I have been following the irrational run up in real estate prices for two years now and I have been saying that real estate is overvalued based on fundamentals of price to rent ratio and price to median income ratios (traditional and reliable valuation methods). Despite the fact that I know this to be true, most of the people I talk to on a daily basis think that it is rational and that somehow it makes sense. They usually bring up low mortgage rates, booming economy, rising population, etc and I am quite frankly tired of hearing about their irrational reasons. These ideas have been rationally refuted time and time again and I'm not going to go into that now.
Most people don't live in my world of statistics, analysis and mathematical rigour - they understand stories. The stories they've been hearing lately are about relentlessly rising property values, get rich quick speculators, and the glories of refinancing the family home. Since these people understand stories I am going to provide a story to back up my point of view. I plan to profile MLS listings in Greater Vancouver and the Fraser Valley over the next while to prove my point. I will call these homes "Home of Insanity."
Today's leveraged investor special (MLS F2708994) is found in the lovely Bridgeview area of north Surrey. It is a 1000 square foot rancher and the seller is asking "only" $285,000. It rents for $1000 / month and the monthly carrying costs of the property would be approximately $2000 / month. You can have the opportunity to subsidize a renter to the tune of $1000 / month by buying this property. I wonder why the current landlord is selling?
If you decide to buy this property you will have the pleasure of seeing your home underwater during a 50 year flood and seeing homeless people, hookers, drug addicts, and gang violence right outside the front door. Clearly this home is also of a "timeless" character because we don't even know when it was built. Before you call the realtor to make an offer, remember to bid above asking price because this home is close to Home Depot, Skytrain, and yes - even scrap metal yards - right around the corner.
19 comments:
Feel free to post your own "Home of Insanity" candidate here.
My house of insanity candidate is MLS V645449. This is a near-new townhouse in Pitt Meadows for a little more than $650,000. In addition to sub-par finishings, you get a location right by river, a nice view but unfortunately the wrong side of the dike if the mighty Fraser starts rising. This almost 2000 square foot townhouse dictates joint ownership of a wall and a monthly strata bill. All this on land formerly polluted by a mill, nestled by an active construction zone and within easy listening distance of the pile driving activity for that new Golden Ears Bridge project. Commuting to downtown Vancouver? Probably an hour and a half by car each way, maybe a little less on the more eco-friendly West Coast Express.
A townhouse for more than a half-mill in freakin' Pitt Meadows?!! People, give your head a shake!!!
There are lots of for sale signs in my area, and all I should have to do is just show the price and any sane person should click to how we are currently in bizarro world.
I have met plenty of otherwise intelligent people who have recently bought houses or condos who are perfectly happy with their decisions, and plenty of other people that agree this makes sense because RE only goes up, the booming economy, wealthy immigrants, land shortages, or whatever justifies this.
A lot of the people that believe this have post secondary educations, and often work with numbers or even finance, so one suspects that "graphs and statistics" would not be too remote to comprehend. Again, owning vs. renting, affordability indices, or even comparing the PV of rents to a comparable property's sale price is not that tough to follow. I mean, this is not nuclear physics or anything.
That being said, if you try to talk about this stuff with most people and they will think you are totally insane. I would probably have better luck convincing most people that the earth is flat or Scientology might really help them, as opposed to talking about the RE bubble. I am grateful for these blogs.
I have been following Walnut Grove in langley since last summer and today we hit 103 SFH's. Nearly double from the low of 52 on Jan 4th. and above last years high of 93. I am looking to buy next jan.
Hope there are some better deals by then.
I guess the whole thing is bizarre. I was looking at houses in Ottawa the other day. I had to narrow my search to $275,000 - $300,000 or there were too many houses showing up (>500). I can't imagine why you would even think of moving here. If this wasn't my home I definitely wouldn't. I mean decent houses < $300,000 will we ever see that here again? It seems so improbable now.
We went a looked at a house the other day in Victoria. Oak Bay around 3,700 sq. ft Double Lot. Corner Property. $1,135,000.
