Housing Bust 2016

Leveraging, renting vs owning, making an investment or buying a home?
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Re: Housing Bust 2016

Post by Pitboard » 24 Oct 2016 10:24

My son lives in Vancouver (condo) They have a child almost 2. I was very impressed with all the parks and play grounds they have that are all with in walking distance. What was very cool was that the people who use the parks have donated lots of large toys for everyone to enjoy. Kids there go out, rain or shine. They put kids in Muddy Buddies. They are thin but very strong waterproof suits that keep them clean and dry. People out there like to be outside.

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Re: Housing Bust 2016

Post by Profit not Prophet » 24 Oct 2016 20:01

Muddy Buddies.....Interesting, almost a junior hazmat suit. I used to just change my clothing when ordered to :)

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Re: Housing Bust 2016

Post by Flaccidsteele » 25 Oct 2016 23:08

Prognosticators have been wrong for a long time. I'll believe it when it actually happens.

Vancouver Home Prices Set For Double-Digit Fall
The report found that home sales began declining in Vancouver as the soaring cost of property blocked many from entering the market, well before the introduction of a 15% sales tax on foreign buyers.
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Re: Housing Bust 2016

Post by Peculiar_Investor » 10 Nov 2016 10:24

Another layer of taxation in Vancouver has been announced. Vancouver Wields C$10,000-a-Day Fine in Crackdown on Empty Homes - Bloomberg. The headline is actually misleading (stupid headlines or financial porn?)
Bloomberg wrote:The empty-home tax will take effect by Jan. 1 and will be calculated at 1 percent of the property’s assessed value, Vancouver Mayor Gregor Robertson told reporters at City Hall.

“Vancouver is in a rental-housing crisis,” Robertson said. “The city won’t sit on the sidelines while over 20,000 empty and under-occupied properties hold back homes from renters.”
A better headline is Vancouver recommends 1% tax on empty homes - British Columbia - CBC News.

Of course the devil is in the details and the exemptions.
Bloomberg wrote:The city will allow certain exemptions to ensure that most homeowners who are Vancouver residents, including those who spend their winters at nearby ski resorts, won’t be affected. Principal homes, as well as properties that are rented for at least six months of the year on 30-day minimum leases, won’t be taxed.

Homeowners will self-declare whether their property is a principal residence or a secondary investment. People who pay the new tax late will face a 5 percent penalty, while those who don’t declare will automatically be taxed. Falsely declaring that a home is occupied or that it’s a principal residence could lead to a maximum fine of C$10,000 a day for as long as the offense continues, according to the mayor’s office.
CBC wrote:Mayor Gregor Robertson said the aim of the tax is not to raise revenue, but rather to encourage owners to rent out their properties in a city with the lowest rental vacancy rate and among the highest rents in Canada.

The proposal is set to go before council next week and staff hope to have the tax in place for the 2017 year, with the first payments in 2018.

It will cost $4.7 million through the end of 2018 to set up the tax, with an annual cost of $1.5 million after that, but the city expects tax revenue to cover the costs, with some money left over for affordable housing initiatives.
Do we really trust politicians who state that ex is not to raise revenue, but rather has another purpose?

The full details can be found the City of Vancouver's website, see Empty homes | City of Vancouver
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Re: Housing Bust 2016

Post by patriot1 » 11 Nov 2016 11:55

Peculiar_Investor wrote:Do we really trust politicians who state that ex is not to raise revenue, but rather has another purpose?
Why does it matter? If people don't want to pay the tax, they don't have to leave properties empty. You could just as well ask whether the tax on cigarettes is really to discourage smoking or to raise money. Don't want to pay it? Don't smoke. Or speeding tickets, etc.

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Re: Housing Bust 2016

Post by Peculiar_Investor » 11 Nov 2016 12:08

Apologies, I didn't mean to bring politics into the discussion. Slapping myself on the wrist.
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Re: Housing Bust 2016

Post by madmoney » 12 Nov 2016 03:06

I don't see why the municipal government is wading in and telling people what they can and cannot do with their own property.

