• Log in

Thicken My Wallet

Everything to do with thickening your wallet

• Home

No Olympic Gold For Vancouver Real Estate Investors

Posted by admin on April 9, 2008 in Real Estate

I am a regular reader of Financial Jungle and, as readers of his blog know, he lives in Vancouver: host of the 2010 Winter Olympics. I asked FJ to guest-blog on the Vancouver real estate market in anticipation of the Olympics and to determine whether Vancouver real estate will experience the thrill of victory or the agony of defeat. Thanks for the guest post Financial Jungle.

“It doesn’t matter what Games you go back and examine, the experience is always the same. People in the host communities think that there are going to be more fantastic returns than they actually realize,” Whistler Mayor Ken Melame said.

Realtors and real estate enthusiasts have been gaga over the anticipated 2010 Olympics since the announcement in 2003. You’ll be hard-pressed to find an investor not dreaming about the day when visitors from around the Globe finally discover Vancouver as a vibrant, beautiful city surrounded by mountains, rivers, parks and ocean, and coupled with mild weathers. The growing optimisms on the Olympics along with government expenditures helped gear local construction into hyper drive, and sent BC into an economic prosperity and an unprecedented housing boom that we haven’t seen in much of the previous decade.

While the real estate craze is partly upheld by strong economy, this may be a self-filling prophecy. It’s up in the air whether the economy can bootstrap itself once all the Olympic construction jobs leave the province. Perhaps we don’t have to wait that long as mounting evidence suggests we’re already entering a correction phase. “Open House” signs were virtually non-existence during the rampant housing boom, but the streets of Downtown Vancouver are looking mighty different nowadays.

During a stroll around our downtown neighborhood, my wife and I found ourselves bombarded with a flurry of open house signs. I was trying to snap the following photos discretely but that proved challenging when eager realtors were sticking their noses out of the lobbies inviting us inside for personal tours.

Bidding wars are also a thing of the past. The Real Estate Board of Greater Vancouver recently released the February report citing a 6.4% deterioration in residential sales relative to a year ago, and a 26.2% jump in new listings during the same period. This is huge. A combination of a drop in sales and a rise in new listings spells troubles for the housing market. Most sellers are still in denial by holding their prices firm and letting their listings stall on the market. But, at least a couple listings in my neighbourhood are lowering their prices. (See photos.)

No question that the market is softening. I know a co-worker whose Kitsilano home has been on and off the market for the past 7 months. My brother’s realtor is recommending home staging to speed the sale. Finally, realtors are scouting for buyers, not sellers. Today, a couple of Royal LePage realtors went through the trouble to send me this invitation:

>> YOU ARE INVITED!

>> We will be providing free information on real estate and investments…

>> Do you want to know about the Nova? (a high rise)

>> We can tell you information on any building you have questions about…

>> Are you a renter? If so, stop paying someone else’s mortgage and start building your own wealth.

>> Let us tell you how. Feel free to bring your friends…

>> ENTER A CHANCE TO WIN A TRIP FOR TWO TO LAS VAGAS!

>> Stop by for a drink and introduce yourself… we look forward to meeting you.

I truly believe we’re finally at an early transitional stage from a sellers’ market to a buyers’ market. This is only natural since the benchmark price for a Vancouver home is now $761,000; townhouse $472,000; condo $387,000 – way more than what an average household can afford.

Valuation On The Condo I’m Renting

Market price = $370,000

Annual rent = $17,400

Rental yield = 4.7%

Condo Fee = $2,640 (est.)

Property Tax = $1,000 (est.)

Earning yield (aka CAP rate) = 3.7%

A report from Genworth Financial foresees Vancouver condos to appreciate 3.5% annually from now till 2012. Note that Genworth is in the business of selling mortgage insurance – their paychecks depend on their optimism. Don’t tell this to my landlady, but to translate the above figures to stock lingo, the property is selling a hefty 27 P/E ratio with a mere 3.5% expected growth rate. As a reference, the prevailing discounted 5-year fixed is 5.79%.

The specious housing bubble is best illustrated with a chart in the following report, but only peek if you’re not afraid of heights: http://www.realestatetalks.com/pdf/VanStatsFeb08.pdf.

Just like the stock market, real estate also has the propensity to overshoot in both directions while trying to revert to the mean. My guess is that the same speculators, who are driving the house prices up today, will be the ones knee deep in their foreclosures unloading their dirt-cheap inventories back to the market.