Wednesday, June 9, 2010

Investment problems

Regular readers will know that I believe the real estate industry needs a code of ethics that requires salespeople to make an investment disclosure if they choose to market their products as investments. I'd even go so far as to say that real estate related salespeople should not be allowed to utter the word investment in any manner related to the products they sell. But I recognize this has a snowball's chance in hell of happening. It's just become too accepted in today's climate that buying a home is "the best investment you can make;" even when it isn't. Like right now.

Take this listing for example:

Aggressively priced at 2010 assessed value of $233,800 to sell quickly! Terrific investment opportunity, with no rental restrictions, this 2 bedroom condo is the best deal in downtown Victoria. This fully remediated building has a new roof (special assessment has been paid), separate storage and bike storage, allows pets and offers secure underground parking for only $60/month. This unit features an open & modern floor plan, large walk-in closet, in-suite laundry, balcony w/ garden views, new paint in 2009, new energy efficient fridge and low flush toilet. All appliances are included. Tenants are currently on a fixed term lease expiring July 31, 2010 paying $1175 per month. This is an outstanding value!
Emphasis mine. Whoever listed this property wants to attract someone who may be thinking about tying some money up in a rental property. Hey, with the lack of first time buyers shopping right now, an agent's gotta get creative to find a buyer right? Let's see what "terrific," "aggressively priced" and "outstanding value" means to this agent shall we?

Scenario 1: Buyer pays cash and retains current tenants at same rent ($1175 per month/$14,100 per year) and pays $110 and $220 per month in taxes and strata fees (actual) for annualized costs of $3960. So the "income" on the investment is $10,140. Expressed as a percentage, this is 4.3%. I've skipped some costs, and not calculated taxes, but you get the idea. The real take-home ROI is likely to be half of that - which a high interest savings account will easily match and provide infinitely more liquidity. Anyway, this is the best investment scenario I can think of, and this is what this agent likely meant by "terrific."

Scenario 2: Buyer isn't really an "investor" but begs, borrows and steals from their primary home equity to scrape out the 20% down required by CMHC for "investment" properties now that April 19 has rolled on past - they do this grumpily cursing that damn CMHC for making it harder for them to get rich too.

So how rich do they get? Check it out (click for larger resolution):

Let's say they too keep the same tenant and same rent, so their input numbers are the same ($14,100). Output is different though: Strata and taxes are the same ($3960) but then add mortgage payments totaling $12,540 for total output costs of $16,500. I guess outstanding value means a minimum loss per year of $2400. I say minimum because we haven't factored income taxes or opportunity cost on the almost $50,000 down payment into the costs either.

Forgive me for this very simplified analysis of "terrific investment opportunity" and "outstanding value" but I wanted to illustrate why residential real estate sales people should be required to make mandatory financial performance disclosures about their "investment products" if they want to act as "investment advisers." But if they want to call themselves speculation specialists, I'll shut my yap.

Oh, and if you're still not convinced by my analysis of what a crappy investment buying in this building today would be over the next year or so, perhaps you can ask any one of the 7 or 8 owners who are currently trying to eject themselves out of their ownership situations - one of whom who is listed for less with more rental income coming in, which I guess takes care of "aggressively priced" then eh?


HachiRoku said...

I used to think our 2 bedroom basement suite was so small at 628sq feet but looking at those spacious (avg 650 sq feet), aggressively priced condos at North Park...I am feeling much better considering we pay quite a bit less for rent and parking is free!

NanHousing said...

Great post. It would be interesting to figure out what % appreciation the 20%downers would need to have to make a decent profit. They also would have to pay a decent chunk to the realtor if they sell and capital gains taxes as well...

In this specific example the realtor can get away with "Terrific investment opportunity" since he is basically saying "it is potentially a terrific investment" and not outright saying "its 100% guaranteed to be a terrific investment"

If people are too dumb to be able to figure out the math then they deserve to buy it.

Animal Spirit said...

MLS 278877 - 2571 Cook Street. List 515K (just down from 529.9). Suited. Top half rents for 1400, bottom for 1520. Total income 35,040 per year - assuming full tenancy. Expenses (20% down, 4.59%, 25 year mortgage): $2300x12 mortgage payment: 27,600 + 2,063 property taxes + 5,000 maintenance and repairs (likely far too low) = 34,663+water+income tax+xxx. Breaking even if all goes well. Seriously underwater is most likely.

patriotz said...

Real Estate Investment Trusts (REIT's) aim for a cap rate of 8%. That's the return to capital, i.e. the yield after all property expenses. Since for a condo your property expenses (taxes, strata, maintenance, etc) are going to come to about 1/3 of rent, that means a gross rental yield of 12% or a monthly price/rent of 100. That's the multiple at which a condo actually makes sense as an investment.

And once the fools get cleaned out that's the multiple to which they will return.

I also agree that those selling real estate should not be allowed to make any claims as to the merits of the property as an investment. They are commissioned salespeople, not financial advisors.

Mr.4AM said...

While I do think nearly all real estate ads are over embellished and thus lack believability, and that any excessively bullish statements about great investments at this time should almost be considered lies bordering on fraudulent intent, let's not kid ourselves either.

Joe 6 pack would still buy it even if you threw in disclaimers about investment risks, or that realtors are not qualified investment advisors, etc. Lemmings never read contracts, fine print and Lemmings believe advice from anyone who tells them they are smart and can easily become rich.

In reality, investment advisors, despite disclaimers and sometimes even verbal obligatory due diligence of trying to understand an individual's financial situation and needs before providing advice, never end up wearing even 1% of any losses on advice they give. So the majority of people aren't any better off in the financial industry... heck just look at people's stock market investments in the past few years. If anything, the disclaimers and faux warnings are there to protect investment advisors AFTER the investments tank.


Mr.4AM said...

PS. After the real estate brokers take a sizeable chunk of your money in comissions, and your "great investment" tanks... try not to cry too much.

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

Such is sales.

A car salesman is perfectly entitled to give the opinion that a Mazda (etc.) is the best car for a customer, just as a realtor is perfectly entitled to give the opinion that a given house is the best one for a customer.

