If you think Vancouver has low yields, check out other figures from parts of Asia, courtesy Global Property Guide:
Taiwan: Price Yields 2.84%
Hong Kong: Price Yields 3%
China: Price Yields 3%
India: Price Yields 3-4%
Those are some mighty poor cash returns, if I might say so. Certainly GPG holds back no punches calling bubbles in all the above countries and territories. Remember these are yields before expenses. In Taiwan, it is likely newly-minted landlords are making a 0% cap rate.
But before we pass off these countries as simply being in a giant asset price bubble fueled by low interest rates, it's worth asking why their yields are so much lower than in North America's. Certainly avid speculation and a lack of perceived viable investment alternatives may play a role. There is one fundamental statistic, however, that can justify lower yields: high rental and income growth rates. While inflation is high in these countries, incomes are continually outpacing inflation by a healthy margin as they play catch-up to the developed world. (Albeit Hong Kong is pretty darn first world!) This in turn increases the present value of future cash flows and justifies a lower present-day yield. This is a similar concept why single family dwellings in areas experiencing density increases have low yields: their future cash flows due to re-development will outpace expected rental growth of the current structure.
Rents in Hong Kong increased over 6% last year; in addition, it is estimated 90% of mortgage loans are variable rate, with the variable rate currently around 2% or so. But it is worth noting rental yields have been low for a long time, what Global Property Guide analysts attribute to the wealthy using property as a method of diversification. Though if rents are increasing at a healthy pace, there may be more to it than diversification. In addition, while the "wealthy" certainly have the luxury of throwing a few % of their net worths into real estate, the majority are blithely going along for the ride with a significant and relatively undiversified portion of their net worths.
It helps to look at these Asian countries' property markets since a large number of buyers and sellers in the Vancouver area originate from these countries. It gives us some perspective of the attitudes and comparables these buyers are using when determining the value of North American (and specifically Vancouver) real estate. That said, I have some concern that the economics that, in part, can reasonably justify lower rental yields in certain countries are being improperly applied to North America, where wage growth is limited close to inflation.
Showing posts with label rentals. Show all posts
Showing posts with label rentals. Show all posts
Monday, August 9, 2010
Sunday, June 20, 2010
Central1: The sheen is clearly off the housing market
You heard them. Read their report here (PDF). A few excerpts:
We now segue into Central1 on rentals:
The sheen is clearly off the housing market, with this week’s release of the MLS® data. As expected, residential home sales in British Columbia continued to trend lower in May. Sales fell for the seventh consecutive month, dipping 6.5% from April on a seasonally adjusted basis. Since reaching a market peak in October, annualized sales have fallen 30% to 75,500. The markets that led last year’s rise in activity, namely the Lower Mainland and Victoria, are now leading the downtrend.Note Credit 1 refers to seasonally adjusted (SA) sales. This blog typically refers to non-seasonally-adjusted (NSA) sales as do the real estate boards; both methods have their trade-offs: SA is good for comparing months long trends but NSA is more closely tied to the front-line effects of supply and demand. The seasonal adjusted data seem to indicate a persistent malaise of sales reminiscent of 2008 (though not as extreme). This was relatively obvious, given listings growth since the start of the year. Interestingly they claim an "unseasonal decline" in new listings for BC in May. Certainly in Vancouver and Victoria this did not seem to be true, however it looks like inventory is now not growing as fast, not because of a lack of new listings but because of a lack of sales and a large number of expiries. Remember that a recorded expiry, sale, or (usually) listing does not change the available housing stock.
On the supply side, B.C. recorded an unseasonal decline in the flow of new listings in May -- the first April to May decline since 2002. We expect to see a pattern similar to early 2008 emerge, where potential sellers hold back on listing their homes in response to higher inventory levels and price declines. However, month-end inventory levels will likely rise over the next few months as the new listings remain elevated and sales continue to trend lower.
We now segue into Central1 on rentals:
Results from Canada Mortgage and Housing Corporation’s semi-annual survey of the purpose-built rental market suggest that rental demand softened over the past year as higher unemployment, particularly among young workers, and a weaker economy slowed the rate of household formation. In addition, existing renters may have found alternative housing in the competing investor owned condominium rental stock or were induced into the ownership market by lower mortgage rates.A relatively bearish report on both the capital and income portions of the BC housing market.
Among British Columbia’s larger urban areas (populations of 10,000+), 21 of 27 markets reported higher townhome and apartment vacancy rates in April 2010 from a year earlier. The aggregate figure for all urban areas rose from 2.5% in April 2009 to 3.2% this year. Among B.C.’s largest markets, the largest relative increase occurred in the Victoria and Abbotsford Census Metropolitan Areas, while the Chilliwack Census Area was the only major market to report a drop in the vacancy rate. Additional slack in the rental market also impacted the rate of growth in market rents, which rose at a much slower pace in 2010. Average rents of properties in B.C. common to both the 2009 and 2010 survey samples rose by 2.2% this April, compared to 3.4% a year earlier.
Thursday, June 10, 2010
The Dirty Underbelly
I wanted to point people's attention to the blog Landlord Rescue, a fun blog to read on the trials and tribulations of a professional landlord in Ontario.
With BC property sales relatively weak (the pace for June sales is lower than May's; in strong markets it's almost always the opposite) but borrowing rates still relatively low compared to the 15 year average, we are likely to see many investors make a longer term commitment to become part-time landlords. Many if not most will find cash flows to be stable with little hassle. While they may not be making an exceptional return if they bought at recent prices, they won't necessarily have negative monthly carrying costs. It is certain, however, a select few will be stuck with significant problems. On average, revenue from real estate is less than headline rent and expenses more than regular maintenance and taxes, which is why professional landlords typically require some premium to account for this aggregated risk.
If you are thinking of renting out a property, it's worth considering what can and does happen every day to landlords. Perhaps reading Landlord Rescue concentrates too much on the fringe cases but, at least, I hope it gives some idea of what some landlords -- and not just the professionals -- will face in the coming years.
With BC property sales relatively weak (the pace for June sales is lower than May's; in strong markets it's almost always the opposite) but borrowing rates still relatively low compared to the 15 year average, we are likely to see many investors make a longer term commitment to become part-time landlords. Many if not most will find cash flows to be stable with little hassle. While they may not be making an exceptional return if they bought at recent prices, they won't necessarily have negative monthly carrying costs. It is certain, however, a select few will be stuck with significant problems. On average, revenue from real estate is less than headline rent and expenses more than regular maintenance and taxes, which is why professional landlords typically require some premium to account for this aggregated risk.
If you are thinking of renting out a property, it's worth considering what can and does happen every day to landlords. Perhaps reading Landlord Rescue concentrates too much on the fringe cases but, at least, I hope it gives some idea of what some landlords -- and not just the professionals -- will face in the coming years.
