Monday, April 28, 2008

Say we bought last year?

For fun. Let's say we bought a condo last March. We stuck to our "fundamentals" and paid $225,000 for a dumpy place in Central Park. We had to pay 1.5% in closing costs for $1250.

Ms. HHV gave us reason to sell this year in March with her big-time move up in her career. We won't pay rent in one town and mortgage in another, so we sell. We have no interest in being landlords and the building (as do most older buildings in Victoria) has rental restrictions, so that option is out.

The condo market did roughly 11% between March 2007 and March 2008. Our place? We'll, I painted it out at a cost of under $200 and about 4 weekends worth of my time. I got a great deal on some new cabinetry for the kitchen and single bath at a cost of about $4500. My family assisted me with the install at a cost of two dozen beers, a bottle of Crown, and 5 steaks ($200) and another two weekends. I went to The Brick and picked up all new stainless appliances and did the buy now don't pay til 2021 deal (hey, I'm selling my condo, I can't lose can I?) at a cost of $4500 for 5 appliances. I figure I'm getting at least 15% or more because I've made so many improvements.

I've paid out just over $800 in property taxes and another $2400 in condo fees this year. So before we talk about mortgage payments etc, let's add up the total. I'm out of pocket $238,850.

We list the place with a Realtor for $259,900. It's a nice place in a dumpy building in a not-so-nice neighbourhood, but there is still demand for low end properties in town and our Realtor thinks we have the nicest unit on the market within a few blocks of downtown in this price range. We're skeptical, but hey, we made a huge investment and we owe it to ourselves to get as much as the market will bear.

We get an offer after the first week. It's for $252,000. We counter with "yes" but no appliances. They counter with $254,000. We accept the offer. They go get financing. Can't get it. Deal falls through. We're bummed because there's a time pressure with our upcoming move and we were happy that we had an offer so soon.

Another week, another offer. This one from a qualified buyer. They do their homework and read the strata minutes for the past two years. They have trouble with some of the questions unanswered from the engineer's report dated November 2007. They offer $245,000. We counter $254,000. Eventually we settle with $250,000. Deal goes through. And we made only 9%. Not the market 11% and we made improvements. Man, are we jaded now.

Then we start crunching the real numbers. $250,000 less the Realtor's commission is $241,000. We "made" $2150 or approximately 0.9% on our "investment." In a market that reported 11%. Where did it all go?

Thank goodness we didn't throw that $5000 we actually built up in equity payments on the mortgage away on rent eh? We would have made over $11,000 in interest payments.

In that same period we made $9600 in rent payments and will have added $6400 to our $20,000 down payment. I know where I'd rather be right now. Do you?


Anonymous said...

If you buy a property with the expectation you will be able to sell it at a profit a short time later, you are a speculator. There is risk in this, and if you cannot accept that, then you shouldn't speculate.

If you buy a property expecting to live in it for a reasonably long period of time, then are forced to sell soon after and you either don't make a profit, or lose money, then you are unlucky. If the possibility of this scenario scares you, then by all means continue to rent. Some people just don't have the stomach for any kind of risk. Of course, the risk in renting is you have to accept what the rental market offers at whatever price the rental market will bear. It's your choice.

Buying a house or a condo to live in is not intended as a sure-fire way to make a profit. In the long term, property owners do better than renters in building wealth, but the emphasis is on long term.

In summary, would you complain about buying a lottery ticket and finding out it is not a winner? Would that seem unfair? You took a risk and lost. Real estate is no different.

So and so said...

good scenario!

Metaldwarf said...

property owners do better than renters in building wealth, but the emphasis is on long term.

a lot of that assumption is tied to the FORCED savings in a mortgage. now that people can go interest only they are just spending the difference.

its a challenge for most people to actually save the difference between rent an mortgage. if a person has discipline and a decent investment portfolio i would argue the renter and the owner are on even ground.

awum said...

Now run the scenario with the expectation of a flat market over the next couple of years. It makes no sense to buy at all with the amount you save by renting.

That whole "real estate is a long-term investment" is, frankly, wearing thin. Everyone who trots it out ignores what the numbers tell you:

Yes, historically MOST of the time when you buy on date X, you will be ahead at date X +5 years, even more likely at X +10 years, and more even more likely again at X +20 years. But not always -- there have been (historically) bad times to buy real estate, times when the long run just doesn't work out for you.

Sure, right at this moment, everyone (even the 1981 purchasers who hung in there for 25+ years) can argue that their long-term investment in real estate has paid off, but that's because (duh!) we are at historically high rates of unaffordability -- we are at the TOP of a frickin' BOOM!!

Do not, ladies and gentlemen, even for a second, allow that argument to hold traction.

