Monday, February 15, 2010

Olympic silence

Is the perfect time to introduce the straw that broke the camel's back.

While we DON'T know what will be announced, it's safe to say something will be (I'm leaning towards EXTREMELY minor--does she have a pulse? Good. Is it under 65 beats per minute? Good. Give her a mortgage.)

Is it over? Bear beers soon?

Discuss.

124 comments:

HouseHuntVictoria said...

What I'm reading is FTBers won't be allowed access to variable rate 5% down 35 year amortization mortgages. Considering less than 20% of the mortgage market is made up of variable rate products (new sales, today) what we will see announced will be window dressing, a "we acted" announcement, and mortgage biz as usual.

Excitement over.

Just Janice said...

It's not what is done, its the perception of what is being done that will matter.

If it's perceived as a preventative measure, then you're right - mortgage biz as usual.

If it's perceived as doing something in response to a bubble, then it still might be effective. Half the battle in getting a bubble to pop is recognizing that it exists in the first place.

omc said...

There is a little phrase in there about checking if the borrower could afford a shift of more than 2%. That is a 30% increase in carying a mortgage, and many ftbs in this town couldn't afford that.

mln said...

Affordability checks alone won't get Flaherty the cover-your-ass points he needs, IMO.

I think that the change would need to be bigger in order for him to avoid some of the blame later on, assuming he actually understands the extent of the problem.

Who knows, maybe they'll drop 35-year amortizations completely?

Just Jack said...

The difficulty with not allowing access to a variable rate for FTB's is enforceability. Its kinda like our bi-cycle helmet or anti-idling laws.

Flaherty has to do something that ALL lenders are forced to follow. And what he does MUST have an affect on the market. The housing market is out of control and to do nothing, while politically advantageous to his party now, may have deep repercussions at elections time when he is perceived as Nero fiddling while Rome burned.

I ditto Just Janice, who couldn't with an expecting mummy, that how Flaherty is perceived is almost as important as what he does. Simply because real estate prices have left the tangible asset of brick and mortar which provided shelter, and have now become a status symbol of perceived wealth.

And Just Janice, I can't believe it my baby turned five last week! It seemed just a week ago, our housed smelled of $*#$. I miss those days. (oh yeah another reason to live in a rental with a new baby)

HouseHuntVictoria said...

I agree on perception.

How I'm reading the potential change:

"If you're a first time buyer looking to use a variable rate mortgage (5%/35year), you will only be given the same amount of money as if you were a first time buyer using a 5%/35year on a fixed term."

Does anyone really think this will have either a perceptive or material influence on the market?

Robert Reynolds - GBA said...

I am always game for a brew.

Personally I would prefer a change to amortization length (25 years max) rather than a change to downpayment rules. Purely for selfish reasons. I save a large portion of my income 20% but I simply have not had enough time to build a big down payment yet. I have 5% of the type of house I want to buy but not yet 10%

The last two years my income has doubled as I earn more clients so my savings are growing faster but I simply don't have the years behind me at a decent income yet.

My income can support a short amortization, my down payment can't just double instantly.

Animal Spirit said...

I'm with Just Janice on the perception thing.

What could be interesting is if somehow there are differing requirements depending on where one lives in Canada. If not, since people are superstreched here vs Ontario, Quebec and Alberta, and since our BC is disposable politically compared to Ontario, the results could be particularly nasty to Mr. Housing Market.

The level of outrage on the part of the builders, RE agents and mortgage brokers will tell us how signficant the changes are. Tons of outrage, very significant changes. Muted acceptance - little change. Positive statements - cosmetic surgery that isn't changing the mortgage pig.

WiseInvestor70 said...

It is so funny how not only first time home buyers, but people in general really believes that house prices will never go down, especially in Victoria, let's be honest is only a 350,000 inhabitants city, I mean is not Toronto or Vancouver, yet prices comparing sizes, construction quality, and overall condition of properties are lower than major cities.

Now why as a business owner or self employed person, someone has to put a 35% downpayment, while people who works for my company have to put a 5% downpayment ?? Would that make any sense ?. I would say let's all play under the same rules, and let's see how many people can actually own real estate in this country ? Not a lot I must say.

By the way, have anyone has seen what their money can buy in other parts of the world with half or even a quarter of the prizes that someone is paying here in British Columbia. ?

God it remains me California, Oh! I almost forget, their real estate prices already drop by 75%, so that is were I see BC real Estate market in no more than 5 years. It's is a simple economic fact, when incomes can grow at the same pace as real estate prices, yet these prices grow 10, 20, 40% in a year, is simply what is called a Bullish attitude that eventually will meet the big BEAR.

By the way, the only thing you need to do to crash a market is convince all the people you know not to be dragged into this market, and into this game of overpriced properties. and within 6 months you will get a drop off in prices of at least 15%.

Just Jack said...

You're not going to get the Feds discriminating based on place of origin. And I don't think it would be fair to FTB's to be hobbled by a more expensive mortgage - just because they are less wealthy than others. Any change Flaherty does has to be universal and fair. To me that only leaves the down payment and amortization.

If Diamond Jim shortens the amortization to 30 or 25 years, then he is hanging those high ratio buyers who took out 40 and 35 amortizations when renewal time comes.

However, a change in the down payment will only affect new purchases. I don't see the reason of pissing off recent home buyers when he could just piss off a smaller group of prospective high ratio buyers.

Anyway, his next pair of shoes should be runners because there will be a lot of people with an axe to grind chasing him. Any bets that he'll be getting his pink slip from Harper a month after the budget or a least shuffled to another portfolio. I'm surprised no one left him stranded on an ice flow when he was up north.

Honestly, would anyone here hire him as a VP of finance?

msr said...

I'm with Rob. I'm always up for beer ;)


I think reducing amortizations is the most effective way to reduce prices in the current climate. But I also think raising DP requirements would probably just end up emptying out the what's left of the FTB pool.

That would good policy if we were deluged by new FTB but I think that time has passed and implementing it now would just cause a crash. Now, that may be what we want but I don't think it makes good public policy.

Animal Spirit said...

Just Jack - yes, I would hire him. Intelligent, speaks well, defends the party line, will likely take one for the team. Would be excellent in a cabinet or a boardroom - irrespective of political stripe.

Agree with your argument that it has to be fair across the country. Given this and our affordability, BC will likely take a harder hit.

I'll bet on 30 year amortizations, requiring affordability on 5 year prime rate and placing these requirements on refinancing.

Don't think that it will make a difference. The RE/mortgage sales force is so good now that most people will be pushed into purchase. It seems so good, so easy, so why not? Most people will fall for it. Betting that more will.

Anyone know of a good 3BR full house for rent to a family that likes to garden?

Robert Reynolds - GBA said...

Probably will be unilateral as ontario is what matters and they are nowhere near as bubbly

maybe give control to provinces?

Animal Spirit said...

Feds like decentralization right now, however that would be a really signficant legislative / regulatory change that couldn't be done quickly. Odds on is that the change will be done within the existing system.

Animal Spirit said...

Anyone know what the broker/agent chatter is on this right now?

Vic said...

Sounds like a finger in the dike and he chickened out as expected.

If the perception comes across as it is suddenly tougher for a certain percentage to qualify then maybe the young and dumb will buy it and that will start the first leg down but I am not quite convinced this will have any long term effect.


Agents will play this up like ho's and keep the BS machine going that 8 times your income is normal to keep their bidding war games from blowing up in their faces.

patriotz said...

Half the battle in getting a bubble to pop is recognizing that it exists in the first place.

Completely off the mark Janice, even as late as two years into the US bust most people thought that prices were still going up, according to polls.

Mr. Market doesn't care what anyone thinks.

patriotz said...

Considering less than 20% of the mortgage market is made up of variable rate products (new sales, today)

It's new sales that drive the market. Enforce qualification based on 5 year rates and you saw the bottom rung off the ladder. A dropout of just 20% of able buyers is more than enough to start the downward spiral.

And just in time for Gordo's cutbacks in the budget. The RE market in this province is toast.

Village said...

I don't see this having a large effect currently. With 5yr fixed posted at around 4%. That's pretty damn low already. It's when interest rates rise that it'll start to matter. When the variable is 4% and you need to qualify at 6% is when it'll hurt.