Friday, January 15, 2010
Seafield Update
This is a quick follow-up post to the post I made on the RTO decision (PDF) last year to raise rents at an apartment complex in the West End. A relatively exhaustive series of blog posts is covering the decision. Start here.
In my analysis I was intrigued the RTO decision interpreted the law that it needn't use any evidence forwarded by tenants in making its decision to markedly increase rents above the annual cap. It turns out, according to the Supreme Court of BC, you can't do that. The law was meant as a way of ensuring that extreme cases of low rents could be fairly addressed. Unfortunately, the law has been difficult to interpret and follow. This case highlighted how much variance there is in rents, even between comparable units. Variance in rents is due to dwelling location, amenities, and quality, and quality of tenant; the law does not address the latter factor in any way.
What will this decision mean? Well, for rents that are significantly below market, there is some argument for ensuring the law is kept in some form. The alternative is a situation where the rental cap is removed and there is a continual push on the Legislature to do just that. On a street level it likely won't have much impact at all. This part of the law that allows above-cap rent increases is rarely used because of the significant amount of research and time required to make a valid case.
Removing the rental cap has its own problems, most notably that landlords can use it as a way of eviction. There are provisions for preventing this but are not universally enforced. The other method BC landlords often resort to is moving in to the property for some months -- the law says it must be at least 6 months -- but it is the prerogative of the evicted tenant to confirm this and complain to the RTO. We heard about this situation for a recent Olympic rental.
The biggest myth around rental caps is that it keeps rents below their fair market value. This is patently untrue according to all the data I have seen. The data we do have on rents come from CMHC (see UBC Sauder School of Business graph (PDF)). Average rent is increasing in line with average income, about 1.8% per year, which is less than the rental cap of around 3-4%.
No matter what the laws and protections awarded to both tenants and landlords, we do know that the vast majority of tenants are not subjected to looming eviction or massive rental increases (or even rental increases at the cap for that matter...). When a business relationship -- which the tenant-landlord relationship is in its essence -- goes sour and trust is lost, the boundaries of law, fairness, and morality are tested on both sides. I know of both tenants and landlords who seem to be perpetually in some sort of conflict with the other. I wonder if it's worth the time and cost.
In my analysis I was intrigued the RTO decision interpreted the law that it needn't use any evidence forwarded by tenants in making its decision to markedly increase rents above the annual cap. It turns out, according to the Supreme Court of BC, you can't do that. The law was meant as a way of ensuring that extreme cases of low rents could be fairly addressed. Unfortunately, the law has been difficult to interpret and follow. This case highlighted how much variance there is in rents, even between comparable units. Variance in rents is due to dwelling location, amenities, and quality, and quality of tenant; the law does not address the latter factor in any way.
What will this decision mean? Well, for rents that are significantly below market, there is some argument for ensuring the law is kept in some form. The alternative is a situation where the rental cap is removed and there is a continual push on the Legislature to do just that. On a street level it likely won't have much impact at all. This part of the law that allows above-cap rent increases is rarely used because of the significant amount of research and time required to make a valid case.
Removing the rental cap has its own problems, most notably that landlords can use it as a way of eviction. There are provisions for preventing this but are not universally enforced. The other method BC landlords often resort to is moving in to the property for some months -- the law says it must be at least 6 months -- but it is the prerogative of the evicted tenant to confirm this and complain to the RTO. We heard about this situation for a recent Olympic rental.
The biggest myth around rental caps is that it keeps rents below their fair market value. This is patently untrue according to all the data I have seen. The data we do have on rents come from CMHC (see UBC Sauder School of Business graph (PDF)). Average rent is increasing in line with average income, about 1.8% per year, which is less than the rental cap of around 3-4%.
No matter what the laws and protections awarded to both tenants and landlords, we do know that the vast majority of tenants are not subjected to looming eviction or massive rental increases (or even rental increases at the cap for that matter...). When a business relationship -- which the tenant-landlord relationship is in its essence -- goes sour and trust is lost, the boundaries of law, fairness, and morality are tested on both sides. I know of both tenants and landlords who seem to be perpetually in some sort of conflict with the other. I wonder if it's worth the time and cost.
Saturday, October 24, 2009
Rental Rates
An article in the local newspaper the Georgia Straight indicates the effects of low interest rates.
"Growing concern?" For whom exactly? The public housing that is offered by MVHC is often at a very low vacancy rate. The concern is, apparently, for MVHC's profits, not so much the tenants taking on high amounts of debt, though as a good Samaritan I would be concerned for both MVHC and the tenants. What is interesting, though, is an indication that the affordable rental market is predicting trouble filling its units. To fill the units they need only drop the price by some amount to attract more applicants, which will certainly hurt their profitability to some degree. I have little doubt they are capable of filling their units to near 100% capacity, but the luxury often awarded to these professionally-run outfits is they leeway choosing their tenants at the expense of charging slightly below-market rents. This luxury may be starting to evaporate. That produces a dilemma for the PMs: take a chance and rent to a suspect tenant or leave the unit vacant. If this is the course they take, profitability can drop by more than the implied decrease in profitability due to lower market rents.
We are hearing reports of weakness in the rental market, likely because of the combination of rising unemployment (causing people to use dwellings more efficiently) and continued dwelling completions exceeding the population growth rate. Low interest rates have allowed the choice of owning to be viable for many more compared to last year -- and a great many obviously prefer to own -- but someone choosing to own instead of rent does not change the overall dwelling supply. The weakness we are witnessing in the rental market is an indication of too much supply for what the population is willing to support. That does not bode well for residential construction starts in the next while, nor are sizable rent increases likely to stick en masse. That sounds awfully deflationary to me.
Hat tip to German Guy.
The Metro Vancouver Housing Corporation is losing many of its moderate-income tenants to the housing market.
With variable mortgage rates going as low as 2.25 percent, plus incentives being offered by sellers, families are buying homes and moving out of affordable rental properties operated by the public housing body, according to a report by regional housing manager Don Littleford.
Although this may be good news for the real-estate industry, Littleford noted in his report—to be received tomorrow (October 23) by the MVHC board—that this is a matter of “growing concern”.
"Growing concern?" For whom exactly? The public housing that is offered by MVHC is often at a very low vacancy rate. The concern is, apparently, for MVHC's profits, not so much the tenants taking on high amounts of debt, though as a good Samaritan I would be concerned for both MVHC and the tenants. What is interesting, though, is an indication that the affordable rental market is predicting trouble filling its units. To fill the units they need only drop the price by some amount to attract more applicants, which will certainly hurt their profitability to some degree. I have little doubt they are capable of filling their units to near 100% capacity, but the luxury often awarded to these professionally-run outfits is they leeway choosing their tenants at the expense of charging slightly below-market rents. This luxury may be starting to evaporate. That produces a dilemma for the PMs: take a chance and rent to a suspect tenant or leave the unit vacant. If this is the course they take, profitability can drop by more than the implied decrease in profitability due to lower market rents.