Imagine you are in a group climbing a mountain in a fog. Sometimes you step forward and you go up, but occasionally you walk on a flat or even down a bit before going upward again. No big deal -- for the most part, since you started the expedition, a step forward has taken you higher up the mountain. So you assume more steps will take you higher again. At some point, you look around and you see the vegetation is gone, there's no more mountain goats and its getting hard to breathe. And then you start heading downward. You suggest you are near the top, let's stop wait for the fog to clear and take pictures. Nonsense, your guide says, on the long term stepping forward takes us higher.

The logical problem here is that your guide assumes the mountain has no top. His logic sounds OK, and you might trust him because he has a license.

But what if you are at the top? Keep walking and you end up on the other side, down in a valley, off a cliff -- you might be climbing another mountain again, but maybe it's not as high as the last one.

You get my drift. Sure, RE is generally a good investment long-term. However, sometimes, as when we are at the top of a boom, that logic just ain't necessarily gonna mean you should buy. I believe we are in that mountain-goat-free zone right about now...

S2 said...

You made money HHV!! You should be happy.

You can now tell all your poor renter friends that you made money in real estate (shhh, you don't have to tell them the real numbers) which will push them to buy too. Well, if the HHVs can do so can we.

You are ahead unlike those sucker renters that we all know are deeply in debt, wasting their money and are forced to rent.

Boy, I bet you are glad you didn't buy last year.

awum said...

I wish I could send this one message out to all renters and prospective first-time buyers:

Now is the best time in recent history to stay out of local real estate, to save up a downpayment, and to wait. The risk of doing that is low, and the potential gain is high. The risk of buying residential real estate is high, and the potential gain is low.

If we all just behave rationally and show patience, the market will have no choice but to moderate. Don't let the flat market theorists fool you, they are counting on the irrational stupidity of first-time buyers to bouy up the flagging market.

Why would we do that?

hmx5 said...

Wow lousy scenario.

roger said...


If someone is considering the purchase of a home they really should talk to a REALTOR® in order to get another viewpoint on renting vs. buying. A local Sooke REALTOR®, on another blog (KIV), takes the position that it is always time to buy.

There are tools to help you make the decision. Here is a free, easy to use calculator provided courtesy of Sunbeam Realty.

roger said...

How long is long term? Here is an example I posted on another blog showing that buying a condo and hoping to sell it for a profit in five years is not a sure thing by any means.

Rent vs. Buy Requires Analysis

There is a brand new 400,000 condo that has become available from a developer. The developer will sell it to you for nothing down and offers a 5 year, 5% closed mortgage with 40 year amortization. Condo and city taxes are $400 per month. Or a recent buyer will rent you their identical new unit, on the same floor, for $1500 per month on a 5 year lease. (This is typical of what you might find at the Bear Mountain development.)

Some friends say: "buy you are only throwing the money away on rent and here is your chance to build equity. You can sell at the end of 5 years and move up the property ladder."

Your monthly payments if you buy will be $1915 for the mortgage and $400 for the condo fees and taxes totalling $2315 per month. At the end of 5 years you have spent a total of $138,900. The bank has received $96,870 in interest; taxes and condo fees totalled $24,000. Your equity in the condo is $18,043 and you still owe $381,957 on the mortgage.

If you rented the place instead of buying you would have paid $90,000 over 5 years. Now if you invested the $815 difference between rent and your monthly payments in dividend stocks (minimal tax) paying 3.5% (compounded monthly) at the end of 5 years you would have $53,355 in savings. Even putting it in a 0% interest chequing account you would have saved a total of $48,900.

Now the condo owner would have to sell privately for 35.3K more than they paid in order to be ahead of renting (53.3K-18K). If they used an agent to sell and they paid 15K in fees they would need to sell for $450.3K in order to break even with renting. The situation for the buyer is even worse if you include maintenance, property transfer tax and legal fees.

What happens if the condo market stays flat and you can only sell for $400K? You are now 50K poorer than the renter!! If the RE market goes down you are even worse off.

hhv said...

What I want to know is this: when we crunch the numbers, we see that even given 11% gains, or in our hypothetical case 0.9%, that the money accumulation just doesn't make sense. Why then does everyone believe their home to be such a great investment.

Brainwasshed by the hype?
Wishful thinking?
Lucky that some years in the last 10 went 25% or more and they really did make money?

S2 said...

Or all of the above.

vg said...

Can you believe these banks now telling us we aren't in enough debt and we should keep on maxing out ? pardon my french but how phucking irresponsible is that ?

Load up please,cause we the bank have to pay back all that AAA paper junk we had to write off so please help us out,talk about desperation.

Banks bank on ‘healthy' Canadian consumer

"Canadian consumers are in such good shape they could probably afford to pile on a little more debt, executives of the country's biggest bank suggested yesterday, as U.S. data showed American consumer confidence at its weakest since the lead-up to the U.S. invasion of Iraq, and home prices dropping faster than ever before.