Claiming that a property is a good investment is another matter entirely. That's a claim of future financial returns and one which a salesperson has no business making.

Just Janice said...

Flogging real estate as an investment without doing the math on it or providing disclaimers is overstepping the boundary between 'salesperson' and 'investment advisor'.

Further, given the way real estate commissions are structured, a real estate agent acting as an 'investment advisor' to a client is a clear conflict of interest as there is no on-going relationship or accountability for the performance of the investment.

Robert Reynolds - GBA said...


If anything, the disclaimers and faux warnings are there to protect investment advisors AFTER the investments tank.

Yup, it is there so we can't get sued. It also lets the client know they can't sue us for losses. Using the car analogy, it is the same thing when you buy a car, if you get in an accident you can't sue Mazda because the brakes didn't stop you in time. (Bad analogy I know)

I am a firm believer in "buyer beware" and that people need to take responsibility for their actions. When buying an investment other than a GIC, there is risk. The buyer needs to understand this risk. When I sell investments I make it very clear verbally and in writing that there is risk. People are always fine with it at the time, but any sort of negative number on their statement and they can lose their shit. I always, always, always do an investor profile with clients when I first meet with them, and frequently thereafter. I have had a few occasions where I will do a profile, it says "aggressive investor" they lose a little money call me freaking out, I do another profile and suddenly it says conservative. I tend to aim more conservative with my clients until I know they can deal with risk.

The same is true for a house, there is risk it could drop in value, the roof might leak, the city decides to build a turnpike in your backyard. Sure a lot of that risk is our of your control but you agree to it when you sign on the line.

I also don't think realtors should be able to give investment advice. At the MOST they should be able to say "this house last sold for $250,000 in 2001, it is currently for sale for $600,000" reporting history is fine. The buyer can draw their own conclusions. Making any kind of prediction of future performance is wrong. Do I expect this to ever happen? No.

Anonymous said...

Meanwhile in Fairfield there is no question that condos are a great investment. Everyone wants to live in Fairfield, even renters. The only way you could lose on a condo in Fairfield is if the big one hits and you have no insurance.

Roger said...

HHV and Animal Spirit,

It has been a long time since I last posted my property investor spreadsheet on this blog so I thought I would provide an update and post the latest version. Anyone purchasing investment property needs to do a detailed analysis before they invest or they could end up with years of negative cash flow hoping for a capital gain down the road.

Here is a detailed analysis of HHV's example over a five year period. Click here My analysis considers many variables such as vacancy rate, maintenance, increased costs and initial costs like property transfer tax and legal fees. One can clearly see that the buyer of this property would have negative cash flow every year and would need to sell the property for 22K more than the initial purchase price just to break even (after considering opportunity costs).

Animal Spirit's example is similar but only a 15K increase in price is necessary in order to break even (after considering opportunity costs). click here In both examples the cap rate is way too low and a knowledgeable investor would walk away.

After running the numbers on many properties I have come to the conclusion that one is not investing when purchasing most single unit properties in Victoria. Rather it is speculation using leverage and rental income to offset some expenses while hoping for a big capital gain. Given the huge price runup in Victoria in recent years, the new mortgage rules and rising interest rates this seems like a great way to lose money for those getting into the game today.

BTW - You can click the download tab on the links I provided and use the spreadsheet to do your own analysis.

HouseHuntVictoria said...


we don't see you enough around here any more, but wow, when you do post, it's certainly worth the wait.

Thanks for the very detailed analysis.

Just Jack said...

Patriotz said:

Real Estate Investment Trusts (REIT's) aim for a cap rate of 8%.

Just Jack said...

Patriotz said: Real Estate Investment Trusts (REIT's) aim for a cap rate of 8%.

An 8% cap rate for an industrial or commercial property is meaningless. If the typical cap rate is 4% and the REIT is aiming for 8% then the trust company would be buying high risk properties in order to get the above average return for their investors. If the typical cap rate for similar grade investment properties was 12 percent, then the 8% target would might be for newer buildings with a better than average sustainable cash flow that is easier to liquidate.

Just stating a cap rate does not tell you that one property is a better or worse investment. You have to know how the cap rate relates to the industry average for similar grade commercial or industrial properties.

And there is the problem with trying to use a cap rate for home ownership condos. The majority of individual condos would exhibit a very very low cap rate. So your condo would be similar to all other condos.

And you can't compare home ownership condos to investment grade properties, because the rate of return that Donald Trump wants for his high rise office buildings has no relation to the common joe and their one-bedroom condominium.

Robert Reynolds - GBA said...

Yay Roger! missed you!

omc said...

I have to say that my PCS is showing a blood bath this week. I set it up last winter to get the most areas and listings up. I have all of eastern saanich, ten mile,queenswood, oak bay and fairfield with all houses up to 1.3Mill. Every couple of days or so a sold one shows up, almost like the winter of 08. Still seeing about 10 new listings a day though.

HachiRoku said...

Roger! Welcome back!

Roger said...


Lets take a closer look at your 1st scenario. If your "investor" was to buy fixed rate reset preferred shares issued by the Cdn. banks they would get a return of 4.5% for the next five years. After that these shares are redeemed by the bank or reset to a higher rate that is much higher. A pretty safe investment by any measure.

Or they could buy the condo for cash and become a landlord with all the headaches. The analysis below shows they would have to sell the condo they bought for 233.8K for 255K in 5 years just to get the same return as the bank shares. That is because the cash-on-cash return and cap rate are only 3.6 to 4.0%. The rest of the return requires the property to increase in value.

click here for analysis

What if our investor was prepared to take on more risk and have a stock portfolio of blue chip common stock with a target of 6% yield (dividends & capital gains)? In this case the condo would have to increase in value to 269K or 15% over 5 years just to give the same return.

click here for analysis

Most amateur investors do not do these calculations themselves or hire someone to do this kind of analysis. Real estate agents are the last ones they should consult for this type of advice. As an aside real estate agents often take their own advice and buy real estate for investment only to get frustrated with the landlord hassles and bail out after a few years.

Jonathan said...