I'm still expecting the end of the Olympics to do the most damage both in psychology and jobs department locally. Projects will have wound down, large debt hangover, likely listing surge as vacation rentals get dumped.

HouseHuntVictoria said...

Changes announced. Nothing drastic.

FTBer must qualify for 5 year fixed rate mortgage (can still use variable). Higher down payment for so-called investment properties (5% to 20%), still lots of wiggle room for people to get around this IMO.

Refinancing changes are minor too IMO (apparently Big 5 banks have limited to 80% for the past 12 months or so anyway).

HouseHuntVictoria said...

This guy says that "the third one willl have the most dramatic affect on the overall real estate picture. With the low interest rates and the recent decline (now turned around in most markets) in prices we have seen more and more investors in the market."

There you have it. Speculation is rampant in Vancouver. Anyone putting less than 20% down in that market isn't cash flow positive. So they're not "investing," they're speculating.

HouseHuntVictoria said...

In other news, the Vanier Institute tells us what we already know: When interest rates rise, a lot of people will be up sh&t creek without a paddle and surprised to find their canoe leaks.

Vic said...

The bottom line is there is serious problems behind the walls of the big 4 banks or they would not have pushed so hard for this. Banks do not do think ahead,they react to what is happening, they just haven't come clean.

The new rule on speculation may just kill the condo mania and you may see some big deals killed like last week's announced one on Johnson St. With no more flipper line ups and deals cancelled then just maybe the first wave down will kick in til interest rates make their first move up.

As far as the higher interest rate test goes, will the lenders and mortgage brokers try to fake your income by asking "you will be the boss in a couple of years right ?" wink wink. I put nothing past any of them, they are fighting for sales to keep their jobs and will do anything to close the deal. Test buyers for 7% and we will see some real panic in the whole bizz but that won't happen. Flaherty obviously has no clue and that is a scary thing.

Vic said...

Wow, I spoke too soon. The big boys got booted in the cajones. Couldn't be because that hockey players development is in suspect shape ? of course not. ;)



"Lenders cut funding for Colwood $350-million Aquattro waterfront development


Construction stalled on Colwood condominium, townhouse project"


"The future of a high-profile waterfront development in Colwood is in doubt after a consortium of lenders financing the $350-million project cut off the money"

Mark said...

Regarding the Aquattro.....

We looked at renting a unit in there. The owner who paid $700K + (no this is not a typo) was asking 2000/month, we said the most we would pay is 1700. He was ok with that. It was a beautiful unit 2Br, 2 Ba + den. Ultimately we couldn't get past the long drive into town.....just made longer by the way with the lagoon bridge being shut down!

He said he was waiting a couple years for the market to roar back so he could flip it (yes he got caught speculating). It was all I could do to bite my tongue as he sounded like a nice guy and I didn't want to piss in is cheerios.

I told my spouse there was no way they were going to finish the project back then as very few units had sold and the prices were outrageous (even in this market).

This recent news does not surprise me at all.

Regarding Carney....what a pile of Hooey! Just enough to make it appear like he did something and all the while still denying there is a bubble??????? IDIOT!

This will come back to haunt him.....all the major banks saying you need to get aggressive and this is what he comes up with? Again no surprise as the Govt is shitting their pants right now and don't want to make an already bad situation worse. Irresponsible, very irresponsible......

Bitterbear said...

Re Aquattro

Out of curiousity, I went out there one morning a few months back. As I was standing in the office looking at the floor plans, an exhausted, beaten looking man approached me somewhat sheepishly and told me that at this point, everything was negotiable. Make an offer, he said. That man, it turned out, was Peter Daniels.

These are gorgeous, high end places. They have wine coolers the size the dishwashers and showers the size of front hallways. I heard a rumor that two bedroom, two bathroom units are now going for 400K, down from 799.

Vic said...

Just as the Globe reporter said on BNN, Flaherty can't come out and say there is a bubble as it would be political suicide. No politician will say to voters your house is overpriced and going to fall. It's all a perceptions/spin game like we've seen so many times.

The other point he made was key, that the banks have to make the government pull the strings as the mortgage brokers and fly by nights will still lend to anyone with a pulse so they will lose business.

omc said...

I wouldn't get too excited that the new mortgage rules will have any effect on the local market at all. There have been very few "investors" in this market for quite a while as the numbers don't add up.

Marko said...

"These are gorgeous, high end places. They have wine coolers the size the dishwashers and showers the size of front hallways. I heard a rumor that two bedroom, two bathroom units are now going for 400K, down from 799."

Go to my website, www.jurasconstruction.com, and click on Limestone Lane. I sold this home for 585k and I was happy with that. We are talking a 2430 sq/ft home with 18'' ceilings, wine cooler and KitchenAid appliances, 7.1 Polk audio system, three full bathrooms, jetted tub, real Brazilian Cherry flooring, cedar finishing, marble entrance, custom mill work...etc. Just take a look at the pictures.

It doesn't surprise me that Bear Mountain, Aquattro, Bayview can' sell these "luxury apartments." A wine cooler is $500, not a high end item.

The difference between the cheapest appliances possible and high-end is less than $7,000 in a Condo. You can't put in $7,000 more in appliances, $3,000 more in flooring, $2000 more in granite and ask 200k more for a 1000 sq/ft Condo because now it is "luxury."

You really need to know the market to play the game. Once again, I will point out Chard Development downtown, launching its 4th building this spring, the834.com 70% sold out, excavations haven't even finished.

Just Janice said...

In economics, we frequently talk about things at the 'margin' as being the important things. The things that determine whether or not doing something is worthwhile. These appear to be 'marginal' changes, but I think the impact might be noticeable.

For what it's worth, here's my prediction:
1. A last gasp, flurry of activity before the rules kick in April 19. If you have something you were wanting to sell, list now - even if its not quite as 'ready' as you'd like it to be - the price won't get better. Many would be buyers jump in for as much as they can with a 'now or never attitude' as they refuse to believe that house prices will decline, or will ever decline enough to enable them to buy again under the new rules.
2. The May numbers to fall off a cliff, in part because a lot of the demand will be brought forward and in part as the new rules will limit the maximums that people can borrow. They will no longer qualify for what they would have qualified for under the old rules...I ran the numbers into a maximum mortgage calculator for a couple earning $100,000 per year with a 35 year term and at the variable rate (1.8%) they would qualify for $722,258 in mortgage at a 5-year fixed rate that number drops 23% to $554,826.
3. In July the HST kicks in, a further (all be it slight) blow to the market.
4. By mid to late 2010 other fixed interest rates begin to increase as the bond market begins to have to increase returns to attract investors. This will further limit the amounts buyers will qualify for.
5. The rules regarding refinancing will begin to bind as those who may have been able to refinance themselves into ever higher standards of living will hit two walls - falling home values and limits on the amount of refinancing available. Some of the impact may result in people selling their homes to access the equity in them, it may also increase the rate of consumer insolvency/bankruptcy, as people will no longer be able to 'wish' their financial troubles away at the stroke of a pen.

The changes are small, but they are actually quite significant, particularly for markets like Victoria, Vancouver and Toronto. Technically speaking adjusting the downpayments and maximum terms may have been a 'less significant' move than what has actually been done. What's funny though is that many people won't realize how significant the changes actually are...they appear to be small and most will fail to connect the dots on how these changes will feed into the larger market.

It's beginning to smell a lot like spring, and the bears can finally wake from their hyper-extended sleep in.

Just Jack said...

At this junction in time, before the new lending regulations take affect I thought that a snap shot at "speculation" as measure by the length of time the property has been held before being listed again might be shown. Perhaps in 2010 2H, this could be done again for comparison.

I looked at 100 current listings of condominiums and 100 current listings of homes in the Victoria area. And then looked at when they had previously sold in order to estimate the turn over rate of properties.

Current Listings:
Condominiums

previously sold
2009 15%
2008 18%
2007 19%
2006 16%
2005 7%
2004 7%
2003 3%
2002 1%
2001 2%
2000 1%
1999 and later 11%

So one can see that 52 percent or half of the condominiums that are now listed for sale were bought in the last 3 years.

