Great weather and another busy weekend, so here’s short Friday numbers:
303 new listings and 280 sales for a 92.41% sell/list. I’ll do more in depth numbers later.
Great weather and another busy weekend, so here’s short Friday numbers:
303 new listings and 280 sales for a 92.41% sell/list. I’ll do more in depth numbers later.
Filed under Daily Numbers
The Best Real Estate Anywhere! 
Here’s Friday June 2nd, 2006 for comparison:
“There were 265 new listings Friday, and 254 sales, for a sell/list of 95.85%.” Similar sell/list but lower listings and lower sales than today.
BUT
“The 7 day rolling numbers were 1,574 new listings and 1,596 sales, for a sell/list of 101.4%.”
I don’t have time to do a spreadsheet but we can’t be higher than 75-80% for the 7 day this year.
75 to 80% is still a seller’s marker
for now…wait until the Fall.
Rob, re this comment:
“Confident:You’re in the camp of people who say “I might be able to afford it, but I’m not afraid to wait it out in order to get more for my buck. I’m not afraid of being priced out”. Its a valid position, (unless you adopted it more than 2 years ago).”
I don’t agree, even if you adopted this 4 years ago, all the more reson to wait it out at this point. If one is that close to being priced out at this point the financial risk is too great. Saving and patience is a better option…a safer financial move. The cycle will end it is only a matter of time.
The only counter is that if you adopted the position 4 years ago there has to be a huge correction for you to get back to where you started, and you’ve thrown out thousands of dollars in rent and missed a lot of appreciation in the meantime. Hindsight’s 20/20, and if we can match that with a good crystal ball we’d all have bought 5 years ago, we’d all sell 6 months before the next correction, then we’d buy back at the trough and have a great big house and a little tiny mortgage.
I can see a correction coming, and I admit I don’t know when or by how much, but if it happens in 2008 I don’t see us retreating to 2003 price levels. Pure guesswork, mind you.
You’ll never get me to bad mouth savings and patience – but patience is not the same as doing nothing.
confident,
If you seriously think you are going to see 2003 prices again you must be dreaming. Even in the US with the so-called real estate meltdown price decreases are minimal to none.
Vanreal
We may not see 2003 prices again although this is not inconceivable nor is it unprecedented in Vancouver. I have no doubt we will see 2005 prices again. I don’t know what statistics you are referring to for the U.S. but if its national statistics these won’t tell you very much. Markets like San Diego are already down 15-20% and heading lower. There are many other frothy US markets down in the same order of magnitude and still dropping. Our average correction after the past four runnups here in Vancouver is 28%. The last was 20%, the worst was 40%. We’re also well into the fifth year of a significant runnup, thereby eclipsing the longest runnup of the past at four years (two others were two years, another was under two years). To ignore this history is truly to be dreaming.
I don’t know if anyone notice. It only take a 50% correction to even out an 100% appreciation.
Original house price = 400,000
100% Appreciation = 400,000 x (1+100%) = 800,000
50% correction = 800,000 x 50% = 400,000
Buying an expensive house just get you so much deeper into the rat race. The ways to be able to get out of the rat race are:
1. Relocate to a cheaper city
2. Sit on your hand and wait it out
3. Buy 2 piceces of real estates and hope for a price appreciation and sell one of them to pay for the mortgage for the other
4…
Rob,
At this point in time, (from my viewpointpatience is doing nothing. About buying real estate anyway! And no, we don’t have to get back to 2003 prices to make it worthwhile to wait. Although that could happen at some point in the next few years.
If you are in a position where you could buy, but that money is not easy to come by, this is not the time to take the risk. Even with a significant down payment. Many people do not seem to be seeing that this looks, smells and acts like a bubble (more and more so every day) and that bubbles can do a lot of damage. The high tech bubble burnt many people…some could afford it, but for many it was life alterating and not in a good way.
Save your money, be patient, be cautious. It seems a little old fashioned and its not easy, but it will be worth it.
If you are wealthy then you do not have to heed this advice. You can afford to take risks.
and Rob, regarding the loss of rent money: what about losing $80,000 to $100,000 in interest over the life of your mortgage (based on a $100,000 mortgage at today’s historically low rates) Triple that or more if you are way in over your head like lots of Vancouver buyers, and as rates rise.
You also have to factor in the loss of capital gains on your down payment. If you have been fully invested in the stock market over the last few years, (with a good advisor )your gains could have a least matched the housing sector.
It all adds up. Adds up to not jumping into the housing market at this time.
johnny has a very valid point. it is extremely difficult to rely on averages, benchmarks, etc. you really have to look at the same property to have a good idea. different areas do better during diff times, some are lagged, etc. so even tho VW is still steady, Surrey could be going down, thereby evening out the average. Surrey could bottom up and start rising while VW is going down, etc. that blurs the average as well.
i just know in the last correction mid 90’s to late 90’s on the MLS graph. several of my friends/colleagues were buying million dollar homes for 30-40% below their all time peak values. however, the graph shows about a 20% cut from top to bottom in that range of time. (lowballs of 25% off already reduced prices were not an insult either).
yes Johnny to ignore history is dreaming. Are we recreating the economic climate of 1982 or the economic climate of 1991. I don’t think so. In 1982 interest rates were 23% with a very weak economy. In 1991, interest rates were 13% with a very weak economy. If I see those interest rates and a weak economy then I will believe you that history is repeating itself. Prices will eventually flatten but I don’t see a price decline on the horizon. the U.S. is going through a rough time thanks to the war in Iraq and the easy credit for housing given over the last two years. We don’t have that scenario here. Tell me what I am missing other than that Canada always follows the U.S. because that is not true. I understand that you have to put all your eggs in the basket of real estate calamity because that is your only hope of buying anything. I just don’t see it happening. Sorry!!
e, averages are all we have to rely on. I would argue the exact opposite that you can’t look at individual properties to determine either an increase or decrease in properties in general. That is not a valid extrapolation. So sorry but I beg to differ with your view, no matter how many anecdotal comments you have about your so-called friends. I am so tired of hearing about people’s friends who got screwed. Give me data!
