Canada's 'housing bubble' deemed close to bursting

[dleung]

SFH occupies 85% of the residential land in Vancouver. A typical 33' lot in Vancouver sells for $1.5M, about $16M per acre. As I mentioned before, the land for downtown condos are assessed from $200M to $800M per acre. Even mid-rises along Broadway go for over $100M per acre. For no other reason other than a severe shortage of developable lots. Yes there are always some parcels around the city that won't see development despite extreme demand for housing, but it's often owing to various non-market factors. What the city needs is an abundance of multi-family zoned land to drive down the cost of land for each development. If only the properties along every arterial is zoned for at least 4-stories, that will still leave half of all remaining residential land as SFH, yet will triple the amount of land for multi-family. If that $100M per acre goes down to $33M per acre, or merely double that of a SFH, it will reduce the land cost of an average 800sf unit by almost $200K, for a total price averaging just over $300K.

[someone123]

Originally Posted by dleung

SFH occupies 85% of the residential land in Vancouver. A typical 33' lot in Vancouver sells for $1.5M, about $16M per acre. As I mentioned before, the land for downtown condos are assessed from $200M to $800M per acre. Even mid-rises along Broadway go for over $100M per acre. For no other reason other than a severe shortage of developable lots. Yes there are always some parcels around the city that won't see development despite extreme demand for housing, but it's often owing to various non-market factors. What the city needs is an abundance of multi-family zoned land to drive down the cost of land for each development.

For the case of the old house I lived in, the land value is assessed at around $27M per acre (33' x 110' standard lot). It's near 4th and Alma, almost in Point Grey. There's clearly lots of demand for people to live in that area but there's been almost no increase in density since I lived there 5 years ago. A handful of modest 3-4 storey multi-unit developments have gone up around 4th. That's it. This is in an area of 1-2 square kilometres, about 6 kilometres from the centre of a major city, with land values of tens of millions of dollars per acre.

A lot of West Side Vancouver has less multi-unit development happening than even that. East Vancouver's limited too. Broadway-Commercial must be one of the busiest and most strategically-located transit stations in Canada and most of the land within a 10-15 minute walk of the station is detached housing.

[whatnext]

Originally Posted by dleung

SFH occupies 85% of the residential land in Vancouver. A typical 33' lot in Vancouver sells for $1.5M, about $16M per acre. As I mentioned before, the land for downtown condos are assessed from $200M to $800M per acre. Even mid-rises along Broadway go for over $100M per acre. For no other reason other than a severe shortage of developable lots. Yes there are always some parcels around the city that won't see development despite extreme demand for housing, but it's often owing to various non-market factors. What the city needs is an abundance of multi-family zoned land to drive down the cost of land for each development. If only the properties along every arterial is zoned for at least 4-stories, that will still leave half of all remaining residential land as SFH, yet will triple the amount of land for multi-family. If that $100M per acre goes down to $33M per acre, or merely double that of a SFH, it will reduce the land cost of an average 800sf unit by almost $200K, for a total price averaging just over $300K.

Except that scarcity does not explain a 40% price increase in one year. Did you get a 40% raise last year, I didn't. While low interest rates might help some locals stay in the game, it does not explain that kind of price run-up. It's clear it is external forces, why deny it?

As vanman and someone123 point out, much of what is zoned SFH in Vancouver is in fact mulitunit with one or two basement suites and now the possibility of a laneway house.

[Berklon]

Hooray for high RE prices!

Without affordable housing, Vancouver risks becoming an economic ghost town

[Pinion]

Originally Posted by whatnext

Except that scarcity does not explain a 40% price increase in one year. Did you get a 40% raise last year, I didn't. While low interest rates might help some locals stay in the game, it does not explain that kind of price run-up. It's clear it is external forces, why deny it?

As vanman and someone123 point out, much of what is zoned SFH in Vancouver is in fact mulitunit with one or two basement suites and now the possibility of a laneway house.

Yep, my father in law owns eight houses on the west side and each have been turned into units for half a dozen people each. Uhhh don't tell the authorities

[big W]

Originally Posted by vanman

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

Well lets be honest and compare real world examples as this is something that I have looked at.

I currently am looking at buying housing overseas (no corporate, income or property taxes in this country by the way) with units costing approximately $75,000 per suite. I have set up a business overseas in that country so no worries with income taxes, corporate taxes etc. The nice thing is I do not have to provide appliances or utilities etc so what I rent out the units for is right to my pocket or actually my companies pocket. The units I can rent for $450 a month. So in this unit I get $5,400 a year net or a cap rate of 7.2% a decent return as this is net income. For an average Vancouver home I could buy 14 of these units so in that case I would get back $75,600 a year. If I were to adjust that income down 10% for vacancy and maintenance costs etc I would still have an income of say $68,040 but say with an $800,000 mortgage I would pay $24,000 in interest leaving me with $44,040 in NET income. Key word is NET (note I also used that in my previous example and you responded with gross values).

