with that statistic, is that it's averaged over 40 years. Over 40 years, you expect real estate to at least track inflation, at best, increase in value as a location becomes more desirable relative to other locations around the world. You can't magically take 40 years and use that as an indicator for the next 8. Real estate cycles typically last longer than that. If you take an 8 year period from this graph you can see that a house purchase can earn or lose money in 8 years. It all depends on timing.


source

[whatnext]

Interesting graph, especially the Hosuing Price Index which reached a peak in 1981, and then didn't reach the same point again until 2006.

The CBC Vancouver piece was OK, no new info. It was amusing to watch the guy from MAC Realty trot out the old "its really different here" arguments. Because, you know, there are no other pleasant land-constrained cities anywhere else in the world.

[Zassk]

Originally Posted by whatnext

Interesting graph, especially the Hosuing Price Index which reached a peak in 1981, and then didn't reach the same point again until 2006.

Very interesting, and makes sense to me when I think about it. The years following 1981 saw large inflation rates, which means that the dollar devalued quickly. Most commodities (including real estate) would have lost value over that period, even if their prices appeared to go up. Essentially, everyone became poorer in the 80's due to inflation.

[whatnext]

Even the Wall Street Journal has noted Vancouver's market is deflating:

http://online.wsj.com/article/SB1000...389676846.html

[Denscity]

Vancouver is still the highest in the country though.

[twoNeurons]

Originally Posted by Denscity

Vancouver is still the highest in the country though.

Doesn't mean much if the whole country is deflating. Still means a lot of people lose a lot of money... as they still owe the bank the overinflated price of their house.

[cornholio]

Correct me if im wrong but new projects can significantly cut the cost of construction and reduce their profit margins as well with just a bit of pressure from the consumer. Which we have not had for a long time so I would assume lots of waste and greed infiltrated the industry and can be weeded out. Obviously those buying now would be the ones paying for any price inflation as a result of these "inefficiencies", because there has not been enough incentive for developers to tackle such problems...yet.

I would be curious to hear what people directly in the industry think though? Seems logical to me but maybe im missing something?

[jlousa]

Not so sure there is fat to be cut on the development side. Once you add the land costs, hard construction costs, soft costs a developer is lucky to see a 20% return on a project over the 3yrs it takes to do a project. Not exactly raking it in unless you are dealing in volume.
Take a look at what a new condo costs in Regina and you'll see it's not a heck of a lot cheaper. If land prices drop we'll see lower condo prices but it won't be as large as some are hoping. Construction costs are pretty static these days and we haven't been paying Olympic premiums for years now.

[cornholio]

Originally Posted by jlousa

Not so sure there is fat to be cut on the development side. Once you add the land costs, hard construction costs, soft costs a developer is lucky to see a 20% return on a project over the 3yrs it takes to do a project. Not exactly raking it in unless you are dealing in volume.
Take a look at what a new condo costs in Regina and you'll see it's not a heck of a lot cheaper. If land prices drop we'll see lower condo prices but it won't be as large as some are hoping. Construction costs are pretty static these days and we haven't been paying Olympic premiums for years now.

I suppose that could be the case but it could just be that we are not seeing the fat, no? Its been so long since there has been any real sustained pressure on developers, I cant think of a scenario in any other industry where this does not ultimately lead to inefficiencies. Regina has also been booming for a while now.

In more simple terms...A motivated person will climb a hill as fast as they can, that same person with a bear on their ass will climb that same hill faster.

I think there has to be much more fat to cut, they just need to look for it like their life depends on it. But I am prepared to be proven wrong.

[red-paladin]

Originally Posted by cornholio

I suppose that could be the case but it could just be that we are not seeing the fat, no? Its been so long since there has been any real sustained pressure on developers, I cant think of a scenario in any other industry where this does not ultimately lead to inefficiencies. Regina has also been booming for a while now.

In more simple terms...A motivated person will climb a hill as fast as they can, that same person with a bear on their ass will climb that same hill faster.

I think there has to be much more fat to cut, they just need to look for it like their life depends on it. But I am prepared to be proven wrong.

The person being chased by the bear might end up with.. a leaky condo too.... Or... well it's bed time for me!

[Alex Mackinnon]

Originally Posted by jlousa

Not so sure there is fat to be cut on the development side. Once you add the land costs, hard construction costs, soft costs a developer is lucky to see a 20% return on a project over the 3yrs it takes to do a project. Not exactly raking it in unless you are dealing in volume.
Take a look at what a new condo costs in Regina and you'll see it's not a heck of a lot cheaper. If land prices drop we'll see lower condo prices but it won't be as large as some are hoping. Construction costs are pretty static these days and we haven't been paying Olympic premiums for years now.

Land prices will come down. That's the big ticket right there. For developers who are well funded this will be great in the long term.

If a developer could make a profit in 2000's market at a bit over half the 2012 price, they can probably do it for that plus inflation as well.

With a lower baseline of prices there will also be more flexibility for developers to make money off of premium features, given that consumers will have roughly the same expendable income as before.

Their problem will be that they can't hawk crappy floor plans for half-a-mil anymore, just cause'. If they want to keep their profit margins intact, then they're going to have bring their A-game.

Meanwhile we could probably stand to lose part of the FIRE crowd. The whole industry is way too large of a portion of our economy.

[whatnext]

Originally Posted by jlousa

Not so sure there is fat to be cut on the development side. Once you add the land costs, hard construction costs, soft costs a developer is lucky to see a 20% return on a project over the 3yrs it takes to do a project. Not exactly raking it in unless you are dealing in volume.
Take a look at what a new condo costs in Regina and you'll see it's not a heck of a lot cheaper. If land prices drop we'll see lower condo prices but it won't be as large as some are hoping. Construction costs are pretty static these days and we haven't been paying Olympic premiums for years now.

How inflated are prices for the trades? It's not scientific I know, but every time I see watch Holmes on Homes I wonder, how do they get someone reputable to reno a bathroom for $10k, when here it would be double that!

[jlousa]

You can get it here for 10K too if you call the right people. Heck you can get all the electrical done in a sfh for 6K on a new build and plumbling for about the same, that's parts and labour. Not sure what fat one can expect to cut on that. Now granted that's not using "reputable" companies but then again most spec sfhs are built that way.