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Vancouver condo prices: flat as a board these days

January 8th, 2014 · 16 Comments

I still run into people who assume that Vancouver condos are all just a speculative game being played by offshore investors. Perhaps it still is, but it’s a long game these days.

As recent B.C. Assessment Authority numbers showed, as they issued their 2014 assessments, condos are by and large not appreciating and values are, in fact, declining in many areas. Did a short story on this here.

 

 

 

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  • Neil21

    Not speculation of increase: wealth preservation, with rental option. What else is there to do with $100,000 or more these days?

  • Richard Wittstock

    There hasn’t been a significant amount of speculation in the Vancouver condo market since 2008. Condos today are very well-priced, reflective of approximately a 4%-5% net rental yield depending upon location. At 25% down, most condos will generate positive cash flow to an investor buyer. Starts are more or less in line with net household formation.

    These are all hallmarks of a healthy, balanced market. Even without immediate capital appreciation, a condo is an important first purchase to enable a person to build equity and get a foothold on the so-called “ladder”.

  • rph

    And of course it depends on the age of the condo too. The newer ones still have relatively low strata fees, some would argue even artificially low in order to make the sale attractive.

    But many of the older condos are seeing monthly strata fees push $400 a month and more. And then you have special assessments for repair on top of that, so it does not take much for a landlord to move into a tight position.

  • jenables

    Richard, Richard, Richard. Can you tell me if the rents that would be charged on these investments are in line with the average income in Vancouver? Or how many people here can and do put 25% down?

  • Randy Chatterjee

    Richard #2: There is no way buying into the current housing market in Vancouver can be remotely financially remunerative. Let’s assume you can buy a 1BR for $400k, with $100k down, pay $400 per month in fees and $100 in taxes, and rent it for $1500. This high-risk, leveraged investment will start by bleeding you $345 per month in the best of circumstances with a 2.5% variable rate mortgage on a 25-year amortization. So, is this a good “net rental yield” on a $106,000 investment (including PTT)?! And don’t forget, you aren’t hiring a property management company that you certainly cannot afford. This investment has to be “actively managed,” including clogged toilets and broken fridges at any time of day.

    Sure, one can play the economist and pretend the interest on the loan, $625 at the start, is the only real cost of the loan. The loan principle of course is paid to yourself. So for all the legwork, repairs, general depreciation, and risk of problem tenants or special building assessments, you could imagine a $4,500 taxable economic return on a $106,000 investment, or just over 4%, if NOTHING untoward happens. Given the poor quality of Vancouver housing construction, the almost certainty of major building envelop failure, and the ludicrous idea that someone earning Vancouver’s median personal earned income of circa $40,000 could or would sustainably pay over half of that for such minimal housing, the risks far outweigh a dreamy, best-possible-scenario of a 4% economic return.

    And, don’t forget the opportunity cost of a tied-up $106k and the very real financial outlay of a minimum of $345 per month for 25 years, and likely far more. And interest rates will of course never rise… Heard that before.

    If I wanted to actively manage my money–without having also to wield a plunger–I can think of many more remunerative businesses with a positive cash flow and yield over 4% that I could buy or start for $106k.

  • Richard Wittstock

    Randy #5

    As a condo builder, and owner of a portfolio of rental apartments and condos, obviously I am going to disagree with just about every statement in your post. You seem to have a strong anti-condo bias, which is fine by me. But let me at least correct your numbers with some real-world figures, so that we have the math right:

    Typical downtown condo, Downtown-South neighbourhood, 8 years old, purchased fall 2013:

    Purchase price is $375,000
    Rent is $1,585/mo
    Strata fees are $232/mo
    Taxes are $1,400/yr

    Net yield is 4.0%

    Mortgage monthly P+I at 2.99% on $281,250 is $1,181.45. Positive cash flow is $55/month. And principal pay down (ie equity with no value appreciation) is approx. $500/month over the term of the 3-year fixed mortgage. So on your $100k investment, equity yield is approx. 6.6%, with tax advantages to boot. And that is based upon Year 1 rents; we know that rents in Vancouver have historically increased at about 3% p.a. which enhances the equity yield by about .6% per year, every year after the first year.

    As one moves farther out from the core, these yields typically increase, as one would expect. I could provide a dozen other examples with returns at or above the levels of this one.