HouseHuntVictoria & All,

I posted the following comment on Garth Turner's blog a couple days ago, because I think many are preparing to "weather a storm" that doesn't really exist. It is always healthy to hear from both sides, and as a Victoria native, I'd like to weigh in...feel free to challenge this.


One of the first on the blog this AM because I’m writing from Cairo, Egypt. Don’t agree with the “chicken little” record that Garth has been playing for the past few years on Canadian Real Estate (it sells books right?), but like his conservative approach to debt and diversified investing strategies.

29 y/o, good salary, 5th country as an expat with the same Danish company. Recently bought a home on the California coast at 2001 prices…still expensive, but the vacation rental market should generate some cash flow (the numbers didn’t work for such an investment in my hometown of Victoria).

Many bloggers on this site feed off each others bearish Canadian RE attitudes, making false parallels to the subprime mess down South. They indiscriminately
paint the entire country with a thick brush, and in doing so neglect a very important fact in their doom and gloom predictions.

Canada is a special place…a place you will only fully appreciate once you leave. Pakistani doctors, Turkmen mechanics, Azeri lawyers, Swedish engineers,
and English policemen lust after our opportunities & lifestyle. They are willing to work hard & pay dearly for what many of us already have.

Don’t believe me…unplug the computer, get out of the rental flat, buy a flight ticket, and see how 6 billion other people live. You may come away
feeling a little better & wiser than you otherwise would reading this negative crap day in and day out.

I have no illusions that some Canadians live beyond their means, and a reality check is long overdue. We’ve become climatised to a standard of living that
we cannot and should not conciously expect to maintain. The world has become a small place, and we are on the wrong side of the coin. Does this mean
Canadian RE will crash? I don’t think so…just a realignment of expectations among the post baby boomer generations. A semi-detached “starter” home in a major Canadian city is no longer for the middle class. Accept it…as Europeans have for generations.

That said, for a young couple starting out in life, I cannot think of a safer investment that offers tax free gains that a live-in Canadian condo/townhouse
can offer in the right market. My career has not allowed for such an opportunity, but I certainly wouldn’t steer anyone clear of such an investment.

Like many under the age of 30, I have lost far more in the stock market in the past few years (and month) than the real estate market. Time will tell.

Canada is special.

An opinion from a young guy who has not clocked the mileage of Mr. Turner, but perhaps has seen more of the world.

Alexandrahere said...

Hi all......Look at the deal this "investor" or "speculator" got!!

#203 - 225 Belleville

Original list 1st Feb 2010 @ $478,000
SOLD; March 3rd,2010 @
the fantastic price of $400,000

This person was hoping to make a killing by renovating and flipping.

Listed: May 5th @ $588K
P.C: June 1 @ $498K
P.C: June 9 @ $468K

Say he eventually sells this condo at $450K with possession date for 1 Sept 2010.

Here are his approximate costs:

Purchase Price: $400,000
PTT: 6,000
Lawyer: 1,500
Completely made-over Reno: 85,000

Selling Fees:

Realtor fees: 17,500
Lawyer: 1,100
Strata fees: ($448 mo) 2,700
Insurance: 300
Hydro: 300
Investment income loss(clear) 300
Mortgage ($360K @ 2%) 6,000

Total Cost $520,700
minus purchase amount: 450,000


Total loss in terms of blood, sweat, tears, divorce,sleep deprivation, peer recognition, etc. etc. etc.....PRICELESS

Note: The reno included all brand new wood kitchen cupboards s.s. appliances, real hardwood floors, granite, new baths etc. (he did leave the old chandelier though?)

Mark said...

Come back in 6 months kid! LMAO!
Just because you've travelled, you think you inderstand economics? You think that what has happened here in Canada is really different than the States?
This shit is comical!

HouseHuntVictoria said...


From my rudimentary knowledge of reno costs, $85K for a condo seems way out of line. Even half that would be on the high side.

I agree that this would-be flipper is getting caught by the market though.

HouseHuntVictoria said...

Jonathan, some of your sentiments are fairly bang on (group think on the bear blogs etc) but I don't think you can dismiss the downturn with an explanation of "truly special place." In fact, I know you can't. They tried to in the US, Cali too, and that didn't work out to well did it.

I too have traveled, I've spent much time in Europe, the US, and 3rd world countries in Asia. I get that "we're different." Real estate is local. It was locals who drove prices up and it will be locals who will drive prices down. I don't care how many people want to come here, our immigration remains slow anyway, and prices will forever remain tied to incomes.

We're capped in Canada. Tapped out. No more cash flow to handle the debt load. Unless you plan to bring some of that Dubai money you're making and give it to everyone else then the Canadian real estate market has no where to go but down.

Rhino said...


I get your point about this being the land of milk and honey...I have traveled though China, I totally agree.

However, that doesn't change the fact that our real estate is severely overvalued. If what your saying is true and all this house price appreciation is just because its so great living here why is it so cheap to rent(relatively speaking)?

I would suggest you come back home for a while, and sit through some dinner parties with some dumb yuppies telling you how they make more money living in there house then working....I think you will change your tune.

Rhino said...

I think they still have the "before" pictures from the condo alexadrahere posted here:

patriotz said...

And you can't compare home ownership condos to investment grade properties, because the rate of return... has no relation to the common joe and their one-bedroom condominium.

You're missing the point. The reason that commercial RE investors want a cap rate of 8% on a typical property is that's what you need to make money. The common joes who settle for less, i.e. who are paying inflated prices, are losing money, and such joes cannot lose money forever.

That's called "reversion to fundamental value" and that's the root cause of RE busts and all other asset busts.

Alexandrahere said...


I've done a lot of renovating in the past, most recently being a two bed. two bath condo 1250 Sq. ft. The reno cost about $40,000. I put in fairly expensive w/w carpeting and top of the line lino. Just run of the mill cabinets, no new doors or closet organizers or crown moldings.

