Inquiring minds want to know...
When I read stuff like this I can't help but wonder if people actually find this encouraging. I really do hope that people don't go out and buy the junk we're looking at to renovate and put the prices up into territory that we can't possibly mortgage our first born to pay... or maybe I do. That way when they realize the mistake they've made and can't possibly cover their flip-related debts with the rents they can bring in they'll be forced to sell in a hurry and bears like us can come in and low-ball. Someone please write that story for the $250 prize.
19 comments:
The question "who are these first time buyers (FTB)" haunts me. I would have thought after a five year run the pool of FTBs would have dried up. I keep hearing about parents succumbing to their kids and giving/loaning them the money for a down payment.
The worst example came from a cashier at my local grocery store. We chatted while she rang up my groceries and she said she just cashed in her RRSPs and gave the money to one of her kids as a downpayment on a house. She was surprised that they deducted some of the proceeds and gave it to the taxman. I guess the kids will look after her in her old age!!
Lets assume that a FTB in Victoria buys a house for 400K and the parents kick in 25% as a gift and they now have a mortgage. A 300K mortgage at 5.2% for 25 years is $1780 per month. Taxes will be around $180 after the homeowner grant. Rough monthly estimates for gas heat/electricity/water are 110/30/50 respectively. So the monthly total will be $2150 and we have not done any maintenance, purchased gardening stuff or spruced the place up yet. Annually $25,800 of after tax income is needed for the new acquisition.
Assuming this is a married couple lets add some more essential budget items: Food (350); MSP (98); Gas or Bus (100). Our annual total is now $32,376 of after tax income for a bare existance with no clothes, movies, lattes, beer, vacations, furniture or improvements to the house.
Now if you go to http://www.taxtips.ca/bctaxcalc.htm you will see that if only one of them is working that person needs a salary of 42K per year. If both work they need to earn 19K. If you consider they need another 10K after tax the salary reqt. rises to 56K for one earner or 26K each.
You can see that they are mortgage poor for many years. Also they are in real trouble if they start off with both working and one loses a job or they decide to have a family. So the safe bet is to only rely on one income and to use the other to pay down the mortgage and to have a little fun.
After 5 years they still have $266K left on the mortgage. What happens when the market drops by 10% and they have lost 40K in house value? They are now in the hole by 6K after all those years of payments.
My question is how many FTBs are left with an income over 56K with generous parents or 100k in the bank?? Or are they a couple pooling their incomes and locking themselves into a life of mortgage debt?
The question still haunts me. Any comments??
Roger,
My fiance works full time at $52K/year. I work part-time and go to Uni full-time, and make roughly $20K, I expect to make $50Kish in September.
We carry some student debt, like 50% of our peers. We have OK savings, not great, but not bad. We have parents who can help by co-signing or 'lending' down payments, or even in building something if we can find an affordable lot.
The only peers we have that own, either bought entry-level condos 3-4 years ago for less than half of what it costs today or had significant help from parents (100K+) to purchase homes 3-4 years ago.
One friend sold a place and bought something else (bigger, comparable neighbourhood, required updating and repairs) for the same price last year. He is now renovating and repairing, put in a suite and redid landscaping. He's into it over $50K more than he paid. His mortgage is approaching $300K. They have similar income to us.
Even with the mortgage helper, he is house poor. They have made significant lifestyle 'sacrifices' to be there.
Now that signs are pointing to a flattening, if not declining, market, people should be nervous. If they are not, then they're not getting good advice or paying attention.
I noticed an advert for Tuscany Village today that stated still selling at June 2006 prices. If that's the case, then anyone who buys is now paying more than market value. June 2006 was close to the peak, that stuff should be less... developer's just prentending like the condo market is flat.
The whole notion of using the house as a forced savings vehicle is just plain stupid. Why would anyone pay the bank more than 100% of purchase price just to have the priviledge of having saved the value of the home? The average interest and average appreciation basically cancel each other out do they not?
This house flip contest makes my husband and I laugh. It will be interesting to see how many people they get entering. I can't imagine a lot of people are going to sign up for this contest. It is pretty much giving you name and address to the Canada Revenue Agency. Hello, we are Canada Revenue Agency. We saw you in the paper for winning a contest about house flipping and we would like to talk to you. Oops, what am I talking about, Canada Revenue Agency probably already has their name and address. Cackle, cackle.
