Tuesday, February 17, 2009

Is now a good time to invest in real estate? - NO, NO, NO!

With home sales — and prices — dropping in B.C., is now a good time to invest in real estate?

The B.C. Real Estate Association says it just might be, pointing to a large drop in carrying costs for an investment property today compared to a year ago.

“It doesn’t matter what the market is doing, I don’t say whether or not it’s a good time to buy,” association chief economist Cameron Muir said in an interview Monday. “That being said, I would suspect investors are actively looking in the marketplace for bargains. If you compare today vs. a year ago, investing in real estate is more attractive than it was then.”

Muir made the comment after the release of an association housing survey Monday that concluded the residential sales dollar volume on B.C.’s Multiple Listing Service declined 61 per cent to $873 million in January, compared to the same month in 2008 when sales totalled $2.25 billion. In the Metro Vancouver region, the sales volume was down 62 per cent over the same period, to $413 million from $1.09 billion in January 2008.

Muir — who said he also believes sales activity in the province will pick up in the spring because of improving affordability resulting from lower mortgage rates and home prices — cited a typical mortgage payment for a property in January 2009 compared to January 2008.

He said the benchmark price for a two-bedroom condo in Metro Vancouver was $334,602 in January, 11.5 per cent less than the $378,336 the same condo would have sold for 12 months earlier. A typical posted five-year fixed-term mortgage stood at 5.79 per cent in January, much lower than a similar mortgage rate of 7.39 per cent the previous January.

Therefore, he said, a condo with a 10-per-cent down payment (on a 25-year amortization) would have resulted in a monthly mortgage payment of $1,890 this January, nearly $600 less than the January 2008 mortgage payment of $2,468 (property taxes, maintenance fees and mortgage insurance fees not included).

Condos are still insanely expensive compared to rent.

On top of that, he said, there’s upward pressure on rents with the same two-bedroom condo renting in October 2008 for about $1,507 a month — a five-per-cent increase from October 2007.

“For both investors and home buyers, your mortgage payment would be several hundred dollars less than a year ago,” said Muir, who noted that investors have so far not been very active since the economic downturn started last year. “As an investor, the cash flow from the rent will more closely match your mortgage payment on the property.”

The BCREA survey also showed that residential unit sales fell 57 per cent to 2,115 units during the same period.

The average price on the MLS in B.C. was $412,934 in January, down nine per cent from the same month last year, the survey noted.

Muir said that home sales were sluggish in January, reflecting an overall malaise in consumer confidence and a weaker provincial economy.

Muir said that first-time buyers are especially affected by the economic news and are holding back because of a lack of confidence. “Demand from first-time buyers has been off significantly. First-time home buyers tend to be younger and not have years of experience in their occupations. Therefore, they have more concerns around job security. They’re more vulnerable to layoffs.”

Yes, those first time buyers would have to earn in excess of $100,000 per year to afford to buy very basic accomadations and I just don't see a lot of those people around right now.

Despite that, he said, the BCREA expects sales to rise this spring because of greater affordability and lower interest rates.

Muir noted that realtors are reporting increased activity from buyers over the past three weeks, but that it hasn’t yet materialized in sales statistics. “By all accounts, there’s increased interest. There’s more showings and more buyers kicking tires.”

Meanwhile, an Ipsos Reid poll released last week showed that a growing number of British Columbians think this is a good time to buy a home, though most say it isn’t a good time to sell.
The poll found that some 71 per cent of respondents said it is a somewhat good or very good time to buy real estate. In November, only 60 per cent of respondents told Ipsos Reid it was a good time to buy.

In the latest poll, though, 82 per cent said this is not a good time to sell a home. The poll also found that British Columbians’ expectations for falling prices are changing, with just 42 per cent of respondents saying they expected prices to be lower 12 months from now compared to 57 per cent in November.

The association represents 12 member real estate boards and about 18,000 realtors.

The last sentence is really all you need to read! The number of realtors declines each and every month right now.


Anonymous said...

Well, I think smart people always can read between the lines when it comes to the media or what 'experts' are saying.

When they say, "Oh, we are different. This time is different. Fundamentals are strong"

It means " Oh shit, things are about to go south"

When they say, " Oh it's dropping, but it opens up the new window of opportunities."