    I am personally continuing to take advantage of this flat market and low cost of debt. I have added units in 2013 to my portfolio and will do the same this year. To each their own.

  • rph

    If it were that easy, and that devoid of pitfalls, more people would be doing it.

    It only takes one problem tenant, a mismanaged strata, or a large repair assessment, for a landlord to encounter a financial loss. And should you have to sell, in a relatively flat market, your RE costs and commissions will put you in the red column.

    footnote: You may be able to increase rents yearly, but tax, strata, and landlord maintenance costs increase too. And of course the older the unit the more maintenance there will be.

  • Bill

    The current edition of the Economist contains their quarterly survey of housing prices compared to rents and disposable income and Canada is 2nd most overvalued compared to rents (76%) and income (31%) and Vancouver would likely be even higher. While there are many non financial reasons that individuals might pay a premium for owning rather than renting, I’m not sure that real estate is a very attractive purchase right now for investment purposes unless there is the expectation that there will be upward pressure on rents rather than a downward pressure on prices.

  • brilliant

    @Richard Wittstock 6-LOL an 8 year old condo downtown and no budget for special.assessments? Good luck with that.

    And Frances, we all know Andy Yan’s stats showed 15% of units downtown are empty. Why try to minimize that?

  • Richard Wittstock

    #7, 8 and 9:

    All I can do is relate my personal experiences over the past 15 years of investing in condos. Not surprised that people are sceptical; I have encountered many over the years including my close friends. But, for me, the proof has been in the pudding. What started with a single condo purchase in 1997 as a first time buyer using RSP savings has grown into a nice, profitable little side business that generates substantial tax-deferred income for our family.

    rph #7, it pretty much IS that easy. I can’t speak to why more people aren’t doing the same but it has worked out very well for me.

    Bill #8, I do expect continued upward pressure on rents, brought on by a scarcity of supply in desirable locations, income growth, and continued population growth. I do not expect a decline in values, much for the same reasons (and because condo capitalization rates are quite reasonable), however if values do decline, I will take that as a buying opportunity.

    brilliant #9, buyers should review the building’s engineer’s report, strata minutes and contingency fund status as part of their due diligence process. I own or have owned units in well over a dozen buildings over the years and have never seen a special assessment. This is a small risk that can easily be minimized.

    Like I said, to each their own. But from my experience, I am a firm believer that real estate investing is the surest way to build wealth over the long term.

  • Bill

    @Richard Wittsthock #10

    You may very well be right but I would be concerned about what happens to interest rates in the next 5 years.

  • jenables

    In the article, Frances states that Vancouver condos have depreciated slightly, and considering the build quality of most, I would be very surprised if they held their value. Bubbling laminate, plumbing and heating issues, cheap finishings. I tend to feel quite badly for those who buy in these days, but that is their choice, and chances are if you have a few units you’ll still be comfortable at the end of the day. It’s the people who don’t have anything else but a condo and mortgage that I feel for, the ones who take the advice given to them directly or indirectly by those who profit regardless of what happens to interest rates in the future.

  • Richard Wittstock

    Here’s a post that presents an alternate (and I would say, more sophisticated and correct) analysis of Vancouver’s market to that typically seen in the media and online:

    http://dustanwoodhouse.ca/vancouver-real-estate

  • jenables

    I read article and it read like this: How I learned to stop worrying and love the bubble, as it doesn’t affect me personally, having bought my home for 160,000 in the early nineties. Also, I am using BC statistics to make points about Vancouver, to sell you the idea that this market is totally healthy and normal… why? Oh, right, because it’s not MY problem.

  • Vanreal

    Condos shouldn’t appreciate much because it is land that goes up not the building. Sfh should appreciate sifnificantly more

  • Andrew Browne

    You can earn more than 4% in a series of diversified, low-risk preferred shares, dividend stocks, REITs, etc. all for a heck of a lot less work than owning and managing rental condominiums. Capital risk is higher in the short-term (if you need the money right away), but negligible in the long-run (if you stay fully invested and avoid selling at the bottoms).

    Richard’s model will wobble if property values are tested, if interest rates rise, or other occasional but normal economic changes occur. I’d be feeling more comfortable having started down that road 15 years ago, too; but anyone expecting the gains of the last 15 years to continue linearly into the next 15 years is delusional.

    Remember: Ups and downs are normal. An across the board 10% drop in property values is hardly unprecedented.