tag:blogger.com,1999:blog-31427364.post1854629092030343243..comments2024-03-26T03:52:23.395-07:00Comments on Housing Analysis: Look out bottom here we comemohicanhttp://www.blogger.com/profile/06094213357140749289noreply@blogger.comBlogger37125tag:blogger.com,1999:blog-31427364.post-63762265029188026392019-04-16T21:00:20.532-07:002019-04-16T21:00:20.532-07:00Very informative and impressive post you have writ...Very informative and impressive post you have written, this is quite interesting and i have went through it completely, an upgraded information is shared, keep sharing such valuable information. <a href="https://jamesb.ca/hastings-east-real-estate.html" rel="nofollow">Vancouver real estate</a>StevenHWickerhttps://www.blogger.com/profile/05864349482360534088noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-14455565246558240602008-06-23T12:19:00.000-07:002008-06-23T12:19:00.000-07:00I don't know if its "better", but CMHC says 4.6% 2...<I>I don't know if its "better", but CMHC says 4.6% 2007-2008</I><BR/><BR/>That's just the last year.<BR/><BR/>Given the high amount of construction due for completion in the next couple of years, not to mention the upcoming recession, I don't see that figure holding up going forward.patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-89818768898248412792008-06-23T07:17:00.001-07:002008-06-23T07:17:00.001-07:00BTW, cansim gets their data from cmhc, so the two ...BTW, cansim gets their data from cmhc, so the two should agree.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-76688323836617596372008-06-23T07:17:00.000-07:002008-06-23T07:17:00.000-07:00I don't know if its "better", but CMHC says 4.6% ...I don't know if its "better", but CMHC says 4.6% 2007-2008 http://www.cmhc-schl.gc.ca/en/search/search_001.cfm and type in "vancouver rents" to get the pdf report. <BR/><BR/>I then looked at the data on cansim for Vancouver and got 4.2% for 2006-2007 (the version of the db I had access to did not have 2007 available). UBCs numbers must be for the whole CMA? UBC don't say where they get them, except from cansim, so who knows what they are doing? Its possible they are downloading the inflation-adjusted numbers and then adjusting for inflation again. <BR/><BR/>Anyway, I slightly exaggerated with 5% - which is Victoria's number. I'd assumed the big city would be similar.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-6938694084666674932008-06-23T05:16:00.000-07:002008-06-23T05:16:00.000-07:00In the last few years rents have been increasing 5...<I>In the last few years rents have been increasing 5% a year in Vancouver, significantly faster than inflation.</I><BR/><BR/>According to this source, they haven't been increasing by even half that:<BR/><BR/><A HREF="http://cuer.sauder.ubc.ca/cma/data/Rent%20Index/van-nom.pdf" REL="nofollow">Take a look</A><BR/><BR/>Note the increases have been even lower than allowed by rent controls, so you can't blame that.<BR/><BR/>If you have better data, I'd like to see it.patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-3890962153701104782008-06-22T16:34:00.000-07:002008-06-22T16:34:00.000-07:00Vancouverguy,Thanks for the commerce lesson - I'm ...Vancouverguy,<BR/><BR/>Thanks for the commerce lesson - I'm learning lots of interesting terms (mostly by flipping to investopedia)<BR/><BR/>If indeed the WACC is a useful way to evaluate leveraged return, and it seems like it is, then a 75% leveraged investment is extremely sensitive to what you choose for the WACC. For instance if I use 6.5 for the WACC, only 1% less than what you are suggesting, I get a required return on equity of 8%, a full 30% less than yours. If we assume 3% inflation, that's a 5% cap rate. <BR/><BR/>This exercise is a very nice demonstration of why leveraging is problematic. The required return on equity to make a given WACC goes up rapidly the more leverage that is used.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-14366608310534647382008-06-22T12:16:00.000-07:002008-06-22T12:16:00.000-07:00JMK,You're right I should have been using 6% or so...JMK,<BR/><BR/>You're right I should have been using 6% or something, which is the current 5-year fixed rate mortgage available from TD. It's interesting that on the same page they list their 5-year closed mortgage at 7.15% and say the 6% one is a special offer. <BR/><BR/>Cost of borrowing factors in if you are looking at equity return requirements for a levered project.