[ArcticS]

This article's a few days old, but I don't think it's been posted here yet. Anyway, an interesting take on the market.

Cut through the hype and do the math
October 11, 2008

Tony Wong


"Why is it that my realtor always tells me it's a good time to buy?" a friend asked recently.

If the market is up my agent will say, "It's a great time to buy. You'll never be able to afford a house in this market again."

If the market is down he'll say, "It's a great time to buy. After all, we're talking long-term here, buddy."

Remember that Jim Carrey movie – Liar, Liar – where the comedian plays a lawyer who can't lie for 24 hours? Wouldn't it be cool if salespeople told you what they really thought?

Maybe it would go like this: "Wong, you're a moron for buying an investment property in this market. The Canadian economy is flatlining, Bay Street is looking shaky, mortgage-backed securities have killed the global credit market and I refuse to sell you the overpriced semi with the leaky roof because you will detest me when it's worth less in three years. And even if I lose a whole heap of commission, I just wanted to say I hate that tie you're wearing."

Okay, now we're talking fantasy. But that's not to say agents aren't honest – the Toronto Real Estate Board, for example, has some of the most stringent requirements for certification anywhere – but any profession where there are commissions involved, whether it's the guy selling you the tie at Harry Rosen or the plasma television at Future Shop, means that consumers should be vigilant. And real estate has some of the biggest commissions going.

I've covered Canadian real estate in the business section at the Star for more than a decade, and we promise to cut through the hype, and trust me, there's plenty of it in the property business, as we start this column on real estate investing.

As global real estate markets are in a tailspin, Canadian markets have begun to feel the heat this year, resulting in significantly lower sales and price depreciation in several markets, including Calgary and Edmonton, and forecasts for more pain ahead. In the Toronto area, prices fell by 3 per cent in September compared to a year earlier, and by a significant 6 per cent in the city of Toronto itself. As the provincial economy teeters on recession, there is much teeth gnashing about how this will further impact real estate values down the road in Canada's financial capital.

Property investing covers a wide swath. Over the next few weeks I hope to examine everything from the condo market, to the resale and new home market, to what renovations bring you the best bang for the buck. With the strength of our dollar, Canadians are also looking at overseas markets – so we'll look at the top places to buy globally.

Canadians are also getting a lot more sophisticated in their portfolios. Some are buying multi-unit dwellings, living in one while renting out the other. Others are buying entire apartment buildings in a partnership. Then there are real estate investment trusts (REITs) that invest in a wide range of properties ranging from apartments to shopping centres. Is this for you?

As the stock market implodes, you could do worse than put your money under the mattress, but real estate remains a viable option.

Is it always a good time to buy?

If you had purchased a home in Toronto at the peak of 1989 for $280,767, it would have taken you till 2002, or an agonizing 14 years later, before you broke even.

And that's not factoring in inflation. An inflation rate of 30.7 per cent compounded annually from 1989, means that your home would have to have increased in value to more than $367,000 if you were to come out ahead back then.

Which is a roundabout way of saying some people from 1989 still haven't got their money back.

So is it always a good time to buy?

Check with your agent, then do the math.

Tony Wong is a reporter in the Star's business section. twong@thestar.ca



Toronto Star

http://www.yourhome.ca/homes/article/514328

 

[cdr108]

If you had purchased a home in Toronto at the peak of 1989 for $280,767, it would have taken you till 2002, or an agonizing 14 years later, before you broke even.

And that's not factoring in inflation. An inflation rate of 3.7 per cent compounded annually from 1989, means that your home would have to have increased in value to more than $367,000 if you were to come out ahead back then.

Which is a roundabout way of saying some people from 1989 still haven't got their money back.

That's the most important and telling part !

And for most people, when you buy a house you have to take out a mortgage and pay interest which effectively 2.25 - 2.50x the value of your mortgage over the 25 year amortization if paid monthly without acceleration.

 

[cabbagetowner]

...and if you bought in 93 you would be laughing all the way to the bank. just shows you that in some ways numbers can distort the picture. really dangerous since most people find stats and numbers very persuasive. it all depends on the scope.