We are hearing reports of weakness in the rental market, likely because of the combination of rising unemployment (causing people to use dwellings more efficiently) and continued dwelling completions exceeding the population growth rate. Low interest rates have allowed the choice of owning to be viable for many more compared to last year -- and a great many obviously prefer to own -- but someone choosing to own instead of rent does not change the overall dwelling supply. The weakness we are witnessing in the rental market is an indication of too much supply for what the population is willing to support. That does not bode well for residential construction starts in the next while, nor are sizable rent increases likely to stick en masse. That sounds awfully deflationary to me.
Hat tip to German Guy.
Friday, April 24, 2009
Raising Rents
An interesting case study of the provincial government’s law allowing landlords to raise rents above rent control to market rates was recently put to use with the residents of a West End apartment unit. You can read the news coverage here and here and, if you are truly interested in what is required under the Residential Tenancy Act's provision for Rental Increases, read the entire decision (pdf).
This is a bit of a long post but if you have interest in this case, you may also be interested in reading on.
In order to apply for a rent increase above the rent control limit, a landlord must show specific and comparable units whose rents are above what would be possible under normal allowed rental increases. The ruling went partially in favour of the landlords, who recently bought the units, and are looking to increase their profits.
Whether you agree or disagree with this provision in the Residential Tenancy Act is one thing. I would like to offer some commentary on how this particular case went and some observations I see ignored by the news coverage, the landlords, and the tenants.
Be Specific
It is immediately obvious the Dispute Resolution Officer (DRO) was required to use specific and comparable rents in deciding the outcome. For the most part the decision provided little in the way of specific rents from comparable units from tenants. The DRO used only a handful of comparable properties in making the final decision, all from the landlord.
In the decision the DRO has stated:
An interesting interpretation of the Act; it effectively cuts the tenants from having their data used as balancing evidence. Scary perhaps. But if it's any solace most landlords don't resort to such rent increases, and not because they are bad businesspeople.
It is probably fair to say the landlords filtered units for rents that were purposefully higher than those in the units they own. It would be silly of them to present units that do not maximise the rents they can charge. But, yes, they are allowed to do this.
The tenants have learned the hard way that, while they needed to find specific and comparable examples to their units, when it came time to make the decision, it didn't seem to matter. Given all tenants in that neighbourhood have an incentive to keep their rents down, the tenants should have had no problem finding comparable rents that were not cherry-picked to be high. What I am not sure of is what burden of proof tenants are required to show to have their evidence considered and accepted. This is certainly a valuable lesson to be learned by others who may find themselves in a similar situation.
Subprime Tenants
What is often missed by looking at listing rents is that renters, like mortgage applicants, have different credit ratings. I am sure landlords will agree that there are tenants that are duds. If a landlord were to rent to such a tenant, to compensate for the added risk of taking on a deadbeat tenant, he should charge a premium.
Why this is important is that, while the Act looks at comparable rents to make a decision, no weight is given to the quality of the current tenants. It could be these tenants are “golden”; maybe they always pay their rents on time, perhaps even taking on repairs themselves since the rent is so good. The previous owner may have accepted lower rents because the risk was exceptionally low.
With new landlords, these unfortunate tenants have effectively lost their built-up credit and business relationship with the previous landlord. To be fair, the new landlords don’t know these tenants from a hole in the ground so are, perhaps a bit naively, treating them as any generic off the street renter. By raising rents to market rate, they are effectively raising rents to what they would charge a tenant with no “credit” history.
What are the current tenants to do? Perhaps they will accept the rent increase, act in good faith, and try to build up their past good favour again with the new boss. This will manifest itself by below inflation rent increases as the landlords realise the tenants are actually “prime” tenants. This assumes the landlord places value on low maintenance tenants. Not all landlords think this way, in which case I would strongly advise the tenants to find a landlord who does. There is no easy way to win a war with a slum lord, or even a landlord looking to offer a premium service for a premium price.
The problem now for the landlords, unfortunately, is that by taking an adversarial approach, they will most likely be paying more than they would should the rents have been raised at a smaller rate. The tenants who decide to stay will undoubtedly “work to rule”. Perhaps the little repairs and renovations they did to save their previous landlord money are now left to the landlord to handle. Perhaps heats are turned up a little too high.
It is hard to really know the motives of the landlords. It could be they are hardnosed businesspeople who will run this rental complex like a generic high turnover unit. This is their prerogative of course but this comes at a much higher operations cost than would a stable lot of tenants, either through higher turnover or greater wear and tear. To be fair, some landlords charge high rents but offer a high quality service to compensate. Perhaps they paid a high price for the units and the only way to stay cash flow positive is to jack up the rents. I don't know anything specific about the actual owners in this case.
All’s Fair
The third thing to note about this sad affair is that, while the Act’s arbitrator has decided for a marked rent increase, the court of public opinion is much more divided and angry. Rent control and the treatment of seniors (of which some of the tenants happen to be) seem to trigger an emotional response. I am sure the landlords have faced added stress and complications by having these tenants go to the local press. Tenants certainly played the sympathy card well, given the high level of media coverage.
I am sure readers here have an opinion on this case. It is a complex issue and I have sympathies for both sides of which I will not expand upon much. But I will say that it’s completely fair game for the tenants to have brought in the media who effectively sensationalised this story. Like it or not, a free press is, well, free to report on these stories as they see fit.
Actually, it was a decent strategic and tactical move on the part of the tenants, worthy of careful study in business schools. The landlords, while likely pissed off, should not be too surprised they are receiving such attention, as should any businessperson trying to make money through uncomfortable situations such as this one. Par for the course, guys. I doubt, though, these landlords really thought media coverage likely before they bought.
In the end, the landlords received a partial increase in rents for some of the units, to be phased in over a course of several months. But with them having an entire building of pissed off (and possibly high quality) tenants who can make the landlord's life miserable or move out and be replaced with what could well be higher maintenance and riskier tenants, I wonder if their investment is really going to be a good one in the end. It could also be that these rents were just too low.
This is a bit of a long post but if you have interest in this case, you may also be interested in reading on.
In order to apply for a rent increase above the rent control limit, a landlord must show specific and comparable units whose rents are above what would be possible under normal allowed rental increases. The ruling went partially in favour of the landlords, who recently bought the units, and are looking to increase their profits.
Whether you agree or disagree with this provision in the Residential Tenancy Act is one thing. I would like to offer some commentary on how this particular case went and some observations I see ignored by the news coverage, the landlords, and the tenants.
Be Specific
It is immediately obvious the Dispute Resolution Officer (DRO) was required to use specific and comparable rents in deciding the outcome. For the most part the decision provided little in the way of specific rents from comparable units from tenants. The DRO used only a handful of comparable properties in making the final decision, all from the landlord.
