Canada's 'housing bubble' deemed close to bursting

[gentlepuppies]

Originally Posted by dleung

2015 report from Sothebys. Always find it interesting the relatively-high proportion of condos among multi-million dollar properties in Vancouver. Also there's almost 3x as many $4M plus sales in Vancouver as the entire country combined.

Can you post a link? I want to see what these sales numbers mean as a proportion of the overall including mid-market

[lio45]

Originally Posted by geotag277

Again you seem a little obsessed with one metric (rent to land value), likely because you are a land lord.

Well, yeah, that's a pretty important metric when it comes to assessing the value of a given piece of real estate.

Remove that metric, and real estate becomes just like BitCoins and ingots of useless shiny metal -- only reason it's worth something is that somehow you can realistically expect some sucker in the future to pay as much or even more than you did for it.

If that's how you look at it, fine, but that kind of real estate is a speculative business, and in such cases all the extra value not backed by actual rental potential is speculative, a.k.a. bubbly from a real estate point of view.

P.S. Wouldn't be the first time we are basically in agreement, just not on the definitions.

[whatnext]

Originally Posted by geotag277

How about you actually cite your sources?

If you want to cherry pick 1996, fine, here's the data:

http://www.metrovancouver.org/services/r...dMedianHouseholdIncomebyMunicipality.pdf

http://www.bankofcanada.ca/wp-content/uploads/2010/09/selected_historical_v122521.pdf

Mortgage rates were double digits in 1995 and as high as 8.5% in 1996, with median incomes for the City of Vancouver at 35k.

Do the math. Homes were prohibitively expensive for residents. Especially 350k ones. Your family either stretched their finances or you were one of the top percentile earners in Vancouver, likely both. Again, your obsession with single family homes only stands to help the same demographics in Vancouver and does nothing to address overall affordability trends.

Um, I did the cite a source: Staistics Canada. I assume you are familiar with Google?

My median income figure is for the CMA (ie. all potential buyers in the Metro area), your much lower figure was just the City of Vancouver proper. Even with higher rates $350k was hardly a figure financeable only by the economic elite as you suggest. Anyone with a foot on the property ladder or $75k down could do it.

I suggest you stop tying yourself in knots trying to prove your theory. You only dig your hole deeper.

[geotag277]

Originally Posted by whatnext

Um, I did the cite a source: Staistics Canada. I assume you are familiar with Google?

My median income figure is for the CMA (ie. all potential buyers in the Metro area), your much lower figure was just the City of Vancouver proper. Even with higher rates $350k was hardly a figure financeable only by the economic elite as you suggest. Anyone with a foot on the property ladder or $75k down could do it.

I suggest you stop tying yourself in knots trying to prove your theory. You only dig your hole deeper.

OK, no problem, I will just assume you are using the most convienent data to try to make your point from here on out.

It doesn't really matter, because you are looking more ridiculous by the second.

Some basic math: mortgage servicing costs on a 300k mortgage with 9% interest would be about a 2500 dollar monthly payment. We've already established that amount alone nearly exceeds the median income of Vancouver residents alone (in Vancouver proper).

But here we have whatnext, in his 1990s whatnext bubble saying that 30k a year for mortgage servicing costs are "no big deal" for those families making 75k in 1996.

At current tax rates, 75k a year income translates into 55k after tax income, which would mean more than 50% of a family's income would go to mortgage servicing costs - an amount that is not recommended by any prudent financial planner. That isn't even taking into account that tax rates in 1996 were much higher, especially for top earners.

Finally, cansim table 202-0707 shows after tax income quintiles for the provinces. For BC, in 1996, the top after tax quintile made 65000 in after tax income. A bit higher than the 50% mortgage servicing costs required, but perhaps comfortable enough to play in the Vancouver housing market. The next income quintile made just 42000 in after tax income - not even close to be able to afford the mortgage servicing costs associated with that "no big deal" property.

So yes, whatnext, you were living in a bit of a high income bubble in the 90s, and you were woefully unaware of everyone around you being priced out of the market. It seems you want to return to those good old days of Vancouver's top earners being able to play in Vancouver's housing market, and you don't really give a damn about the actual affordability issues that are occurring and endemic to the market.