Confident:
Just buy a trailer home man. You are really green.
Rob said:”I can see a correction coming, and I admit I don’t know when or by how much, but if it happens in 2008 I don’t see us retreating to 2003 price levels. Pure guesswork, mind you. ”
Rob,why do you say you can see a correction coming?
Confident, I think those are some valid points. I think you’ll come out ahead relying on reasoning instead of blind faith.
Rob, if you have time, I’m interested in what assumptions you make when deciding if something is a reasonable investment property. (Either now, or at any point in the last 10 years.) e.g. If you put A% down for a $B property, with a mortgage payment of $C, and rent equal to $D.
I’ve never bought real estate, but I figure you’re an expert in the area, so I’d be interested in hearing an investment scenario that you went through, say, in 1999. I’m interested in the reasoning that you use to determine whether or not something is likely to be a good investment.
Vanreal
First, let me assure you that I have many eggs in my basket; I can pick and choose where to put them including paying cash for a Westside SFH home. Enough on that subject.
Second, the war in Iraq has got nothing to do with the US RE market. Credit has been easier in the US, with looser standards than Canada. That said credit has also been easy in Canada, and cheap.
What is at the real root of the demise of frothy US markets is the same thing that will be at the root of our eventual correction; too much increase in price, too soon. Our prices will be whacked back down as has occurred or is occurring in US markets which parallel our own.
Many markets in the US that have or are now correcting can point to lower unemployment rates, higher migration, greater infrastructure spending per capita, higher incomes, equivalent GDP growth and similar interest rates (incidentally, mortgate interest is tax deductable in the US as are property taxes whereas here, neither is the case).
Study the real facts, Vanreal, and maybe one day you’ll get real.
Vanreal said:
” Prices will eventually flatten but I don’t see a price decline on the horizon. the U.S. is going through a rough time thanks to the war in Iraq and the easy credit for housing given over the last two years.”
*On the other hand the Canadian dollar is really strong and making it harder for Canadian manufacturers/Exporters to make money with the U.S.
*There is soft lending practices as well in Canada as well and we can’t write off our mortgages like the Americans.
*Strong Economy, Strong Economy, Strong Economy. If your not expecting a signifacant payraise compared to the steep incline of housing prices then you are basically spinning your tires, going no where and passing your mortgage off to your children unless interest rates go up 4-5% in the next 40 years. More likely to happen in the next 25.
What next.. your going to come back with, ” Hey man at least when 2010 hits you’ll be able to rent your apartment out for the games for $20,000 for the entire two weeks”
Right now I am packing away $5,000 a month while I rent.
vanreal wrote:
June 2nd, 2007 at 6:55 pm
“Are we recreating the economic climate of 1982 or the economic climate of 1991. I don’t think so. In 1982 interest rates were 23% with a very weak economy. In 1991, interest rates were 13% with a very weak economy.”
——————————————————–
So in late 1990, interest rates were 13%…..the bulls at that time must have thought the gravy train would not stop because 13% interest rate was almost half of the 23% of 1980.
Fast forward to June 2007 and interest rates are in the 6% range……the bulls of today must think the gravy train will not and cannot stop because 6% interest rate is almost half of the 13% of 1991 and a quarter of the 24% of 1980? (Or is it different this time because of the strong economy?)
I can’t believe that there are STILL people out there who think this will go on forever. Of COURSE there will be a correction.
Confident:
Fully invested in the stock market with a competent advisor would return the same as real estate in the last few years? Really? What kind of return are you talking about, percentage wise? What’s the advisor’s number? (I won’t tell anyone else, honest!)
Lesser Ape:
I have two ways of evaluating a property, depending on who I’m buying for.
I rent a lot of places, and have done so for many years. As a result I have a pretty good feeling about what I can and can’t keep full with little or no problem. If I see a place that a) I can keep rented, b) that my wife would let her sister live in, c) that cash flows positive at less than 35% down and d) that I’ve got a little cash for, I buy it. I’ll do the analysis on paper as a matter of course, but the decision is made when I’m inside and when I’ve spoken with the tenant.
For clients I want (depending on the client) a cash flow positive property with 50% down or less, a rent multiple of 175 or less, internal rate of return of 11% or better, and nice looking cash return on sale after 5 years. The numbers vary in all kinds of ways, and its half art half science.
When I first started and I was looking really hard I had some different assumptions (mind you I also had no money and no experience). It seemed to me that a house should sell for 100 times its monthly rent, and I could find Maple Ridge houses taht would do that (late ’80s). I also looked for (and found) no money down deals as well as vendor financed and agreement for sale deals. With some miles under the hood I perhaps accept slightly worse numbers, but higher quality properties.
The first place I bought I got for $64,000. Rent was $480 (still is, actually, so the returns have dropped), but that’s a rent multiplier of 133. It required 26% to break even. I forget what IRR was, or what cash on sale after 5 years was, but I guess I’ve done about 600% on that one. That’s lucky, of course, since we’ve had a good run up here, but at 5% per year I’d have been doing just under 20% per year.
