Baby, we got a bubble!?

[rbt]

I thought I would share this with you all.

A friend called me yesterday and said that a house on his street was asking $925,000 while I was out of town, I confirmed that and reported to him it was sold conditional. He then told me that the same house new 14 years ago was sold by the builder for $290,000.

90-93 were good years to be buying. Do you happen to know what that developer was selling them for in 87-89?

Much like picking up stocks in the first 6 months of 2009, BMO has tripled since then (grabbed at $28; includes 25% in dividends).

This is the reason why trough to peak is a poor measurement for expected returns on investment.

 

[CN Tower]

CMHC to hike mortgage insurance premiums May 1


http://m.theglobeandmail.com/report...remiums-may-1/article17159342/?service=mobile

 

[Condo George]

Stay tuned for Feb resales numbers, if we good sales and price increases despite the cold weather, this could prove to be a turning point for sediment. I also am tracking the listings to market ratio, now that the sky is not falling maybe owners or market timers are content with holding creating a further supply shortage in freehold specifically. I am noticing the multiple overask offers again as in 2011, this maybe another sign that the demand is coming back and with no supply, buyer frenzy is the end result. I was in the company of Mr. Tal last night for dinner, he is still concerned about the condo market.......

 

[TorontoMike$$]

I have read Mr. Tal's articles he does not have a clue about real estate. Very sad actually hes been calling for a downtick for a long time and has been wrong every time

Cn could probably get him on the were going back to 1930's pricing bandwagon.

 

[nopacnone]

The demand for condos for rent is still HUGE. I just went through months of research to find a condo for rent and I can conclude that LOTS of people in Toronto make good enough money to afford brand new high priced units. Bidding wars are common! I don't see how any home or condo owners would have trouble finding tenants in this market. Buying a condo in Toronto is obviously an EXCELLENT investment.

On another note, is it not in the best interest of investors to vigorously spread news about real estate bubbles, to slow down general competition and discourage first-time buyers?
Had there NEVER been talk of a bubble in the past 10 years, we might have had enough condos by now for prices to be lower.

 

[AKS]

On another note, is it not in the best interest of investors to vigorously spread news about real estate bubbles, to slow down general competition and discourage first-time buyers?
Had there NEVER been talk of a bubble in the past 10 years, we might have had enough condos by now for prices to be lower.

I think you're delusional. Although rental prices are high, so is the cost of ownership. If you factor in the purchase price, mortgage costs, maintenance fees, property taxes, closing costs, etc. It's quite expensive. Unless you have a steady job and income, if anything goes wrong you will be in a foreclosure and lose your money when it's sold at a lower price by the bank because you can't maintain the cost of maintaining it.

 

[CN Tower]

I think you're delusional. Although rental prices are high, so is the cost of ownership. If you factor in the purchase price, mortgage costs, maintenance fees, property taxes, closing costs, etc. It's quite expensive. Unless you have a steady job and income, if anything goes wrong you will be in a foreclosure and lose your money when it's sold at a lower price by the bank because you can't maintain the cost of maintaining it.

Most investors who rent out their condo units are in complete denial of the truth. They look, but do not see. They listen, but do not hear.

With few exceptions, when you purchase a unit for over $500 per square foot you are not achieving a yield in a excess of your cost of capital. PERIOD.

The investors fail to take into considerstions any yield on their initial equity, vacancy, leasing costs, repairs and maintenance expenses not budgeted for and finally turnover costs.

What they do simply is take their gross monthly rents and deduct their mortgage payment, condo maintenance fees and property taxes and see some positive number. They're also empowered by reported sales prices of comparable units in excess of their acquisition costs.

But year over year, when everything is factored in and theoretical appreciation is ignored, they always come out behind.

Please dispute my assertions with facts, if you must.

 

[interested]

^^^^
CNTower


In his post above CNTower is absolutely correct.

When I did the numbers, my conclusion was that at $400/sq.ft. you made money, $450 was the max/sq.ft. that made sense to me. At $500/sq.ft., I could not justify the numbers anymore.

Best case I figured was about 2.5% return if fully funded ( or approximate cost of capital as CNTower suggests) based on $500/sq.ft. and todays ultra low interest rate.

In fact, the last purchase I made other than one high priced condo for personal use (and hence the investment issue while important was not the sole issue) was 2008 at $410/sq.ft.( parking and locker included). One may make some money at $500/sq.ft. but unless rents increase, I don't see $600 and certainly not $700/sq.ft.(unless one is in Yorkville where rents are higher) but most are not buying there to rent out and make a profit.

However CNTower, remember there are those who are buying Canadian condos for wealth storage....though I doubt with a declining dollar and an asset that is not increasing in value...this strategy makes sense to Canadian investors and probably less sense now to foreign investors.