But this person did an expensive reno:

Very reasonable costs would be...if you didn't do the work yourself:

Hardwood fls.1200s.f: $25,000
Granite in large kit: 5,000
Top of line SS appliances
Large fridge bottom freezer 1,500
Good quality s.s d/w 1,000
SS over stove m/w 500
good quality smoothtop range 1,200
lge kit. with maple cabinets 12.000
Ceramic backsplash 1,100
loads of door pulls 150
Double ss kit. sink 300
Taps 300
Lite Fix/under cab lites 400

2 bathtubs 600
2 sinks 250
2 taps 150
2 acrylic tub surrounds 3,000
2 mirrors 300
2 lite fix 250
2 toilets 500
2 vanities with countertops 3,000
2 toilet seats 100
2 sets of bath/shower "trim" 500
4 towel holders 250
2 tissue holders 50
2 new doors with hardware 400

2 bed.doors with hardware 400
2 closet doors with hrd 300
1 lg walkin closet org. 400
1 bd closet organizer 100
2 bd lite fixtures 100
3 hall/foyer lite fix 300

baseboards 1,000

paint (2coats) & labor 3,500

Electrician all work 2,500

Plumber all work 2,500

Tear out labour costs & 1,200
dumping fees

Approx total: $76,000

I just guestimated the 1300
square feet of true hardwood floors and installation.

Also, I think labour costs for the installation of all the above could quite possibly be more. Plus the taxes on purchases and labour.

Also the quality of granite varies greatly. However this is a huge kitchen.

Don't think this quote is out of order for somewhat good quality fixtures. Your could pay a little less.....but one heck of alot more. The costs of very good quality kitchen and bath sinks and accessories can be huge.

Same with the paint. Three coats instead of three is the norm. i.e. one basecoat and two topcoats.

So - what do you think?

Animal Spirit said...

Roger - great to have you back - and to think all this time that you were actually Double Agent!

off topic from the discussion - my matrix account (SFH and townhouses < 525K in core areas) has gone haywire this week:

13 new listings (some could be re-lists)
37 price decreases
1 price increase

If this transfers into knife-catchers buying lower end homes and distorting the published median and average, then all hell could break loose.

Seller psychology has changed. Buyers will be looking for deals. This could feed itself something nasty.

HouseHuntVictoria said...


I don't think we need to go back and forth too much, but my guess is on a reno like that you get a handy specuvestor doing much of the work themselves. I can't see anyone paying $20/SF for the kind of hardwood that would have been used, when that hardwood costs less than $10/foot and if you get a trades discount you're looking at less by around 20%. Anyway, I see where you're headed and I like it, I just think there's very few true pros who would spend that kind of dough on a reno. I know someone who built an 800SF second story on a 2-bed cottage style house for less, and finished it just as nice.

I've got a friend in the kitchen biz, and your bang on with that number for sure. And same for most of the little things. My guess would be the labour costs are significantly lower and the electrician and plumber are cut out of the picture. Correct me if I'm wrong, but probably a no-permit-required kinda reno, and many carpenters/reno people will end up doing the plumbing & electrical themselves because it's just replacing a sink or light fixture/switch.

Now, I may be wrong on the people flipping, so my assumptions could be way off the mark too.

Roger said...

Animal Spirit said,

Roger - great to have you back - and to think all this time that you were actually Double Agent!

Don't know where you got this idea... Double Agent's data and charts are much better than the stats I used to post.

BTW - I lurk here from time to time but don't post very often unless I have something to contribute.

Rhino said...

You may be right HHV, but if your in the flipping business and you don't get permits and use licensed guys your opening yourself up to potential liabilities. If you install a faucet line wrong, and it breaks a year later and floods the whole building, the owner and strata will likely go after you in court. If you deal with a licensed plumber they have insurance....

Alexandrahere said...

Rhino is right. When you install a bathtub in this case 2, the entire building water has to be cut off. You must hire a licensed plumber.

Many of the 70's condo's just like in that era of houses, most were built with aluminum wiring. So at the least you should replace the wire to copper at the outlets.

Building a brand new place and doing reno's, particularly in older buildings are very different jobs.

First of all there is the ripping up of all the old carpets lino, cabinets,tile, baseboards etc. Then there is the removal of maybe three layers of wallpaper...if you don't watch'll ruin the gyproc.

The tear outs and the disposal of the "junk" is time consuming and adds to the costs.

Then there is the taking of down walls versus the putting up of walls, etc. etc.

Anyway, I'm sure when thinking about it .... you know all that.

think said...

Great posts today! This is why I love this blog!

jesse said...

Just Jack, cap rate for properties must be taken in context with the variability of cash flows. That is, a slum could have a higher cap rate due to low quality tenants.

A good comparison is to a utility like the gas or water company, who receive relatively predictable cash flows that roughly track inflation and have capital to maintain and expand on an ongoing basis. For a REIT that is relatively diversified, the business justification to investors should be about the same. For lower risk stable tenants 8% seems about right. (Interestingly this in theory should be independent of inflation.)

For Joe Landlord with a single investment property, I can't see how returns are going to compete, assuming we properly account for ALL costs, including his time managing and maintaining the property over a long time frame and assign some aggregated costs for low probability events (i.e. stuff a REIT would see but only a few unlucky landlords would see).

Just Jack said...

You're missing the point. The reason that commercial RE investors want a cap rate of 8% on a typical property is that's what you need to make money. The common joes who settle for less, i.e. who are paying inflated prices, are losing money, and such joes cannot lose money forever.

My point is that while RE investors want a cap rate of 8%, they are NOT getting that rate unless they take on high risk assets. Bonds and GIC's are low risk, hence a low rate of return. Apartment blocks, office towers are selling at far less than an 8% cap. In order for the REIT to get an 8% rate of return they would have to take on high risk ventures like a oil rig in the Gulf of Mexico, and that isn't working out to good lately.

A condominium to an owner occupier is not considered high risk and that is why it HAS an ultra low cap rate. The problem is not the rate of return it is the pay back period of the asset. A condominium is a poor investment because of the outlandishly long pay back period in relation to other assets.

For example, if the pay back period for solar panels on a home was 40 years, would you install them? Most of us would say no that's too long. How about if it were 5 years? I would say most of us would install them. Because after 5 years, an economic benefit would flow to you by reducing your operating expenses. While some of us might not ever get to see the end of 30 or 40 years to receive any benefits from a house.

patriotz said...