In Vancouver, I were to buy a $1,000,000 house and have $6,000 income a month or $72,000 a year. Adjust down for the same 10% gives me $64,800. Then I know I will have to pay property taxes of approximately $300 a month or $3,600 a year, leaving me with $61,200 income. I would then have to pay some utilities say $500 a month for all the tenants leavings me with $55,200 a year. Then I must pay the government income taxes on this money say a third of the total leaving me with $36,800 a year. If there are any other expenses that I incur then this number goes down further. But here is the kicker. With a 20% down and mortgage of $800,000 I would pay $24,000 in interest. Leaving me in a net gain or $12,000 for the year. Why spend $1,000,000 to get $12,000 a year.

At the end of the day I get more than 3 times the return on my investment going somewhere else.

[ssiguy]

The BC and Vancouver governments will do everything in their power to keep the housing boom going which means opening their arms and closing their eyes to off-shore Chinese money laundering.

Housing has kept the house afloat and now it has become a house of cards that no one dares touch.

Even politicians who don't like how the city has gone know that it's too late. They can't change it now as the economy would collapse.

[whatnext]

Originally Posted by big W

Well lets be honest and compare real world examples as this is something that I have looked at.

I currently am looking at buying housing overseas (no corporate, income or property taxes in this country by the way) with units costing approximately $75,000 per suite. I have set up a business overseas in that country so no worries with income taxes, corporate taxes etc. The nice thing is I do not have to provide appliances or utilities etc so what I rent out the units for is right to my pocket or actually my companies pocket. The units I can rent for $450 a month. So in this unit I get $5,400 a year net or a cap rate of 7.2% a decent return as this is net income. For an average Vancouver home I could buy 14 of these units so in that case I would get back $75,600 a year. If I were to adjust that income down 10% for vacancy and maintenance costs etc I would still have an income of say $68,040 but say with an $800,000 mortgage I would pay $24,000 in interest leaving me with $44,040 in NET income. Key word is NET (note I also used that in my previous example and you responded with gross values).

In Vancouver, I were to buy a $1,000,000 house and have $6,000 income a month or $72,000 a year. Adjust down for the same 10% gives me $64,800. Then I know I will have to pay property taxes of approximately $300 a month or $3,600 a year, leaving me with $61,200 income. I would then have to pay some utilities say $500 a month for all the tenants leavings me with $55,200 a year. Then I must pay the government income taxes on this money say a third of the total leaving me with $36,800 a year. If there are any other expenses that I incur then this number goes down further. But here is the kicker. With a 20% down and mortgage of $800,000 I would pay $24,000 in interest. Leaving me in a net gain or $12,000 for the year. Why spend $1,000,000 to get $12,000 a year.

At the end of the day I get more than 3 times the return on my investment going somewhere else.

Except you're ignoring one thing many outside commentators do: investment return is often not the overriding purpose for Chinese buyers. The house is a safety deposit box with a gold bar inside. It's located in a safe place, with a minimum of regulation or supervision. If things go south in China the owner can get out and live in it or liquidate it for cash. Over the last decade the appreciation alone has been enough of a return. Renters aren't required or even desired, they are just a hassle.

[geotag277]

Originally Posted by big W

Why spend $1,000,000 to get $12,000 a year.

"Why acquire $1,000,000 of stocks which don't pay dividends and get $0 a year?"

[Pinion]

Originally Posted by geotag277

"Why acquire $1,000,000 of stocks which don't pay dividends and get $0 a year?"

Detached houses went up about $300,000 this last year alone in Vancouver proper and the nearby suburbs.

[cornholio]

Originally Posted by geotag277

"Why acquire $1,000,000 of stocks which don't pay dividends and get $0 a year?"

Except like stocks they did go up. And allot. Don't confuse people with lots of liquid money buying houses with smart people. Most are not. Most investors are stupid enough to ignore dividends, they focus on only the value failing to realize that the value is a abstract number. In Vancouver's case the value of real estate is inflated due to speculation. Speculation in large part fueled by offshore money flowing in and combined with low interest rates allowing some locals to try and keep up. Speculation that imo cant pay off in the long run. Though it does pay off in the short run as we can all see. But at the end of the day someone at some point in the future will be left holding the bag when the market corrects.

