What $350,000 CAD Gets You in Vancouver

All Things Financial thought it would be neat to “show you what $300,000 USD will buy you in various parts of the country.” So far there is one other Canadian entry in Ottawa, where $350k can buy you a nice house.

I searched MLS.ca for any houses in Vancouver West for under $350k but no luck. I did not think I would find anything. I have searched before and one usually cannot find anything half-decent for less than $600k or $700k. I checked Vancouver East and there were only 2 houses out of 452 that were around $350k. I do not think it would be fair to say that you can find a house for $350k in Vancouver East when there are only 2/452 at that price range. Looks like you can only get an apartment/condo for that price.

I did a search for anything in Vancouver West between $325k and 375k. I then looked for something that I would actually like to buy, something in Kitsilano for example. Well there isn’t much selection actually. It turns out that if you have $350k your best bet is somewhere downtown. There’s far more selection at that price range. Here’s the one I’ve chosen:

Downtown Vancouver Apartment Outside

Downtown Vancouver Apartment Inside

It offers a bit more square feet (723) than some of the others, probably because it is a bit older than many of the apartments for sale downtown; however, the strata fee of $265 is a bit higher than some of the others. It does offer “huge indoor pool, Jacuzzi, gym, squash court, entertainment room.”

Could Harper’s Win Cost Voters their Homes?

According to this article, Harper’s win could cost voters their homes. The author describes how Harper’s policies could end up causing some people to lose their homes, as increased government spending on military campaigns by the Harper government will lead to higher interest rates.

Both Reagan and Bush Jr. sharply cut taxes, particularly for the rich. Both of their administrations also went on military-spending binges. The combination of reduced revenues and higher military expenditures created whopping deficits. The Bush administration’s shortfall approaches a half-trillion dollars.

Harper has promised to increase military spending and cut taxes. He also plans to redo the fiscal framework to ensure more money goes to the provinces.

The Liberals claimed during the recent campaign that this would blow a huge hole in Ottawa’s finances. The Conservatives vehemently denied it. However, given the record of socially conservative U.S. Republican administrations, it’s easy to imagine that Harper’s approach could result in a large deficit.

Whenever a government collects less than it spends, it competes with the private sector to borrow money. This puts upward pressure on Canadian interest rates.

Vancouver already has the highest housing prices in the country, with many people carrying large mortgages. This makes them especially sensitive to rising interest rates, which can occur when a government rings up a huge deficit.

During the 2004 federal election, Liberal candidate Kwangyul Peck, an economist, claimed that Harper’s flawed fiscal policy could cause some voters to lose their homes.

I am not so worried about some voters losing their homes. I do not think interest rates would increase so dramatically that people who were not already at a high risk of losing their homes would lose their homes. And the point is a bit moot. If you ever lose a home (or anything) you can always blame someone. Blaming the prime minister seems a bit ridiculous. But I think the threat of increased government deficit is very real, especially after what I saw on the news last night. Harper talking about how Canadian forces will not “cut and run,” and that “the Canadian Forces need to be in Afghanistan for 10 years or longer to help rebuild the battered country.” Peter Mackay said “the length of Canada’s commitment to Afghanistan remains an ‘open question.'” We could see our federal surplus and/or federal spending in various areas drop dramatically.

Bad Real-Estate Advice

I promise this will be the last article with “bad” in the title in a while. There is never a shortage of bad financial advice though, in fact sometimes I feel like the majority of the advice out there is bad advice. Here is an excellent example of bad financial advice, “Tip For Ignoring Bad Advice In Money Magazine.”

The latest edition of Money Magazine profiles a couple, 46 years old, that together make $120k/year, have a $250k ARM mortgage, a $30k home equity loan, and $12k in credit card debt. The couple is very concerned about boosting their slim retirement savings; to this end, they’d like to leverage the equity on their LA home, which is now worth $1 million.

Here comes some — in our opinion — highly irresponsible advice from a CFA who suggests this ‘extreme makeover’ (Money’s phrase): Take out a new $500k ARM mortgage, pay off the debts, then plow the remaining $200k into the U.S. stock market (80%) and bond funds:

The article then gives several reasons why this is a BAD idea. I’ll let you read the article… The blogger who wrote the article above gives a possible alternative,

How about this approach — sell the house. Retire the debts. Take the remaining $700k and put away a big chunk for savings (invested not only in the US stock market). Then buy a more modest home, or rent until the housing market settles down.

I am amazed at how resistant people are to selling their home outright and renting. I’ve even heard people use the excuse “I don’t want to move because it’s a pain.” Even if you made just $100,000 on the sale of your home (many people in Vancouver have made much more in the past few years), combine that with the mortgage payment you will no longer be paying and that’s a lot of rent! Not only that but you should have plenty to spend on a moving company, making it less of a pain. Moving isn’t so bad. The first few times I did it, it was annoying, but you get used to it. Here’s another blog article I saw recently about buying vs. renting, “Buying vs. Renting a House.” Scroll down to the comments, they are more interesting. Here’s one,

I know lots of home owners who pay more money each year in real estate taxes than I pay in rent. And that’s not including landscaping, maintenance and repairs, expensive furniture to fill the expensive house. I don’t buy into the idea that buying a house now, at what may be the peak of a housing bubble, makes any kind of sense.