“The Canadian consumer is extremely healthy right now,” Dave McKay, the new head of domestic banking at Royal Bank of Canada, said at a presentation for analysts in Toronto.

“We're seeing record employment levels still,” he said, noting that rising unemployment is a key driver of consumers' inability to repay debts.

Consumers here have disposable income and will benefit as lower interest rates improve housing affordability, he added."

hhv said...

Funny how they're still seeing "record employment" south of the border too...

Everyone should have a look at Langley Financial Planning site today. WOW.

vg said...

"Bankruptcy lawyers and personal finance counsellors have begun ringing alarm bells for consumers, suggesting now is the time to be whittling down debt."

Common sense, like the above statement,goes out the window when everyone's a winner.

Anonymous said...

Anyone else see the CBC National newscast tonight and the part about Canadians looking at buying property in Arizona and there is a lot for them to look at.

I mean really. If a Canadian retiree can buy a 3 bed/2 bath home for $150,000 in Arizona why the hell would they buy here in cold, rainy, bloody overpriced Victoria. Makes no sense at all.

S2 (too tired to log in)

roger said...

S2 said:

I mean really. If a Canadian retiree can buy a 3 bed/2 bath home for $150,000 in Arizona why the hell would they buy here in cold, rainy, bloody overpriced Victoria. Makes no sense at all.

There are some issues associated with buying in the United States.

1. Immigration only allows Canadian citizens to stay a maximum of 6 months in any 12 month period.
2. Provincial governments only allow 6-7 months out-of-province before losing health coverage.
3. The IRS in the US requires Canadians to communicate with them if they are regularly present for 4 months or more.
4. Upon death there are estate issues and taxes to be resolved in the US.
5. Arizona is OK for property taxes but Florida makes non-residents pay more than residents.

All that being said if what you want is a seasonal home at a low price there are certainly some deals and they keep getting better as the months go by.

S2 said...

Here is a link to the CBC site that has a video of last night's show about Canadians buying property in Arizona. It is under the Consumer Life banner: video, real estate

Sorry. I don't know how to link direct to the video.

victorianna said...

“The Canadian consumer is extremely healthy right now,” Dave McKay, the new head of domestic banking at Royal Bank of Canada, said at a presentation for analysts in Toronto."

Interesting. Especially in light of that whole Debt Trap thing that some other media outlet was trumpeting a couple of weeks ago. So, big surprise, banks would like to see even more Canadians completely strung out with debt. And when they approve me for a mortgage that is 8 times my annual family income, they have only my best interest at heart.

roger said...

Canadian Press (CP) release:

BoC governor Carney warns about loosening mortgage standards in Canada


OTTAWA - Bank of Canada governor Mark Carney is concerned about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.

Carney told a Commons committee Wednesday that the central bank is watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.

"We have concerns with the increased prevalence of very long amortization and higher value mortgage products," he said.

hhv said...

"But that stuff isn't sub-prime, you need good credit to qualify"

It's funny when things turn sour how the truth starts coming out eh Roger?

Anonymous said...

So much for politicians telling us that employment income is on the up and up in B.C.

roger said...

Stats Can data in this news release.
Average family in Victoria has a little more in its wallets than five years ago: census


OTTAWA — The latest census data suggests the average family in the Victoria region has a little more in its wallets than it did the last time Statistics Canada asked people about how much money they make.

New information from the 2006 census released Thursday indicates the median income for families in and around Victoria was $70,878 - an increase from the 2001 census, when it was $67,748 when adjusted for inflation.

The 4.6 per cent increase compares with a national increase in income of 3.7 per cent and a provincial increase of 1.8 per cent.

Individuals in the metropolitan Victoria area had a median income of $28,541. Five years earlier, the median income was $27,732.

Not surprisingly, the level of education has a direct impact on earnings. Among people in the Victoria area with a university education, the median wage was $57,447; those with college degrees made $42,689; trade or apprentice school grads made $42,702; people with only a high school diploma made $39,202 and those with no secondary school diploma made $32,332.

What about all those seniors??

Senior citizens in and around Victoria had a median income of $27,051.

vg said...

Amazing roger, and the Royal Bank thinks I don't have enough debt to pile on to my declining wages,what a frigging joke.

roger said...

VREB stats for April are now available here

A graphical analysis of the VREB data is in a slideshow @ VREB Stats Analysis Use the Pause and Single Step Buttons instead of autoplay.

The VREB single family home data, published on their website, includes waterfront and acreage sales. When I receive the complete VREB report that has a more detailed breakdown, as used by CMHC, I will update the CMHC slideshow in the gallery.

Median and average sales numbers only tell part of the story. I will be interested to see what you folks think after you look at all the data in the slideshow.