Lucky I am tying so many knots for myself here, it will allow me to crawl out of this deep hole I've made for myself

[geotag277]

Originally Posted by lio45

Well, yeah, that's a pretty important metric when it comes to assessing the value of a given piece of real estate.

Remove that metric, and real estate becomes just like BitCoins and ingots of useless shiny metal -- only reason it's worth something is that somehow you can realistically expect some sucker in the future to pay as much or even more than you did for it.

If that's how you look at it, fine, but that kind of real estate is a speculative business, and in such cases all the extra value not backed by actual rental potential is speculative, a.k.a. bubbly from a real estate point of view.

P.S. Wouldn't be the first time we are basically in agreement, just not on the definitions.

I would only add that one metric only makes sense for a certain type of investor, one that wants to generate revenue based on the property's lease characteristics.

It is a bit like a stock investor who is a bit obsessed with valuing stocks according to the P/E. Yes, that metric does tell you quite a bit, and some would even argue it is "the most rational way" to choose stocks, but at the same time there are a myriad of classes of companies where the P/E is almost completely meaningless. For example, Amazon, who values free cash flow over outright earnings and will happily plod along with negative or zero earnings while generating billions of dollars of cash flows. P/E would tell you Amazon is a terrible investment.

[Xelebes]

Originally Posted by geotag277

I would only add that one metric only makes sense for a certain type of investor, one that wants to generate revenue based on the property's lease characteristics.

It is a bit like a stock investor who is a bit obsessed with valuing stocks according to the P/E. Yes, that metric does tell you quite a bit, and some would even argue it is "the most rational way" to choose stocks, but at the same time there are a myriad of classes of companies where the P/E is almost completely meaningless. For example, Amazon, who values free cash flow over outright earnings and will happily plod along with negative or zero earnings while generating billions of dollars of cash flows. P/E would tell you Amazon is a terrible investment.

Oh, do tell us what your pricing model is.

[geotag277]

Originally Posted by Xelebes

Oh, do tell us what your pricing model is.

I think everyone knows I don't have a sophisticated pricing model for evaluating Vancouver real estate to pull out of my hat which will magically justify the pricing of single family detached homes.

If my assumption that single family detached should have been rezoned as multi family decades ago, one major metric to look at would be comparable land acquisition costs to redevelop single family into multi family.

Whlle condos and townhome pricing is still elevated, they aren't nearly the runaway train that single family detached housing is, and it seems many developers can make financial sense of acquiring lots to convert to multifamily - those would be the comparables I would look at from a real estate perspective ahead of rent to price ratios.

[lio45]

You might have guessed that I'm a big P/E fan... of course I also value very much the long-term earnings potential, not just the current P/E (which might be temporarily attractive due to factors that won't last).

I think that what you're missing is that market rents aren't only a measure of "real estate P/E", they're also (and I would even say mostly) a measure of housing demand in the area.

If a 2br apt can be easily rented for $800 a month market rate, then a 1,500 sqft SFH in the same neighborhood should not normally command a price in the multimillion range. (Just throwing approx. numbers out there.)

If there's a huge discrepancy between demand for housing (shown by rents) and demand for property as a speculative investment vehicle (shown by property values out of whack with rents), then it indicates a bubble.

Just for the sake of comparison, in some neighborhoods of Manhattan (NoMad, Flatiron, etc.) you had the AVERAGE rent for a 1 br at >$4,500 and the AVERAGE rent for a 2br at >$7,000 one year ago. Probably even higher now. US dollars of course. Now obviously with that kind of demand -- i.e. a market that has shown it's ready/willing to pay those prices; plenty of people who want/need to live there and have the wages needed for it -- then you can make a case that a little rectangle of land there is indeed truly worth millions; you just have to put a building on it and the money will reliably flow in.

In Vancouver, you take your little rectangle and put a giant pink stucco monster on it and cross your fingers that you'll find someone who has a few millions in cash they have to take out of China. If for whatever reason you don't, you're left holding the bag.

[geotag277]

Originally Posted by lio45

If a 2br apt can be easily rented for $800 a month market rate, then a 1,500 sqft SFH in the same neighborhood should not normally command a price in the multimillion range. (Just throwing approx. numbers out there.)

