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08-22-2012, 09:18 PM
Lonny Bohonos
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Originally Posted by opendoor View Post
Just look at rentals and compare them to selling prices in the same buildings/neighborhoods. I mentioned earlier a friend who rents for $2500 while basically identical houses on her street have sold for $1+ million. Assuming a $900K mortgage, that's about $4500 a month plus $350 a month in property tax and another couple hundred on insurance. So that's easily 2X.

More generally, the average price to yearly rent ratio in various Vancouver neighborhoods currently ranges from about 25:1 to 60:1 depending on the location (so 25-60 years of rent to match the purchase price of the residence). Here's an article from the Province discussing this:

I think their numbers overstate the case a bit, as they have it at about 35:1 to 70:1 depending on the area. Though I may be understating it as the IMF recently pegged Vancouver's overall price to rent ratio at 58:1.

Under current interest and property tax rates 15:1 is considered about equivalent in terms of monthly costs. A place that rents for $2K a month ($24K a year) would cost roughly the same month to month as a $360K place. At 25:1 (which is arguably the low point of any average location in metro Vancouver), a $2K a month place is going to cost about $3500 a month in mortgage, taxes, etc to own. So that's nearly 2X at the absolute low end. At 58:1 which is the IMF's number for the city overall, you're seeing a $2000 a month residence cost about $1.15 million to buy and $6500 a month to own. And those figures are under current record low interest rates. Under a more reasonable interest rate, then the spread becomes even greater.

It's happened before under fundamentals way less out of whack than we have right now. The question in my mind isn't why Vancouver would have a price crash, but why wouldn't it? Why is Vancouver different? We saw a 20% correction in 2008 before interest rates fell through the floor, so why is a slightly bigger drop out of the question? I doubt we'll see prices cut in half like some of the hardest hit US markets, but 30% from the peak is a perfectly reasonable scenario.

And really, even if you ignore pretty much every other factor, interest rates alone are going to see Canadian real estate taking a hit. Here's what $4K a month on a 25 year mortgage gets you under various interest rate scenarios:

3%: $850K
4%: $750K
5%: $685K
6%: $620K

So that's a 27% drop in buying power simply due to interest rates returning to their 2007 levels. Even if you accept that real estate isn't overvalued by a single cent right now, there's going to have to be a correction from the return to more normal interest rates given the levels of debt and low equity we're seeing right now.

- personal debt levels are higher
- the US crash came at a time when "things were good" (none of this Europe is failing, US is bust news)
- low savings levels CIBC (?) reporting that ~50% of 50-59 year olds canadians have less than $100,000 saved up and a good portion are "planning" to work through "retirement". Many had their retirement tired up in home equity.
- vancouver has seen the most speculation.
- any foreign investment is likely on the hot seat especially from china as china is now dealing with their own issues, plus the govnt has put the serious brakes on foreign investment in ream estate.
- ~25% the number ive come across of jobs related to real estate (construction etc)
- Vancouvers job market over all is service orientated and likely more prone to the effects of a downturn.
- the govnt cant lower interest rates any lower to stimulate.
- the govnt already "bailed out" the banks who consequently have a ton of exposure to risk with these mortagages as do taxpayers.

I personally dont see why it cant get as bad as the US. Maybe worse.

Massive sell off as people try to protect their retirement "savings", as foreign investors pull out their "cash", people cant afford the mortgage, followed by a shedding of R/E related jobs, less economic activity as people try to "save" etc etc

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