You’re probably curious why I haven’t raised rents. Remember that I buy partly on account of the tenant. This one has a senior in it, on a fixed income. I could probably squeeze her for more, but considering that I’m not missing any meals and my equity is growing, I eat the increase in strata and taxes. Once she’s gone I’ll reno it and bump the rent to modern levels.
Looked at a property today. Multi family in East Burnaby, three suites. If it generates $3000+ (I haven’t been in it to confirm) it will break even at just under 30% down.
Frankly I don’t buy Confident’s point lock stock and barrel. Interest is the cost of money. You don’t worry about what you paid for yesterday’s coffee, and you don’t worry about what you’ll pay for tomorrow’s either. Count it up. If you’re like me you probably spend north of $300/month on that. That’s a $50,000 mortgage. However, I think its worth it. Coffee and something to eat in the morning with the paper is what I do. If it cost $600/month, I might start caring. If it cost $100/month I’d probably buy more.
Interest is the same. I get the money for as long as I want, but I have to pay the price. If the price is low (which it is now) and if I can make the borrowed money work hard for me (which I almost always can), the price is worth it. Over the last 4 years Confident saved a lot of money on interest because he didn’t borrow money. I had a tenant pay interest for me and made a lot of money on property appreciation and mortgage paydown. On personal property I paid a lot of interest as well, with no help from tenants (aside from the 1st house which had a suite), and guess what? The bank was happy, because they made money, and so was I. I think I got my 1st place around 1990, so I’m not just resting on the last 4 years of appreciation.
That said, I’m a huge believer in paying off personal mortgages quickly (pay weekly, up the payments, get ‘er done in 15 or less), and also in payng down the first investment property mortgages as well (solid foundations) even if the interest is cheap. In that I differ from many very smart people who are less conservative than me and who stay much more leveraged. I’m a bit af a ‘fraidy cat in that regard (however that points to my distinction that patience isn’t the same as doing nothing).
I clearly don’t buy that the stock market can match returns in RE over the past while, and if so, like I said to Confident, give me the number of that advisor.
I do agree that risk is dangerous, and that you should not get in over your head. You need to keep debt under control. I’m with Confident on that score. However, there are more ways through this jungle than perhaps he sees.
Jim:
I see a correction coming the way I see winter coming. Right now I can’t even see it on the horizon, but give it time and it will get here. You can say its based on faith in cliches: the market will change – it always does, and the cure for high prices is high prices. Add a few of your own if you like! 🙂
On a serious note, everyone is talking about interest rates rising around the world. Our currentcy is going up, and that makes it tough for us. Hiccup in China and we’re in big trouble, I think. The housing problems in the US will be put in perspective (they’re minor, really, and will pass).
Johnnyrent,
First of all the war in Iraq does affect the American economy. In the seven years since Bush has been president the deficit and debt have skyrocketed. Not the case in Canada. This affects their economy whether you believe it or not.
Secondly I’m not saying prices won’t stabilize or even drop slightly but to be forecasting a devastating drop in prices does not appear to be likely any time soon. Yes anything can happen. Major earthquake. Terrorism. China meltdown. If that happens your stock market gains will evaporate as will mine. All my money is not in my house either. But you can’t compare our economy to 1981 or even 1991. When it moves significantly in that direction I will be more of a bear than you.
Also your comment about Americans writing off mortgages and property taxes is valid however, property taxes in most US cities are about 4 times what they are in Canada to begin with. I have many friends across the US and I know what they pay. As far as the mortgage deductions go, it is both a plus and a minus. In the US if you sell your house you have to pay capital gains unless you buy a more expensive house. You cannot pocket your profits tax free.
Comparing Canada to the US is a bit like comparing apples to oranges.
Oh and I am very real Johnnyrent
Johnnyrent, you say San Diego is down 15-20%, can you please back up this comment ? Here’s what I found:
http://www.signonsandiego.com/news/business/20070516-9999-1b16housing.html
Perhaps you’re getting confused, sales are down but prices are up.
Johnnyrent doesn’t like to confuse the issue with facts.
i have been watching the market.
It looks like Rob doesn’t agree with his two friends Bobo and Bobo2.
Rob has now turned his attention to macro economics, wow!
Bobo thinks we have run out of land and therefore prices will continue to rise.
(something about mountains, and ocean,(somebody please tell Europeans, and the well to do West Vancouver millionaires, that you can’t build on mountains, and of course the BC coastline is built out, and to the east, well there is Alberta-no more land there either.
Rob on the other hand thinks a correction is possible, and the severity will be determined by factors outside of Rennies control.
Interesting
oh it works!
I read this blog every day.
I read VHB everyday. It was great.
My story is like many others one small child and 2 good incomes and lots of money saved. I have always lived in kits or in false creek south I have been waiting for a shift (prices down) for 2 years.
At this point I feel like giving up. It just aint gonna happen folks. I just came back from a BBQ at my friends place on commercial and 6th. Nice street he lives on and a great modern duplex. His dad is a builder and built this place a year ago one side for each of his kids.
My friend sold his 1500sqft 1/2 duplex on commercial, for $741,000.00. That is sick!
You can talk sell/list %, Economy, psychology, cycles, grow ops, 14 day rolling, Shiller, Dude it is a mess?
We rent a great place for $940.00. but i wanted something bigger. so I started looking for places to rent $1500-2000max. not much out there.
so there you go!
1/2 duplex on comercial $741,000.
hay Rob know any nice garage’s for rent?
thanks for all the work you do posting numbers and monitoring the blog.