In the decision the DRO has stated:
The landlords do not have to prove that the rent is significantly lower than all comparable rental units, but merely have to prove that there is evidence that in the current market, there exist similar rental units which attract a higher rent than what is currently being paid for the subject unit
An interesting interpretation of the Act; it effectively cuts the tenants from having their data used as balancing evidence. Scary perhaps. But if it's any solace most landlords don't resort to such rent increases, and not because they are bad businesspeople.
It is probably fair to say the landlords filtered units for rents that were purposefully higher than those in the units they own. It would be silly of them to present units that do not maximise the rents they can charge. But, yes, they are allowed to do this.
The tenants have learned the hard way that, while they needed to find specific and comparable examples to their units, when it came time to make the decision, it didn't seem to matter. Given all tenants in that neighbourhood have an incentive to keep their rents down, the tenants should have had no problem finding comparable rents that were not cherry-picked to be high. What I am not sure of is what burden of proof tenants are required to show to have their evidence considered and accepted. This is certainly a valuable lesson to be learned by others who may find themselves in a similar situation.
Subprime Tenants
What is often missed by looking at listing rents is that renters, like mortgage applicants, have different credit ratings. I am sure landlords will agree that there are tenants that are duds. If a landlord were to rent to such a tenant, to compensate for the added risk of taking on a deadbeat tenant, he should charge a premium.
Why this is important is that, while the Act looks at comparable rents to make a decision, no weight is given to the quality of the current tenants. It could be these tenants are “golden”; maybe they always pay their rents on time, perhaps even taking on repairs themselves since the rent is so good. The previous owner may have accepted lower rents because the risk was exceptionally low.
With new landlords, these unfortunate tenants have effectively lost their built-up credit and business relationship with the previous landlord. To be fair, the new landlords don’t know these tenants from a hole in the ground so are, perhaps a bit naively, treating them as any generic off the street renter. By raising rents to market rate, they are effectively raising rents to what they would charge a tenant with no “credit” history.
What are the current tenants to do? Perhaps they will accept the rent increase, act in good faith, and try to build up their past good favour again with the new boss. This will manifest itself by below inflation rent increases as the landlords realise the tenants are actually “prime” tenants. This assumes the landlord places value on low maintenance tenants. Not all landlords think this way, in which case I would strongly advise the tenants to find a landlord who does. There is no easy way to win a war with a slum lord, or even a landlord looking to offer a premium service for a premium price.
The problem now for the landlords, unfortunately, is that by taking an adversarial approach, they will most likely be paying more than they would should the rents have been raised at a smaller rate. The tenants who decide to stay will undoubtedly “work to rule”. Perhaps the little repairs and renovations they did to save their previous landlord money are now left to the landlord to handle. Perhaps heats are turned up a little too high.
It is hard to really know the motives of the landlords. It could be they are hardnosed businesspeople who will run this rental complex like a generic high turnover unit. This is their prerogative of course but this comes at a much higher operations cost than would a stable lot of tenants, either through higher turnover or greater wear and tear. To be fair, some landlords charge high rents but offer a high quality service to compensate. Perhaps they paid a high price for the units and the only way to stay cash flow positive is to jack up the rents. I don't know anything specific about the actual owners in this case.
All’s Fair
The third thing to note about this sad affair is that, while the Act’s arbitrator has decided for a marked rent increase, the court of public opinion is much more divided and angry. Rent control and the treatment of seniors (of which some of the tenants happen to be) seem to trigger an emotional response. I am sure the landlords have faced added stress and complications by having these tenants go to the local press. Tenants certainly played the sympathy card well, given the high level of media coverage.
I am sure readers here have an opinion on this case. It is a complex issue and I have sympathies for both sides of which I will not expand upon much. But I will say that it’s completely fair game for the tenants to have brought in the media who effectively sensationalised this story. Like it or not, a free press is, well, free to report on these stories as they see fit.
Actually, it was a decent strategic and tactical move on the part of the tenants, worthy of careful study in business schools. The landlords, while likely pissed off, should not be too surprised they are receiving such attention, as should any businessperson trying to make money through uncomfortable situations such as this one. Par for the course, guys. I doubt, though, these landlords really thought media coverage likely before they bought.
In the end, the landlords received a partial increase in rents for some of the units, to be phased in over a course of several months. But with them having an entire building of pissed off (and possibly high quality) tenants who can make the landlord's life miserable or move out and be replaced with what could well be higher maintenance and riskier tenants, I wonder if their investment is really going to be a good one in the end. It could also be that these rents were just too low.
Tuesday, March 17, 2009
Owner’s Equivalent Rent
A question surfacing recently on local blogs and forums has been how to properly value owner-occupied housing. The concept of “owner’s equivalent rent”, the effective rent an owner-occupier pays to carry a property, can be used to justify a property’s value. Such a concept would require setting equivalent rent based upon what other owner-occupiers pay, a slightly unsatisfying exercise for the value investor. A more palatable method would be to find equivalent investment properties and see what rents they command but this is not always easy. It begs the question: how does one ground a property’s value when there is little in the way of equivalent local rentals to do so?
A recent article in the Vancouver Sun had three local pundits involved in the real estate industry give their comments about the local real estate market. While I cannot encourage you to read it fully, I did pick up on a few items Dr. Tsur Somerville from the University of British Columbia has said about his research in how real estate markets behave with a significant portion owned by owner-occupiers.
Q: You said the investment piece is gone: Does that mean that the froth is not going to happen again? (If people aren't buying as investment properties, what would happen with price?)
Tsur Somerville: A couple of issues: No. 1, we don't actually really understand what goes on with investment real estate. When you look at research and studies, it is because home owner/occupiers are such a big piece....
Q: How big?
Tsur Somerville: Since we don't actually 100 per cent know which unit is which. But if you take the Lower Mainland and [calculate] 2.5 million people, 2.6 people per household, that's 800,000 households, 60 per cent homeownership [so] 480,000 households.
The investment piece is still very small in the overall number. It's highly concentrated in certain product types, downtown condos, certain suburban high rise buildings. Overall, it's not a big story. Going forward, we have two things we don't really understand, which is what are those people going to do?
What Dr. Somerville is commenting on is that when owner-occupiers make up a significant portion of a housing pool, it becomes more difficult to determine motivations of marginal players when existing data lump investors and owner-occupiers in one pool, especially when the “investment piece is still very small,” say, 40% of total households.
Joking aside, what I believe is implied is many people place a monetary premium on ownership and motives for buying and selling are not always strictly financial, hence the difficulty in separating true “investors” from the rest. (this blog discussed the concept of the "ownership premium" here.) The “non-investment” focus of marginal owner-occupiers therefore adds uncertainty to the behaviour of the market. He states that there is segmentation between owner-occupied and rental housing, or at least that is the perception, meaning that valuing entire neighbourhoods based upon the whims of investors not heavily involved in the market is questionable.
