Baby, we got a bubble!?

[macookie]

The downward trend has to start sometime... and yes Interested, I understand that because we're dealing with averages, and that it means that perhaps a few million dollar condos aren't being consumed by end users as fast as the developers can build them. Which kinda puts a dent into overall figure... where as $xxx/psf could be substantially up.

But... as for now we can only wait to see what the next quarter unfolds... and how everyone spins this down.

 

[Eug]

The downward trend has to start sometime, but this could just be volatility month to month with numbers like this, like has happened before several times.

P.S. When rent money isn't dead money

Mr. Lam has been bearish about Toronto's real estate market for years and he cautions that people who think buying a house is always a good investment may not fully understand the costs.

A property tax rate of 0.8 per cent on an $800,000 property is $533 a month, he points out. In addition, owners have no choice but to make major repairs such as replacing the roof or installing a new furnace. He thinks a realistic estimate is about three per cent of the value of the house per year.

Once those sums are paid out, the amount available to put towards the mortgage is drastically reduced, he argues, and makes renting the more attractive option.

He has some fair points, but depending on the value of the house vs. the type, I think the 3% per year number is way too high. For example, on a $1.2 million Leaside house, that 3% would be $36000 per year, just for maintenance. That's $3000 per month, which of course is far, far too high.

 

[MadMax]

His 3% yearly maintenace cost on a house is ridiculous. A roof is bought every 15-20 years as well as furnaces. How much does it really cost to pay the local kid down the street to mow your lawn. The article is somewhat bias considering the source and what they do for a living.

 

[macookie]

His 3% yearly maintenace cost on a house is ridiculous. A roof is bought every 15-20 years as well as furnaces. How much does it really cost to pay the local kid down the street to mow your lawn. The article is somewhat bias considering the source and what they do for a living.

Then you have windows, paint, carpeting or new flooring, perhaps a new kitchen, a broken pipe, a new deck, a new porch. Possibly new landscaping... a tree removal, snow removal... a new driveway, a leaky basement, new eavestroughs, new siding... the list is endless. 3% might be really conservative too... depending on your taste and your level of expertise to do the work yourself.

 

[MadMax]

^^ Most of the things you have mentioned are done every 10-15 years. The only annual cost would probably be somrthing leaky, a broken pipe, and or landscaping depending on how green your thumb is. Still a lot less than 3% per year. Kitchens, paint, flooring, etc.etc. do not need to be done at all if a homeowner chooses not to.

 

[Eug]

Then you have windows, paint, carpeting or new flooring, perhaps a new kitchen, a broken pipe, a new deck, a new porch. Possibly new landscaping... a tree removal, snow removal... a new driveway, a leaky basement, new eavestroughs, new siding... the list is endless. 3% might be really conservative too... depending on your taste and your level of expertise to do the work yourself.

As someone who lives in a detached home, I can assure you that 3% number is ridiculous.

A new roof, done once every 15-20 years, will be less than $10000. A new furnace, replaced every 15-20 years, might be $4000.

BTW, I don't see how building a new kitchen is a maintenance expense.

P.S. I just did some rough calculations. That 3% might be accurate if you included renovation upgrades... which would of course increase the value of the home. I've spent roughly 3% on maintenance AND renovations. For the renovations I ripped out my entire basement and knocked some of the support walls to make it much more open with new monster sized support beams to compensate, and then put in engineered hardwood floors, a 3' x 5' rain shower, a solid stone sink with custom made vanity, brand new second kitchen with bamboo cupboards, etc.

 

[interested]

Macookie:
I believe your bias is showing through.
If we are talking about a say 700K home as more or less average for a single detached in a reasonable neighbourhood; 3% is $21000/year.
My experience: I am in a home worth somewhat more than the $700K. I have been in it for 25 years.
Costs:
Roof I did at 18 years: Cost $6000
Windows I did at 20 years (2/3) One side of the house with less sun gets better duration and also internal wainscotting could not be matched so some not replaced. Cost $9000 (Approximately $1000/window opening on average).
Doors for cosmetic reasons $4000.
Painting every 3 years outside trim: Inside about every 5 years: cost: $4000
Carpeting replaced fully at 20 years: $10,000.
Flooring (upgraded not necessary) $20,000.
New Kitchen (at 22 years cosmetically) Total redo $65000(note no rental will do this except a very high end).
New Deck: (done in stone at 2 years; still good... ) cost was $25000
Driveway: interlock...done once: cost $10000. Spraying and maintaining...perhaps $1000 every 3 years.
Eavestroughs...no need to replace.
Landscaping: $1000/year...this is generous though we had $10K for the initial planting, flower beds etc.