IMHO, the CoV should make it much more difficult to tear down existing homes. That will cause people to expend cash to upkeep their properties, which will keep cash moving in the Reno market, and move the pendulum back from the housing stock being solely looked at for land value and now looked at for house value.

The way it is right now, there is zero incentive for a home owner to keep the house in a state of good repair and inhabitable because they know that 1-2 years down the road, rotted away with no investment or energy, the property continues to escalate in value.

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Re: Housing Bust 2016

Post by patriot1 » 12 Nov 2016 08:13

madmoney wrote:I don't see why the municipal government is wading in and telling people what they can and cannot do with their own property.
Actually it's not telling them what they can or cannot do, but taxing them according to what they do.
IMHO, the CoV should make it much more difficult to tear down existing homes.
Now that's telling them what they can and cannot do. :wink:

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Re: Housing Bust 2016

Post by madmoney » 12 Nov 2016 17:17

Touche :lol:

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Re: Housing Bust 2016

Post by Germack » 18 Nov 2016 22:23

I did some analysis of the Canadian housing market and surprisingly the cost to own a house (mortgage interest/opportunity costs + taxes + utilities + maintenance) stayed pretty constant over the last 10 years even when house prices almost doubled. This was due to decreasing mortgage rates. See graph below.
Historical Home Price, interest rates and cost to own a hosue.png
Assumptions: Taxes+utilities+maintenance = 13.5k per year and increased by 2% per year.

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Re: Housing Bust 2016

Post by Flaccidsteele » 19 Nov 2016 01:23

Metro in debt: Newton area worst in the region for debt-to-asset ratio
Despite repeated warnings, household debt continues to rise in Canada, particularly in B.C. where home prices and a high cost of living have fuelled a borrowing surge.
Demand For Single Family Homes In Vancouver Drops Over 50%
Earlier this year, detached teardowns begun selling for over $3 million dollars. Now we’re starting to see homes purchased earlier this year listing for a loss. This demonstrates what could be a major turning point for prices in the market.
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Re: Housing Bust 2016

Post by Just a Guy » 20 Nov 2016 02:03

Germack,

The cost of ownership isn't related to the price of a house, even property taxes aren't as it's the ratio of your house value compared to everyone else's. If your property doubled, along with everyone else's, then your portion of the tax bill remains the same.

What I wonder about is, Did you factor in the increased loan amount? It looks like you just took into consideration the interest rate. If you borrow $100k at 5%, it's the same amount of money as $200k at 2.5%, again it stays the same, as long as the interest rates continue to fall.

The problem with this is the results when the interest rates start to increase. For example, had you borrowed $100k at 5% and renewed 5 years later at 2.5% (with your house now being worth 200k), you are saving money over people, your new neighbour, who bought a 200k house today at 2.5%. Your neighbour is a person just like you, it's not someone more wealthy, they are in their own neighbourhoods buying places at higher relative amounts. Neighbourhoods aren't worth more relatively as houses are worth more everywhere and the cost of borrowing is the same relatively (the house that was $500k at 5%, and attracted a certain kind of buyer, is now worth $1M at 2.5% and still attracts the same kind of buyer since it's costs the same to own).

Now, let's go 5 more years down the road where the situation reversed. Third renewal for your 100k house (and your starting to get it paid down a little, but we'll ignore that for simplicity) and you're back at 5%, no big deal, you've been here before. Your neighbour however is up for their first renewal and have 200k at 5%...ouch! Not so affordable anymore.

Maybe he should sell you think? Except the people who would buy this house can't afford it any more than they can, so the house price has to decrease. The guy who bought a $500k house 5 years ago doesn't want to overpay to live in a neighbourhood where houses were $200k 5 years ago just to bail out your neighbour, his neighbourhood is facing the same problem and those houses will also fall in value. People won't overpay to downgrade, but richer people can probably afford to eat the loss longer.