None the less, certain high profile units will be in demand in prime locations and if one can hold, the losses should certainly be manageable so long as one can choose the time when one is selling.



Returning to costs, I assumed vacancy of 1 month every 2 years (presently an OK assumption but not as clear going forward); R/E commission, and minimal repairs of $250/year. Also, insurance while not huge must be added in.

The past 10 years the real gain has been in the escalation of the price and the yields from years ago purchased properties which are high based on historical cost. Proper accounting and business thinking today would be to take today's price to calculate the yield. Note: I am not advocating selling if there is a large capital gain (since you will lose 1/4 of your capital gain if you are in a 50% tax bracket) and cannot replace the asset with the corresponding lower amount of money to spend....unless one believes there will be a significant drop in asset price or one feels one has too much real estate in one's portfolio of one simply no longer wishes the asset.

 

[AKS]

What they do simply is take their gross monthly rents and deduct their mortgage payment, condo maintenance fees and property taxes and see some positive number. They're also empowered by reported sales prices of comparable units in excess of their acquisition costs.

By the way I calculate it, it's still negative if you deduct gross rent with mortgage payment, maintenance fees, property taxes, etc. For example, you purchase a unit for $550 psf. (If you can find a 1+1 per-construction for that downtown)

Assumptions:
$550 psf x 500 sq ft = $275,000
locker $5000
parking cost $50,000 (depends on area, it might cost more)
Rental $1800/month
maintenance fee at 60 cents psf. $300/month
25 yr mortgage down payment assuming you borrow 75% of the balance = $247500 / 25 yrs / 12 months = $825
25 yr mortgage interest cost assuming rate of 3.5% = $722/month
property tax value of $330k = $205 (http://wx.toronto.ca/inter/fin/tax.nsf/tax?OpenForm&Seq=1)

The cost to maintain per month is $2052. If you rent, it would cost you $252 more to put out each month. But you could be making a payment towards your purchase price of $825. This excludes the hydro, internet, tv, food, insurance or other excess expense you may have. You would need an income of at least $2800/month to live. You won't have money for vacation and just have enough to live on. If you lose your job or drop in earnings within a month, you will be in trouble of foreclosure or owing money to either the government, condo, or bank. If interest rates go up, you will have to pay even more and it will be a bigger financial burden.

After trying to calculate from the ownership and renting it out POV, I guess you could say you have a bit of earnings to help with your original down payment. But you don't have enough to cover all the expenses and mortgage payments. You need to contribute to the monthly down payment. The rental won't cover all the costs associated with ownership. Also, income is unsteady depending if you use an agent or not and how long the unit is unoccupied within a year. You also need to clean up the unit once a renter leaves because chances are, it's very dirty and hasn't been cleaned in a year. And although the unit might belong to you, if you consider the other side of the coin; you're paying for the unit so someone else can live in it. You are taking all the risks, but the renter has no risk and can leave whenever they want after the contract ends. (the owner needs to contribute to down payment)

Also the interest rate you assume at 3.5% would need to last 25 years which is unlikely. Once interest rates starting moving up, the cost of ownership to the owner will be in red. You would need to ask yourself, if mortgage rates hit 10% within the 25 year time frame, will I still be okay with it? Also, there's other factors such as rising property taxes, maintenance fees due to things breaking down, increasing hydro and water bills, etc. Or if your condo unit has problems such as plumbing, fan coil issues, replacing appliances. Your home value might decrease if interest rates go up because people will unlikely be buying real estate. The bank may chase you to put in more down payment to cover the shortage. The money you are now losing from your condo, you could be earning a lot of interest if you left it at the bank or invested it elsewhere. Condos aren't very liquid compared to other investment vehicles.

I should mention however that even if it looks like you can earn a bit towards the down payment by renting it out, if you factor in the closing costs, land transfer taxes, phantom rent, etc. You're going to be losing money. There are more risks than gains if any. That's why many people rent. They have the freedom to move around, avoid any financial risks and can spend their money in excess of their rent any way they want. If they become unemployed, they can always move back with their family without any financial burden.

 

[nrb]

Pimco believes Canadian real estate is overvalued by 30%: http://www.theglobeandmail.com/repo...market-in-time-cuts-holdings/article17194498/

Ed Devlin, who heads up Canadian investing for Pimco, told the Financial Times he expects a drop in the residential real estate market of up to 30 per cent over the next two to five years.

To be clear, Mr. Devlin is not forecasting a sudden crash, but he joins a chorus of voices, from Deutsche Bank to the Organization for Economic Co-operation and Development, in raising red flags.