Look very pretty, new carpet etc. Nice Kitchen. Where is the laundry room???? You had to walk outside, around the house and go in a tiny door to get to the laundry room. And a disaster of a laundry room I might add. $1,135,000.
Could you show the break down of your calculations for carrying costs for this example?
Also on a side note with the bond market pricing in a rate increase in the near future, does anyone have a copy of VHB's Renewal Gap chart and data? It would be nice to see what people will be facing if rates were to increase say 0.5% this year.
Thanks!
Mohican, you forgot to mention the proximity to Surrey's #1 place to be seen, the Turf Hotel. I drove through the area recently and was surprised to see it was still there, essentially unchanged from how I recall it in the 1970's.
Is that other in-spot up the hill, the Flamingo, still around?
fencesitter:
basically the mortgage to buy the property would be about 1700 - 1800 / month and property taxes and insurance (if available) would be roughly 300 / month.
Did u see the note at the end of the surrey home's listing? "please don't bother tenants". Why? Will they come out with a shotgun because they think you're cops raiding their grow-op? lolz.. This city has gone cuckoo over real estate. Ran into a friend from university a few weeks ago. He said he wants to buy a place of his own, but it's too expensive right now. But he wants to buy a condo for investment. LOL. It's too expensive to buy a condo to live in, but it's fine to invest in one? (oh yeah, just put 50% down and the rent might break even with mortgage payments, over 25 years mind you) This guy's a Commerce major. I didn't bother arguing with him. I'm also tired of the RE only goes up, blah blah, Olympics, blah blah, running out of land, blah blah garbage.
If you're cash flow negative, you're betting off renting out the condo and writing off the loss against your other income, and renting the place you actually live in.
Granted down the road you would be liable for taxes on the capital gains when you sell (yeah right), if you don't have losses to carry forward.
Cash flow before taxes is the same either way but you don't get the tax writeoff on the loss if you owner-occupy, though of course on an opportunity cost basis it's the same.
It's the flip side of the tax benefits when owner-occupancy actually makes sense, when the imputed income > carrying costs.
I recall pointing out to Rob C. in the comments on his blog that the comparable between renting the place I'm in now and buying the same thing simply made no sense. I rent a 3 br and den duplex in Vancouver for less than 1500/mo. To buy with 25% down would be, say, 2500-3000/mo? He pointed out the opportunities to own in North Surrey -- something like this deluxe abode. Apples to oranges anyone?
Mohican said:
"basically the mortgage to buy the property would be about 1700 - 1800 / month and property taxes and insurance (if available) would be roughly 300 / month."
For $289K @ 5.25% for a 25yr I come up with $1730/mo payment too, but only $1250 of that is paying interest. I realize that that payment still has to be made, can this $480/mo really still be counted as a carrying cost?
It still doesn't make sense to buy as an "investment", but the loss is not $1000/mo.
can this $480/mo really still be counted as a carrying cost?
No, it's saving. However Mohican didn't include depreciation on the structure, which is a non-cash flow expense, and maintenance. Factor that in and I'd reckon you're back around 2:1.
fencesitter:
Carrying costs have nothing to do with payments towards equity. They measure whether you have more cash in hand at the end of the month than the beginning. This is important because, with negative carrying costs, if you are unable to pay the monthly balance owing out of your pocket, you are in foreclosure.
You are asking more about investment worthiness, not carrying costs or cash flow. You can have a good investment that has high leverage and/or negative carrying costs, but there are risks.
fencesitter - you are correct that there is a component of saving built in but I also did not include maintenance / depreciation so I figure it washes out.
Additionally, when using leverage it would terribly unwise to be in a position where the investment itself does not make enough to at least pay the interest payment and other carrying costs not including depreciation and improvements.
This home is so far from that as is any real estate investment in the greater vancouver area these days.
VHB Renewal Gap:
http://tinyurl.com/2dnmy5
I'm reading 'Extraordinary Popular Delusions and the Madness of Crowds' right now, by Charles MacKay, and it's amazingly current, even though he wrote it in in 1850 or so and was describing mass investment frenzies from the early 18th century. Plus ca change...
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