I got a bit side-tracked here. Nobody should go and sell their house just because the market has gone up, but if you are like the couple described in the Money article, who are “very concerned about boosting their slim retirement savings,” then make sure you get some “good” advice before doing anything drastic.

Renting vs. Buying Calculator

I was going to create a spreadsheet to determine whether buying or renting makes more sense in different scenarios. But then I found this excellent buy vs. rent calculator from Vancity. Here’s how it works:

We calculated your breakeven point by examining how long it would take to create enough equity in your home to exceed the value of investing your cash on hand. We also accounted for differences in your monthly rent and house payments. If your rent payment is less than your net house payment, we add that monthly savings to your investment. If your house payment is less than your rent payment we subtract that amount from your investment. You may notice that on the schedule at the bottom of this report the investment value can be reported as negative. This happens if your house payment is significantly lower than your rent payment. It illustrates that if you continue to rent the extra cost of renting would, in effect, use up your cash on hand.

It can take into account all sorts of fees, mortgage fees, closing fees, annual property taxes, GST on a new home, maintenance/condo fees. The home appreciation rate can be varied as well as the future sales commission. For the investment used to compare with, one can vary the investment return and the inflation rate.

Just make sure that if you include utilities in the “maintenance/condo fees” field that you also include it in the “monthly rent payment” field. The only reason to put utilities in at all is if the amount is at all different in the rental property vs. the owned property.

Note also that there is a bug in their charting which causes the chart to not extend past the 10-year time frame. Scroll down to view the detailed numbers for all years.

Just plugged in some values using the rent that I am paying now ($1050) and the price of a comparable apartment in Vancouver. A quick scan on mls.ca shows that I’d have to spend at minimum $280,000 for a place of comparable size, with around $200 in condo fees. I haven’t even factored in location (and the location we currently are renting in is hard to beat, so $280,000 is very conservative). I assumed a 0%-down mortgage and the default of 3% annual appreciation on the home. Most of the other things I left at their defaults (except inflation which I lowered to 3% from the default of 4%). For my case, the value of the investment (initial cash-on-hand + monthly contribution of (mortgage payment minus rent) invested at 7% after-tax return) was $830,407 after 25 years. The home equity after 25 years was only $556,903. This assumes a monthly investment of $1300 (mortgage payment minus rent). This is almost what we are contributing monthly right now (we should be up to this level in 2006). So right now, renting is clearly the best option for us.

Doom and Gloom

There is an interesting chart here, “Asset Class Performance” (got the link from here) showing the performance of various asset classes since 2000 and giving several predictions. One comment said: “I believe all will fall, while bonds will soar. special thanks to debt deflation depression.” The poster leaves no website to track him down unfortunately.

While digging around in Google for the term “debt deflation depression,” I found found this article: “Will the Latest Oil Price Shock Lead to a U.S. and Global Recession?

Interesting article with some interesting comments as well. The comment that Google picked up was this prediction:

I don’t understand how you can face two decades of real wages lagging productivity world wide, and still not be 100% convinced that a major depression is guaranteed in the coming years. The only way for consumers to absorb higher oil prices would be to take on more debt. As long as debt can be piled on, growth can go on, but there is no doubt that debt growth is the one and only fuel of the present growth.

Take away the US and european overindebted consumers, meaning, take away housing boom asset wealth induced spending… And the world falls into 30’s like debt deflation depression.

And if there’s one way out, I’d like to see it. Apart from aggressive monetising of public deficit, and aggressive policies in favor of higher wages (and I see none of them coming in the coming years), I can’t think of any.

So ?
So is there a question ?
Of course higher oil prices and lower house prices, will force the world into depression. Higher oil prices may indeed speed up the top of the debt-housing boom.

Talk about doom & gloom. Also no website provided for that comment either. No one really knows exactly what will happen in the next few years, but I have certainly seen a lot of doom & gloom predictions popping up lately regarding the stock market, real estate, and the US economy. I try not to let any predictions I read dictate my behaviour. I am invested for the long term and realize that market fluctuations are a fact of life. I am prepared to stay invested no matter happens and to invest consistently in my RRSPs year after year (especially when markets are down).

The Flattening Yield Curve

What started making me look into bonds (which spurred me to write the last article) today was this article on Bill Cara’s site, “It’s all in the slope, folks,” which suggests that the yield curve in the US is starting to look like it did in 1999, and that it is getting close to being inverted, which has often signaled the start of a US recession in the past. He used this really neat applet to look at the yield curve at any point in the last 7 years. Here are his predictions:

Note the similarity between the yield curve of today and as at year-end 1999.