<BR/><BR/>Be careful comparing debt returns to project returns. A bond is not an appropriate, unlevered comparable, because it has preferential treatment in terms of cashflow and security, and so the owner of the bond is not taking risk on variance of cashflows unless they drop below a certain level. Banks are essentially saying that the risk of a preferential interest in a home is 6%, and that's only for five years; you are taking project risk for the whole life. If we said that the WACC was 7.5%, then our required rate of return on equity would be 12.0%. This makes the numbers I was saying were a reasonable equity return look fair, and you can see how a small change in the WACC would leave you with a higher equity return requirement. Generally, my mind thinks in terms of the levered equity return requirement for a project, because except in certain situations we are always investing equity where I work. <BR/><BR/>At 10-13% you're looking at housing risk as if it's a levered utility kind of project. Regulated utilities get guaranteed rates of return on their invested capital... I think as an undiversified investment, and taking all the risk personally on the structure, that you would need at least that rate of return. If you are investing in a portfolio, then maybe your return of return could be at the bottom end of that, but taking individual risk on a single structure... not so sure about that.<BR/><BR/>Is the 7.5% a reasonable WACC for the project if we are looking at it on a project basis? 10-yr BBB corporate spreads were something like 250bps on average over the past couple of months. If we just added that to the 30-yr GCAN rate (because I can't remember what the 10-yr BBB spread was, but I can look up the 30-yr GCAN), you end up with 6.7%. Pretty much at our WACC, but for a debt security on an investment grade corporation..... says the 7.5% WACC is too low. <BR/><BR/>A 7.5% WACC, by the way, is about equivalent to a 7% cap rate with inflation if you are required to amortize your debt over thirty years. The Project IRR is 9.0% of course, as you would expect with a 7% project yield plus 2% growth. In situations where the proportion of debt and equity does not stay the same over time, WACC is less than Project IRR.VancouverGuyhttps://www.blogger.com/profile/16249093887857923600noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-23192758687438452192008-06-22T11:59:00.000-07:002008-06-22T11:59:00.000-07:00"rents themselves can increase with inflation or e...<I>"rents themselves can increase with inflation or even faster, even if the building is depreciating, due to densification."</I><BR/><BR/>I urge you to compare rents in a new building in Yaletown to a 30 year old unit of similar size in the West End and let me know which one is higher. Same densification, different price.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-80801776145454977092008-06-22T10:50:00.000-07:002008-06-22T10:50:00.000-07:00You can account for depreciation however you like....You can account for depreciation however you like. I'd assumed that was what you have been calling "net" rent. <BR/><BR/>However, rents themselves can increase with inflation or even faster, even if the building is depreciating, due to densification. In the last few years rents have been increasing 5% a year in Vancouver, significantly faster than inflation. <BR/><BR/>If indeed real rents have been dropping (though I'd never heard that) the reason may be that home ownership has been increasing. If renters are predominantly composed of the poorest workforce real rents will drop. A <I>lot</I> more people own condos now than 20 years ago, and presumably a large proportion of those would have been renters before the cheaper home ownership option was available.<BR/><BR/>If you are discussing real rents in Canada, then I expect another part of it is that rent data is collected by the CMHC from commercial apartment complexes only, and there have been very few of those built in the last 30 years. Newer, better quality rentals tend to be in condos. In fact, many of the nicer apartment buildings have been turned into condos in the last 15 years.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-12503029222672286062008-06-22T09:56:00.000-07:002008-06-22T09:56:00.000-07:00It's worth noting that rents on a same property ca...It's worth noting that rents on a same property cannot increase with inflation due to depreciation. Also real rents have been falling for a generation.