Now houses
2009 5%
2008 12%
2007 16%
2006 15%
2005 11%
2004 4%
2003 7%
2002 2%
2001 5%
2000 2%
1999 and later 21%

For houses 48% or roughly half the homes listed for sale were previously purchased in the last 4 years.

It seems odd that the turn over rate for housing is so high in the first four years of ownership. As opposed to the turn over rate for properties held over five years being relatively flat.

Vic said...

"The difference between the cheapest appliances possible and high-end is less than $7,000 in a Condo. You can't put in $7,000 more in appliances, $3,000 more in flooring, $2000 more in granite and ask 200k more for a 1000 sq/ft Condo because now it is "luxury.""


And we wonder why developers get a bad name when the public figures out how they just got ripped off.




"You really need to know the market to play the game. Once again, I will point out Chard Development downtown, launching its 4th building this spring, the834.com 70% sold out, excavations haven't even finished."


So who bought the 70% ? I bet half were flippers on free money who are now screwed when the condo market tanks. And who will buy the last 30 % if the new flippers have to pay 20% more on a down payment ? And what happens to Chard if no one buys the last
30% ? I would say another Aquattro is waiting in the wings.


It's pretty naive to think there is a never ending pool of sheep to buy these overpriced boxes. The pool is damn near empty and we know what happens then.

Vic said...

Pumping Chard as some sort of bellwether to what the future holds for Victoria is kind of lame after reading this part of the TC article. Wait til BM deal comes out, I am sure Chards deal will be the last of the big deals for a very long time. Maybe you missed this part marko.



"In Colwood, there are about a half-dozen projects on the sidelines, including the proposed $1-billion Colwood Corners residential and commercial plan and the Silkwind condo project. The latter remains a gaping hole in the ground."

Robert Reynolds - GBA said...

The official wording from Govt.

here
and
here

my thoughts

Marko said...
This comment has been removed by the author.
Marko said...

"Pumping Chard as some sort of bellwether to what the future holds for Victoria is kind of lame after reading this part of the TC article."

I am in no way associated with Chard, nor am I predicting the future.

I am just noting that developers can be successful in any market if they have the right project, in the right location and at the right price.

Failure of such projects such as Reflections, Bayview, Aquattro cannot only be blamed on the market, but execution as well.

The Juliet and Reflections were finished at the same time, one developer went belly up, the other had a successful project and quickly started another building. Same market, different results.

Vic said...

I wouldn't be calling it a success until the yet-to-be-dug-excavation hole is completley built. There is so much time for many things to go wrong as seen on past projects where people back out in droves or developers try to jack up cost over-runs.

Animal Spirit said...

yesterday I wrote:

"The level of outrage on the part of the builders, RE agents and mortgage brokers will tell us how signficant the changes are. Tons of outrage, very significant changes. Muted acceptance - little change. Positive statements - cosmetic surgery that isn't changing the mortgage pig."

today over at Vancouver CondoInfo, permabull/industry blog writer ___________________
Dave Says:

February 16th, 2010 at 8:35 am

These are good and prudent changes.
_____________

Point made. RE/mortgage got the Minister's ear and these changes won't modify the trend line. Congrats to all those in the industry - you won the battle with the big banks.

On another note, heard second-hand today that Ministries are planning more staff cutbacks in preparation for March's budget.

patriotz said...

I am just noting that developers can be successful in any market if they have the right project, in the right location and at the right price.

That's a tautology Marco. In other words it isn't saying anything.

Animal Spirit said...

patriotz - I disagree. Marko has a point - in any market one can be successful.

Panza said...

And almost anyone can profit in an overly bullish market. But the Aquattro was never the right project in the right location at the right price. And it is one more welcome harbinger of change.

I am happy about that populist bit of legislation announced today. As many have predicted, it will probably lead to a flurry of people buying above their means before the change deadline. Thus it will also lead to a more spectacular pop and a quicker return to sensible pricing.

Vic said...

FWIW, CTV said the banks are saying they aren't waiting for the deadline and will be implementing them right away. Mortgage brokers will be busy leading the final herd of sheep to the slaughter.

patriotz said...

Marko has a point - in any market one can be successful.

That's not saying anything either. What is saying something is telling us what economic parameters are necessary to be successful, not truisms like "the right place", etc.

Just Jack said...

I have come to a conclusion that home owners in BC are NOT taxed enough. The provincial government missed out on a lucrative gravy train by not taxing away most of the growth in prices.

Say, the typical household is maxed out at paying $2000 per month in mortgage and $250 per month in property taxes. If you increase the property taxes to $2,000 per month, then the maximum mortgage would have to fall to $250. So a buyer could only finance a fraction of what they can today.

This would solve the problem of affordable housing as the province and municipalities could by the Bear Mountain McMansion put up thin partition walls between the rooms and house a dozen or two low income families.


Who am I kidding. How do you thing the provincial government is going to pay for the Olympics. They will just cut back payments to the municipalities forcing the municipalities to raise property taxes.

BC "The most taxed Place on Earth

olives said...

HHV, there is a post on KIV about renting that is begging for your response.

Vic said...

re: KIV post : And agents wonder why they get slagged when they post fear factor crapola about missing out on even higher prices and never getting back in.

What a disgrace to the industry,do these people not have a clue about valuations ? What do they think is normal for this town ? 10 times income ? 12 ? Did they miss the part about government layoffs ? Developments denied major money ? BM not being able to close a deal for a year now ? Another soon-to-be unemployed agent in the site lines.

Just Janice said...

What got me about the KIV realtor is that we presently live in a world where somebody with a Masters in Education earns more selling real estate than in improving the school system!

Loved the graph posted by Olives over there...it shows that anyone who bought real estate in the US in 1895 was screwed in real terms until 2001, those buing in 1890 didnt make much over and above inflation until 1945, anyone buying in 1908 didn't make any gains until 1948 those who bought in 1978 had to wait until 1989 to make any real return. It really highlighted the *luck of timing* element to the market.

HHV the only thing about keeping the condo as rental property is the risk of property value declines - and home equity isn't real until its realized as money in the bank. Other investments might perform better at a lower risk over the next few years.

Just Jack said...

Ahhhhhh, the voices of sanity in an insane world. :-)

S2

patriotz said...

HHV the only thing about keeping the condo as rental property is the risk of property value declines

There are plenty of other "things":

1. Declining rents (as we are alredy seeing in Vancouver and all over the US).
2. Higher property taxes (as discussed).
3. Vacancies.
4. Assessments.

Also agree with JJ that property taxes should be a lot higher. Property tax is the only tax that cannot be evaded, and does not discourage productive activity. And I think it's inevitable that they will become higher for these reasons. There is simply no other place for the government to get more. Which is yet another reason why the long term outlook for RE looks so bad.

HouseHuntVictoria said...

Just Janice & Patriotz,

While I agree that there is much downside risk, we don't know enough about the property in question. If this person paid $120K for their condo a decade ago, has paid down consistently over time and has a low mortgage cost, the rent it collects now could provide a nice little return for some time.

If carrying costs are $700/month right now and the individual can get a decent long term tenant for $1100, having $300/month cash flow should provide a decent cushion for a lot of the bumps you write about.

I'm not of the mindset that owning a rental property is a bad investment over the long term, especially if the owner is renting somewhere else for the short term. Worse case scenario the family moves back in, which they can do within 60 days as I understand the RTA.

Just Janice said...

But HHV - even if the person has no mortgage, keeping the condo might not be the best decision. Keeping the condo means forgoing the use of that money for other purposes. Lets say the condo is worth $300,000 - then even at 3% interest the person is foregoing $9,000 per year without risk and without additional costs of property tax, maintenance, advertising, etc. A high priced condo rental would garner maybe $1300 per month in rent (huge maybe there), but would involve $1200 per year in property taxes, $250 (conservative) per year in maintenance, $2400 in Condo Fees, plus the risk of property devaluation. So the carying cost would be $3,750 per year and the net rent would be $11,900 - just $2,900 more than in the dump the condo scenario. If condo prices drop 3% the person loses $9,000 in equity and has a net return of $2,900 compared with gaining $9,000 by putting the money in a alternate, low risk investment earning 3%.