 

[cdr108]

...and if you bought in 93 you would be laughing all the way to the bank. just shows you that in some ways numbers can distort the picture. really dangerous since most people find stats and numbers very persuasive. it all depends on the scope.

Yes, very true but the point of the article is his concern about buying at the peak at 1989 and what he considers to be another peak in this cycle.

 

[taal]

At the same rate what's the alternative ... wait 14 years and then make a purchase?

 

[cdr108]

Where did you get 14 years?

It's actually cheaper now to rent a property than it would cost for a mortgage/maintenance/property taxes for a similar space.

Most RE corrections will happen swiftly ... within 4 years from the peak, then a period of stagnation where it becomes a buyers/balanced market.

US RE values started to decline from it's peak in 2006 ... most likely will be done by 2010, then stagnate for another few years.

 

[taal]

Yes renting is typically cheaper on a monthly basis at any time.

The point is it's very hard to time the market. If you're looking to make a purchase and you'll use it as a place to live for 5 - 10 year time period at the very least as opposed to investing timing the market isn't for you and you'd probably be better off making the purchase whenever you want.

 

[Hydrogen]

Yes renting is typically cheaper on a monthly basis at any time.

Except when you pay off your home.

 

[cdr108]

Yes renting is typically cheaper on a monthly basis at any time.

Not true ... if one is a true real estate 'investor' and not a 'flipper', one would look for positive cashflow based on almost 0% down, although one wouldn't go with 0% DP, which covers all costs and the added premium for the risk of being a landlord.

 

[Glen]

Not true ... if one is a true real estate 'investor' and not a 'flipper', one would look for positive cashflow based on almost 0% down, although one wouldn't go with 0% DP, which covers all costs and the added premium for the risk of being a landlord.

Show me an example.

 

[Dichotomy]

I just found this tidbit off www.brazzil.com (yes, another site that I haunt). Made me laugh my ass off, but it's very appropo for our times:

"Once upon a time, in a place overrun with monkeys, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, they became harder to catch, so the villagers stopped their effort. The man then announced that he would now pay $20 for each one. This renewed the efforts of the villagers and they started catching monkeys again. But soon the supply diminished even further and they were ever harder to catch, so people started going back to their farms and forgot about monkey catching. The man increased his price to $25 each and the supply of monkeys became so sparse that it was an effort to even see a monkey, much less catch one. The man now announced that he would buy monkeys for $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

While the man was away the assistant told the villagers, "Look at all these monkeys in the big cage that the man has bought. I will sell them to you at $35 each and when the man returns from the city, you can sell them to him for $50 each." The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again, and once again there were monkeys everywhere.

Now you have a better understanding of how the stock market works"

 

[cdr108]

Show me an example.

Go to your local public library and pick up any book on real estate investing.
First rule of RE investing is positive cashflow, capital appreciation is icing on the cake.

The problem we have now after 10 years of price appreciation is that many are led to believe RE investing is capital gains.
Most projects sold in GTA within the past 2 years would not pay for itself if an investor puts down 25% and tries to have the rents cover the mortgage.

 

[Glen]

Go to your local public library and pick up any book on real estate investing.
First rule of RE investing is positive cashflow, capital appreciation is icing on the cake.

The problem we have now after 10 years of price appreciation is that many are led to believe RE investing is capital gains.
Most projects sold in GTA within the past 2 years would not pay for itself if an investor puts down 25% and tries to have the rents cover the mortgage.

Show me a property that can be bought with 0% down and return a positive cash flow.

 

[DarnDirtyApe]

Glen, I think the point is that you can't with prices where they are now.

 

[cdr108]

Show me a property that can be bought with 0% down and return a positive cash flow.

You misunderstood what I said.

One doesn't purchase with 0% down, you go the conventional route of 20-25% DP with 25 year amortization.

The rent one receives from the property should cover the mortgage (75-80%), PLUS abit more as a risk premium to the landlord (the positive cashflow). Thus, it would be like getting income to cover a mortgage at 90- 100%.

Hope that clarifies it what I was trying to explain.