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-19590263719316270122008-06-22T09:48:00.000-07:002008-06-22T09:48:00.000-07:00"If the price of your home goes up with inflation ...<I>"If the price of your home goes up with inflation and your rent goes up with inflation, an 8% return rate today is going to be a real return, not a nominal one."</I><BR/><BR/>Perhaps, should you want to explicitly factor out inflation-adjusted cash flows, a fair comparison would be to an inflation-adjusted bond.<BR/><BR/>Yield is a proxy for relative value but patriotz and others are right that it's the future cash flows that are important, not necessarily current yield. <BR/><BR/>Interesting discussion.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-82553129376373044692008-06-21T23:34:00.000-07:002008-06-21T23:34:00.000-07:00yes thank you - I meant the total return you want ...yes thank you - I meant the total return you want is really high. Equivalent to an 11% return on a bond.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-67688880345212923232008-06-21T22:14:00.000-07:002008-06-21T22:14:00.000-07:00It doesn't change the fact that you want a really ...<I> It doesn't change the fact that you want a really high yield for real estate.</I><BR/><BR/>Nonsense, 8% gross yield on RE is not "really high", in fact it's quite low. <BR/><BR/>Before the recent bubble era, price/monthly rent fluctuated between 100 and 125.<BR/><BR/>You also seem to have a problem with defining yield. Yield is simply the monthly or yearly payout (gross or net) divided by the market price of an asset at any given time. Growth of payout or market price over time is factored into total return over a given period.patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-22077625289738999892008-06-21T17:14:00.000-07:002008-06-21T17:14:00.000-07:00Sorry if I got the terminology backwards - by "bef...Sorry if I got the terminology backwards - by "before Inflation" I meant by "before inflation is taken into account". <BR/><BR/>Does the cost of borrowing enter into the calculation of "fundamental value"? Clearly no one would pay 7% interest to borrow to buy 4% treasury bonds, so I think you are confusing matters (or at least me) by discussing leverage. Interesting topic, but tangential to determining what a house should be worth based on future incomes.<BR/><BR/>However, when you say it costs 7% to borrow, are you factoring in predicted future rate increases? Otherwise it is about less than 5.25% for anyone with decent credit and a good downpayment. Even the advertised rates are only 6%.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-12905263780903534932008-06-21T11:54:00.000-07:002008-06-21T11:54:00.000-07:00"A couple of times you and jesse have claimed that..."A couple of times you and jesse have claimed that a cap rate of 8% is appropriate. That's like a before-inflation return of 10-11%"<BR/><BR/>I think his problem was with the statement that this is a before-inflation return of 10-11%. It's a post-inflation return of 10-11% if your rent increases with inflation and you assume a perpetuity or thirty year investment or something like that. And that's return on all capital employed, not an equity return. Your equity return would be pretty good, depending on your cost of debt. With a cost of debt of 7%, rent inflation of 2%, and an upfront cap of 8% you would end up with a 14.2% equity IRR. <BR/><BR/>I do think that he meant a gross rental yield though, not net of costs, so the return would be a fair bit lower than that. It would be about 11.3% if we made it a 7% all-in cap instead (net of costs). <BR/><BR/>Is that reasonable? 430bps premium over your cost of debt given 75% leverage and taking all risk on value retention over the long-term? Housing has beta a fair bit lower than one I would say, but your leverage is higher than on comparable investments and you are concentrating your risk and not diversifying it at all, so it would not be a tough argument to say that's a reasonable rate.VancouverGuyhttps://www.blogger.com/profile/16249093887857923600noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-68500027065499511692008-06-21T11:32:00.000-07:002008-06-21T11:32:00.000-07:00I think the report is good because it comes from N...I think the report is good because it comes from NZ so they have no vested interest in pumping up or down our real estate. The data is a bit out dated though, according to Paul B's site the most recent REBGV median prices (weekly data) would be around $700,000. The median of income of $60,000 puts us at a ratio of 11.7, the highest on the list of all major cities in the US, Canada, UK, NZ and Oz. In the mean time the US prices have also fallen so I would assume their ratios have also dropped. Vancouver sits head and shoulders at the top of unaffordability worldwide. No wonder Robert Shiller calls Vancouver the most bubbly city in the world.joycerhttps://www.blogger.com/profile/12478268857930965402noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-56621571253660807722008-06-21T08:16:00.000-07:002008-06-21T08:16:00.000-07:00A couple of times you and jesse have claimed that ...