If it's not worth it to buy real estate in Victoria right now, then it is equally not worth it to keep real estate in Victoria right now.

In my opinion the condo market is likely to be disproportionately affected by the recently announced mortgage changes and a correction larger than 10% in that market is likely over the next 12 months.

HouseHuntVictoria said...

JJ, agreed. I'm mainly trying to be balanced. I'm not a fan of rental properties as a form of investment. Ultimately, it's speculation on higher future value. Every property investment book I've ever read have always followed the monopoly method: buy a shack, buy a house, buy another house, sell the 3 to buy a small apartment etc... in the end sell it all for cash.

You know residential real estate investing is a poor persons game when pension funds avoid it like the plague.

Robert Reynolds - GBA said...

Man I just had a crappy day. I sat down with a client I inherited recently who hasen't had anyone look at his investments in 10 years, they were all Nasdaq, he is down 50% over the last 10 years. Brutal.

I got him repositioned, set up TFSA's for him and his wife.
Convinced them to set up RESPs for the kids when they come in next week and do their RRSP contribution.

Ten years ago they paid a financial planner do a plan for them, it was totally unrealistic, retirement at 55, 12% compound ROI forever. After the wife left to pick up the kids the husband asked me what their retirement plan looked like now. I plugged as much as I could into my planning software. Retiring at 55 he would be broke at age 66. If we wanted to retire at age 60, 5 years after his goal of freedom 55, he needs to save another $18,000 per year, every year, for the next 12 years before he retires. He almost cried.

Great guy, runs his own business and is successful at it too. Great family, kids. I feel like I just crushed him showing him the numbers.

This client is way better off than most, he has assets and income and rental property. His mortgage is almost paid off. The retirement crisis is going to be HUGE. Even if nothing happens to houses in the next few years, once the bulk of the boomers start to retire they are all going to sell their houses. Ten years from now it will be their only option.

Robert Reynolds - GBA said...

HHV Said
You know residential real estate investing is a poor persons game when pension funds avoid it like the plague.


There are some awesome Real Estate funds out there, the best is probably the GWL Real Estate Fund. they own the buildings outright it isn't some weird REIT thing.

Problem is they appraised some buildings and they were lower than expected so they devalued the fund by 10% which caused a run for the exits, the fund is now locked to withdrawals until they sell a building and raise some liquid capital. Still performing damned well though.

The graph will look very familiar to the folks here

Robert Reynolds - GBA said...

I should rephrase that the GWL Real Estate Fund HAD been performing damned good.

patriotz said...

I'm not a fan of rental properties as a form of investment. Ultimately, it's speculation on higher future value.

Only if the yield is inferior. If you are getting, say, 8% net of expenses, you never have to sell. Eventually the tenants will pay your mortgage and you will have a free property.

As those who bought in the mid-80's would have right around now.

An investment is speculative if its risk-adjusted yield is lower than financing costs. Return to investors must come from the next buyer. In other words it's a Ponzi scheme.

Whether RE, or anything else, is a good investment depends on how much you pay for it compared to how much income it produces.

omc said...

I have been noticing lately that oak bay houses above $800k have slowed right down. Anyone else? It is almost like the market is splitting again; the $600k gorden head box with a suite Kamakazi is out in full force.

think said...

OMC,
Yes, I am definitely noticing the same thing. The market is very unstable and I really think it is going to tank sooner rather than later, in fact I think it has already begun and by the summer house prices will have started to drop significantly. I just spoke with a real estate agent who works in Victoria selling high end real estate and he said the high end of the market is dead and he thinks the lower end is totally unstable. He thinks it is going to crash. My PCS has not had much selling and lots of new listings - very noticeable change, also a friend of mine has noticed the average selling price dropping on her PCS as well. It really is showing early signs of a shift... time will tell but I'm excited. I think what happened was the first drop in the housing market was totally fear based because we have so much media nowadays that people saw what was happening in the US and freaked and everyone just stopped buying - then in the early part of 2009 people looked around and thought they were fine - no sign of recession in Victoria - must be that we are different, and lower house prices and low interest rates - great time to buy! Now it is a different story - overpriced houses again, interest rates that people are nervous about as the general public seems to think they will rise soon, job losses and many more to come over the next few months, vacancies on the rise all over the city, for lease, for rent signs everywhere, businesses struggling, no hope for pay raises in the foreseeable future, etc. It is a hard time and I think people are starting to worry. It will crash, its already happening from what I see.

Animal Spirit said...

Went for a run along the west side of the Gorge today (streets between the waterway and Craigflower, north of Tillicum), saw an absolute on of new listings.

Honestly was shocked - has something actually changed on the listings side, or is this a freak area?

Animal Spirit said...

Robert Reynolds - can post a link to your blog - want to get a hold of you re: financial planning

Vic said...

"This client is way better off than most, he has assets and income and rental property. His mortgage is almost paid off."


I'm a little confused here Robert. The guy almost cried ? and he has a mortgage almost paid off and rental property and assets/income and is succesful at his business ? I'm not sure what's to cry about unless he's a spendaholic or has unrealistic retirement income levels.

Bubble 'n Fizz(le) said...

This client is way better off than most, he has assets and income and rental property. His mortgage is almost paid off. The retirement crisis is going to be HUGE.

Why wouldn't he hire a general manager to run his successful business and use the profits as a retirement income supplement? That is what a lot of successful business owners do--either that, or sell the business. On the other hand, if he was a typical bear-blogger renter with no assets and a dead-end job, your prognosis would have been spot-on. I also find it hard to believe a successful businessman would leave his investments on autopilot for ten years. This story sound apocryphal--made up to prove anyone with real estate assets is f**ked.

Leo S said...

What is this KIV site? I can't find it on google.

Robert Reynolds - GBA said...

my blog
http://canadianlifeandhealthinsurance.blogspot.com/

my company
HMR Employee Benefits Ltd.

Animal, I'm always happy to talk to a fellow blogger. I have actually worked with a few ppl from this blog.

Story is not made up, I can't go into too much detail due to confidentiality etc., which I'm sure Bubz will just take as an excuse.

He got the financial plan when his kids were born about 10 years back. Nasdaq was the place to be. Dot Com's crashed and his advisor quit the industry. He didn't bother finding a new advisor until I came around. He left it because he figured he would wait till the market came back, it never did.

He wants 70%-80% of his pre-retirement income which works out to $100K in todays dollars. He has a little over 100K saved in RRSPs, TFSA (as of yesterday), and Non-Reg. He doesn't know if he would sell his business as one of his kids might take it over. He doesn't want to sell his house to finance his retirement. He is also saving for his kids education.

If he wants all these things he needs to save 18K a year above what he is currently saving and earn 6% on all his assets to reach his goal. Could he do it, probably, but he thought he was on track, he looked like he was going to cry because he realized he lost 10 years, and that he was a long way from his goal.

He is better off than most, but his problems are typical of many people i talk too. lots of house, no cash. Furthermore most people don't want to sell their house to pay for retirement. the goal was to have it paid off when you retire then live there. Is that unrealistic expectations? maybe but it is what 90% of boomers want.

Vic said...

"He wants 70%-80% of his pre-retirement income which works out to $100K in todays dollars."


End of story, the guy needs a reality check. I have read so many articles that clearly show if all is paid off and you have a good chunk in the bank and you live "with in your means" you would need only one quarter of that, and you can live very comfortably and still have a vacation every year.

And how does a ten year old know he wants to take over dad's business ? LOL.

Not sure about your methods of explaining costs after retirement but they are not what they are when you have kids,mortgage and car payments. $100,000 income with no debt = blowing cash out the window AKA living high on the hog.

Just Janice said...

Robert -
I think many people overestimate the level of income that they will need in retirement to lead a similar lifestyle to what they had prior to retirement. As a result, I think many are led to oversave for a retirement that may or may not materialize while making significant sacrifices to their lifestyle in the present. Alternatively, those who have high expectations and then realize that getting there is next to impossible, are left crying or feeling hopeless.