Many bloggers on this site feed off each others bearish Canadian RE attitudes, making false parallels to the subprime mess down South

The mess down south had nothing to do with "subprime" lending. Many US markets that had very little subprime lending had huge busts, e.g Marin County near SF.

The mess down south, just like in Ireland, Spain, etc. was caused by prices too high in relation to rents and incomes. That is the root cause of all RE busts.

People who blame the mess in the US on "subprime" are trying to pretend that excessive prices don't matter.

Do you get it now?

patriotz said...

My point is that while RE investors want a cap rate of 8%, they are NOT getting that rate unless they take on high risk assets.

Of course not, because other buyers are paying too much, and those other buyers are going to lose money because they paid too much, which means that the cap rate for low risk properties is going to have to come back down to 8%, because investors cannot lose money indefinitely.

RE investors who know what they are doing will not accept less than 8% for a low risk property, because that's all they are worth in fundamental terms.

Just Jack said...

And we come round circle to the point that I was making.

The rate of return of an investor for an apartment building is not the same as an owner occupier of a condominium. Rightly or wrongly the owner/occupier places an additional economic benefit on home ownership.

And where do we get the 8% figure. I suppose it is historical, but if you are in the business of REIT, you can't stop buying properties because there are no longer good quality properties at 8%. What happens is that you lower your standards and take on risker properties to achieve that 8% goal.

jesse said...

"the owner/occupier places an additional economic benefit on home ownership."

Yes but a landlord gets no such benefit. That marginal buyers are willing to pay more can never justify an investor overpaying.

"What happens is that you lower your standards and take on risker properties to achieve that 8% goal."

If there are no good investments many REITs hold cash. Taking on more risk I'm sure is done by many -- the marginal buyers -- but their returns will inevitably suffer. Again, that investors are overpaying because they are taking more risk, just like a homeowner overpaying because of intangible ownership benefits, does not justify higher prices.

Anonymous said...

Well it looks like no more BC government layoffs folks. That means Fairfield will never go down since it's mostly government workers out here.

reasonfirst said...

Hey Fairfield,

BC Government is downsizing by attrition not layoffs - they are an old workforce and leaving at a rate of about 1500 year. And like you said - they live in Fairfield.

Anonymous said...

CMHC just released a report on renovations and homebuying in Canada last year. A brief overview is on Canadian Mortgage Trends and you can download the entire report by clicking here

Amazing to see how many people renovated because they got a 15% tax credit from the government.

Rhino said...

Never really understood downsizing by attrition. If the employee isn't doing anything useful enough that would warrant replacement, why do we (the taxpayer) have to wait on them to retire to get rid of them.

reasonfirst said...


2 reasons:

1. Avoid early retirement packages
2. Avoind any union resistance

If you want to get rid of 2000 people in a given year, layoff 500 and let the rest go without hassle. Happens in the private sector too.

think said...


I'm seeing the same thing on my PCS - this week - steady new listings and almost nothing selling - it is pretty wild! It's like the market has just gone totally dead quiet. Now comes the panic and crashing prices as all the sellers that need to sell race to the price bottom. This market is totally bear now - no doubt about it - I find it bizarre when people question "IF" prices will drop - I mean duh... nothing is selling already unless it is a bargain, price changes every day, etc... the writing is on the wall...

Skeptic said...

Victoria Mayor Dean Fortin tries to put lipstick on a pig...

Humboldt Valley is Victoria's newest neighbourhood

Fortin helped unveil the newly branded Humboldt Valley– an area tagged to become both a neighbourhood as distinguishable as Fernwood or Cook Street Village, and a European-inspired tourist destination.

I walked along there yesterday and it brought back fond memories of Paris in the springtime.

think said...


You said "Recently bought a home on the California coast at 2001 prices…still expensive, but the vacation rental market should generate some cash flow (the numbers didn’t work for such an investment in my hometown of Victoria)."

You pretty much answered your own question of why the real estate market in Victoria will certainly crash. If the numbers don't work for buying here it means they are out of alignment with fundamentals and therefore are not an accurate reflection of true value - the prices need to come down - I think you know that deep down or you would have bought here.

HouseHuntVictoria said...

Humboldt Valley is a step up from Quadra Village, that's for sure. But why this city has such a fascination with calling one block a "neighbourhood" is beyond me.

Anonymous said...


Nice to see you posting again. You will be happy with my Monday report. Sales have not picked up in June, new listings are brisk and lots of price corrections are happening in all areas of Victoria.

Agents are reporting that things are slowing down. Some have said it is because buyers think they need 10% down now according to the new mortgage rules. It is still 5% on new purchases but the misunderstanding is due to the 90% max. re-financing rule.

May was hard for VREB to spin because there were only 756 MLS sales vs. 879 in May 2009. In June 2009 there were 946 sales and June 2010 will be in the low 700's. Hard to spin that.

think said...


Can't wait for Monday ;)

think said...


End of May 2010 there were only 695 sales, the 756 sales were in April. Do you think June will come in under 695 sales?

Rhino said...

I like some of the headlines realtors are putting on listings these days. Like the one below "Final price reduction, must sell".

If you really must sell, how can you guarantee that it will be the last price reduction. And do they they really think buyers will be like "holy shit, last price reduction, where do I sign!".!-MUST-SELL!-Executive--Downtown-Condo-for-SALE!-_11994608

Anonymous said...

Think said,

End of May 2010 there were only 695 sales, the 756 sales were in April. Do you think June will come in under 695 sales?

You are absolutely correct. I looked at the wrong column in my stats report. Here is a corrected version of my post

May was hard for VREB to spin because there were only 695 MLS sales vs. 879 in May 2009. In June 2009 there were 946 sales and June 2010 will be in the low 700's. Hard to spin that.

I think May sales will come in slightly higher than May because there are more business days in June than May and the Victoria Day weekend slowed things down a bit. I will stick my neck out more on Monday when I get the month-to-date stats.

The year-to-date sales spin VREB used last month will also wear thin over the next few months as 2010 sales fade compared to 2009.