<I>A couple of times you and jesse have claimed that a cap rate of 8% is appropriate. That's like a before-inflation return of 10-11%<BR/><BR/><B>No, I said a nominal rate of 8%, not real.</B> </I><BR/><BR/>Real estate is a "real" investment. If the price of your home goes up with inflation and your rent goes up with inflation, an 8% return rate today is going to be a real return, not a nominal one. You will get an 8% return rate in tormorrow's dollars and your capital will increase with inflation. That is the definition of a "real" return. Your expected return is the equivalent to a 10-11% bond (for which neither the return nor the capital increase with inflation.)<BR/><BR/>You can claim historic multiples are whatever, but I've not seen those for Vancouver, and I have no idea if they have been constant with time. It doesn't change the fact that you want a really high yield for real estate.JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-27102454323426879092008-06-21T05:12:00.000-07:002008-06-21T05:12:00.000-07:00Hey Joycer, that's a nice report. I really like th...Hey Joycer, that's a nice report. I really like that my city in Saint John, NB tied for 5th most affordable. <BR/><BR/>The problem is for May 2008 the CREA lists the average sales price for my city going up 22% YOY. It was probably a great time to buy two to three years ago, I purchased last year at an OK time, and in the next year or so things will get skewed as the price to rents go out of whack at this rate. <BR/><BR/>Lets put it this way, last year I purchased my 1152 sq ft bungalow for 102K (List 119K, Tax Assessed 113K). This year a home down the street of near the same design went for 130K (List 144K, Assessed 115K) and now my next door neighbour is attempting to sell a very similar design (List 139K, Assessed 97K).<BR/><BR/>The reasons for the increase are a pile of large construction projects attempting to make the area an energy hub. These include an LNG plan, LNG pipeline, New Refinery, Nuclear plant expansion, possible new nuclear plant, possible new high rise in town core, and Potash mine expansion. Of course, after the 6 years of the major boom in construction a lot of the workers will be leaving putting a pile of housing on market all at once . . . I'm starting saving now just in case ;)Traciatimhttps://www.blogger.com/profile/07939921958167371917noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-53931158550596009902008-06-20T23:51:00.000-07:002008-06-20T23:51:00.000-07:00A couple of times you and jesse have claimed that ...<I>A couple of times you and jesse have claimed that a cap rate of 8% is appropriate. That's like a before-inflation return of 10-11%</I><BR/><BR/>No, I said a nominal rate of 8%, not real. I never talk about real yields nor do most other people on this board as far as I know, altough I do talk about real total return. But when I mean real, I always say real.<BR/><BR/>8% gross yield is a price/yearly rent of 12.5 and a price/monthly rent of 150. That's towards the high end of historic multiples, so 8% gross yield is towards the low end of historic yields.<BR/><BR/>And yes I would buy at that multiple.patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-43984688148069699462008-06-20T20:06:00.000-07:002008-06-20T20:06:00.000-07:00The problem is that fundamental value can only be ...<I> The problem is that fundamental value can only be estimated, not known exactly, wbich is the reason why there is a risk premium.