From a value investment perspective, to determine the net present value, we sum a property’s expected discounted net cash flows. We should also remember that undensified detached housing can justifiably carry a premium over today's rent as the property could be redeveloped in the future so as to increase its utility (as discussed here) and possibly a "gentrification" premium AKA location-location-location in some circumstances (see m-'s great post for some interesting data and analysis). Determining net present value with many equivalent properties with known rents is simple; unfortunately it is more difficult when properties have few direct comparisons. It is possible that in certain neighbourhoods the one or two rentals offering true comparables do not provide enough of a sample to truly gauge what rents would be for other properties. This can even be true for a seemingly normal property with a high finish quality where the neighbourhood's rentals are not renovated to the same degree.
Buyers are therefore left looking at comparable sales in the same geographic location to determine value, in part because neighbourhoods and even adjacent blocks can significantly vary in price. I doubt very much rental data enters into most owner-occupiers’ heads when determining a fair price yet it is an important and almost necessary clue when determining a property’s value ex speculation. Perhaps it is a stigma associated with comparing “the renters” to “the owners”; an admission a property can be rented out at all goes against the concept of “achieving” ownership, or maybe it is just making the buying decision simple: find five comparable sales, offer about that, and Bob’s your uncle. Alas, this is not my idea of value investing.
Believe it or not, even “high quality” houses are rented out. A quick search of Craigslist turns up a few “high quality” rentals, as examples (not sure if they’re “real” or not; these props will likely disappear so maybe do your own search...):
You can calculate how much these properties would be worth as net present value and compare to their rough market values. There are not too many examples of higher quality rentals, however, and we are still left with the problem that a specific neighbourhood will likely reveal few, if any, equivalent rentals for a property for sale.
Yet even from the close to nonexistent comparables, we can still make some assumptions. In the absence of direct data we can look at high quality rentals across the entire region and compare them to lower quality rentals in their respective areas. This will give a rough indication of the premium higher quality demands in the rental market. From this we can look at a larger set of “high quality” compared to “lower quality” rentals and apply a factor to determine equivalent value for a certain “higher quality” property. The concept is simply that there are many neighbourhoods that are effectively comparable, even if separated geographically.
Using comparables from other neighbourhoods is roundabout method of determining value. The uncertainty is higher and my guess is Realtors won’t like the concept one bit; after all isn’t all real estate local? But we need something, even if it’s using deductive inference, or the market is not grounded on anything but sentiment and margins.
Many neighbourhoods have a large mix of both rental and owner-occupied properties so the problem of determining value for the value investor is less severe. For some neighbourhoods, say close to UBC for example, the concept of determining value for predominantly owner-occupied properties I am sure can seem daunting. Even in the face of such high noise, using a bit of deduction, an expanded "virtual" rental market provides us with enough of a tangible signal highlighting how much "high quality" properties are currently priced above what the rents say they are worth.
Wednesday, March 4, 2009
The Rental Shortage
The Tyee has had an interesting series of articles on the housing market of late and the latest in their installment is The Path to New Rental Homes: One Broker's View by guest poster David Goodman. I encourage you to read the post as it highlights some of the technicalities surrounding building rental housing in the Vancouver area. Certainly it seems, on the surface, to be a bit of a quagmire.
First he starts off by setting the scene:
Purpose-built rental housing is not being built because of more profitable alternatives to the developers, namely selling it to someone else to deal with. I laugh when I realise the rental vacancy stats Mr. Goodman cites don't include small time landlords to whom his developer acquaintances sell. I am sure regulation plays some part but give me a break -- even if we remove every shred of red tape surrounding rental units it still wouldn't make sense UNTIL THE RENTS CAN COVER THE THE CARRYING COSTS.
It is laudable Mr. Goodman's suggests to streamline the ability to build purpose-built rental housing again but to think doing so will suddenly swing developers into the rental camp again is a bit too "rich" for me, at least until land values drop or rents increase to where it makes financial sense. I encourage him to keep priming the pump for such an eventuality.
First he starts off by setting the scene:
During my 26 years in apartment sales, I've heard on at least 50 separate occasions developers commenting that "even if the land is thrown in for free, we cannot make the numbers work on a new rental building." As a result, the Vancouver vacancy rates stands at 0.5 per cent, the age of the average purpose-build rental is 50 years plus, and local developers attempting to produce new rental housing are likely to lose money.So developers cannot "make the numbers work"? Sounds reasonable. But I don't really get it. The vacancy rate is low, apparently signaling low supply. I would expect rents to increase to compensate for the low vacancy rate. I wonder why rental rates aren't increasing -- maybe the vacancy rate isn't as low as he is citing? He continues:
Things changed considerably in the early 1970s when the strata condominium was introduced to the market. This new concept provided buyers, including tenants, the opportunity to purchase and own their own suite rather than pay rent. Prices paid for condominiums were soon much higher than rental apartments. As a result, land quickly increased in value to reflect the fact that building condominiums was significantly more profitable than building rental apartments. Accordingly, except for very few special situations, the construction of purpose-built rental properties ceased. This situation has not changed much since the 1970s.Ahh now we get to it. The reason purpose built apartments have not been built is because building condos is more profitable. It certainly seems that, given the horrid price to rent ratio in the city, any developer would be batshit crazy to build something with cash flows unlikely to cover debt repayments and other carrying costs (except with a large downpayment of course! haha).
Over many years, the developers of condominiums would assemble single-family lots in apartment-zoned areas or seek to rezone former industrial sites. Unfortunately, we have almost exhausted the conventional source of residential development land throughout the Lower Mainland. As a result, the cost of multi-family zoned land and the resulting new condominiums have increased much further in Vancouver compared to other parts of Canada. This is one reason why we have all heard of some prime Vancouver sites selling at over $200 per square foot gross buildable at the recent peak of the market.The old faithful "running out of land" argument. Can we be so sure about this? Maybe it seems land supply is tight because there are so many projects under construction? The population didn't suddenly explode in the past 5 years and hit the buildable land brick wall. It is entirely possible what we are witnessing is underutilisation of existing housing and speculation. If we were truly land constrained wouldn't real rents be increasing as well? Strange how they are not.
I have learned to appreciate the important real estate concept known as "highest and best use" in considering the value of real estate.Developers and value investors share this philosophy. But the difference is what "value" means. For the developer it's a very simple and short term calculation: build within one or two years and sell, pre-sold or on spec, to someone else, likely a speculator (in one form or another). This dude either occupies it, using the full brunt of his ownership premium, keeps it dark for a flip, or rents it out at a yield a developer wouldn't touch with a ten foot barge pole. Value investors, on the other hand, look at "highest and best use" more on what cash flow is possible. It may mean re-development but only because doing so generates higher rents to compensate for the construction costs and delay in occupancy. I have no clue the thought patterns of Mr. Goodman's current clients though I would expect, given they are the "dudes" buying the bags, it's not exclusively a value play.
Purpose-built rental housing is not being built because of more profitable alternatives to the developers, namely selling it to someone else to deal with. I laugh when I realise the rental vacancy stats Mr. Goodman cites don't include small time landlords to whom his developer acquaintances sell. I am sure regulation plays some part but give me a break -- even if we remove every shred of red tape surrounding rental units it still wouldn't make sense UNTIL THE RENTS CAN COVER THE THE CARRYING COSTS.