HouseHuntVictoria said...

This "we don't have a subprime problem" argument that keeps getting tossed out by media, real estate industry pundits and supporters etc, is such a moot point regardless that it's hardly worth debating. But here's why I think it's meaningless anyway:

1. Subprime lending helped to create the economic conditions for inflated prices and high household debt ratios in the US. The loosening of the CMHC insurance conditions between 2002-2010, coupled with the uber low interest rates available throughout this period, helped to create the conditions for never-been-higher home prices and never-been-higher household debt ratios in Canada. So we're in the same real estate and consumer debt related position the US was in in 2005-2007.

2. Subprime lending did not cause prices to fall in the US. High household debt ratios, rising interest rates and extremely high home prices led to a correction. Walk-away mortgage policies, adjustable rate mortgages (ARMs) and rising unemployment led to a further reduction in prices once the natural correction (caused by high prices) began. In BC, we don't have walk-away mortgages, but every one of our mortgages is an ARM (3 to 5 year terms mostly, even if fixed rate they "adjust" upon renewal) and rising unemployment could well occur should a prolonged correction establish itself, leading to a further reduction in prices.

It's important to understand that Subprime lending's problems were felt mostly in two ways: by the market through inflation by allowing people who otherwise couldn't get into the market to do so and by the financial institutions and players who ended up holding this unsecured debt, thinking it was secure, when the sh&t hit the fan.

In Canada, we're at all-time high levels of home ownership as a direct result of mortgage insurance liberalization that had the same effects on our market as the Subprime lending did in the US. To say that the lack of Subprime lending in Canada in and of itself is the reason why we can't end up like the US (house price wise) is, well, economically ignorant and a sales-related talking point conjured up by the PR wizards in the real estate association offices and repeated without question by a lazy news media.

Jonathan, we've discussed it at length here, but you really should read more on the America Canada blog: CMHC's effects on the market

By their very definition, every one of Canada's CMHC-insured mortgages are "subprime" precisely because they allow people who otherwise would not qualify for a bank mortgage to get one.

This is another must read: CHMC - Canada's ticking time bomb (H/T Skeptic)

And one more (again H/T Skeptic): Hosed in Canada; Housing Crash is a Given

Alexandrahere said...

I agree with you HHV on the "neighbourhood theme". I live in Fairfield and I am now one block to the "Cook St. Village" and three blocks to "Humbolt Valley" "Fairfield the Blogger" will LOVE this one.

Can't wait to assemble my stats for Monday. Many of the new listings are re-lists and many of the price changes are former re-lists as well.

And the "writing is on the wall"

Just Jack said...

Here is a blurb I got off a site called couple-of-victoria-bc-real-estate tips-for-selling-your-house-fast/

" Realtors are experienced in marketing homes to the best effect and can point out to buyers why it would make an excellent investment"

Realtors should really be held responsible for saying this.


Anonymous said...

I keep hearing stories about people wanting to buy a condo. Why do it when prices have not gone up in 2 years and prices have started falling again.

I posted this before but some may find it useful.

Condo prices in Victoria

kabloona said...

Meanwhile, back East in a faraway City we all know and love, the housing-bubble story continues to go mainstream.

Next month's Toronto Life magazine will feature a cover story about the Toronto Housing bubble:

July 2010 Contents


Bubble Trouble

"It wasn’t supposed to be like this. Our recovery from the Great Recession happened faster than expected, we got in the mood to buy again, and the housing market spontaneously returned to bidding wars and double-digit gains. Experts say we’re in a bubble that’s ready to pop. The question is, how bad will it be?"

By Maryam Sanati and Bert Archer

HouseHuntVictoria said...

The new face of debt

This story repeats itself up and down the island. This is a clear example of why "we're not any different here."

Quote that sums the whole thing up:

“We used to think that our house would go up enough in price to cover our debts,” Mr. Kennedy explains. “But I don’t think you can rely on that."

Anonymous said...


The article you posted does reveal a new face in the debt crowd - retiring boomers with poor budgeting skills.

The couple in the article are not that unusual. Many boomers used to 100K+ incomes are retiring with incomes less than half that amount. Unwilling to accept a drop in their standard of living drives them into debt. HELOCs and credit cards are their downfall.

I suspect the Kennedys' are in this debt trap and servicing their 70K loan with interest only HELOC payments of around $200 a month. This is affordable given their 37K income but is a debt they will never be able to repay until they sell their house. In BC they can defer their property taxes until they sell and use this money to pay the monthly HELOC charges. Hoever, if they continue to borrow they will eventually hit a wall and face a very unpleasant retirement future.

Skeptic said...

Our local newspaper, the Times Colonist, is well known for its in-depth reports on Canadian real estate. The don't disappoint with their latest article on the softening housing market.

Forget market timing, buying a house is about life timing

'You know, you're making the biggest mistake of your life. The housing market is going to fall."

Animal Spirit said...

The RE crowd is starting to get desperate - changing to 'it doesn't make sense to time the market' to pull FTBs out. Also note the dissing of the other reporter because he didn't follow the crowd.

This was an attempt to create uncertainty over whether waiting is better or not. Of course one will never know where the market bottom is. I'd still prefer to buy when the current 585K house sells for 410K in two years, than get it for 390K in five.

patriotz said...

If renting is cheaper than buying at below normal interest rates then it's better to wait. It's that simple.

As sprit said, the goal is not to time the bottom, but simply to buy at a price that makes sense.

Marko said...

what are the stats for this lovely Monday?

Rhino said...

Looking forward to double-agents stats. Here is what I got from my PCS (SFH under 800K Victoria, Victoria West, Oak Bay, Saanich East):

New Listings: 44
PC: 27

Sold: 14
OM: 14

Definitely the most bearish week I have seen in a while.

think said...

Month to date stats:

sales 284
new 716
total 4513

sales/new listings ratio 39%

Trend continues, still in bear country :) I'm sure double-agent will post some more insights and graphs!

omc said...

What interests me is the low sales figure; anyone got any info on averages fo the month?

Alexandrahere said...

Good morning are my stats.