The point: $200,000 total. Let's assume another $50,000 miscellaneous for a total of $250,000 Some of this is capital improvement and adds value to the home but still. This works out to $12000/year based on a 700K home is.
Still; over 25 years that I have been in my home.... this is 1.7% and in fact my home is worth more than 700K.

Perhaps for a $500K home this would be closer to the 3% mark but I suspect that also one would not be spending the additional dollars that a larger more expensive home such as mine would command so I concur 3% is high.

That said, it is important to maintain houses or they deteriorate. Also, condos can be more expensive and sometimes one has to do repairs when one is not financially equipped to do it....in other words, you do not get to choose the timing.

Yes, renting makes more sense than owning at present prices. On that we agree. However, as MadMax pointed out, money in real estate is money not available to invest with "financial planners" or the investment industry.

 

[cdr108]

Macookie:
I believe your bias is showing through.
If we are talking about a say 700K home as more or less average for a single detached in a reasonable neighbourhood; 3% is $21000/year.
My experience: I am in a home worth somewhat more than the $700K. I have been in it for 25 years.
Costs:
Roof I did at 18 years: Cost $6000
Windows I did at 20 years (2/3) One side of the house with less sun gets better duration and also internal wainscotting could not be matched so some not replaced. Cost $9000 (Approximately $1000/window opening on average).
Doors for cosmetic reasons $4000.
Painting every 3 years outside trim: Inside about every 5 years: cost: $4000
Carpeting replaced fully at 20 years: $10,000.
Flooring (upgraded not necessary) $20,000.
New Kitchen (at 22 years cosmetically) Total redo $65000(note no rental will do this except a very high end).
New Deck: (done in stone at 2 years; still good... ) cost was $25000
Driveway: interlock...done once: cost $10000. Spraying and maintaining...perhaps $1000 every 3 years.
Eavestroughs...no need to replace.
Landscaping: $1000/year...this is generous though we had $10K for the initial planting, flower beds etc.

The point: $200,000 total. Let's assume another $50,000 miscellaneous for a total of $250,000 Some of this is capital improvement and adds value to the home but still. This works out to $12000/year based on a 700K home is.
Still; over 25 years that I have been in my home.... this is 1.7% and in fact my home is worth more than 700K.

Perhaps for a $500K home this would be closer to the 3% mark but I suspect that also one would not be spending the additional dollars that a larger more expensive home such as mine would command so I concur 3% is high.

That said, it is important to maintain houses or they deteriorate. Also, condos can be more expensive and sometimes one has to do repairs when one is not financially equipped to do it....in other words, you do not get to choose the timing.

Yes, renting makes more sense than owning at present prices. On that we agree. However, as MadMax pointed out, money in real estate is money not available to invest with "financial planners" or the investment industry.

i appreciate your example interested.
i guess the thing that i may not agree upon is the methodology of using your present value of the property, when it might be more proper to use the original purchase price or value at the time the maintenance/renos were done.

i do think his 3% is a bit high, more like 1.5-2.0% of market value would be spent on maintenance annually, and that's what i've heard to be recommended.
this is similar to your calculation ... roughly estimated on a $700K property over 25 years (@ 1.5-2.0%) would be $262.5-350K over the years, which is close to your $250K not adjusted for inflation.
btw, does anyone find it coincidental that the 1.5-2% maintenance is roughly the historical long-term price appreciation of R/E?
when one factors the interest paid over the amortization of a mortgage, R/E doesn't become as lucrative or financially savy the less one puts as down payment, or the longer the amortization; bubbles excluded.


while this money manager has a vested 'interest', IMO it goes beyond that.
more money diverted to fixed property expenses like mortgage, taxes, utilities, insurance, etc takes away from disposable income/discretionary spending, which is what our economy depends on.

http://www.rbc.com/economics/market/pdf/natacct1.pdf

 

[interested]

All valid points cdr.

Regarding the methodology, you are correct.

In fact; the $700K is about the middle value between what I bought for if I add the capital improvements and the present value. That is why I chose to use our home despite it being worth more than $700K now but that being about 2/3 of the present value but if we allow for the capital improvements, it is about at the 50% value given what it originally cost + capital improvements (vs. repairs).

Also, most repairs/capital improvements have occurred more recently (as the house gets older) and so are more weighted towards end value. That said, I agree with your concerns. I still think 1.5-2% of market is more realistic as you do than 3%.