[geotag277]

Originally Posted by cornholio

Don't confuse people with lots of liquid money buying houses with smart people.

There are lots of idiots buying stocks too, that doesn't mean a company is a bad investment. As long as the fundamentals are sound according to your own investment principals, you have nothing to worry about. Sure, the laws of supply and demand dictate that these things fluctuate, but things have a way of working themselves out in the long term.

And fundamentals have different interpretations. For an investor who only views the single metric of "rent versus acquisition costs", then the fundamentals of the Vancouver market don't add up. Just like the investor who only views the single metric of price over earnings would have largely missed out on the fact that Amazon has been a great investment for the past two decades and has made billions in cash flows that don't necessarily show up on earnings.

The up and down fluctuations of the stock market and the real estate market don't matter over the short term, especially for individuals who have a diversified portfolio. The long term trends and investment horizons are the most reliable and the most revealing in either case.

[Xelebes]

Are you conveniently eliding over the fact that stock is much more liquid than real estate? There's a reason real estate is always placed below investments in equity and debt on the balance sheet.

[big W]

And we must also remember that when stocks get over priced and the do not make any sense we see a market correction or a crash. Just a thought and right now I believe Vancouver Real Estate is getting close to the point of a correction. Hence why an investment there is not one I would make and would rather invest somewhere else.

[big W]

Originally Posted by whatnext

Except you're ignoring one thing many outside commentators do: investment return is often not the overriding purpose for Chinese buyers. The house is a safety deposit box with a gold bar inside. It's located in a safe place, with a minimum of regulation or supervision. If things go south in China the owner can get out and live in it or liquidate it for cash. Over the last decade the appreciation alone has been enough of a return. Renters aren't required or even desired, they are just a hassle.

Yes and a market when many buyers are really not behaving based on typical market fundamentals is not a market I want to be in. Again I see this as a market that is being primed for a bubble and therefore it will be corrected. I assume it will be a long term stagnation rather than a large drop but a correction will occur. Again we can all go round and round but different people have different investment strategies and this is a market that I choose to stay away from as I look at the fundamentals and it really seems to be an irrational market.

[ssiguy]

The issue with Vancouver is that money gushing in from China is not bought as an investment. It is bought as a passport, a place to give your kids a good and free education, a centre to launder dirty money, and a fast exit when the police come knocking at your door.

This is why Vancouver's housing is totally detached from the strength of the local economy or wages. This is why I think comparing the stock market to Vancouver's real estate market is not a good one. The stock market {despite it's flaws and speculation} is still a gauge of underlying economic strength.

Vancouver's real estate has very little to do with economics. It's like comparing the TSX and the Cayman Islands..................one is a place to invest your money and the other is a place to hide it.

[jmt18325]

Originally Posted by ssiguy

a place to give your kids a good and free education, a centre to launder dirty money, and a fast exit when the police come knocking at your door.

Citation needed.

[whatnext]

Originally Posted by big W

Yes and a market when many buyers are really not behaving based on typical market fundamentals is not a market I want to be in. Again I see this as a market that is being primed for a bubble and therefore it will be corrected. I assume it will be a long term stagnation rather than a large drop but a correction will occur. Again we can all go round and round but different people have different investment strategies and this is a market that I choose to stay away from as I look at the fundamentals and it really seems to be an irrational market.

I absolutely agree.

[whatnext]

This $6.2M Vancouver mansion was sold in 2010: It’s been vacant and rotting for six years

The $6.2-million Point Grey home boasts unobstructed vistas of the North Shore mountains, English Bay and Vancouver’s skyline.

A park sits across a quiet street. The home represents everything a family could aspire to.

But it’s vacant and rotting. Windows are left open and debris sits in the yard. Like a symbol of futility, a June 2015 City of Vancouver “untidy-premises” order remains pinned to the door....

...Current owners Huai Can Ren and Xue Pei Sun bought the 4100-block 8th Avenue West home from Wei Min Zhang in July 2011 for $4.6 million, records show.

The couple’s occupations were both listed as “business person.” Wei Min Zhang had bought the home in July 2010 for $3.35 million. On Wednesday, a neighbour told The Province he hadn’t seen the current owners...

....Huai Can Ren and Xue Pei Sun are also owners of a $3.57-million Arbutus Ridge home in the 2300-block 21st Avenue West, records show. The home also appears to be unoccupied...

http://news.nationalpost.com/news/canada...old-in-2010-today-its-vacant-and-rotting

[Berklon]

^ That's not the only house either.

This is a common complaint in Vancouver. Similarly, there are a lot of condos in Toronto that are owned but empty.