Financial Jungle

The best time to plant a tree was twenty years ago. The second best time is now.

The Chinese who came up with this proverb sure wasn’t thinking of Vancouver real estate, and certainly not not inflation.

One of the persistent excuses I hear from wannabe investors today is, “I’m in it for the long-haul. Real estate always goes up.” That may be so, but the perseverance required for an overpriced investment may shock you off your seat.

Consider this: Euphoric Vancouverites, who invested near the height of the 1981 bubble, did not recover their original inflation-adjusted principal until 2006! Again, that’s inflation-adjusted; a dollar can buy a lot more Big Macs in 1981. For the unfortunate investors looking for an immediate vengeance, the hiatus turned into a 26-year hibernation. I believe the reality in 1981 was far worse beneath the chart. Devastated by 20%+ interest rates and hefty closing costs, I suspect many of the under-achieving investors were counting their blessings in light of foreclosures and bankruptcies devouring their peers.

CMHC has recently pumped a few more pockets of air into the bloated market by eliminating the down-payment threshold required for investment properties. There’s a big catch. The new CMHC premium is a mammoth 7.25%. Let’s work an example. A potentially insolvent Vancouver investor looking to capitalize on the housing momentum can borrow 100% plus 7.25% on CMHC insurance for a $339k 1-bedroom 580 sqft condo. The monthly mortgage payment on a 6% rate and 25-year amortization is $2,326. Throw in another $400 for condo fee, property tax, insurance and other maintenance, the payments balloon to $2,726. Consider that the suite was previously rented for $1,450, it would be a miracle for anyone with perseverance to hold this property until the first dime is made.

With the glaring agony in US housing, I just don’t see a prosperous long-term outcome with the recent move by CMHC. It’s bad enough to borrow 100% for a primary principal home, but to borrow 100% for an investment property and 7.25% mortgage insurance is preposterous; rent yield is low, and now so too is cash-flow. CMHC just removed the housing air bag. The landing will likely be gruesome.