Real estate is a long term investment, you can't just look at current rates and prices or you'll probably lose your shirt in the long run.

P.S. I'd also point out, interest rates at the beginning of your chart had room to go down...there isn't much room left to keep the bubble from exploding anymore.

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Re: Housing Bust 2016

Post by Germack » 20 Nov 2016 16:00

Hi Just a Guy,

I agree with everything you said except in my opinion the cost of ownership is definitely related to the price of a house. The higher the price of a house the higher the cost of the ownership.

I often read in the media that houses are not affordable anymore, but based on my data this is just not the case. Cost of home ownership in 2016 is not more expensive than it was 10 years ago in 2006. In some cities e.g. Montreal cost of ownership is actually ~25% cheaper in 2016 than in 2006.

This picture will change drastically if interest rates rise and this may cause a severe correction of the housing market. Let's assume I am willing/able to spend 40K per year on housing. This means at current interest rates of 2% I can afford to buy a house for 1.325 million (Ta+Ma+Ut = 13.5k + 26.5K interest). If interest rates should increase to e.g. 4% I can now only afford to buy a house for 662.5k (Ta+MA+Ut = 13.5k+ 26.5K interest).
Hosue Price equal 40k cost.png

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Re: Housing Bust 2016

Post by SkaSka » 21 Nov 2016 16:33

*Anecdote*

Family member who bought piece of land and built house in 1960 for $40,000 in Burnaby is selling the house for $1.6 today.

The value of the house grew at a nominal 7% over the past 56 years.

Inflation ran close to 4% over the past 56 years.

Subtract out inflation and 56 years of maintenance, repairs, renovations, etc and real return probably works out somewhere between <3%.

Seems ok, albeit not spectacular in terms of an "investment" relative to other investment opportunities. Of course, I understand a home is not purely an investment. However, many people tend to think of their home as an investment.

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Re: Housing Bust 2016

Post by FinEcon » 21 Nov 2016 19:31

SkaSka wrote:*Anecdote*

Family member who bought piece of land and built house in 1960 for $40,000 in Burnaby is selling the house for $1.6 today.

The value of the house grew at a nominal 7% over the past 56 years.

Inflation ran close to 4% over the past 56 years.

Subtract out inflation and 56 years of maintenance, repairs, renovations, etc and real return probably works out somewhere between <3%.

Seems ok, albeit not spectacular in terms of an "investment" relative to other investment opportunities. Of course, I understand a home is not purely an investment. However, many people tend to think of their home as an investment.
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Re: Housing Bust 2016

Post by Just a Guy » 21 Nov 2016 23:40

Most people don't pay cash for their property, so make sure you account for the increased price. Use the rule of 72 to figure out how many multiples of the original purchase price you paid before you cleared the mortgage.

Then, add in the costs of the upgrades and any interest you paid on loans used to pay for the upgrades.

You'll find your return is probably lower than you thought.

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Re: Housing Bust 2016

Post by patriot1 » 22 Nov 2016 11:13

SkaSka wrote:Family member who bought piece of land and built house in 1960 for $40,000 in Burnaby is selling the house for $1.6 today.
So buying in 1960 and selling today makes a lot of money. The rear view mirror doesn't tell you anything going forward.

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Re: Housing Bust 2016

Post by Insomniac » 22 Nov 2016 13:06

If in 1960, you had put $40,000 in a portfolio of 50% bonds and 50% TSX composite, you would have about $4.3 million now.
(try it out using Stingy Investor Asset Mixer)

Of course you can't live in a portfolio.