I concur with your last point that money removed from the economy is a problem. However we must also remember that housing does also spur the economy, in the form of construction jobs, people involved in the sales and marketing of real estate, furniture purchases, renovation industry, blinds and appliances etc. You get my drift... housing does also add to the economy as well.

 

[Eug]

i do think his 3% is a bit high, more like 1.5-2.0% of market value would be spent on maintenance annually, and that's what i've heard to be recommended.

That seems more reasonable... which means his 3% isn't just a bit high, but probably 50% to 100% too high.

btw, does anyone find it coincidental that the 1.5-2% maintenance is roughly the historical long-term price appreciation of R/E?

The long term price appreciation of an average Toronto home since the 1950s is about 2.9% after accounting for inflation (ie. in today's dollars). If you de-emphasize the impact of the last decade, the long term trend since the 1950s is about 2.6% after inflation.

 

[cdr108]

I concur with your last point that money removed from the economy is a problem. However we must also remember that housing does also spur the economy, in the form of construction jobs, people involved in the sales and marketing of real estate, furniture purchases, renovation industry, blinds and appliances etc. You get my drift... housing does also add to the economy as well.

yes, but not when prices are over-valued IMO.
i agree with you that renting makes more sense than owning at present prices in GTA, and perhaps throughout Canada, but i'm not too familiar with the r/e markets beyond.

 

[macookie]

yes, but not when prices are over-valued IMO.
i agree with you that renting makes more sense than owning at present prices in GTA, and perhaps throughout Canada, but i'm not too familiar with the r/e markets beyond.

The average cost of a 3-bedroom house in Chatham/Sarnia/Windsor/London is about $250,000. A little less in Windsor, a little more in London. The smaller towns in between around $200K. I don't think houses are priced out of reach for the average Canadian in that corner of Southern Ontario... because there's lots of housing priced above and below that on mls.

You're likely owning if you have an average income... and you're likely better off to do so... because it's yours, and there's a sense of community in these places... but there's plenty of available units for rent at reasonably low prices, if you need or want to.

 

[interested]

Actually Macookie, in London I owned a townhouse because my daughter went to Western which I bought for $220K when she was finishing 2nd year going into 3rd of a 5 year University degree. I sold it 3 years later when she finished for $280K. Presently they were asking $297K in the complex for 1 and it sold, I am sure for asking. University parents from the Toronto area are the biggest buyers.
4 or 5 bedrooms with 3 and 1/2 bathrooms; 2100 sq.ft. You can make money being a landlord there. I got $1800 for 4 rooms and my daughter's room was free. (would have been another $550-600/month.) I just did not wish to be a landlord to students in a different city though as an investment it was great. We discussed with my wife using a management company and it still would have made sense. In fact, I even debated about buying another one and having 2 there just for that reason. In the end, I decided my sanity and life quietness did not justify the potential aggravation.

 

[cdr108]

Actually Macookie, in London I owned a townhouse because my daughter went to Western which I bought for $220K when she was finishing 2nd year going into 3rd of a 5 year University degree. I sold it 3 years later when she finished for $280K. Presently they were asking $297K in the complex for 1 and it sold, I am sure for asking. University parents from the Toronto area are the biggest buyers.
4 or 5 bedrooms with 3 and 1/2 bathrooms; 2100 sq.ft. You can make money being a landlord there. I got $1800 for 4 rooms and my daughter's room was free. (would have been another $550-600/month.) I just did not wish to be a landlord to students in a different city though as an investment it was great. We discussed with my wife using a management company and it still would have made sense. In fact, I even debated about buying another one and having 2 there just for that reason. In the end, I decided my sanity and life quietness did not justify the potential aggravation.

that's a pretty good ROI.

if your daughter's room was rented, it would have brought in $2,350/m >>> $28,200 per year = 12.818 %
what are/were the expenses like? were utilities included or extra ontop of rent? trying to get an idea of the NOI

 

[interested]

^^^
The utitilies were paid by the students equally (my daughter paid 1/5).
Expenses: Taxes were $3000 as I recall.
Insurance $1000 (one problem is if you do not have a family member, it is considered "rooming house" and insurance can be difficult and very expensive (closer to $3000).
Condo fees (it was condominiumized were $245/month or about $3000/year.


there were also some repairs etc. $1000/year.

So expenses were around $8000.

Note: no mortgage included here.

If I would have rented my daughter's room...$20,000 net on $220 investment which now is closer to $300K.

Of course, one can have some down time. I had 2 rooms unrented over the summer one summer...meant $3-4000 less that year.