It means " We admit that we were wrong, and it's going to drop a lot more, but my sponsors won't be pleased if I don't sugar-coat the current situation. "

So, to use these news and so-called expert analysis as
an indicator to foresee the bottom, which message do you have to listen to as a
sign of market bottom?

What would these people be saying when the market is really bottomed out?


When media don't even talk about 'crisis' anymore,
that's when the reality is
fully kicked in.

And yes they are right about
one thing though.

IT IS DIFFERENT this time.

With global economic meltdown combined with the biggest real estate bubble
we've ever seen in Vancouver, This time,
things are going down
harder, faster and longer.

Always appreciate great post.

From Vancouver, Danny

AndrewJ said...

They should open their monthly reports with the current number of realtors. Kind of like Battlestar Galactica with its number of surviving humans at the beginning of each show. It gives you a good idea of how things are going :-).

johnnyrent said...

Proving once again that this market will never run out of greater fools.

veej said...

I don't know... I mean Muir is totally un-biased isn't he? Pretty bang on in that Vancouver Sun front page piece in April "15 Myths of Vancouver Real Estate". That was what... 1 month before the crash? Yeah, he is pretty reliable. Hey, I sell computers.. where do I sign up for a free front page marketing piece with the Van Sun? Now that we are talking about the Sun... remember the star columnist that was fired for taking bribes from condo developers? Ahh the local papers... the pinnacle of ethical and unbiased reporting. I wonder if they would be liable... hmmm. I'll run naked on fire across the Burrard St. bridge if they ever featured a front page article written by Garth Turner or Robert Schiller.

jesse said...

"Proving once again that this market will never run out of greater fools."

That remains to be seen. The sheer number of "fools" is likely why it will be years before we hit bottom. Believe me, the facade of high prices in Vancouver is so complete it will take some time to flog this dirty beast to the floor. Get comfortable.

patriotz said...

"Proving once again that this market will never run out of greater fools."

The US RE market never ran out of greater fools - there was always somebody buying - and how did that turn out? Bernie Madoff never ran out of "investors", either.

The issue is not whether there are some greater fools - that's always true - but whether there are enough greater fools to keep the bubble going. Asset bubbles are pyramid schemes and require an exponentially increasing number of greater fools (or more precisely an exponentially increasing inflow of capital) to sustain. Simply not possible.

JimTan said...

Cameron Muir: $1,890 vs. $1,507 a month

Numbers don't lie. Getting close! Don't forget the equity portion of the mortgage payment.

markoz said...

Jim Tan: first of all that $1,507 rent is suspect. I rent a 2,000 sq ft house with a yard for $2,000 a month. Secondly, that is $1,890 PLUS property tax PLUS condo fees. Add about $400 a month for those items. Thirdly, the first 5 years of a mortgage is almost all interest with very little of the payments going to principle. Finally, even the realtors are forecasting a drop in prices this year of over 10% which means the equity portion of your mortgage payment will be totally wiped out and then some.

jesse said...

$1507 for a $334K asset. That's roughly a 4.3% cap rate. Hardly appetizing.

patriotz said...

I thought that cap rate meant the net yield, not the gross yield. Even the gross yield is below financing costs.

Anyway a condo should have a gross yield of at least 10%, or putting it another way a price/rent of at most 120.

Yes that's the yield you need to make a condo a viable investment, we have seen it before and we will see it again.

jesse said...

4.2% assumes 20% gross rent towards expenses so it is net.

Anonymous said...

I just looked at a very new downtown (Georgia) 2 bedroom condo being sold for $430,000, apparently $100,000 below assessed... It's a beautiful unit and I didn't expect to find a brand new condo for $430,000, I'm just curious to know if you guys think this is fair value and if anyone would actually consider buying a place like this?

jesse said...

@Chad_MPNP, from a value investment standpoint, it entirely depends upon what it could reasonably rent for. The quick and dirty method is to multiply the monthly rent by some factor, say 120 or so, to get fair value. For example a condo that rents for $2K/month should cost $240K. Hope this helps.

veej said...

What everybody is failing to realize, especially Muir.... rents and home prices fall in recession.