741,741,741 ………….
vanreal said,
” First of all the war in Iraq does affect the American economy. In the seven years since Bush has been president the deficit and debt have skyrocketed. Not the case in Canada. This affects their economy whether you believe it or not”.
Have you ever heard about deficit spending in bad economic times to prop up the economy? It is good for the economy but bad for the US Dollar. %99.99 of the money they spend on Iraq war is paid to the US companies who supply the army and also US personnel whose family spend the money in US.
2(A general question):
How many times you can successfully ran red lights? Lets say; you ran them five, seven or even thirteen times without being hit by another car or being caught by cops; does it mean it is safe to do so and nothing bad is going to happen when you ran the next red light?
CheapMan, spending money you don’t have (i.e. deficit spending) contributes to inflation and this can lead to higher interest rates.
The US has offshored lots of its manufacturing so the spending is probably helping Asian businesses now instead.
Vanreal,
Real Estate gains in the US are also tax free. Up to $250k if you’re single, and $500k if you are married.
And as far as Canada and the US being apples and oranges, compare Van RE with this famous US graph by Robert Shiller:
http://tinyurl.com/zptel
Big run-ups in late 70’s, 80’s, and today. Big drops in early 80’s and 90’s. With the exception of the Hong Kong wave in the 90’s, it looks like a Van graph. I would say apples to apples.
“I clearly don’t buy that the stock market can match returns in RE over the past while, and if so, like I said to Confident, give me the number of that advisor. ”
Thats BS. If your advisor did not make you 10% annually the past 6 years then he should be fired. A competent advisor intune with the markets would have easily doubled your money the last 6 years that real estate has doubled.
Even a conservative portion invested in oil and gas as well as resource stocks would have doubled this money in well less than 6 years.
Is this not where all the the rich “oil and gas” Albertans are making their millions to buy out BC real estate as so many would like us to believe ? They made it investing in oil and gas and resource stocks,not working as clerks for $40,000 a year.
Regarding the debate about prices in San Diego, here is a sales/price chart as of the end of April. It breaks down existing homes and condos, new homes/condos and then aggregates all of them, county by county in San Diego.
http://tinyurl.com/29ycgq
What you see here is that not all parts of a metro market correct at the same time, just the way I expect Vancouver’s suburbs to correct before Vancouver proper, with the Westside being the last holdout. What it also shows is that builders of new condos and homes need to turn inventory and are far faster to drop their prices than existing home owners (other than flippers in trouble). Price reductions are over 20% in these cases. Of course eventually existing home prices will have to fall to be more in line with their new home competition. In the meantime existing home seller resistance to lowering prices accounts for skyrocketing inventory in San Diego and significant drops in selling activity despite the time of year.
You see similar patterns in other US markets. Even in the Bay Area, often cited as being yet untouched by corrections, this is only true so far for certain Bay Area counties and areas within those counties. For instance, while San Francisco county median prices are flat, there are areas within this county that are off more than 20%. In another Bay Area county, Sonoma, median prices are off 15%.
My point being that it is pure fallacy to discount the fact that many frothy markets in the US have not corrected significantly or are in the beginning stages of it. You can’t have new home/condo builders cutting prices 15-30% without this ultimately having a bearing on all housing prices. The US is roughly one year into its correction and about the same time frame ahead of us in terms of a run up starting. I expect more bloodletting in the US for the next 12 to 18 months or more. Corrections there and here in Vancouver typically last many quarters.
Not sure if this was posted here but Victoria prices are down in May,only slightly as in 1-2% but it is not up as the norm the last many months and May should be one of the best months of the year if this market is still considered to be hot.
The VREB spokesperson also said homes had to be “realistically priced” in order to sell. What does that tell you ? This booms cracks are now showing,only the fools are buying now.
Bobo may be right in pointing out the USA is different than Canada.
The Fed printed cheap money and it found its way into the subprime market.
In the US they call it subprime, suicide loans, ARM’s and exotic financing.
In Canada we call it a renewable mortgage.
Then there is the borderline predatory lending in Canada.
Bobo2 calls it” creative financing”.
Its exhausting debating 2 sides of the real estate coin. Especially when neither side has any data to back their claims. Bulls say onward and upward because it has and it is, bears say crash coming because it has before and the US has turned down. Nothing new to see here;move along folks.
Hey skeptic,
how you doing man? Seen Johnnyrent link above? Did you say something about S.D. prices?
Jim,
news in this business are not breaking news…..they take months or years to develop. But when they do they have the force of a large wave, both on the way up and on the way down……
crabman, Real estate gains in the US are only tax free if you buy another property.
vanreal said,
” First of all the war in Iraq does affect the American economy. In the seven years since Bush has been president the deficit and debt have skyrocketed. Not the case in Canada. This affects their economy whether you believe it or not”.
Some perspective.
The US deficit is about 2.6% of GDP and falling. It’s projected to be 1.4% in 2009. The debt to GDP ratio is about 65%.
The EU’s mandated ratios are 3% and 60%, which most of its largest members fail to meet.
On average, the budgets of US states are in surplus.
vanreal: there is also the homeowner exemption ($250k tax free for single, $500k tax free for married) for primary residence (i.e. tax free capital gain).
and for taxable capital gains, if you hold longer than 1 year, the tax you pay on a capital gain less 15% or less (may be 5% if you’re in a lower tax bracket). (whereas in canada if you’re in 50% tax bracket, you pay 25% on that capital gain!)
in the US, you may deduct $3k/year of accumulated capital losses against ORDINARY or other income (in canada you cannot).
in the US, people may hold a primary residence as well as a secondary residence. both you may deduct mortgage interest, strata/home owner association fees, insurance, property taxes, etc from your income.