The goal of the house flip is to make the maximum profit in the shortest possible time. Revenue Canada will only consider the profit income if they can prove that you were doing this as a business endeavour and not as a sale of your principal residence. If you only do it once and live there for a reasonable time you will be OK. If you do this multiple times and brag about it in the newspaper, like the article a few weeks ago, you will attract their attention.
For today's potential flipper Revenue Canada is the least of their worries. You only have to be worried about tax if you made a profit. If you buy a 300K house, pay 4K property tax and invest 50K you now have 354K invested. FSBO is not all that successful in a slow market so the real estate fees will be about 15K. You need to sell for 369K in order to break even. In a flat market you might get your 369K back and you made nothing. The mortgage payments, taxes, heating bill, water, electricity and your "sweat equity" were your occupancy costs. It would have been less stressful and a whole lot more fun to have been renting.
The downside is that the market turns ugly and you sell for a loss. By the way, forget about throwing the keys down on the bank manager's desk if this happens. The bank will foreclose, sell the property for any "reasonable" offer and you will owe them the difference between the outstanding mortgage amount (plus real estate fees and court costs) minus the sale price. You now have a new loan and no house. They will throw in the bad credit rating for free.
I have been doing some research on flipping a house. There are still some guys making money at it. Check out this video at:
http://tinyurl.com/2nw83k
Maybe I'll get eaten alive for writing in this blog...but we are one of those "evil" entry-level home sellers. But at least we aren't real home flippers.
We bought 4 years ago, saving a 25% downpayment by living in a glorified 2 bedroom crack house for 6 years with 1 (and for a while, 2) freinds sharing our low rent. It sucked but at least in 2003 we luckily found a single mom selling a cute, small 3 bedroom privately. She even knocked 10k off her listing price because realtors were essentially boycotting her (no commission, no clients).
We had no intention of "cashing in" on our investment/home because at the time we bought it, we were really in love with the idea of being home owners. We are selling now because, well, to be completely honest, 1) homes are expensive to maintain when you aren't rich and 2)we are sick of doing home support for 15 years and this gives us probably our only chance to get some serious money in the bank and do something different.
What about our nice home? Hey its great. Loved gardening in the big yard. Loved not having crazy people downstairs or agro/loud jerks upstairs. Loved buying stuff for the yard and house.
But folks. Our combined income is only 55k. Houses, even nice older ones, cost money to maintain. In the last four years we have spent $3600 on a woodburning stove, $900 on a new hotwater tank, $850 for a new fridge, $850 for a new dishwasher and $5700 ripping out walls and floors in the bathroom, retiling the bathroom and redoing floors in the kitchen and bedroom. Renos true but also necessary stuff because of damage not being repaired by previous owners. Add another $2500 for repainting our house for the sale but if we stayed, it would still need repainting.
This averages about $300 a month over 4 years. And if we stayed in our home we would also be paying over the next couple of years for a new furnace, wiring upgraded to 200amp and in maybe 10 years a new roof.
If you have a good income, say, family income close to $100k or more, I think you will be ok. But be carefull if you have a lower income like ours because even with our relatively low mortgage payments, we havn't saved a penny since we bought our house....and please, please if you do buy a home, make sure you do maintanance on an ongoing basis.
And good luck.
Hello,
The whole notion of using the house as a forced savings vehicle is just plain stupid. Why would anyone pay the bank more than 100% of purchase price just to have the priviledge of having saved the value of the home? The average interest and average appreciation basically cancel each other out do they not?
Not necessarily when you factor in the rent you have to pay at the same time. Particularly if you consider the rent rises with inflation, whereas your mortgage doesn't.
Mark_s,
You're comments are welcome here anytime. This is an equal opportunity environment.
Sounds like you have some good reasoning and judgement in your decisions.
"Not necessarily when you factor in the rent you have to pay at the same time. Particularly if you consider the rent rises with inflation, whereas your mortgage doesn't."
True, rent is money that you don't get back. But if you buy a $225K condo, at 5% interest, for 35 years, you pay $250K+ in interest. That's money you don't get back. Considering that a $225K is significantly inflated right now. And there's a good chance that all it will do is 6% or so over the life of your 'investment', your money is better invested elsewhere.
I'm not saying that a home is a bad purchase, I'm simply saying that if your home is all you can afford, its a bad investment. If you can pay your mortgage and all the other costs associated with your home and have money to invest, then great. But if it's a choice between renting and investing for retirement and just plain owning and counting on CHIP to be your retirement plan, then I think you need to think again. But that's just my opinion and I'm far from a financial planning or RE professional.