It is laudable Mr. Goodman's suggests to streamline the ability to build purpose-built rental housing again but to think doing so will suddenly swing developers into the rental camp again is a bit too "rich" for me, at least until land values drop or rents increase to where it makes financial sense. I encourage him to keep priming the pump for such an eventuality.
Friday, January 23, 2009
Developer Turns Condos into Rentals
I came across this interesting article -- from January 2007 -- about a developer named David Franco turning an unbuilt Washington DC development from luxury condos into rentals. To quote:
"In many cities, banks have significantly scaled back loans to condominium builders. Some have demanded that developers sell half or more of the units in a building before even beginning construction.
In hopes of salvaging something from their costly plans, hundreds of developers like Franco are looking to the strong market for apartments, planning to rent their units for at least a couple of years while waiting for today's condo surplus to shrink.
After six weeks of failing to lure more than a couple dozen buyers, Franco and his partner, Jeff Blum, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings."
Read the whole thing. Like a book we've already read, today we hear this:
"In the face of sales that have ground to a halt, Wall Financial Corp. has decided to scrap its 414-unit Wall Centre False Creek condominium project in favour of building rental apartments on the site, company principal Peter Wall said in an interview.
In its last quarterly financial results, Wall Financial said it had sold almost 30 per cent of the Wall Centre Creek's units, 120 in all, but that sales had come “to almost a complete stop” during the quarter."
I see. What an innovative concept! Vancouver hasn't seen any substantive purpose-built rentals for years now so sounds like a winner; a real contrarian move. Surprised nobody else has thought of that. I would love to see how Mr. Wall pitches this idea to his financial backers, or is he using his own money?
"In many cities, banks have significantly scaled back loans to condominium builders. Some have demanded that developers sell half or more of the units in a building before even beginning construction.
In hopes of salvaging something from their costly plans, hundreds of developers like Franco are looking to the strong market for apartments, planning to rent their units for at least a couple of years while waiting for today's condo surplus to shrink.
After six weeks of failing to lure more than a couple dozen buyers, Franco and his partner, Jeff Blum, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings."
Read the whole thing. Like a book we've already read, today we hear this:
"In the face of sales that have ground to a halt, Wall Financial Corp. has decided to scrap its 414-unit Wall Centre False Creek condominium project in favour of building rental apartments on the site, company principal Peter Wall said in an interview.
In its last quarterly financial results, Wall Financial said it had sold almost 30 per cent of the Wall Centre Creek's units, 120 in all, but that sales had come “to almost a complete stop” during the quarter."
I see. What an innovative concept! Vancouver hasn't seen any substantive purpose-built rentals for years now so sounds like a winner; a real contrarian move. Surprised nobody else has thought of that. I would love to see how Mr. Wall pitches this idea to his financial backers, or is he using his own money?
Saturday, December 6, 2008
Greater Vancouver Price / Rent Ratio
House prices in Greater Vancouver are overpriced and consequently the rental yield on properties is very low. The chart above (click to enlarge) shows the long term detached house price adjusted for inflation, the inflation adjusted rents for a 3 bedroom apartment and the price to rent ratio for the benchmark detached family home (I used a multiplier of 2 on the 3 bedroom apartment rent to represent the benchmark detached rent).
The price to rent ratio is at all time highs by a long shot with monthly rent representing 1/300th of the purchase price of a home. In some cases the ratio is much worse.
Any analysis of price vs rent would be ignorant if it did not account of the cost of capital, which is represented here by the five year mortgage rate. Mortgage rates were extremely high in the early 1980s and prices were also very high so the mortgage payment to rent ratio was extreme. It peaked in the third quarter of 1981 at 3.5 times equivalent rent to purchase the same property. In the current cycle we peaked at 2 times rent for equivalent properties. Clearly affordability was worse for a brief time in late 1980 through early 1982 compared to today.
The risk today is of course the prices themselves but the risk of mortgage rates rising is an additional risk that mortgage renewers must keep in mind. Would they be able to absorb an unexpected drop in house prices of 20% combined with a rate increase of 2-3%? Variable rate mortgage holders are in for just such a surprise over the next couple years. Fixed rate mortgage holders may dodge the bullet on the rate increase but the price decreases may leave them feeling a little trapped, especially if the payee loses his or her job.
Thursday, December 4, 2008
Ratio of Owners to Renters
I was thinking about the state of the current real estate market in Greater Vancouver and I was wondering where future buyers of real estate are going to come from given the abysmally low current sales levels and the atrociously high prices. Who can afford to buy and how big is that pool of buyers compared to the population.
I had a look at the historic census data on home ownership versus renters in 1991, 1996, 2001, and 2006 and this is what I found. CMA = Census Metro Area.
In 1991, there were 588,590 occupied dwellings in the Vancouver CMA. 334,420 (57%) were owner occupied. 254,170 (43%) were rented.
In 1996, there were 692,720 occupied dwellings in the Vancouver CMA. 411,400 (59%) were owner occupied. 281,320 (41%) were rented.
In 2001, there were 758,390 occupied dwellings in the Vancouver CMA. 462,645 (61%) were owner occupied. 295,745 (39%) were rented.
In 2006, there were 816,770 occupied dwellings in the Vancouver CMA. 531,725 (65%) were owner occupied. 285,045 (35%) were rented.
We can safely assume that the owner occupied percentage has not fallen from the 2006 level. The current housing bubble was born out of a natural predilection towards home ownership and demographic trends, developed rapidly via low interest rates, and grew into a fat, disgusting beast via irrational ownership psychology and greater fool mentality. It is now time to pay for these excesses. Some of the excesses were part of the natural cycle but the bubble developed out of the unnaturally low interest rate environment and the bubble mentality
Given the above data, I just don't see any turnaround soon. Most of the potential buyers are gone. There are no more greater fools. The supply of homes for sale continues to build but there are very few willing buyers at todays prices. I expect that some renters may be convinced to buy if prices came in line with rents but this pool of buyers has shrunk over the past 20 years so there is little opportunity. Add to this the fact that many baby boomers will be looking to downsize from their large suburban homes into smaller dwellings over the next 10 - 15 years and you have a recipe for a very long and deep correction in housing.
Statistics from here. http://www.metrovancouver.org/about/statistics/Pages/KeyFacts.aspx
I had a look at the historic census data on home ownership versus renters in 1991, 1996, 2001, and 2006 and this is what I found. CMA = Census Metro Area.
In 1991, there were 588,590 occupied dwellings in the Vancouver CMA. 334,420 (57%) were owner occupied. 254,170 (43%) were rented.
In 1996, there were 692,720 occupied dwellings in the Vancouver CMA. 411,400 (59%) were owner occupied. 281,320 (41%) were rented.