SFH Min 2bed,2bath $375K-$775K
in Victoria, Oak Bay, Esquimalt,Saanich West & Saanich East.

Reduced: 54
New: 59
Sold: 23
O/M 1

Note: 7 of the 54 reduced were re-lists i.e. BOM

One SOLD went for $4K over asking price. The rest of the sales were all below original asking price.

Some interesting sales were:

1133 Balmoral $524K Sold: $449K
3033 Austin $529K Sold: $474K
4664 Sunnymead$$729K Sold: $680

Some interesting price reductions:

Judah originally $579K to $519K
2374 Cookman $659K to $599K
929 Rankin $597K to $529
1049 Redfern $579K to $514K
519 Lockside Dr. $679K to $$619K
3282 Wicklow $799K to $739

Condo's & townhouses
Minimum 2beds $260K to $625K
Victoria, Oak Bay, Esquimalt, Saanich East and Saanich West

New: 32
Reduced: 19
Sold: 6
OM: 4

Note: 4 of the 19 reduced were re-lists.

Anonymous said...

Think beat me to it. My office has not released the graphs yet so here are some comparison stats.

For the period June 1-13 (9 business days). June 1-6 (4 business days) in [].

MLS Sales - 284 [129]
New Listings - 716 [349]
Active Listings - 4513 [4446]

Totals for May 2010

MLS Sales - 695
New Listings - 1621
Active Listings - 4521

Totals for June 2009

MLS Sales - 946
New Listings - 1436
Active Listings - 3794

Projection: Lowering my earlier estimate of MLS Sales from low 700s to 690; New Listings at 1625 and Active Listings reaching 4700.

Comments: May was a soft month for sales and June will be a repeat with sales comparable to May but way down from June 2009. Price reductions will continue as sellers chase the market down.

Alexandrahere said...

My stats are just for last week, i.e. June 7th to June 13th

Anonymous said...

I have been following another real estate debate over on Kids in Victoria This one is about the merits of buying a condo. The debate seems polarized with real estate agents and homeowners on one side and real estate bears and patient buyers on the other.

I posted this condo price graph here last week and it made it over to KIV. Even though it shows prices going up and down over the last 2 years with no net change it appears to have little impact on readers.

It is my belief that realtors and mortgage brokers should provide the facts and let people decide for themselves if real estate is a good investment. In that spirit I prepared the following example of what happens if you buy a 300K condo with the intention to step up the property ladder. The assumption is that the buyer intends to sell in 5 years which is a typical scenario.

In a nutshell the buyer has to sell for 324K before they make any profit and they will be paying $1630 a month (PIT + condo fees) along the way.

Analysis of a 300K condo purchase

Hopefully someone will post the link over on KIV so that the financial facts are on the table. The biggest decision of peoples lives should be made on facts not emotional rhetoric and real estate myths.

Anonymous said...


I want to thank you for posting my links on KIV. It did not generate any feedback but maybe some of those that are seriously considering buying will now have some facts to consider.

It is really important that people understand that mortgage rates will be higher when they renew. We are at historical lows due to the credit crunch and weak world economies but that won't last forever.

I have a feeling things will get very ugly for some homeowners that are buying at the peak of the market. If one can afford the payments today, increased payments in the future and maintenance associated with owning they will be OK. Anyone hoping to flip or move up in a few years is going to get burned. And those that do not have a handle on their finances or steady income will sink under the debt. Any ethical, informed real estate agent will advise clients that buying now means thinking long term.

Rhino said...


Not sure if you ever posted this before but are you actually an active Realtor? if so, what the heck do you tell your clients!

Alexandrahere said...

Double Agent and all.

To give you an idea about the value of buying a condo:

My Aunt and Uncle sold their house back in 1972. It was built around 1912 and was on McClure St. in Fairfield. The house was in very good condition and was gorgeous inside.

Anyway they sold it for $25,000. Going through the same realtor, they bought a 2 bed 2 bath condo in Fairfield on Linden.....just a few short blocks away. They purchased the condo for $21,000. They were happy about it and used the extra $4,000 to buy some new furniture and a "new" 2nd hand car.

Back about 7 years ago my Aunt had to go into a rest home. She sold the condo for $120,000. It so happened just a few months later the house on McClure went up for sale (I viewed the open house) and it sold for around $700,000!!.

So, I would say to a young couple starting out, WAIT and save until you can afford to buy even a semi-detached (half duplex) rather than a condo.

In my opinion, condo buying should be left to people at or approaching their retirement. They can then have the freedom to travel or just enjoy themselves no longer having to maintain a yard and the exterior of the house etc.
I would also buy in an older condo that has been recently reno'd and had has a large contingency fund. Scout around the place when you are looking at it and try to talk to some owners. You will get alot more out of them than you will the realtor. He doesn't live there day to day.

Sure the place isn't going to hold its value as a house would. But when you are in your retirement years financial gains are just not as important. You have either made it or you haven't by now. And so all you are looking at then is "how much more money do you want to leave your grandchildren?"

Olives said...

Double Agent - Don't worry, I bet a lot of people on KIV viewed your links - if someone is "bullish" how can they possibly comment - it must be confusing to look at that info if you strongly believe the opposite is true (or want to believe the opposite is true I suppose).

No one commented on my deflation link either...but I can appreciate that is very difficult for many people to wrap their head around that idea.

patriotz said...

Any ethical, informed real estate agent will advise clients that buying now means thinking long term.

One, the clients of real estate agents are the sellers, not the buyers. Are you the "client" of a car salesman?

Two, telling people that "buying now means thinking long term" is giving investment advice, and I don't think RE agents should be giving investment advice, period. It is entirely the responsibility of the buyer to offer a price which is compatible with their financial means and goals. The only responsibility of the RE agent to the buyer is to correctly represent the facts (not give predictions) regarding the property. The responsibility of the agent to the seller is to get the highest possible price, consistent with the above.

Just Janice said...

It's an interesting conversation on KIV, and if it causes even one person to pause and think about their purchase than a public service has been done. It's amazing how short memories are - nobody seems to remember the world before 2001 and that world is far more 'typical' than what has persisted since then.