I think part of the job of a good financial planner is to adjust those expectations to match the likely reality of retired life, and to plan accordingly. Unfortunately, I think many financial planners fail to seriously assess the plans of their clients. If your client is no longer paying a mortgage or raising his/her children and paying for their needs - how much of their monthly budget do they really need? Further, do they see themselves of being able to or wanting to take care of a house that is sized for a family in their retirement years? Lastly, fully assess what other pension/retirement income will be available?

I find the 70-80% level quite high, particularly given that many of the expenses of life go down fairly dramatically in retirement. For many people, focussing on avoiding debt and saving in relatively safe (all be it somewhat lower yielding) vehicles will more than meet their retirement needs.

Also, the fact that a man at the age of 48 would be near tears under the circumstances you describe is somewhat disturbing and fairly unrealistic. Many first time buyers now aren't even planning on being mortgage free until their 65 (assuming their 30 when the buy their first SFH and take a 35 year mortgage).

Just Jack said...

Patriotz Said: Only if the yield is inferior. If you are getting, say, 8% net of expenses, you never have to sell. Eventually the tenants will pay your mortgage and you will have a free property.

I would also add that the residential revenue property should be not less than 5 self contained suites and be near new or substantially updated for a cap rate of 8% (mortgage payments are excluded in the cap rate calculation). Otherwise your taking on a higher risk and should be compensated with a higher rate of return than 8%.

There are NO revenue properties that have met this criteria in Victoria for the last five years. The current cap rate is 2 or 3 percent which is poor compensation for the risk one is taking. This is just another indication of how over valued our current market prices are today.

Vic said...

"Many first time buyers now aren't even planning on being mortgage free until their 65 (assuming their 30 when the buy their first SFH and take a 35 year mortgage)."




Exactly Janice, Freedom55 is not reality for even most boomers even in this current enviroment, as there is too much life to live still. I have met many who find retirement boring after a year or two and are itching to go back to work doing something wether it's their own business venture or contract work.

Just Jack said...

Animal Spirit Said: Went for a run along the west side of the Gorge today (streets between the waterway and Craigflower, north of Tillicum), saw an absolute on of new listings.

A good observation on your part. Most of the for sale signs will be exclusive listings for a week or two, before going multiple. Then they will show up on your PC account.

Robert Reynolds - GBA said...

The 70-80% of income figure is the budget the client came up with. That is what he wants in retirement. Yes I can help him try and get there, and yes I can help him adjust his goal to something less. But again, I am trying to help him reach this goal.

The kids don't know if they will take over the business but it is an option he wants to keep open for the kids.

Basically, if he wants $100,000 a year, and retires at age 60, has a life expectancy of 85 he need 2.5Million over his retirement. Most people have nowhere near the savings to generate this income.

Long story short, there is a whole generation of people out there who are house rich and cash poor. They will get maybe $16,000 from the govt. each year, and have little else to live on.

Don't take this as me slagging RE ownership, it is a key part of the puzzle, but having a million dollar house and no savings is foolish. I am not against real estate at all. I want to buy a house as much as the next guy, but in BC at the moment it is far too expensive so I personally focus on saving.

I am not a financial planner, I do not have a CFP designation.

Bubble 'n Fizz(le) said...

"I can't go into too much detail due to confidentiality etc"


You've already given us everything except his name and SIN. He's 48, has kids, $100K in the bank, $125K a year in income, owns his business and house and has a rental as well. If he knew you were spilling his specifics on a blog I think he'd fire you immediately.

"He is better off than most, but his problems are typical of many people I talk too. lots of house, no cash."


He certainly is better off than most, but his problems are not typical. He is young enough to grow his business and other assets to provide a very comfortable retirement. Are you actually qualified to do financial planning? You must have missed the professional ethics part of the courses, and your advice seems particularly naive.

Just Jack said...

Robert Reynolds Said: He wants 70%-80% of his pre-retirement income which works out to $100K in todays dollars. He has a little over 100K saved in RRSPs, TFSA (as of yesterday), and Non-Reg. He doesn't know if he would sell his business as one of his kids might take it over. He doesn't want to sell his house to finance his retirement. He is also saving for his kids education.

He doesn't have to fold up his company. If he cuts back on personal expenses and draws the very least from his company, he could build up, and invest, the retained earnings in his business. When retirement comes, he could stop activity in the company, but draw down his retained earnings as a dividend.

He might also want to re mortgage the home, put the money into his company and have the company pay a return that would match the bank loan. In this way he could deduct the mortgage payment, the company would have more money to invest, and he would have greater control of his investment.

How about putting his kids on the payroll? Then use this money for the RESP.

I am not a financial planner or an accountant, just bi-curious.

Just Jack said...

Basically, if he wants $100,000 a year, and retires at age 60, has a life expectancy of 85 he need 2.5Million over his retirement. Most people have nowhere near the savings to generate this income.




My parents are retired and they do not have 2.5 million in the bank. They have CPP and OAP and a paid off condominium. Its not an exciting life, but they never wanted to fly to Paris in the spring time, or ski the Alps. All they wanted to do is play pull tabs in the states and drink their rye whiskey.

patriotz said...

the goal was to have it paid off when you retire then live there. Is that unrealistic expectations? maybe but it is what 90% of boomers want.

It's not the least bit unrealistic, because the boomers were able to buy in the 80's.

Any boomer who will still be carrying a mortgage past 5 years from now has some serious financial management problems. Which unfortunately are too late to fix for almost all of them.

Robert Reynolds - GBA said...

Dear Mr. Troll - I just described nearly every business owner in Victoria, Vancouver or anywhere. Or as you suggested before I could just be making it all up.

JJ - Those are some of the things we are looking into as well. Like I said I can help him get there but it isn't going to be a cake walk. A corporate IRP makes sense. business owners can effectively income split by paying a spouse a salary. He can tax shelter earnings in the company. I might also suggest a smith maneuver, but not many people have the stomach for that me included.

Robert Reynolds - GBA said...

Any boomer who will still be carrying a mortgage past 5 years from now has some serious financial management problems. Which unfortunately are too late to fix for almost all of them.

bingo. This is a HUGE percent of the population.

Robert Reynolds - GBA said...

Blogger Leo S said...

What is this KIV site? I can't find it on google.

www.KidsInVictoria.com

Leo S said...

Ah ok. I found that site but didn't think it was the one you meant.

Robert Reynolds - GBA said...

Leo

I think this is the thread that was being discussed

Just Janice said...

A person who lives 25 years does not need $2.5 million in the bank to have a retirement income of $100,000 per year. Unless, all of his or her holdings are returning precisely 0% per anum. At 5% interest, a person would earn $125,000 per year and not even nip into the principle, at 4% its 100K, but given that CPP and OAS are available, again this would be too rich. 3.3% return is all that would be needed...and then you leave your kids with an inheritance of $2.5 million - which I'm not too sure is something that is really desireable. That and what the hell are you going to spend $100K per year on in retirement - home is paid for (nothing saying he wouldn't sell and go condo), kids grown. The guy is probably working himself to the point where he'll never enjoy it given what needs to be done to meet that goal. Wouldn't the amount of savings neccessary be a number significantly less than $2.5 million as interest would be earned on the savings available?

Robert, I hate to be nit picky but if you aren't approaching your clients with a realistic picture of their needs in retirement, aren't you doing them a bit of a disservice? I mean there's a lot to be said for an advisor who will realistically assess what is needed, where a person is at, AND help them get there. I mean $100k per year in your working life, and $100k per year in your retired life are two very different things.

Robert Reynolds - GBA said...

I never said you need 2.5 Million in the bank, I said: "he needs 2.5Million over his retirement. Most people have nowhere near the savings to generate this income." He can have less as long as he has some rate of return.

What would you spend $100,000 on in retirement? I can think of tonnes of things.

-A Cabin on the lake
-Summer home in Palm Springs
-That Jag in the driveway you always wanted
-The sailboat to take a trip around the world in.
-Trips to Disneyland with your grand kids
-Golf course dues
-Building your art collection
-Fancy dinners out
-Stocking the wine cellar with Dom

I could burn through a hundred grand EASY.

Robert Reynolds - GBA said...

CPP and OAS will contribute about $32K of the $100K of income, so you only need $68K from savings. About $780,000 in RRSPs should be able to provide the balance of income needed well beyond life expectancy

Panza said...

I plan to spend more money after retirement. What do you do with all those extra hours in the day otherwise?