Ontheisle:
You take 10% per year for the last 6 years. I’ll take the gains we saw in real estate multiplied by leverage. If you think the stock market gave returns like real estate you need to a) accept less actual money in your pocket and then b) argue that we need to compare apples to apples. The fact is that 600% returns on real estate aren’t uncommon recently. Just do the math.
Rob,
with all due respect, if you look at time series of real returns of stock market investments and RE over the past 100 years, the difference is striking:
1) Stock market investment has consistently given an average real return 5 to 6% higher than RE.
(source: Shiller, Google it if you don’t believe me).
2) Stock market investments are relatively easy to liquidate. Commissions are low compared to RE. Taxes and maintenance costs are lower for stocks.
3) The past years have been peculiar in many countries by most historical standard in that RE prices have been doing relatively better. There have been other periods in which this occurred in the past, and inevitably we have reverted to stocks outperforming RE.
In synthesis, given RE had a great run for the past few years, it makes a lot of sense for people to sell off and put money somewhere else (arguably stocks, if they can leave there for a while). At least this is the lesson from history. Alternatively, we can look at the past 6 years and make fancy stories on how RE is a heaven for money and will out-perform any investment alternative…..
“The fact is that 600% returns on real estate aren’t uncommon recently. ”
I think you are grasping at straws Rob, 600% ? please don’t insult our intelligence here, your credibility just went down immensely in my books.
If you are talking playing Mr. Land Developer flipping left and right then maybe you might make that 10 properties later. If you are going to compare a similar house flipper to a very active trader in the stock market then the stock flipper would make 10 times your 600 % easy.
What’s happening in the U.S.of A.:
Regarding the debate on the relationship between Canada and the US, I feel we should all step back a bit and recognize that it is difficult to make inference on local markets like Vancouver based on national data in the U.S. .
Nonetheless, there is a fair amount to learn from what is happening south of the border and we should be happy to discuss it openly.
So, to separate facts from fiction, can we state what is happening south of the border? Well, very much so!
Calculated Risk, in fact, does it for us tonight on an excellent post which I suggest to both bulls and bears (link follows):
http://calculatedrisk.blogspot.com/
So, who is going to tell me next that RE in America is doing just fine??
ontheisle:
Robs point is: 25% down on a million dollar house is 250k. House goes to $2.5 million in 6 years you get a 6 fold increase on your 250k(happened often). Of course that ignores cost of captital, holding costs, etc. Also Rob(the realtor in him perhaps?) ignores transaction costs and the fact that pricipal residences should be shelter first, and investments,oh,I don’t know, NEVER?
OntheIsle:
You say that properties have doubled. We all know that 5 years ago you could find lots of cash flow neutral properties with 25% or less down. Money has been cheap.
If I buy with 25% down and the property doubles I get 400%. Here’s the math: I buy for $100,000 with a $25,000 down payment. I have a $75,000 mortgage. The property doubles in value. Its now worth $200,000. I owe $75,000 (actually less, due to mortgage paydown). My equity is now $125,000. Equity gain/divided by original equity= percentage increase. (125,000-25,000)/25,000=400%.
Of course, some properties have more than doubled.
And of course, as some people never hesitate to point out, some amateur specu-investors bought with less than 25% down.
10% down ($10,000), 90% mortgage ($90,000), cash loss of $200 per month, $2400/year.
Property doubles. Its worth $200,000 now, and you owe $90,000, plus you’ve lost another $2,400/year for four years.
$200,000-$90,000 = $110,000.
$110,000 – (2,400*4) = $100,400
Divide the equity gain by the original equity and you get….100,400/10,000 = 1,004%.
Yes, leverage can be negative, but the fact is that real estate is commonly bought with mortgage financing, while stocks generally aren’t.
No, comparing leveraged real estate to to unleveraged stocks is comparing apples to oranges, but we’ve been down that road before. Real estate is not very liquid, has a big price ticket and has high transaction costs, but it has the balancing benefit of having a specialized leverage tool that is very easy to apply. You can’t ignore that.
Now, tell me: am I still insulting your intelligence with the tales of 600% return on investment? I manage hundreds of rental properties. I’ve seen it countless times and I have done it myself. When people complain that specuvestors have bought pre-sales with extremely low downpayments and then flipped them, they’re admitting what I’m saying.
As I said- do the math. 1 property. No flip. Buy and hold for 5 years. Cash flow neutral. Beats the hell out of 10% per year, frankly. Is it easy? No. High transaction costs. High entry price. Requirement to be risk tolerant. Are there benefits? Clearly. Tax, leverage, inflation hedge. There’s no question about it. This is textbook stuff. If you don’t find it credible you don’t understand it.
An active stock trader would make ten times my 600%, easy? (That’s 6000%, by the way). Great. Give me his number. I’ve got some money to invest.
Domus:
I’ve been collecting rent for a long time. I’ve seen a lot of people get pretty wealthy with real estate. I own investment real estate as well. If you want to argue that stocks are better, great. Fly at ‘er. If you want to argue that real estate doesn’t pay off, you, and anyone you quote, is demonstrably wrong. The lesson from history is to take the 5%-7% annual increase that we see here, leverage it, take advantage of taxes, and get double digit returns year after year.
Rob,
I believed the 600% gain you were referring to was a number based on the actual price paid six years ago versus what it sold for meaning multiple properties needed to accomplish this as in a house bought for $300,000 now being $600,000,thats a 100% gain in my books as you never stipulated wether it was 25%,50 or 100 % down payment.