It indicates a discrepancy which you choose to interpret as a bubble. Again, SFH housing stock is going down and town homes and condos are being newly supplied to the market to meet demand (albeit not fast enough to create a buyer's or even a balanced market).

SFH are getting more and more and more rare and that also increases their value.

It is a common occurrence of housing markets that when development of SFH is constrained, single family detached properties and the land values go through the roof. You can see it in every market where it happened (San Fransisco, Toronto recently). There is plenty of historical precedent for it.

On top of that there is no comparable market in Canada to the size and developmentally constrained nature of Vancouver.

You can feel free to interpret the Vancouver market as a bubble, certainly foreign investors are pushing the market higher than it would be without them - as at the end of the day, like stocks, real estate is supply and demand, and foreign investors necessarily increase the demand size, just like lottery winners, domestic money launderers, etc.

But I think the evidence has been on the wall since 1991 that SFH in particular have been a runaway train in terms of value long before foreign investors was the buzzword of the day, and even whatnext's articles show local residents are willing to bid 200k+ over asking price to acquire these properties.

The situation in Vancouver right now is a total seller's market. There aren't enough condos, town homes, or SFH detached housing to go around. At this point the only way to meaningfully increase the former is to get rid of the latter which means there will never again be a meaningful contribute of new SFH to Vancouver to offset demand.

Personally I think if you did have 9 figures to spend on real estate in Canada (realistically 200k in floating assets that you want to allocate to RE assuming carrying costs are no problem), investing in SFH in Vancouver is probably one of the best investments you could make (and historically, for the past 20 years, would have been one of the best investments you could have made).

You can call it a bubble, but the way I see it it's back to basics real estate fundamentals of supply and demand and the future housing picture of Vancouver will mean this land will always be extremely valuable.

[Pinion]

Originally Posted by geotag277

I think everyone knows I don't have a sophisticated pricing model for evaluating Vancouver real estate to pull out of my hat which will magically justify the pricing of single family detached homes.

How do you personally benefit by defending status quo? I think you need to disclose this before you continue this charade.

[dleung]

This back and forth is getting boring. Vancouver/Toronto are likely overvalued by 20-30%. The evil Chinese money launderers might be responsible for a fraction of that. Then there's the restrictive land-use, density, desirability, available land, blah blah blah, which factors into 90% of the value of a SFH but only 50% of a condo. You can argue the land is over-valued, but the other 50% won't change much: http://westerninvestor.com/index.php/news/bc/1580-vancouver-condo-costs-520k-before-its-built-. Keep in mind developers typically profit 15%.

[geotag277]

Originally Posted by Pinion

How do you personally benefit by defending status quo? I think you need to disclose this before you continue this charade.

I benefit as much as lio, try asking him first.

[GreaterMontréal]

http://www.moneysense.ca/property/buy/city-or-suburbs-what-it-takes-to-live-in-downtown-montreal/

very interesting

Toronto-Montréal-Vancouver-Calgary

[whatnext]

Originally Posted by geotag277

I benefit as much as lio, try asking him first.

Evade, evade, evade Geo's standard m.o.

He doesn't even live in Vancouver, which is probably why he has zero credibility on the issue.

[big W]

I tend to see things like Leo. Basically in my opinion Vancouver is in a large bubble which will actually get worse for the next few years with the low dollar. I tend to see us getting closer to when the bubble pops and then look out. Incomes in Vancouver do not support the prices and the return on investment is not there for me and most people in reality. Yes you can argue that the prices are going up so its good, but price them in US dollars and its going down so the foreign investments will actually go down. At some point someone will be left holding the bag. I look at investment in real estate as a source of income and in reality for my investment I can earn more for less somewhere else and that's what I choose to do. For example, I could buy 20 houses for 50,000 and rent them for 300 a month net revenue of 6,000 a month or I could buy one house in Vancouver giving me 1,000 a month. No thanks I will take the extra 5,000 a month and do another investment. Something to think about.

[ssiguy]

As with all things in Vancouver, China & Hong Kong have the largest impact on the local economy and a massive influence on the real estate market and if Vancouver mirrors the latest stats from Hong Kong then Vancouver is in real trouble.