</I><BR/><BR/>I agree. But what should that risk premium be for residential properties in Vancouver? <BR/><BR/>A couple of times you and jesse have claimed that a cap rate of 8% is appropriate. That's like a before-inflation return of 10-11%. i.e. 6-7% more than a treasury bond. Are the net returns from a rental property really that risky? <BR/><BR/>If you are insured all that can happen is depopulation of the city you buy in, driving vacancies way up. The risk of that happening in Vancouver seem pretty low to me. Migration has been from the heartland to coastal cities for a few decades now - do you see that reversing? What else am I missing that makes you and others here assign such a large risk premium?JMKhttps://www.blogger.com/profile/14740454447994074321noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-25809064088341672282008-06-20T14:00:00.000-07:002008-06-20T14:00:00.000-07:00Interesting report comparing Canada, US, Australia...Interesting report comparing Canada, US, Australia, and UK housing. If you hadn't guessed, we're quoted as being "severly unaffordable" in Vancouver.<BR/><BR/>http://www.demographia.com/dhi-ix2005q3.pdfjoycerhttps://www.blogger.com/profile/12478268857930965402noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-88468226735252582022008-06-20T12:28:00.000-07:002008-06-20T12:28:00.000-07:00I will add that if the tenant is also paying the p...I will add that if the tenant is also paying the principal part of the mortgage payments, plus all ownership costs, the house has indeed cost you nothing.<BR/><BR/>The reason is simple - the price you paid was less than the fundamental value of the house. Buy any asset below fundamental value, and you really do get a free lunch. The problem is that fundamental value can only be estimated, not known exactly, wbich is the reason why there is a risk premium.patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-18484963600599516962008-06-20T07:55:00.000-07:002008-06-20T07:55:00.000-07:00If I can buy a place with zero down and command a ...<I>If I can buy a place with zero down and command a rent that covers all my costs (including vacant months, prop taxes, repairs etc.) for 25 years, I then own the house and it has cost me nothing (minus the risk of holding).</I><BR/><BR/>It cost you the compounded value of the principal part of all of your mortgage payments. Remember the principal part of the mortgage payment, which results in the house being paid off in 25 years, is savings, not an expense of ownership.<BR/><BR/>This may be more, less, or the same as the market price of the house at that time.patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-3630775067418077262008-06-19T23:29:00.000-07:002008-06-19T23:29:00.000-07:00"If I rent that smae house for 25 years, I have no...<I>"If I rent that smae house for 25 years, I have nothing.</I><BR/><BR/>Of course your landlord has something. He has something by charging you rent that is paying off his mortgage or going into his pocket.<BR/><BR/><I>In a perfect model with everything held constant, ownership premium does exist and should be quantifiable. Basically rent plus x%."</I><BR/><BR/>This means an investor in the same property must, like you, carry rent + x% but can only take in rent. He loses x% every period.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-77105722400843815882008-06-19T20:38:00.000-07:002008-06-19T20:38:00.000-07:00deflation, unlikely.If Central Banks chose between...deflation, unlikely.<BR/><BR/>If Central Banks chose between inflation or deflation they'd choose inflation.<BR/><BR/>Most of the tame inflation that we witnessed in the past 15 odd years was because of globalization, that shifted labour to low wage countries. As you see their cost of living rise, you're going to see inflationary pressures on products we buy. If you look at CPI in asian countries a larger proportion of it is in food. So, crop yields are most important. Poor people switch diets as they get richer to meats and it's a 1:10 ratio approx depending on what type of grains to meats. China also doesn't really produce things, they're more of a assembly plant. So, in other words most cost savings is labour only.<BR/><BR/>If you've even been to China, the projects going on there is immense. They're trying to build a road network similar to USA. I was there for a month. I rode the train from beijing to shanghai to Chengdu and the amount of roadways, bridges and train tracks, tunnels... good luck seeing that economy dieing off in the next 5 years. You don't go from a growth rate of 11% to nothing in a year, that's with China forcing banks to have a 19% tier 1 ratio.<BR/><BR/>If there is a chance for deflationary pressures, I sure didn't see it in that article.Gabrielhttps://www.blogger.com/profile/02110168476086184327noreply@blogger.com