If we are talking leverage as per a low downpayment as in your example then sure it is 400 % or whatever. Then in my case I can leverage my stock on margin and including all the various stock investing tools such as options,flow thru shares with 40% plus tax deductions,warrants, and basic trading tools that yes 6000 % is possible with the right broker who is in tune with oil,gas and resource stocks the last 6 years. As well I can borrow cash from the bank based on my income and leverage against that as well.
There are five to ten bagger stocks all over the place the past 6 years and these aren’t penny stocks,many of these were oil companies tha turned to income trusts that are still up triple or more even after the tax hit by the government. As well the stocks can be sold on a moments notice and not when someone decides to knock on my door with a check.
I can also play the market when it goes down as well as up where I have not heard of any option in real estate other than shorting the US home builders.
Rob: Is there a conflict of interest in being a large property owner, such as yourself, and therefore having a vested interest in continued RE appreciation, and advising clients that real estate is not likely to decline in value anytime soon?
Or do you steer clear of commenting on wether or not real estate is poised to decline, or that further appreciation is likely?
I would think a balanced approach for your clients would be to incorporate an element of market direction; over say a 1 year, 2 year, or 5 year, time frame. And if so what do you point to as likely market direction predictors?
Rob,
there must be a misunderstanding. I never said RE does not generate money for landlords. That would be just silly. I am just saying I strongly believe RE is not the best way to save and invest your money, especially for retirement purposes.
Of course many people think differently: houses are made of bricks and mortar, they can be touched. This is a big plus for many. I get that. For me: I just think in terms of opportunity cost (what I another investment would give me) and truly find no reason to buy RE in Vancouver.
One more thing: where did you get that 6% appreciation number you mention above. According to Sauder, appreciation of RE in Vancouver is much smaller than that over long horizons. More like 1% or 2% at most……which frankly tells me something about the what lies ahead.
Anyhow, if the market calms down and I decide to buy something in RE, I will search your advise. I owe you that much…..this blog is a great source of entertainment!
Rob, thanks for your detailed reply. I guess the challenge in this market is achieving your positive cash flow criteria. I find it interesting that you started focusing on the numbers, and then evolved towards putting a bit more emphasis on quality. That parallels Buffett’s evolution.
Thanks for putting the numbers up. People are so focussed on the big numbers, when the individual numbers for a deal are probably more important. But, as I said, I’m relatively clueless when it comes to knowing what the “right” numbers are, so I was interested in getting your perspective. (And I find it admirable that you’re making the decision not to squeeze your tenant.)
I’d agree with you that interest is the cost of money, but I nevertheless think Confident is right. If you strongly believe that a market is going to fall, be it real estate or any other market, it’s unwise to invest in that market, and particularly unwise to leverage yourself to do so. (Unless there’s so much positive cash flow from the investment that it more than makes up for the loss of capital.)
Plus, Confident says you have to consider the opportunity cost, which also seems reasonable. And that money spent on rent is similar to money spent on mortgage interest — both are costs, and you get something of value in return. That’s not to say that he’s right about where the market’s headed.
(It just kind of irritated me that he made a reasonable comment, and got “go buy a trailer home”. The value of these forums is in the number of reasonable people, like Jim, Confident, and you. Disagreement’s great, but slapping someone down when they try to make a reasonable point isn’t.)
I’d agree with you that you need to factor leverage into the long-term returns of real estate vs stocks. They are such different investments that I think it would be really hard to compare the actual returns you’d get in real life, once you factor in things like leverage, cost of money, pain-in-the-ass factor etc.
I’d agree with you that it would be pretty unusual for an unlevered stock portfolio to match the returns that levered real estate has done recently. If you were narrowly focussed on oil, you could have done it, but that would be taking on larger amounts of risk. (Though I guess one could argue that a narrow oil/gas portfolio has the same degree of diversification as a narrow single-city real estate portfolio.)
Rob, this wealth building theory of yours… Is it patented?
Let me see if I have the first basic steps …I buy some RE for 100k, and then wait for it to double every so often right?
I have been on the slow boat, but boy has it paid off! Own props in your town and down here, all different types (apt buildings by the ocean and in the ‘hood (even had a drive-by murder in the front yard of one of my props), ocean view homes, homes in the hills and a really plain home for me/my family that we will probably live in forever. Started in 1990. Scrubbed lots of tenants floors, told every word in the book by I don’t know how many tenants, extortion attempts from tenants, I scrimped, I saved, become pretty handy with the trades, cut corners to save money,but I always just kept going. Never got caught up in the stock market in late 90’s because it scared me as I didn’t understand it; real estate NEVER scared me because I think I understand it. I always listened to my gut, not the media. And lost most my best opportunities when I talked to too many people that scared me with their opinion/analysis. I am always ready to pounce when an opportunity comes up. Bought my last home here in Dec 06 and I’m challenging the tax assessment as they want 500K more than I paid for the property because I didn’t let my purchase price be public info, (that lesson may really cost me). I remember reading one of the self-help books back in the early 90’s that said when you look at someone who has it all- you have to realize that most likely there was 15-25 years of blood, sweat and tears. I’m one of those guys now! I truly believe that opportunity will always be around for Gen X, Y, and Z……..
Ontheisle, the difference between leverage in real estate and leverage in the stock market is that:
1. The stock market is more volatile.
2. The stock market has margin calls.
Combined, these things mean that 75% leverage in the stock market is far riskier than 75% leverage in real estate. One bad week can wipe you out.
In fact, I think that there are better than even odds that if you used 75% leverage in the stock market for 10 years, you’d lose 90-100% of your original capital in those 10 years.