As with all places some months tend to have lower sales than others and Dec/Jan tend to be relatively slow moving months at roughly the same sales levels due to Christmas. With the latest stats for Jan/15, Hong Kong's market is not collapsing but rather in a full scale crash.

Sales evaporated in Jan/16 compared to Dec/15 by a truly whopping 80%! That is the largest fall in sales on record since stats have been tallied starting in 1991. Prices peaked in Sept/15 and in the course of just 4 months prices have plunged 10%.

How is this possible? Don't the Hong Kongers always say "it's different here", "were running out of land", " everyone wants to live here" or "prices will always go up"?
Well Hong Kong really doesn't have any land left, it has a population density 10X Vancouver's, is growing by 65,000/year which is twice as fast as Vancouver, is a world financial centre, and has one of the highest income levels on the planet.

What's more most economists expect prices to plunge ANOTHER 30% by mid 2017 and at LEAST 40% over the next 2 years by the time the carnage is done and that is assuming that the Chinese economic woes don't get worse.

[vanman]

Originally Posted by big W

For example, I could buy 20 houses for 50,000 and rent them for 300 a month net revenue of 6,000 a month or I could buy one house in Vancouver giving me 1,000 a month. No thanks I will take the extra 5,000 a month and do another investment. Something to think about.

FYI a 1k a month in Vancouver proper may get you a basement suite if you're lucky. If you want an entire house you're looking at closer to 3k and up.

A lot of new homes are built with mortgage helpers in mind. They will have up to two one bedroom basement suites renting for around 1k each as well as a laneway home that can go for another 1200-2k. That is potentially 4k in extra rental income. If you decide to rent out the secondary suites as well as the main house you could be looking at close to 7k or more in rental income which is not a bad return on investment at all. These homes with multiple suites are increasingly becoming more common and you will often find homes with more than one set of numbers out front like this one:

http://www.starproperties.ca/images/portfolio/12.jpg

[lio45]

Originally Posted by vanman

A lot of new homes are built with mortgage helpers in mind. They will have up to two one bedroom basement suites renting for around 1k each as well as a laneway home that can go for another 1200-2k. That is potentially 4k in extra rental income. If you decide to rent out the secondary suites as well as the main house you could be looking at close to 7k or more in rental income which is not a bad return on investment at all.

Out of curiosity, what do you call "not a bad cap rate at all"? 5% is pretty bad, anything below that is really bad.

The 4-unit building you're describing (main house + 3 secondary suites in a neighborhood where the rents are what you said they are) ceases to be an acceptable investment at ~$1.5M.

For ~$1M it would give decent returns.

[someone123]

Originally Posted by lio45

Out of curiosity, what do you call "not a bad cap rate at all"? 5% is pretty bad, anything below that is really bad.

The 4-unit building you're describing (main house + 3 secondary suites in a neighborhood where the rents are what you said they are) ceases to be an acceptable investment at ~$1.5M.

For ~$1M it would give decent returns.

I like to share the anecdote that about 5 years ago, when real estate was cheaper, I was renting the ground floor of a house. It was assessed at around $2M and the monthly rent was $1,600. I just checked again and it's assessed for only $2.43M now. Land value $2.27M.

I know some people who have built laneway houses and rented basement suites and they've had a lot of problems. Keeping 3 units full of happy tenants is not simple, and living in the upstairs part of a house with a bunch of tenants is different from having a house to yourself. Some of these people literally have $500k+ mortgages and around 1,000 square feet of living space.

I suspect the whole idea of scraping together enough to pay for a $900,000 house so you can get on the property ladder, assuming you get some tenants so you can afford food, is another signifier that Vancouver is in prime bubble territory. People do this not because it makes sense in terms of living arrangements but because they anticipate future returns. These kinds of arrangements also make the economy more fragile. Many households in Vancouver don't have much room in their budgets to absorb any significant of shock.

[someone123]

Originally Posted by lio45

For ~$1M it would give decent returns.

Here's an article on the laneway houses: http://www.huffingtonpost.ca/michael-hungerford/laneway-housing-vancouver_b_4298984.html

The $2k type rents are for laneway houses in the part of the city where the houses tend to be in the $2M and up range these days. A laneway house might be great if you want to add more space for relatives but they're not really a money-making proposition.