I just read about the smith manoeuvre. Love it! Thanks RR. I can`t wait to use it once prices make buying a sound choice again.

I was hoping to see some recent listing/sales numbers on here today. Where are you Think?

Robert Reynolds - GBA said...

CASE STUDY TIME

The Smiths are the average Canadian family for four.

John age 55 and his wife Jane also 55, have two kids, Jimmy age 13 and Jill age 9. They have an average Victoria house ($650,000) with a mortgage that will be paid off in 5 years. John has an average RRSP with a value of $60,000. Jane was a stay at home mom so she hasn't contributed as much to her RRSP's and only has $30,000.

They opened a TFSA last year at their bank but only had $1500 to contribute. it only earns 1%. John and Jane each make average RRSP contributions of $2730 each year and earn an average return of 5%.

They plan to have the mortgage paid off in 5 years, and will then contribute their $2000 per month mortgage payment to RRSP for the last 5 years before they retire at age 65.

The Smiths want both Jimmy and Jill to go to university so they save $200 a month for each child's education. Due to some tighter years and bad markets Jimmy has $13,000 in his RESP and Jill only has $9,000.

John earns a salary of $60,000 per year. Jane earns a little less at $40,000 per year. They feel well off as their home is nearly paid for, and they are earning well above the average family.

Have I painted a decent picture of the average middle class family? good.

Now lets look at their retirement.

At age 65 John has $270,000 in RRSPs, Jane has $84,000

Jill and Jimmy have $46,410 and $41,491 respectively in their school fund.

CPP and OAS will pay the Smiths about $30,000 per year at age 65. The Smiths want an income of 70% if their pre-retirement income, however, base on their current savings they will have a short fall of between $13,155 and $20,544 throughout retirement. If they wanted to reach their goal of 70% they would need to contribute another $17,551 per year to their RRSPs.

Alternatively, they can reduce their retirement expectations to 30% of their pre-retirement income and just die broke

Their house, however, will be worth nearly a million dollars.

What are they going to do? Live on roughly 30% of their pre-retirement income? or
A) Sell the house
B) Take a reverse mortgage
C) Gamble their savings in high risk investments to try and boost their income
D) Lotto tickets.

This is a fictional average person. Yes I have missed things. Yes there are loads of assumptions. Yes you can see the report with all the numbers in it.

It can be downloaded here. warning 1MB, 52 page PDF

Nitpick away ;)

Just Jack said...

You can burn through a hundred grand easy today, because at your age you're a consumer. That starts changing after 55, you become a saver. At retirement, your not going to start jetting around the world, buying investment hotels and having lunch with Donald Trump (he's not that interesting to talk to - Ivana this, Marla that -just a broken record).

A life time of habits are not going to change. Sure, you may take an one extended holiday, and some mini trips through out the year - if your health is good. Maybe move close to your kids and grand kids - until they tell you to go away. Take up a hobby like painting or repairing old vacuum tube radios (always remember to unplug, unplug, unplug before inserting a screwdriver).

But, if your a type A personality and go cold turkey on the retirement - then you have a good chances of dying in the first year or two of retirement, then its better to go out Dennis Hopper style -stoned.

Your better off losing 30 pounds and cycling 50K a week starting today, in order prepare yourself for retirement tomorrow, than trying to stuff more into your RRSP. Live heathier, work longer - not harder and live longer.

And if you keep yourself healthy, there are plenty of countries in the world where you can live quite well for a fraction of what it costs in Canada. Countries like Comoros, Djibouti, Eritrea or one of my favorites Tuvalu (any country with the capital city that has the word fun in it has to a good place to live).

Robert Reynolds - GBA said...

The reports not working right, trying to fix, hang on.

Robert Reynolds - GBA said...

JJ - Isn't Tuvalu sinking into the ocean?? ;)

Robert Reynolds - GBA said...

The report should be fixed, it wasn't saving property it kept showing separate analysis for John and Jane. Which made it very confusing. The report should now show their combined figures.

Pay attention to the top right where it say "Before or After Recommendation" before recommendation is what they have based on the scenario above. After is if they saved the extra 17K per year.

link

Just Jack said...

Thats a very good case study.

And I think it really shows how the boomers have been gambling on real estate as a way to meet their retirement needs.

Now, the boomers should be broken down into two groups. The front end boomers now aged 55 to 65 and the back end boomers 54 to 45+/- (or when ever the birth control pill came to Canada).

The front end boomers have moved through the real estate market pushing prices up for their retirement. The back end boomers like those in the case study are scarred silly - they are constantly told that they are in deep doo doo and have to doo doo something now or else they will be living in the DTES. The front end boomers bought real estate when it was an investment, the back end boomers are speculators.

Now here is the poo in the poo sandwich for the back end boomers. The front end boomers are starting to SELL off their properties. The back end boomers are once again about to be screwed just as they were in the 1980's. All the bread has been eaten up by the front end boomers and what is left is just the poo.

Just Jack said...

Well Robert, its a matter of interpretation. I say the water around Tuvalu is just getting higher.

Panza said...

If it does sink there is always Passo Fundo in brazil. It too is cheap, though not as much fun as a tropical island.

Vic said...

"What would you spend $100,000 on in retirement? I can think of tonnes of things. "


That list is made up of "wants" not "needs". Anyone can want to blow $200,000 if thats the case.

If one wants the place in Palm Springs and the Jag I think he just maybe should have bought them alot sooner than 65 plus.

As well the "average" couple with kids that age aren't 55, more like early 40's. Yes there are more "older" parents but most do not wait til they are almost out of safe child bearing ages to produce some little ones.

Most boomers I grew up with here had there first ones when they were early/mid/late 20's. Those few who waited that long usually did it for career reasons where the house/debts and RRSP's are all now paid off.

If these people are crying for having kids so late in life thats far from a boo hoo story.

Robert Reynolds - GBA said...

Vic et al.

I'll run the numbers again tomorrow for any ages/incomes/kids/etc. you want.

Post it here or email me. rob@hmrinsurance.ca

Just Jack said...

Baby boomers with late kids.

I have several friends in their 50's with a wife 15 years younger and one, two and three little one's. Most of the women that I know had their first kid in their early 30's.

And for anyone out there in there 20's. As disgusting as it may seem, your parents are still having sex, so you might have to share that inheritance yet.

Vic said...

And we won't even get into the fact that almost half end up in divorce along the way so those usually have to work to 65 to keep up with the extra costs involved.


Any couple I know who managed to stay together is sitting fine with a house paid off and RRSP money put away and also having two kids. The ones who didn't lost an easy 10 years or more and I pray for a few of them because they have jack.


JJ, a 15 year difference ? He must be loaded... or something else. ;)

Just Jack said...

No, Vic

He was loaded

With two wives and a total of 6 kids, three in university and three in and just out of diapers, he will never retire or pay off his mortgage.
He makes good money, but no pension, and very little savings.

However, when he kicks it, his wife is sitting pretty with a paid off home.

patriotz said...

he will never retire or pay off his mortgage... However, when he kicks it, his wife is sitting pretty with a paid off home.

By that I take it the mortgage is life insured.

But that must get pricey when you take it out at his age. :-)

Just Jack said...

The matrimonial home is the domain of the wife. And while we, men, joke that its a man's castle, in fact it is the wife who calls the shots. Women are indoctrinated early in our society as to the benefit of home ownership in children stories like Cinderella and Snow White. Even Shrek had to fight to own his own swamp, before Fiona moved in.

And most women (stereotype alert) will want the security of home ownership and fight not to lose that home at any costs.

For most, this is their retirement plan. And this is going to make things worse when property values begin there decline. Afterall, a happy wife - a happy life.

When property values fall the rate of divorce increases which increases the amount of sellers under duress. Add in relocation, and court sales and the profile of the typical seller tips to one that HAS to sell from one that is holding out for a better price.

With the typical home having almost tripled in value in the last 10 years. The economic incentive to trade up in spouses is tempting to some. And as the market starts to decline, I think most of us guys should really make an effort to get our socks in the laundry hamper - or else.

Just Jack said...