I've always heard that 'renting is just throwing money away' or 'it is not money you are getting back' or our all time favourite 'why pay the landlord's mortgage when you can pay your own'. We rent and it IS money we are getting back because we put any money we save from not buying a house (mortgage, taxes, repairs and such) into diversified investments and they are making us a very nice chunk of money each month. To me an investment is something that gives you an income stream. We will buy a house when the market starts making sense again which to us means that we will be able to pay off our mortgage in our lifetime. We will then have a house paid off and a good income from our investments. We just can't imagine only having a house. You can't eat door knobs.
I think these prices are unsustainable. I am thinking about when to become a first time buyer - maybe not yet - 2008 is the likely time to see some real dents in the prices.
Inventories have been increasing now in the Victoria area since summer of 2005, so unless that changes, something will have to give on the price front sooner or later.
I am also making a housing price blog/page, feel free to check it out...
Cheaprealty.net. It's a work in progress, much like my search!
hhv said But if you buy a $225K condo, at 5% interest, for 35 years, you pay $250K+ in interest. That's money you don't get back.
Thats a great way to think about it. Right now, for that $225k condo you'd pay, lets say $800/mo in rent. Now if you spend 35 years in that condo, at 3% inflation, you will spend $580K in rent. You can lower the inlfation rate to 1% if you want, and the number is still $360K.
You are absolutely correct though - everything I've read says that you should be saving 10-15% of your gross, and maybe 30% can go to housing. If you can't get into the market on those terms you probably shouldn't be buying.
Greg said I think these prices are unsustainable....
Maybe, but they are sure affordable compared to the rest of the west coast of North America. I have friends in Seattle, San Francisco, and San Diego, and they think our prices are great.
I don't doubt that there will be a flattening at some point soon. But I'd be surprised to see a huge drop (without a huge spike in interest rates or similar financial clamity). Victoria is a beautiful city and people are willing to pay for that.
greg,
You have some interesting graphs on your site. I found some interesting charts for Vancouver. It shows housing in different areas versus inflation and mortgage rates. The URL is: http://tinyurl.com/38qr6z
The current 9:1 ratio of average price to earnings is an interesting statistic. Have you considered a plot of this stat as well? Stats Canada may have the earnings data.
Another interesting one that I did is a rolling 6 month average of the average SFD monthly selling price. This smooths out the monthly "noise" and gives you a trend line. My plot showed this number has been relatively flat since last year.
jmk said
Maybe, but they are sure affordable compared to the rest of the west coast of North America. I have friends in Seattle, San Francisco, and San Diego, and they think our prices are great.
There are several reasons why this is true:
1. Salaries for professionals are much higher in the U.S. than in Canada. As an engineer I have seen this first hand having worked in both countries.
2. Income tax is lower in the U.S. so people have more disposable income.
3. Mortgage interest is tax deductible in the U.S. and this encourages people to buy more expensive houses. Prices rise to meet the demand. When you sell there is a capital gains tax so in a rising market this forces sellers to reinvest in another property instead of sitting on the sidelines with their profit.
4. The U.S. dollar has been worth more than the Cdn. dollar for many years. During the real estate boom 300K US would have bought a Cdn. house worth 400-480K so we looked like a great deal. That same 300K converts to 350K now.
5. Americans, in general, are more entrepreneurial than Canadians and willing to try an investment without examining it to death. If you look in the Caribbean, Mexico and Canada you will see many American property owners and far fewer Canadians.
Roger,
If you'd like to email us those graphs, I'll post 'em here.
The email link is above the picture.
If you don't want them public, but don't mind sharing them privately, I'd like to see them.
Roger, those are some interesting charts at the Financial Planning and Personal Sanity site. The points about construction and infrastructure ending late 2008 and helping to amplify a drop in values in the Lower Mainland are worth watching.
jmk,
all I can say is, perma bulls who think "desirability" and affordabiliy will drive prices up indefinitely in the local area, compared to other locales, should go take another look at the charts on my site.
The single family home price action is in a classic hockey stick pattern that usually precedes a sharp drop.
The fact prices are different in the US now is not a big factor, since the Canadian dollar has strengthened significantly. Since the US are already well into a correction which is likely to be worse than the one coming here.
Besides, if people could all move here because they like it, they would have done so already.
The local economy is seriously short of high paying professional jobs that would support the type of economic transplants you are talking about.
hhv,
I sent you the graphs that you requested. Did you receive them OK??
Yes, cheers.
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