1981 might look 'easy' at the end of this mess.

Marko said...

It is interesting to note how many one million plus sales occur every month. It seems like every month average price is skewed by an excess of these sales.

I am assuming that the majority of people buying 1+ million homes are generally better educated, probably involved in business, and most likely were 20 years or older in 1981.

You would think this segment of the market would be struggling?

Just Jack said...

Here is some data for the last decade showing the median price for condos and houses in the urban core for the month of May. The number in brackets is how many units sold.

Year Condo House
2000 $125,000 (56) $235,000 (200)
2001 $117,500 (87) $247,500 (255)
2002 $133,500 (119) $261,148 (266)
2003 $139,000 (126) $298,500 (243)
2004 $179,000 (169) $345,500 (250)

2005 $207,251 (186) $419,900 (233)
2006 $249,500 (168) $495,000 (249)

2007 $253,900 (192) $535,000 (283)
2008 $299,900 (141) $573,750 (242)
2009 $280,000 (178) $555,000 (261)
2010 $295,000 (166) $620,000 (199)

It appears that the typical condominium remains roughly half the price of the typical home at any time. A strong correlation that shows condos as being a stepping stone to buying a home. But as prices continue to rise the condo owner becomes more stretched to buy up to a home. Lower interest rates and easier credit availability vamps the cycle upwards such as the period 2005/2006 with zero down and 40 year amortizations which also brought in more buyers.

In my opinion, you are better off not buying a condominium as long as you continue to SAVE money for the down payment on a home. For most people that is not possible and they require a costly forced savings plan or death pledge administered by the banks.

We are now once more at price peaks - will this be the straw that breaks the camel's back?

Grasshopper said...

Has anyone seen this new condo project?

The Zen

311 Sq foot condos starting at $169,000 (sorry but that is extremely small.)

Here is the write-up.

THE ZEN.Located right on the corner of Cook St and Meares. Sleek urban lifestyle starting at just $169,900. This means owning your own condo or having a great investment walking distance from downtown Victoria and Cook St Village for as little as $587.00 per month.

Just Jack said...

After reading the posts on KIV I feel like I have gone 12 rounds with Mike Tyson. Whew!

It must be called The Zen because you can only fit in it if you are sitting in the lotus position. You had better be the anti-social type because how could you fit your friends in?


Animal Spirit said...

Median price change in Victoria – using last 50 price changes for central areas, houses and townhouses listing <525,000.

Median price change: -3.2%
Maximum price change: -7.0%
Median new listing price difference to assessment: +9.2%

Animal Spirit said...

Shouldn't the Zen be called the University Single Room instead?

Just Jack said...

Remember the good old days of being a landlord and the vacancy rate was (0.5%) half a percent in Victoria, because everyone wanted to live here. And last year when the rate almost tripled to around 1.5%, but that was nothing to worry about as rents were strong and increasing.

And how about today, would you want to buy an apartment building if the immediate future trend is for rental rates to flatten and the vacancy rate to continue to increase to 2.5% and more.

Skeptic said...

Cameron Muir tries to come clean but can't resist spinning....

B.C. home sales sag in May: report - Greater Victoria figures drop nearly 20 per cent

British Columbia real estate sales are slowing down and inventory is rising as interest rates inch up and credit rules tighten.

Muir is not surprised to see the slide. High levels of sales in Victoria, Vancouver and the Fraser Valley at the start of this year were "unlikely to be sustained," Muir said.

"We've seen that moderate now as a result of that pent-up demand being already expended in the marketplace. We've seen higher mortgage interest rates, as well as tighter credit conditions for low-equity home buyers -- all of those having an impact on overall housing demand."

The slower pace of sales, coupled with an increase in the number of properties on the market, has "quelled upward pressure on home prices," Muir said.

"My expectation going forward is that sales will likely stabilize or even increase slightly in the coming months," he said. This will happen as interest rates rise gradually. That rate increase is being counterbalanced by improving economic conditions bringing job growth and lower unemployment rates and higher wages. "Those things certainly underpin housing demand," said Muir.

Skeptic said...

More real estate news. Not looking good for amateur landlords with suite and condo rentals.

CMHC says Victoria Vacancy & Availability Rate Increased

“Rental construction and competition from the condominium market added upward pressure on vacancy rates and historically low mortgage rates attracted renter households towards homeownership over the last year,” said Bob Dugan, Chief Economist at CMHC's Market Analysis Centre.

Victoria April 2010 (April 2009)
- Vacancy rate 2.5% (1.2%)
- Availability rate 3.7% (2.5%)
- Two bedroom rent $999 (1043)

- Availability: A rental unit is considered available if thexisting tenant has given, or has received, notice to move, and a new tenant has not signed a lease; or the unit is vacant
- Vacancy: A unit is considered vacant if, at the time of the survey, it is physically unoccupied and available for immediate rental.

Interesting to note that Victoria rents have dropped and are lower than Calgary and Ottawa and the same as Edmonton. However house prices are much higher than these three cities. Something is out of whack....

HouseHuntVictoria said...

^ Thanks Skeptic, pretty much confirms everything we've been discussing the past couple of months.

Anonymous said...

Anyone in BC can get a mortgage!

Grow-op was financed by banks

Alexandrahere said...

Hello All;

Just checking out my PCS. One incredible price reduction at 1261 Palmer in Saanich East, Maplewood area. It is a 1934 SF, 3bd, 2bath home.

It was originally listed on 10 April 2010 at $639K and has been re-listed today at $529K. Big expectations? or Typo?

kunwak said...

Roger, thanks for posting. Your statistical skills and analytic thinking are extremely interesting.

Alexandrahere said...

wow....4505 Limerick Ln. in Gorden Head: Originally listed at $899,800
just sold for $723K. $176,800 reduction.

The house is assessed at $874,000 as well.

Looking at it though, it is lovely on the outside but the inside? Worth nearly One Million dollars? I don't think so.

Anyway people have a great rest of the day.

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Jade Graham said...

The reason I'm still comfortable with my decision though is that I did not simply take the down payment and invest it in a stock portfolio.