The matrimonial home is the domain of the wife. And while we, men, joke that its a man's castle, in fact it is the wife who calls the shots. Women are indoctrinated early in our society as to the benefit of home ownership in children stories like Cinderella and Snow White. Even Shrek had to fight to own his own swamp, before Fiona moved in.

And most women (stereotype alert) will want the security of home ownership and fight not to lose that home at any costs.

For most, this is their retirement plan. And this is going to make things worse when property values begin there decline. Afterall, a happy wife - a happy life.

When property values fall the rate of divorce increases which increases the amount of sellers under duress. Add in relocation, and court sales and the profile of the typical seller tips to one that HAS to sell from one that is holding out for a better price.

With the typical home having almost tripled in value in the last 10 years. The economic incentive to trade up in spouses is tempting to some. And as the market starts to decline, I think most of us guys should really make an effort to get our socks in the laundry hamper - or else.

Just Jack said...

Oh, bother. It use to be that everyone said they ain't making anymore land. Turns out now they ain't making any more rentals. Fellow basement dwellers, expect your rents to go UP.

http://www.timescolonist.com/
business/fp/money/worry+home+loan+
rules+still+bent/2575536/story.html

"The group most affected by the changes are condominium investors, who will suddenly be forced to come up with a 20% down payment to be eligible for mortgage insurance. If you're a renter, this part of yesterday's news could affect you in the coming years.

In some major markets like Toronto, the condominium has become part of the new de facto rental market because taxes and other government regulations have discouraged the construction of rental stock. Expect the supply to grow less quickly, potentially raising your rents."

S2

Animal Spirit said...

Just Jack - what asinine b.s. in that article.

patriotz said...

In some major markets like Toronto, the condominium has become part of the new de facto rental market because taxes and other government regulations have discouraged the construction of rental stock

That's ridiculous. They don't build multi-unit rentals any more in Calgary, either. In fact they have been converting existing rentals to condos. They are not too big on taxes and regulations (no rent controls) there.

The reason is simple and obvious - the market price for condos is inflated so far above rental value that developers can make far more money selling them than they can building and renting out properties.

If condo buyers weren't so stupid and didn't pay such absurd prices, condos and rentals would be equally attractive to developers.

The author is just another bubble denier.

Marko said...

"If condo buyers weren't so stupid and didn't pay such absurd prices, condos and rentals would be equally attractive to developers."

The problem is when condos and rentals are equally attractive to developers, and then pretty much nether is attractive.

How many condo towers were built downtown/core during the 1990s - Manhattan and Metropolitan? I believe Regent's Park was started in the late 1980s and Shoal Point caught the end of the 1990s. Therefore, when condos were closer in attraction to rentals for developers essentially two towers went up in 10 years.

patriotz said...

The problem is when condos and rentals are equally attractive to developers, and then pretty much nether is attractive.

Maybe they were just waiting for the next bubble, i.e. the current one?

Or maybe real rents are too low. The stats for Vancouver show that they have been declining for decades, I wouldn't be surprised that Victoria is the same.

The problem with respect to investment in rental housing is that there are too many amateurs in the business - condo speculators, house landlords, basement suite owners - who don't pay attention to getting a competitive return. Thus the business becomes unattractive to real business people.

Just Jack said...

No, it's the highest and best use of the property.

We all know that if we buy in bulk we get a good price. That is why you can buy a pound of nails for $5. But if you only need 10 nails then you buy a small pack of 10 for 89 cents. That's the economy of scale.


So when a developer looks at a vacant site that he can either build 10 rental apartments or 10 separate titled condominiums for nearly the same cost, he builds 10 condominiums. The highest return, in terms of money, for the land is 10 condominiums.

And looking back historically, the demise of the purpose built rental apartment building occurred when condominiums ownership was developed in the early 1970's.

I don't think its a case of real rents being too low. The rents are determined by market conditions. The purpose built apartment buildings are old stock inventory and the condominium is mostly newer housing hence the rent difference of some 30 to 40 percent between the two.

I think developers today are in the market for the short term. A lot of the apartment buildings of the past were built and held by the developers for their long term income stream. Today its the quick buck. And I don't blame developers. I wouldn't want to hold most of the complexes built today, because the materials are so china cheap that you would have to strip the suites every 15 years.

Marko said...

"because the materials are so china cheap that you would have to strip the suites every 15 years."

First of all a lot of products out of China are actually really solid believe it or not.

Second of all, construction methods are improving as is the code.

For example, now a few builders including myself are using I-Joists on all of our projects instead of 10'' x 2'' which can shrink anywhere from 1/8'' of an inch to 1/4'' and cause problems later on.

Could you be more percise when you say "cheap materials?" What exactly will need to be stripped in 15 years? The drywall? The flooring? The appliances? The fixtures?

Just Jack said...

The kitchen and bathroom cabinets, the lower grade laminate floors, door and cabinet hardware, exterior light fixtures. Actually anything that was once made of brass and is now plastic. The low grade particle board being held by staples in the cabinetry, off gases from anything that requires glue, fibreboard that swells when it gets wet. All most all plastic components as they degrade quickly. Take a look at your stoves, the "food traps" under the electric burners can not be cleaned - they can only be replaced. Most of the appliances in spec homes are not going to make it to 15 years without repairs, but are cheaper to replace than to repair.

No Marko, the quality is not there. I have gone through half a dozen plastic house phones in the last 10 years. Yet the phone I have never had to replace or repair and one that I use every day in my den was made in the USA in 1935.

I'm not saying all products but anything made in China is suspect. Unfortunately, almost all of these components are made in China. In my shed I have garden tools that are over 30 years old that are as solid as they day they were made. I replaced a snow shovel with one from china and it lasted one season.

For the last 20 years we have exported our cheap jobs, garbage and pollution to China, they remake it, repackage it and sell it back to us. I check the package on everything I buy, from frozen spinach to sardines and make my choice accordingly. What peeves me off, is that I am having less and less choice everyday.

omc said...

I don't know JJ, my experience in the construction field leads me to believe opposite from what you are saying. Think of the 70s houses with thier paper thin doors and single pane windows (even though you could get double pane). The 90s houses with basically no finishing. All the way to the worst homes of all the 40s spec house.

Now a days the standard fixtures are much better. There was monkeys doing some of the work then, just as now.

Vic said...

"First of all a lot of products out of China are actually really solid believe it or not. "


How about the China drywall fiasco that still hasn't been dealt with ? Not to mention the lead poisoning filler content in so many products ?

patriotz said...

The highest return, in terms of money, for the land is 10 condominiums.

You are confusing use with titling, and economic return of an asset with the return to one party in a transaction. In economic terms the use of the property is the building that you put on it, and the economic return is the same whether it's a multi-unit rental or condo. Namely the rental value.

Developers build condos because the people who buy them are idiots who are willing to pay far more than the economic return. The greater return to the developer is at the expense of losses to them. But the property itself is not producing a greater return, i.e. a more valuable real output.

Just Jack said...

Well, you can't just label someone an idiot just because they don't have a similar view point to yours.

Currently, the public perceives an additional value to home ownership over the simplistic approach of just rental value.

If the market were to crash for condominiums like they did for the leaky condos, then the rental rate would be appropriate. This would provide an investor with a positive return on their equity in terms of money. However a home owner receives a return on his equity not in money but in intangible items such as a sense of security, right of passage into adulthood, peer acceptance, even the ability to attract a mate.

These are not easily quantified in terms of money, but by virtue of condominiums selling well over what a developer wants as a rental rate of return is sufficient proof of the existence of an intangible return to the home owner.

Think of yourself as a young boy masturbating - there was no tangible return to the physical effort you invested, but you continued to do it for the intangibles or just until you needed laser eye surgery.

Vic said...

My Jack, that was quite the anology. Puts a whole new spin on the word condominium. ;)

HouseHuntVictoria said...

I'm somewhat with Patriotz on this one.

It comes down to ROI. Think about the taxation. Building a rental unit has no tax value to anyone. It's taxed at the highest rate possible and provides very little ROI to begin with.

Building a condo/multi-unit dwelling gets tax preference and provides higher ROI.

Why would anyone build a purpose rental? Answer: free land or tax favouritism. The example lies at the foot of the Millstream interchange--it works, but municipalities and the CRA must work together to provide incentive, rather than dissuasion.