In 2001, there were 758,390 occupied dwellings in the Vancouver CMA. 462,645 (61%) were owner occupied. 295,745 (39%) were rented.
In 2006, there were 816,770 occupied dwellings in the Vancouver CMA. 531,725 (65%) were owner occupied. 285,045 (35%) were rented.
We can safely assume that the owner occupied percentage has not fallen from the 2006 level. The current housing bubble was born out of a natural predilection towards home ownership and demographic trends, developed rapidly via low interest rates, and grew into a fat, disgusting beast via irrational ownership psychology and greater fool mentality. It is now time to pay for these excesses. Some of the excesses were part of the natural cycle but the bubble developed out of the unnaturally low interest rate environment and the bubble mentality
Given the above data, I just don't see any turnaround soon. Most of the potential buyers are gone. There are no more greater fools. The supply of homes for sale continues to build but there are very few willing buyers at todays prices. I expect that some renters may be convinced to buy if prices came in line with rents but this pool of buyers has shrunk over the past 20 years so there is little opportunity. Add to this the fact that many baby boomers will be looking to downsize from their large suburban homes into smaller dwellings over the next 10 - 15 years and you have a recipe for a very long and deep correction in housing.
Statistics from here. http://www.metrovancouver.org/about/statistics/Pages/KeyFacts.aspx
Monday, July 14, 2008
What to do?
It is clear that home prices in the Vancouver area have only just begun their downward descent with the Fraser Valley leading the way. It seems that developers are catching on quckly to the notion that they must provide steep discounts to move their product now and private sellers are slowly catching on to the same fact.
Now here is the background for my question:
I have found a home for sale that would likely meet my criteria. My criteria is this:
1) Walking distance to grocery store and other shopping (10 minutes or less). Preferably a rec centre as well.
2) Within 5-10 minutes drive to work. Preferably walking distance.
3) Does not need any major repairs or updates.
4) Price must meet pricing standard as follows:
Fair Price = {[1/(5 Year mortgage rate)*100] * [Annual Rent (estimate) - Annual Strata Fees/Maintenance - Annual Property Taxes]}
This is how my formala works out in this specific case:
Fair Price = (1/5.7%*100)*(19,200 - 2,000 - 1,500)
Fair Price = 17.5 * 15,700
Fair Price = $275,378
The asking price is higher than the current fair price but I'm fairly certain that I could get my fair price in the next couple months if conditions stay as they are. The price was just reduced 10% so it popped onto my radar.
But here is the question: Should a person purchase with the full knowledge that the property they are purchasing will likely fall in value even further? Why or why not?
I am personally comfortable with the risk of further price declines as long as the fair price criteria is met but I may not be the norm. I will also be purchasing with a 30-40% downpayment and well below my affordability level as the lenders see it so even temporary job loss wouldn't be a major issue.
Now here is the background for my question:
I have found a home for sale that would likely meet my criteria. My criteria is this:
1) Walking distance to grocery store and other shopping (10 minutes or less). Preferably a rec centre as well.
2) Within 5-10 minutes drive to work. Preferably walking distance.
3) Does not need any major repairs or updates.
4) Price must meet pricing standard as follows:
Fair Price = {[1/(5 Year mortgage rate)*100] * [Annual Rent (estimate) - Annual Strata Fees/Maintenance - Annual Property Taxes]}
This is how my formala works out in this specific case:
Fair Price = (1/5.7%*100)*(19,200 - 2,000 - 1,500)
Fair Price = 17.5 * 15,700
Fair Price = $275,378
The asking price is higher than the current fair price but I'm fairly certain that I could get my fair price in the next couple months if conditions stay as they are. The price was just reduced 10% so it popped onto my radar.
But here is the question: Should a person purchase with the full knowledge that the property they are purchasing will likely fall in value even further? Why or why not?
I am personally comfortable with the risk of further price declines as long as the fair price criteria is met but I may not be the norm. I will also be purchasing with a 30-40% downpayment and well below my affordability level as the lenders see it so even temporary job loss wouldn't be a major issue.
Sunday, April 27, 2008
A Letter to My Landlord
Dear Landlord,
I want to express how much I appreciate what you do for me and my family. We purchase housing from you at a reasonable cost and this housing meets my family's needs on a month to month basis.
I know you may see me as a lowly tenant who can't afford to purchase a home and is relagated to the unwashed renting masses for eternity. Little do you know that I could easily purchase the home you rent to me but I won't because it would cost me nearly double what I pay to you every month. Our arrangement allows me to save a very significant sum of money every single month.
This is the reason I am writing this letter as I truly do appreciate the ability you give my family to rent for less than what it would cost us to purchase the same property. I know this is a sacrifice for you because the rent I pay you doesn't even cover your costs, including the interest you pay on the mortgage, strata fees, and property taxes. All of this in addition to the hassle and work that goes along with being a landlord as well as the potential for large costs like special assessments or appliance replacement.
I don't known why you do it but thank you for your service to my family.
Sincerely,
Mohican, Mrs. Mohican, and Baby Mohican
I want to express how much I appreciate what you do for me and my family. We purchase housing from you at a reasonable cost and this housing meets my family's needs on a month to month basis.
I know you may see me as a lowly tenant who can't afford to purchase a home and is relagated to the unwashed renting masses for eternity. Little do you know that I could easily purchase the home you rent to me but I won't because it would cost me nearly double what I pay to you every month. Our arrangement allows me to save a very significant sum of money every single month.
This is the reason I am writing this letter as I truly do appreciate the ability you give my family to rent for less than what it would cost us to purchase the same property. I know this is a sacrifice for you because the rent I pay you doesn't even cover your costs, including the interest you pay on the mortgage, strata fees, and property taxes. All of this in addition to the hassle and work that goes along with being a landlord as well as the potential for large costs like special assessments or appliance replacement.
I don't known why you do it but thank you for your service to my family.
Sincerely,
Mohican, Mrs. Mohican, and Baby Mohican
Monday, December 10, 2007
How much will prices fall?
This question is the essential question for all those waiting to buy real estate due to the fact it is over-priced and offers no value over renting right now in the Vancouver area. For a value oriented individual, no premium should be paid to own versus rent.
For comparison purposes I have selected two typical 'first time buyer' residences in the Lower Mainland to determine what I consider to be a “fair market value” for these homes.
Methodology:
I am comparing the monthly cash outflow for buying versus renting, with renting representing the fair market value of the monthly cost of the housing in question. Sources for data are the Multiple Listing Service for local asking prices and Craigslist for local asking rents. I have tried my best to find units that are as similar as possible.