If you want to make a comparison using stock market leverage, borrowing 20% would be a more reasonable number.
Plus, the fact that 10-baggers exist doesn’t mean that your entire portfolio is likely to be 10-baggers.
That said, I think the unleveraged stock market will outperform leveraged Vancouver real estate from here.
Lesser Ape,
I realize I was making an extreme case on the margin stuff as most would not invest that way as nor would I max out all on margin, but there are those that do with the right broker.You only have to hit a couple of triples on 25% of your porfolio til you can increase your leverage big if you wanted to.
People making 600% on real estate by maxing out every dime they have and then some for those with negative cash flows are then basically playing the same risk as the stock market this past year or two where the risk is the highest of all time and where we are one bad headline away from causing a whole lotta hurt and their 600% could be back to zero in no time. Just have to watch Flip This House lately,there are more losers than winners out there now and bigger losers.
There is a post above suggesting that the suburbs would depreciate first then (maybe) the west side.
Here’s some anecdotal evidence (which is arguably superior to theory-based speculation :).
In my mission neighbourhood…a new 200 or so home ‘ burb) there are 6 houses for sale within 150 meters of my house. Prices range from 360K-450. In the last 7 months, 3 sales and 3 still on the market. Not terribly hot, i’d say, but its a small sample.
I drove through Coquitlam, Port Coquitlam, and New Westminster during Victoria Day weekend, and saw a lot of “for sale” signs. More than I’ve seen in years, and not many saying “sold”.
okay, I exaggerated….mostly you would not have seen the returns of the real estate market in the five years. However, 300% returns have been “doable” because of the runup in resource stocks. Lower returns still very significant in the last few years…
I am not saying invest in stocks/don’t invest in real estate. I am saying now is not the time to get into real estate or add to your holdings. I won’t repeat my argument..it gets kind of boring.
I want to talk about the difference in the relationship with your broker compared to relationship with your realtor……
No more time right now. any commnents?
Rob,
I asked this question a few days ago, but no reply.
You talk about sales and good sale days, but those high winter like inventories are not mentioned. Why?
Sales just seem to be barely eating up the additional inventory coming on stream. One would think in a hot sales market like May/June that inventory number would be coming down, not stagnating at the level it is.
What’s your take on inventory levels? What level do you think it will take before we see some pricing relief?
“Real estate is not very liquid, has a big price ticket and has high transaction costs, but it has the balancing benefit of having a specialized leverage tool that is very easy to apply. You can’t ignore that.
“
Too true. But Rob, the flipside of your argument regarding 600% or 1000% return is kinda sucky for average Joe Homebuyer. If he wants to own a home, he must borrow to the eyeballs to get a piece of property that is unlikely to be suitable for his present needs (let alone his future ones), he must accept a level of risk many multiple times that he would never dream of accepting on his stocks & RRSPs, and he must accept a living standard well below what he could afford by renting.
Face it, with rent being so much cheaper than buying the financial argument for buying into real estate with heavy leveraging right now for 99% of buyers is predicated on a projected continuation of the last few year’s appreciation. Anything less, and the wallet suffers. In a roundabout way, you recognize this when you mention how hard it is to find good metrics. As I mentioned before, potential first time buyers have metrics too — and they include many of the same factors you use.
Frankly, I’m willing to grow my nestegg and rent (which with all due respect is not “doing nothing”) and shake my head while prices continue to rise, because even if we do see 10% or 15%+ appreciation in 2007, like you I don’t believe it will hold. And if it doesn’t hold, then buying in 2006 or 2007 would have been a disaster for me by 2008 or 2009.
Sure, I wish I could have bought in 2001. Thinking long term, I still don’t wish I bought in 2006. I’m on the fence about 2005.
“I asked this question a few days ago, but no reply.”
Seriously, does it really matter what Rob says, it’s all BS anyway.
The Sales/List, MOI, YOY, MOI, Median, and Average price stats are slick sales tools, and when these figures are further cropped, manipulated, and made to fit a customized argument and further restricted to a specific area, as with Rob’ it’s downright blatant worthless nonsense.
It’s typical. Last week the blog went from Bull s—t to Horse s—t , and then back to Bull s-t.
By the way, Rob, my point here (and in recent comments) isn’t so much that it sucks to be poor. Sure it does, and it sucks to not have the option to buy a home. My point is rather that the pool of potential first-time buyers is steadily dwindling, and that those who continue to buy do so generally at extremely high risk. They are getting less for their buck each passing month also.
I think this is the logical extension of your observation that good metrics are hard to find. Similarly, good reason to leave rentals and buy a home are hard to find. There may be some (e.g., marrying into wealth, bumping off a rich relative, leaving town…) but there aren’t enough to keep this market going.
Awum:
I never said this market won’t change. I said that 600% returns on investment haven’t been uncommon recently. I’m correct on that, btw, and its not lost on me that those returns go hand in had with the problem you highlight.
One thing:
we bears got it very wrong with inventory this month. Inventory did not decrease as in the past years, but it did not significantly grow either. I think 13,000 will be reached by middle July.
So, there are still quite a few people buying out there: some of them I know, and the reason they decided to buy is that:
1) they are young;
2) they want to establish families;
3) they are exhausted from a nervous point of view and decided they don’t want to wait any longer. In a way they are desperate to buy.
I keep on telling them to rent and enjoy their family life in rental accommodation for a couple of years, but they won’t listen: they put up angry faces and they claim, with a defeated attitude, that the market will never go down…..can’t argue with this compelling statements!