But why would the gov't give anything up? Everyone wants to own, not rent, and ownership is where the big taxes come from for municipalities. They couldn't care less about non-tax paying renters, despite all the "fix homelessness now" hoopla--which is why all their "solutions" to lack of rentals are about taxing homeowners with illegal suites by making them legal.

I'd wager the ROI plays less that 1% into the decision making process for true corporate developers... it's mostly about tax, IMO.

Just Janice said...

Thank-goodness we've moved away from the retirement planning scenario discussion and back onto the housing market.

The lack of purpose built rentals is interesting. Partly it's a function of demographics - a large portion of the rental stock was built to accommodate the boomers as they initially ventured forth from their parent's homes. Partly its a consequence of tax changes. Partly, its a consequence of the boomer's kids not venturing forth from their parent's homes until they were nearly ready (or so they think) to take on home ownership themselves. Partly its an artifact of the run up in housing prices that has caused purpose built rental buildings to be uneconomic (from the developers perspective). After all, if 10 units of housing is the best use of the property, then 10 units will be built. The second decision relates to how they are managed - and generally speaking they will be managed in whichever way yields the highest return, given the risk involved. Right now, that means condominiums not rentals. But everything changes at some point and its conceivable that large portions of the condos will be bought by investors and managed as rentals after a real estate correction...quite simply because the price and the prevailing rents will make it economic to do so.

I think the 'shelter value' is always determined by the rental value that would prevail for a given property - but that other values may also exist 'ownership value'. While the shelter value is always likely to be positive, the ownership value can be either positive or negative depending on the context in which it exists. When ownership value is positive, rents are lower the home prices and when ownership value is negative then home prices are lower than rents.

Marko said...

A little off topic, I've been browsing some websites, I found this on onepercentrealty.com, a discount agency...

"Our Vancouver Island offices completed a study on their Salespeople's 2008 gross commission figures. Even in a year with sales volume down industry wide by one third, our salesperson’s still did very well in 2008. The Brokerage wide average for our working agents who were with the company throughout all of 2008 was approximately $87,000 while the top 50% of the salespeople earning average gross commissions in excess of $145,000! Then factor in that we don't charge our working agents any monthly office fees coupled with the reduced operational overhead required to obtain a sales volume at 1% is a small fraction of what traditional agents will spend to generate the same amount of business."

Is it just me or is $87,000 for what a realtor does a ridiculous amount of money? Does the average person with a Masters Degree even make that much these days?

I have officially ordered books/course from UBC and will be getting my realtors license within the year.

Does anyone know how complicated it would be to launch a new realty company? I basically want to offer people a business model where we offer 80% cash backing for buyers (on listings with 3% and 1.5% for buyer's agent). I like driving around anyway in my evenings/weekends. I would' mind showing 10 homes or so, doing a little negotiation and making $2,000 and give the rest to the buyer's (on a $500,000 transaction buyer's commission would be $9,000 and we split that $2,000 for me, $7,000 for them).

I also would list homes on MLS for $1,500 flat seller’s fee + whatever you want to put for the buyer's portion keeping in mind that $1,000 probably won't attract many buyer's agents.

What do you guys think? I would like some feedback.

Vic said...

One of the other reasons apartments have not been built in years is because basically the government doesn't want to give tax breaks to builders of future renter ghettos. I think the NDP of the 70's/80's were the last to do it.

They want everyone to own so we then keep buying useless junk for them which inturn keeps the economy churning. If we all rented and it was cheap, they would lose out on billions in future taxes from all angles.

Home ownership is so key to keeping political parties in power. Happy owners = winning elections. But I think we will have alot of unhappy owners soon when negative equity will be the norm and the party ends, for a very long time.

patriotz said...

Partly it's a function of demographics - a large portion of the rental stock was built to accommodate the boomers as they initially ventured forth from their parent's homes.

Have to disagree. Purpose built rentals stopped being built in the early 70's as a result of Dave Barrett's rent controls, which of course was right around the time boomers started establishing their own households.

Bill Bennett dropped the rent controls in 1983 but purpose built rentals never came back, as the developers had discovered that they could make more money with less risk selling condos. The reason being that dumb money always chases out smart money as I said before.

HouseHuntVictoria said...

Marko,

You'd best talk to an agent or the VREB about your idea. As I understand it, you have to set up a brokerage in order to be your own boss. It's not enough to just get an agent's license, you'd have to be a licensed broker, which means way more costs/fees. I'd guess once you figure out the costs associated, your 80/20 split will look like your paying yourself far too little to justify the cash outlay initially/each year. I don't think you can be a licensed agent without a licensed managing broker.

They're also a protectionist lot... you may find that other agents will refuse to show their listings to you or make it such a pain in your ass that your clients will think you're not a good agent etc...

think said...

Victoria month to date stats...

sales 461
new listings 1096
total active

thats a sales/list ratio of 42% - interpret it as you wish but I still see a potential bear market if this continues!!

think said...

oops...somehow I left off some info...

total active listings 3088

Just Jack said...

Well, here is the sales to new listings ratio for the following class and area

Core Area houses 0.48
Core Area condominiums 0.42
Peninsula houses 0.4
Westshore houses 0.32

Houses in the core areas of Victoria continue to exhibit the strongest demand with houses in the Westshore being the more difficult properties to sell.

Three of the above remain in balanced market conditions (between 0.4 to 0.6) while Westshore properties have fallen into a bear market territory.

My interpretation is that the "move up" middle income plus market remains strong, but the
below middle income market is stumbling. Today's market appears to me all about location, location, location. And if you don't what this phrase means - then you are probably not in the right location, location, location and will probably never be invited to party there either. If you do know what location, location, location means then you are definitely deluding yourself because there is a good chance you don't live there. And if you think this means Bear Mountain - then your probably from Alberta and its about time you bought BC car insurance.

The rates may be subject to wild swings as this data is only for the last 21 days.

think said...

Jan/Feb 2010 stats are looking just like Jan/Feb 2008. Interesting year that 2008 was, and the next couple of months will make things clear. I see a weakening of the market, the fact that the sell/list ratio for the past couple of months has been under 45% is a CHANGE from the fall/winter. And people may say "oh its seasonal" but this past year has been anything but typical - I mean come on - highest prices and sales in December!??!? Totally not seasonally typical. There are some signs of shifting... the stats hint to it, particularly if the lower end is struggling that hints that it will trickle to the core eventually (always the last to fall). And its not just "bear mountain" thats suffering - high end properties in oak bay are quiet and more stuff is sitting longer and taking lower offers. Just saw a house sell today for 50,000 under asking in south oak bay. I'd say that's an ok location. I think everyone agrees the real estate market can't stay hot forever, I just think the crash is closer than some may think. But time will tell... we'll know in one or two more months if this trend of lots of new inventory continues!

Vic said...

"And people may say "oh its seasonal" but this past year has been anything but typical - I mean come on - highest prices and sales in December!??!? Totally not seasonally typical."



They bend the price/listings/sales to whatever pleases them. There is always an excuse when your a salesman and real estate is the worst because it is slow to start a trend. When you get the highest prices/sales in December then you have panic/herd buying which never ends well.

When the Oak Bay homes have to start lowering their prices then that is a sign worth noting.

What I don't get is if you are in a sucker bidding war on a POS dump for $500,000 that you know will end up at 550,000, then why not just max out on another hundred grand or so and low ball an Oak Bay place in the $700,000 range ? If you're going down with the plane then why not do it with some style versus some shack in a so-so part of town ?

Just Jack said...

Well Vic, I like your style.
Go big - or go home

It doesn't matter anymore what you offer for a property. Bid another 100 large and your payments are only another $260 or so a month. When the market tanks your going to walk and declare bankruptcy anyway. And its easier to negotiate with a bank when you owe hundreds of thousands than just thousands.

And this market was created by both the banks and the government lose lending policies - it was their fault anyway. So, you will have a bad credit rating for half a dozen years - big deal. You lose just as munch sleep owing a thousand bucks as you do a million. Your going to have a lot of company and the banks will have to make deals to get a fraction of the money you owe back.

Now just youtube the song "Burning down the House" and enjoy.