If yields of today jumped to those of 1999-2000, by roughly +150 basis points across the board, then I believe that the present housing market bubble would pop, rather than have the air let out slowly as is now happening.

Should the Treasury continue to print money the way it has, and the way it must in order to meet the fiscal deficit of government, then there will be inflationary pressures.

And should the Fed continue to raise rates the way it has, and the way it must in order to stabilize prices (i.e., combat inflation), then the more downward pressure there will be on economic growth. These are also deflationary pressures.

As long as the U.S. Treasury continues to reflate, and the Fed continues to tighten, the yield curve will continue to flatten, and will soon invert, similar to what happened in 2000.

According to the Wikipedia article on Yield Curve:

An inverted curve occurs when long-term yields fall below short-term yields. Under this abnormal and contradictory situation, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve may indicate a worsening economic situation in the future.

The Three Worst Reasons to Buy a House

I just came across an excellent article, “The Three Worst Reasons to Buy a Home.” It is actually a summary of “this MSN Money article.”

(1) Real estate is better than the stock market. While the real estate market has been red hot in the past few years, with a national average increase of 50% over the past five years, and prices in some markets doubling during that same timeframe, it’s important to keep in mind that past performance is no guarantee of future results. Major real estate recessions are a very real possibility, and it can often take a long time to recover. Moreover, real estate appreciation over the past 40 years has only topped inflation by 1%, as compared to 7% for the stock market. Over the long run, the law of averages has a funny habit of evening things out, so look before you leap.

The MSN article provides further information about past market declines:

Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California — all of which suffered major real estate recessions in the past 20 years. After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems.

Two articles at the van-housing blog: here and here show that Vancouver has had drops as well. This should all be no surprise to most people. Yet 3 weeks ago one of my in-laws claimed that “real estate is the best investment ever.” Just last week someone (a recent condo buyer) said to me “you think it’s going to go down?” with complete disbelief. And this week someone else told me they didn’t think prices were going to fall but that they might “level-off.”

The final nail-in-the-coffin for the “real estate is better than the stock market” argument comes from the MSN article: “In the past 40 years, the average appreciation for homes has exceeded the inflation rate by only a percentage point or so. Compare that to stocks, which have bested inflation by 7 percentage points in the same period.”

(2) Rent is the equivalent of throwing your money away. Renting is often cheaper than owning, especially in overpriced markets. Also, you’re not really throwing your money away when you write a check to your landlord — you’re exchanging cash for a place to live, and you’re buying flexibility, freedom, and a lack of homeowner headaches.

The Wealthy Barber provides some excellent commentary against the “rent is throwing your money away” argument:

Paying rent is no more throwing your money away than is buying food or clothing. You need shelter. It’s one of the three basic necessities of life. Renting is one way to acquire that shelter, and in some cases, it’s a very intelligent way.

The last reason to not buy a house, is one that applies to those in the US:

(3) The tax deduction makes it all worthwhile. While it’s true that your mortgage will get you a tax break, it’s not like you’re going to end up profiting. Deductions such as this are like giving someone a dollar for the privilege of receiving 35 cents (or less) in return. While this helps to offset the cost of ownership, it’s by no means a justification for buying a house. Moreover, the other costs associated with home ownership (e.g., insurance, repairs, maintenance, etc.) aren’t typically tax deductible. On top of all this, recent legislation seeks to place a cap on the mortgage tax deduction, meaning that the tax benefits of buying a home may shrink substantially.

Canadians have no mortgage-interest deduction. So this is irrelevant. Not without doing something crazy like The Smith Manoeuvre. One less reason to buy a house for the wrong reasons!

REITS vs. the Stock Market

Think that real estate is hands-down a better investment than the stock market? I found some data on REITs (Real-Estate Investment Trusts) compared to the stock market, and on first glance it looks as if the stock market outperformed the real estate market from 1975-1993 and also from 1990-1996. Be wary, especially now that we are in a real estate peak, of people telling you that real estate is the best investment out there. Be also wary of those who tell you that it was the “best investment they ever made.” As David Chilton says, for many of those people, “it’s usually the only investment that they’ve ever made.”

Stocks end lower, rattled by housing

It looks like the shit is starting to hit the fan in the housing market. It’s starting to spill into the stock market with this announcement from Toll Brothers Inc. and more and more into the mainstream (unfortunately it probably hasn’t caught on with the speculative condo owners yet). Weston Boone, vice president of listed trading at Legg Mason Wood Walker says:

A soft real-estate market is not good for the consumer. It is not going to bode well going forward. You have to take into consideration the rising interest-rate environment. There aren’t a lot of catalysts for positive sentiment in the market.

Hopefully by the time the market is in the bottom of it’s trough, I’ll have enough of a down payment saved up. Historically, the time from peak to trough has lasted at least 7 quarters (or 1.75 years) in Vancouver. So I am extremely content to not be invested in real estate at this time. Not only is my rent far below the mortgage payment I would pay for the same place, but we can pick up leave with a month’s notice at any time. No, rent is certainly NOT throwing your money away.