By the way, I don’t even remember when was the last time I talked to some investor thinking to add to their RE portfolio or to flip something. All I hear from the RE “expert” is that they are thinking of selling before the Fall…….must mean something……
By August or September, you’ll pass six months of inventory or more, even if sales remain hot.
Rob’s area may see up to 35,000 sales in 2007, which sounds like a lot. Subtract out those that are buying up, though. You soon see that the number of FTBs buying into the market in any given year doesn’t need to be that high (out of the grand total of bodies in the Lower Mainland) to keep feeding the monster. On the other hand, it wouldn’t take much for the FTB supply to dry up.
It’s a sensitive system, in other words. Someone suggested to me that the number of buyers actually goes up (temporarily) when mortgage rates rise, because of folks with mortgage pre-approvals temporarily holding lower rates. There has to be a down side to this sensitivity, too, but we haven’t much of that since we’ve had 5 years of sellers’ market. Domus’s young friends might change their desparate attitude pretty quickly if the market actually turned…
Not sure if this is common, but I’m beginning to think so when I talk to people. Younger home owners have dollar signs in their eyes thinking the good economic cycle will never slow, end or otherwise. No thought if they will still be able to afford their mortgage payments, car payments, credit card payments, if one of them ever gets laid off their job. The seem to believe the gravy train will never end and nothing will ever go wrong with housing prices, the economy, their jobs, health, etc. Or..maybe they just don’t care if they end up in foreclosure or bankruptcy.
Millionpitfall:
I share your view. Some young ones are reckless.
It is a bit like a circus, in which everyone is rushing into. Buy more car, house, club membership, gadgets. I would really like to see the saving rates figures disaggregated by age group.
One possibility is that many young ones expect to be bailed out by parents/relatives if things go wrong.
I think the fact that many of them have only lived through economic expansions can explain their recklessness: they do not know the ugly face of economic crisis and downturns. Their are the children of the “great moderation” era, the era with no business cycle.
I hate to be a party-popper, but this won’t last. It cannot last. When the bad times hit, they hit hard. And they will realize it, unfortunately for them.
Domus,
It’s like when your Grandparents or parents told you about the war and depression. You couldn’t ever see the economy getting that bad when you were young. Then you live long enough to go through a bad recession yourself. Then your opinion changes.
millionpitfall said: Sales just seem to be barely eating up the additional inventory coming on stream. One would think in a hot sales market like May/June that inventory number would be coming down, not stagnating at the level it is.
Actually last year in 2006 according to Rob’s numbers inventory climbed in May. We jumped from 8490 to 9186 (+696). May 2007 we went from 11,293 to 12,133 (+840). Listings, even in hot markets, often outpace sales.
While May is normally a strong sales month it is also a strong listings month. Listings usually go down later in the year (and not because of sales) but because less people are listing and more listings are expiring.
That’s interesting math. We also have 3,000 more listings than last May too. You must be a realtor, because any retailer would be concerned his inventory levels are not moving very well. Only the new stock arriving is being sold, while the 12000 plus inventory left in the store is sitting collecting dust.
Unfortunately the downturn won’t really start until there are no bears left.
millionpitfall: You must be a realtor…
No, I’m not a realtor.
“Only the new stock arriving is being sold, while the 12000 plus inventory left in the store is sitting collecting dust.”
That’s true. We’ll see more over 90s and expiries later this year . I recall last year over 90s hit the 30% range in late fall, maybe we’ll see that earlier this year.
If only new stock is being sold, then why have over 90s been falling/stable?
We just sold more this May than we did last May. Inventory levels don’t seem to be having the desired effect. And, of course, this inventory isn’t owned by a store owner. Some of it may not need to be sold. Considering that prices are rising and DOM is falling, I’d guess that people who need to sell are accomplishing their goals. That’s probably crazy talk though.
I think Rob is trying to wait until the inventory levels go down before answering my inventory question.
Rob,
I asked this question a few days ago, but no reply.
Asked this question this morning again, but no reply.
You talk about sales and good sale days, but those high winter like inventories are not mentioned. Why?
Sales just seem to be barely eating up the additional inventory coming on stream. One would think in a hot sales market like May/June that inventory number would be coming down, not stagnating at the level it is.
What’s your take on inventory levels? What level do you think it will take before we see some pricing relief?
And…no I’m not waiting for the market to crash or a major correction.
I genuinely think that a major correction would be good for the city, also economically (in the longer term).
Have you seen the latest immigration numbers at Sauder? Lowest in 20 years. People are not coming any more: on net, they are leaving. That can’t be good.
A correction sooner rather than later might still avoid a crash. Although i think the crash will come, as people are greedy………….
Million:
I’m having trouble getting some comments to appear. I’ve tried to answer your questions twice (although I can’t say that they’re very interesting questions).
I mention inventory everyday. I don’t spin it like you might spin it, but there’s nothing stopping you from spinning it, so spin away.
My thoughts on it are that it hasn’t hit the levels a lot of people thought it would, and it seems to have stalled.
It doesn’t seem to effect price.
It doesn’t make it easier to find product.
The last two don’t make sense, theoretically, but its the case.
I have no clue about what level we’ll need to hit to get price relief.
One wouldn’t think a hot sales market like May or June would do anything in particular unless one wanted the facts to somehow fit a predetermined view (as in May had huge sales but for some reason that still seems to be proof that bears are right).
There are assumptions made like “Sales track listings” and “Spring is a traditionally hot market”. There are grains of truth to the statements, but not much more. We’re having a strong year with several months in a row of slower appreciation than we saw in ’05 and ’06.