Deutsche Bank, for example, believes the Canadian housing market is the most overvalued in the world.

Mr. Devlin’s 30-per-cent call goes beyond the much more mild decline projected by some Canadian economists. Toronto-Dominion Bank, for one, believes the market is overvalued by about 10 per cent.

“I’ve been talking with clients and writing about how the housing market is overvalued,” Mr. Devlin told the Financial Times.

 

[interested]

Pimco believes Canadian real estate is overvalued by 30%: http://www.theglobeandmail.com/repo...market-in-time-cuts-holdings/article17194498/

On BNN they clarified this over the lunch hour:
Pimco issued a clarification stating that they see a 30% decline not allowing for inflation: They are expecting a 5 to 10% decline over the next 5 years whereas one would normally expect inflation increases over this time.
That is quite different than a 30% decline. Also, this is in keeping with most economic forecasts of a gentle decline in nominal values.

 

[nrb]

On BNN they clarified this over the lunch hour:
Pimco issued a clarification stating that they see a 30% decline not allowing for inflation: They are expecting a 5 to 10% decline over the next 5 years whereas one would normally expect inflation increases over this time.
That is quite different than a 30% decline. Also, this is in keeping with most economic forecasts of a gentle decline in nominal values.

Please link me to this info, as I cannot find it anywhere.

 

[interested]

Please link me to this info, as I cannot find it anywhere.

It was on the noon show...
It was their commentary and Paul Bagnell stated that Pimco issued a clarification.
I am not sure where it would be.
I don't know if one can go back and see this anywhere written or if it will be rebroadcast.

 

[cdr108]

i hope that doesn't sound right.
are they expecting inflation of 20-25% over the next 5 years ?!?

if so, that means interest rates will be going up and will affect R/E prices inversely ... not good news

On BNN they clarified this over the lunch hour:
Pimco issued a clarification stating that they see a 30% decline not allowing for inflation: They are expecting a 5 to 10% decline over the next 5 years whereas one would normally expect inflation increases over this time.
That is quite different than a 30% decline. Also, this is in keeping with most economic forecasts of a gentle decline in nominal values.

 

[interested]

i hope that doesn't sound right.
are they expecting inflation of 20-25% over the next 5 years ?!?

if so, that means interest rates will be going up and will affect R/E prices inversely ... not good news

Again it was the commentary by Paul Bagnell.
If we assume 10% decline that would be 20% or 4% average/year over the next 5 years. A lot of forecasters are expecting inflation to pick up next year but who knows?

Again, I apologize as it was a "phrase" from the BNN commentator.

From the Globe now on line: I hope this clarifies the comment.

Pimco downbeat on Canada's housing market Add to ...

Michael Babad

The Globe and Mail (includes correction)

Published Monday, Mar. 03 2014, 7:04 AM EST

Last updated Monday, Mar. 03 2014, 3:00 PM EST
88 comments
These are stories Report on Business is following Monday, March 3, 2014.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Pimco cuts Canadian holdings
The world’s biggest bond fund is taking a downbeat view of Canada's housing market, projecting a decline over the next few years and slashing its holdings in the country.

Ed Devlin, who heads up Canadian investing for Pimco, told The Globe and Mail's Tara Perkins that the company expects a decline in house prices of possibly 10 per cent to 20 per cent in real terms in about three to five years.

"In nominal terms, I see it flat to down 10 per cent," he said.

"And if you get that kind of 10-, 20-per-cent real correction, that should alleviate some of the stresses," he added in an interview with our real estate reporter.

"And so that's kind of what what we're seeing. It will start this year, it could be bumpy along the way."

To be clear, Mr. Devlin is not forecasting a sudden crash, but he joins a chorus of voices, from Deutsche Bank to the Organization for Economic Co-operation and Development, in raising red flags.

Deutsche Bank, for example, believes the Canadian housing market is the most overvalued in the world.

Toronto-Dominion Bank, in turn, believes the market is overvalued by 10 per cent.

(Editor's note: The Financial Times earlier reported that Mr. Devlin called for a decline of up to 30 per cent, but later revised that to between 10 per cent and 30 per cent.)

Pimco’s primary Total Return Fund, with assets of almost $250-billion (U.S.), cut its holdings of Canadian debt to 2 per cent in the third quarter of last year, compared to 4 per cent 12 months earlier, according to the newspaper.

About a month ago, on Pimco’s website, Mr. Devlin wrote that there is little chance of an all-out meltdown in Canadian real estate and that he expects a more orderly cooling.

A full crash, he wrote, would only be sparked by developments he doesn’t see in the cards, such a sharp hike in interest rates, a sharp rise in unemployment or a disruption to mortgage credit.