Mohican's fair market value is based on the fundamental price of the housing (rent) minus any extra owner incurred costs plus any principal paydown
Assumptions:
- 100% financing
- 6% fixed five year mortgage rate with 40 year amortization
- Inclusion of maintenance fees and property taxes
1) Our first candidate is MLS # V673124 in the Central Park area of Burnaby. It is a two bedroom, 1 bath condominium. Maintenance fees and property taxes are approximately $400 / month. I assume the purchase price to be the asking price at $309,000. In this scenario a buyer would have monthly cash expenses of $2,084 = ($1,684 + $400with only $158 of principal pay-down for a total net cost of $1,926 / month. For comparison I found a comparable unit for rent in the same neighborhood, with the same features for $1200 / month for a net savings to the renter of $726 / month. Based on these numbers the mohican fair market value of this condominium is $183,456. This represents a 41% decrease from the current day asking price.
2) Our next candidate is MLS# F2730243 is a 3 bedroom, 3 bathroom townhouse in the quickly growing Clayton area of Surrey. This townhouse has an asking price of $334,900 and maintenance fees and property taxes are approximately $350 per month. In this scenario a buyer would have monthly expenses of $2,175 = ($1,825 + $350) of which only $172 is principal paydown. This gives us a total net cost of $2,003 per month. I found a comparible unit for rent in the same complex for $1600 / month. This gives the renter a monthly net savings of $403. Based on these numbers the mohican fair market value of this townhouse is $266,012. This represents a 21% decrease from the current day asking price.
For comparison purposes I have selected two typical 'first time buyer' residences in the Lower Mainland to determine what I consider to be a “fair market value” for these homes.
Methodology:
I am comparing the monthly cash outflow for buying versus renting, with renting representing the fair market value of the monthly cost of the housing in question. Sources for data are the Multiple Listing Service for local asking prices and Craigslist for local asking rents. I have tried my best to find units that are as similar as possible.
Mohican's fair market value is based on the fundamental price of the housing (rent) minus any extra owner incurred costs plus any principal paydown
Assumptions:
- 100% financing
- 6% fixed five year mortgage rate with 40 year amortization
- Inclusion of maintenance fees and property taxes
1) Our first candidate is MLS # V673124 in the Central Park area of Burnaby. It is a two bedroom, 1 bath condominium. Maintenance fees and property taxes are approximately $400 / month. I assume the purchase price to be the asking price at $309,000. In this scenario a buyer would have monthly cash expenses of $2,084 = ($1,684 + $400with only $158 of principal pay-down for a total net cost of $1,926 / month. For comparison I found a comparable unit for rent in the same neighborhood, with the same features for $1200 / month for a net savings to the renter of $726 / month. Based on these numbers the mohican fair market value of this condominium is $183,456. This represents a 41% decrease from the current day asking price.
2) Our next candidate is MLS# F2730243 is a 3 bedroom, 3 bathroom townhouse in the quickly growing Clayton area of Surrey. This townhouse has an asking price of $334,900 and maintenance fees and property taxes are approximately $350 per month. In this scenario a buyer would have monthly expenses of $2,175 = ($1,825 + $350) of which only $172 is principal paydown. This gives us a total net cost of $2,003 per month. I found a comparible unit for rent in the same complex for $1600 / month. This gives the renter a monthly net savings of $403. Based on these numbers the mohican fair market value of this townhouse is $266,012. This represents a 21% decrease from the current day asking price.What do you think? What would you be willing to pay for these places? Do you think prices will fall by the amount stated and when?
Monday, November 19, 2007
Price to Rent Ratio Stinks in Vancouver
Well another loverly day in the blissful paradise that is Vancouver. Warm, balmy tempuratures in the low single digits, liquid sunshine of different varieties and over 8 hours of wonderfully cloud-filtered daylight. The weather must be one of the reasons for the real estate prices being higher here than anywhere else in North America. Really, California or Florida, give me a break . . . all they have is sun, sun, sun and hot, hot, hot. Who wants that!?!?! (um - don't answer that - me - thats who!)
Let's look at the Price / Rent ratio in our splendid and worthwhile village, er, I mean Metropolis of Vancouver. The average price / rent ratio over the data period has been 19.9 and currently sits at an all time high of over 27 as of June 2007.
Now let's look at Price / Rent ratio in other loverly places where sadly for them it doesn't rain as much. How would you get mould to grow if it doesn't rain? How would building envelope specialists be employed in these sunny climes? Notice anything about most of the more pricey real estate markets in the US? (hint - the earth orbits it and clouds block our view of it in Vancouver 300 days a year)
Vancouver clearly has nothing to worry about with its cost of living because quite obviously this is such a desireable place to live and nothing like Honolulu or San Diego or Miami. Smart people (or amazingly rich and stupid people) will pay anything to experience the bone-chilling warmth of Vancouver in November (and December and January and February) with short and wet days and dreary and soaking nights.
Price / Rent ratio be damned. What is the point of all these silly numbers anyway? Afterall how can you measure the cost of our amazing climate and mouldy buildings? Priceless I say.
Gosh - I am so sick of this self-absorbed city.
Thursday, September 6, 2007
Dedicated to all the Renters Out There - Mortgage Payment / Rent Ratio
You are smart. You won't be swindled into paying a premium in order to rent money from the bank and pay more in interest charges than you rent would be. Congratulations!
Clearly there are good times to buy and bad times to buy - guess which time we are in! Generally speaking, as a financial planner I would never recommend an individual buy a home unless mortgage payments are less than equivalent rent.
Methodology:
Mortgage Payment is calculated by using the Benchmark Greater Vancouver House Price, putting 25% downpayment towards the principle and having a 25 year mortgage with blended principle and interest payments. As an aside, the payment is $300 less when using a 20% down with a 40 year mortgage. I don't really know of too many buyers who have $150,000 required as a downpayment though.
Rent data is from CANSIM and purchased with your generous contributions. I would appreciate the feedback on the rent data I used. Here is my issue: CANSIM has rent data for 1, 2, and 3 bdrm apartments but not for single family homes. For comparison purposes I used a multiple of 2.3 times the 2 bdrm apartment rent data to approximate the benchmark SFH rental rates. Do you feel this is too high, too low, or whatever? Should I just use the 3 bdrm and ignore any potential differences?
Clearly there are good times to buy and bad times to buy - guess which time we are in! Generally speaking, as a financial planner I would never recommend an individual buy a home unless mortgage payments are less than equivalent rent.
Methodology:
Mortgage Payment is calculated by using the Benchmark Greater Vancouver House Price, putting 25% downpayment towards the principle and having a 25 year mortgage with blended principle and interest payments. As an aside, the payment is $300 less when using a 20% down with a 40 year mortgage. I don't really know of too many buyers who have $150,000 required as a downpayment though.
Rent data is from CANSIM and purchased with your generous contributions. I would appreciate the feedback on the rent data I used. Here is my issue: CANSIM has rent data for 1, 2, and 3 bdrm apartments but not for single family homes. For comparison purposes I used a multiple of 2.3 times the 2 bdrm apartment rent data to approximate the benchmark SFH rental rates. Do you feel this is too high, too low, or whatever? Should I just use the 3 bdrm and ignore any potential differences?
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