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Re: Housing Bust 2016

Post by longinvest » 22 Nov 2016 14:02

Insomniac wrote:If in 1960, you had put $40,000 in a portfolio of 50% bonds and 50% TSX composite, you would have about $4.3 million now.
(try it out using Stingy Investor Asset Mixer)

Of course you can't live in a portfolio.
You can't live in a portfolio, but you can withdraw money from it. According to The Stingy Investor Asset Mixer, had you withdrawn 1.75% from the portfolio to pay for rent from 1961 to 2015, you would end up with $1.6 million left in your brokerage account at the end of 2015, after making a $29,106 withdrawal. This would allow for a monthly rent equal to ($2,425 - investment taxes) + (house city taxes + house maintenance). For simplicity, let's equalize investment taxes with city taxes and maintenance; you end up being able to rent a place for $2,425 per month in 2016.

I say: pick whatever you prefer. I'm sure there are situations where buying is the better proposition and others where renting is the better proposition, from a strictly financial perspective. But, in real life, other perspectives often dominate, like what the spouse wants. :wink:
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Re: Housing Bust 2016

Post by kcowan » 22 Nov 2016 17:12

longinvest wrote:I say: pick whatever you prefer. I'm sure there are situations where buying is the better proposition and others where renting is the better proposition, from a strictly financial perspective. But, in real life, other perspectives often dominate, like what the spouse wants. :wink:
Like I say: "Buying a house is a lifestyle expense." There are periods when it can outperform just like the stock market.
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Re: Housing Bust 2016

Post by Just a Guy » 22 Nov 2016 18:44

Now, what happens if you'd bought the place, mortgaged it to the most you could, amortized it for 25 years and rented it? After 25 years it's paid off, yet still generating rent and growing capital gains. You could, of course, releverage it again and buy more properties, 1960-today is 56 years, you'd have both paid for and generating rent.

That's why investment properties are different than homes.

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Re: Housing Bust 2016

Post by longinvest » 22 Nov 2016 18:55

Just a Guy wrote:Now, what happens if you'd bought the place, mortgaged it to the most you could, amortized it for 25 years and rented it? After 25 years it's paid off, yet still generating rent and growing capital gains. You could, of course, releverage it again and buy more properties, 1960-today is 56 years, you'd have both paid for and generating rent.

That's why investment properties are different than homes.
Nothing prevents someone with a paid of home to remortgage the property and invest the capital into a balanced portfolio. Rebalancing the portfolio will require a few minutes, each year. Investment properties are likely to require more work. Or, one could skip the mortgage altogether and simply rent and invest.
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Re: Housing Bust 2016

Post by Just a Guy » 22 Nov 2016 20:05

Ahh, but to buy stocks you generally need cash. To buy real estate, you can leverage 80% easily, and upwards of 95% or more with some creativity. Sure, in 25 years (or sooner depending on your equity) you can refinance a home, but an investment property can be leveraged from day one.

Even the best margin accounts only gives you about 50% leverage.

Going by the original example of 3% growth, that's on 40k, not the 8k you actually had to invest. That 3% is actaully giving you a return of 15% on your actual cash...a lot better than the market. You could have leveraged 4 more properties for the 40k you invested in the stock market.

Of course there are all sorts of reasons why you wouldn't do this, but the point is more you're trying to compare apples to oranges. Sure buying a place for cash vs. Investing the cash would probably be worse in most cases, however real estate investing is all about leverage and leverage has higher earning power more often than not.

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Re: Housing Bust 2016

Post by adrian2 » 22 Nov 2016 23:25

Just a Guy wrote:Even the best margin accounts only gives you about 50% leverage.
For most large cap stocks, you can use your own $3,000 to buy $10,000, borrowing 70% of the purchase price.
That's not so far from 25% deposit required to avoid CDIC mortgage insurance for a personal property.
For an investment property, it becomes even closer.

Of course, the risk profile would be very different.
Just wanted to set things straight on the margin rules.
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Re: Housing Bust 2016

Post by Flaccidsteele » 22 Nov 2016 23:55

I love reading the de-evolution of the thread since SkaSka's benign "anecdote".

And I enjoyed reading SkaSka's anecdote as well. Thanks for posting that. Interesting.
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