Advice

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advice

I’m a regular blog reader and huge fan of your educational Greaterfool.ca blog. My wife and I live in BC (Vancouver) and are hitting our 30′s. We’ve been renting for almost a decade and are patiently waiting for the market to hit the bottom. While we’ve sat back for years renting (and saving), at the same time, noticing the local housing market balloon to unsustainable numbers, sometimes when I read about your ongoing ’real estate doom/gloom’ forecast (and albeit a ‘bang on’ forecast), the real $100 (plus HST) question is this: “Well, when is it the RIGHT time to BUY?” — Alex

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It’s hard to tell how many people come here seeking that answer, as opposed to those merely infatuated with my swarthy magnetism. This blog is a daily column – it’s rolling history. So there are no answers, only guidance. I’m always amused at those critics who storm in and throw a 12-year-old comment in my face to prove I’m fallible. Like that was ever in doubt.

All we can do is peer at the swirl of events and trends around us, apply logic and experience, and plot a reasonable path. Should you buy real estate now? There are two answers to that.

The first depends on you. This is why the GreaterFool crack team of technical analysts, who couldn’t get a decent babe between them even if they flossed and dressed, came up with the Rule of 90. Simply put, deduct your age from 90 to determine what percentage of your net worth should be in your house. So a 30-year-old might reasonably have 60% in real estate and a 60-year-old just 30%.

The premise is simple. Don’t buy a house if you can’t afford one. Reduce real estate risk systematically as you get older. Make sure you always have diversification. And if you’re feeling horny in the middle of a house bloat, get a hot date instead. Or, in the case of a technical analyst, a puppy.

This brings us to the second answer, which is all about market conditions and the rolling history aspect of this pathetic blog. Real estate costs a stupid amount of money, or involves taking on life-altering debt. That’s why understanding where prices are going is critical, especially if you’re entering the market with scant resources (less than 20% down).

A case in point might be the Toronto condo scene. For two years I’ve been telling you to stay away (go back and read why). After the July 9th massacre, when F murdered long mortgages, gutted cash-backs and eviscerated debt ratios, it was simply too late. Anyone who bought after the summer of 2011, especially with 5% down, was screwed.

Even the latest numbers from the local real estate cartel confirm it. In the first two weeks of February condo sales in 416 tumbled 14.4% while prices dropped 8.4% from the same time a year earlier. Imagine what this means for the average $355,000 unit bought with the average 5% down. With closing costs (including CMHC premium and double land tax), the mortgage is $355,524, after the $17,750 down payment. But the current value of the unit is $29,820 less than last February. So, you end up owing $355,524 on something with a market value of $325,000, after spending $17,750 – plus monthly fees and a premium cable TV package with access to the Suicide Channel.

And to sell it you must pay another $16,000 in commission, plus a mortgage break fee. Total loss after a year: a minimum of $65,000, or 18% of the original condo price and 366% of your down payment. Did Mr. Lamb tell you about that?

Now here’s Aman Bhangu, a dude who must be an engineer because spreadsheets arouse him. Every month, he just told me, he plots the Teranet data and dives deep to uncover market trends. Last night he sent me the latest analysis. “The composite index is down 5 straight months,” Aman concludes. Among his key points:

Vancouver: down for 3 straight months, but it would have been down for SEVEN straight months had it not been for the minor upward blip in October. In total, prices have fallen over 5% from the highs and compared to the highest January sales pair since 2004 – which was in January 2004, sales pair volume is down 61%.  Even versus an average January from 2004 onward, Vancouver sales pairs are down 44%.

Calgary: All this talk of a price resurgence in Calgary is rubbish.  Calgary has declined for two straight months and has had sales pair volume decline in a straight line every month for 7 months (there has been no seasonal pick up  just a downward trend). Prices are down 7.5% from their all time highs.  Sure, prices are up 4.29% YoY, but since July prices are virtually flat.  That 4.29% uptick took place at the start of the previous year and is old news.

Toronto: 4 months of price decline – off from the all time highs now – 37bps MoM decline.  I thought Toronto would be worse for volume – this price decline is on higher than average seasonal volume.   I’m expecting Toronto to be the last hold out in Canada for the price correction.

So, Alex, there ya go. If you can afford to buy a Van house in your thirties and still have a third of your assets elsewhere, go for it. But understand the place will likely be worth less in a year. If you have to throw everything you’ve got into a down payment, so real estate equals 100% of your net worth, then it’s kamikaze time. Is this really worth the risk? And don’t delude yourself the way so many people do, saying, ‘well, we’re going to live there for 30 years, so it’ll all work out.’

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Trust me, you won’t. Those days are gone, along with patience.

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avatarGarth Turner - The Greater Fool posted Wednesday, February 20th, 2013.

2 Comments for “Advice”

  1. If they have been waiting a decade the right time was 10 years ago….

  2. If we look at past episodes where home prices hit a peak, it took about three or four years for house prices to stabilize after the peak. So give it lots of time.

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