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Sunshine Coast, BC: Is today a good time to buy?
03-30-2014, 07:04 AM, (This post was last modified: 03-31-2014, 04:10 AM by Skook.)
#1
Sunshine Coast, BC: Is today a good time to buy?
I follow a few twitter feeds and the other day one linked to a post titled ‘Long-term home ownership trends: The US, England, and Canada’ on the AEI (American Enterprise Institute) website. I have never been to this site before and after reading the piece I began to nose around. I found some interesting posts in their ‘Housing Finance’ section which is found via Policy Studies > Financial Services > Housing Finance.

A February 27th post, ‘Is today a good time to buy?’, by Edward J. Pinto, Co-director of AEI’s International Centre on Housing Risk, caught my eye. The piece contained one paragraph that I found interesting and I thought that it might be a worthwhile exercise to try to apply its suggestion to the Sunshine Coast. Pinto wrote:

Quote:To gauge the sustainability of home prices at a neighborhood level, compare the home’s sale price to what it would cost to rent. In the past, rental estimates for individual single-family homes were hard to find. Today, a prospective buyer may go to Zillow.com and look up a Rent Zestimate for tens of millions of individual properties. By dividing the annual rent estimate by the home price you are able to calculate a home’s gross yield. For example, a $250,000 home with a rent estimate of $1,500 a month, would have a yield of about 7.2%, before home ownership costs. As a rule of thumb, a yield of 8% or more means the home is a relative bargain, below 5% and the home is overpriced, and for between 5% and 8% a buyer should plan to stay in the home for at least five or six years and either put a little more down or pay the loan down faster.

I remember someone saying on a Canadian real estate blog that he wished we had our own version of ‘Zillow.com’ and now I can appreciate why after visiting the site. However, I think with the Sunshine Coast being such a small market you can come up with a fairly accurate Rent Estimate for properties by visiting the Holywell Property Management website, the Coast Reporter Classifieds, Craiglist and Kijiji. It’s a bit of work, but worth the effort when you are making such an expensive, life-altering purchase.

Back in the spring of 2010, I was looking for a rental in either Sechelt or Gibsons. The pickings were slim and the prices were high, but that is definitely not the case now. I been following the SC real estate market for a year now and I am seeing many homes once listed for sale now being put into the rental pool. Unfortunately, the sellers likely bought in high - remember that the Benchmark Price on the SC peaked in July, 2010 and has been falling ever since. Well, for many it is hard to accept price drops that end up below assessment, so they pull the property and try to rent it out hoping that the market will turn around. Unfortunately for them, I don’t think that is going to happen for some time to come.

Now, because I have been keeping track of certain developments and listings, I have examples of properties that were listed for sale, failed to move and then were put up for rent. Or, properties that were sold (likely to investors) and then put on the rental market either for income or to help cover mortgage payments. So, I am going to “gauge the sustainability of home prices at a neighbourhood level” with four examples.

The first is a home in Sandy Hook. It was listed for sale back in early 2013 for $799,000. I didn’t keep track of the property so I don’t know if it had any price drops, but I do know it was eventually pulled. It went onto the rental market early this year at $2,500/mth, failed to rent and recently dropped the rental price to $2,000/mth. Here are the calculations:

$2500 X 12 = $30,000 divided by $799,000 = 0.037 X 100 = 3.7%
$2000 X 12 = $24,000 divided by $799,000 = 0.015 X 100 = 1.5%

Well, this home’s “gross yield” sucks and therefore was definitely overpriced in 2013.

********************

The second example involves a townhome at Wakefield Beach - the development that was such a roaring success back in 2006, but now suffers from an extreme case of price “dropsy.”

This townhome was put up for sale in May, 2013 at $519,000 and then dropped the price one month later to $499,000. It didn’t sell and in November was listed for rent at $1,700/mth and that listing disappeared so I assume it was successfully rented, but possibly for less than asked for if the owner was desperate. So, let’s do the calculations for both the original sale list price and the price drop:

$1700 X 12 = $20,400 divided by $519,000 = 0.039 X 100 = 3.9%
$1700 X 12 = $20,400 divided by $499,000 = 0.041 X 100 = 4.1%

So, this townhome was overpriced, too. Now, it just so happens that a townhome did move recently at Wakefield - at $435,000. This was a drop of -5.2% from its original July, 2013 list price ($499,000) and a whopping -26.9% from the 2007 developer list price of $595,000. Ouch.

********************

The third example is from the trendy new condo development in Sechelt - The Watermark.

In March, 2013 one of the smaller units in Phase 2 (5725 Teredo St) was purchased for $264,900, A month ago, the unit was placed on the rental market with the proviso that it would be available March/April 2014. Well, March almost over and its hasn’t rented, but looking at the Jan/Feb Watermark construction pics, I doubt the building is ready for move in anyways. So, let’s do the calculation:

$1100 X 12 = $13,200 divided by $264,900 = .049 X 100 = 4.9%

Now, this one is close. It’s just on the cusp of being overpriced. And, according to Pinto, “between 5% and 8% a buyer should plan to stay in the home for at least five or six years and either put a little more down or pay the loan down faster.”

I think it might be safe to assume the owner has no plans to live in this unit, may have paid cash, and in two years’ time may list it for sale. If the owner is Canadian, he/she must hang onto it for at least two years under Canadian Revenue Agency rules or pay whopping investor ‘flip’ taxes.

********************

The final example is, again, from the Watermark and involves a unit at 5665 Teredo St (Phase 1) where the seller signed a ‘contract to purchase’ during the pre-construction sales and therefore likely didn’t benefit from the early bird discount of 5%. The same unit in Phase 2 is currently listed at $284,900 but prices jumped with Phase 2, so let’s knock $20,000 off that price and say this Phase 1 owner paid the same price as the example above.

As soon as Phase 1 was move in ready in August, 2013, the owner put the unit on the rental market at $1,250/mth. Well, the owner was facing quite a bit of competition from fellow Phase 1 unit owners, so the rent price was dropped to $1,050/mth within a month or so and the rental listing did disappear rather quickly after that. So, applying our calculations for both rental prices, we get:

$1250 X 12 = $15,000 divided by $264,900 = 0.057 X 100 = 5.7%
$1050 X 12 = $12,600 divided by $264,900 = 0.047 X 100 = 4.7%

So, based on the fact the market would not accept a rent price of $1250/mth price and the owner had to drop it to $1050/mth, we must come to the conclusion based on Pinto’s advice that this unit at Watermark was overpriced at the time of its purchase. Are we surprised?

********************

So, for all those wondering “Is today a good time to buy?” on the Sunshine Coast, here is one tool that may offer an answer.
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03-30-2014, 09:11 AM,
#2
RE: Sunshine Coast, BC: Is today a good time to buy?
Just tried this for our current rental in TO and the one we are moving to and I got 3% and 3.8% respectively.... oooops! :-)
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03-30-2014, 10:24 AM, (This post was last modified: 03-30-2014, 11:39 AM by Skook.)
#3
RE: Sunshine Coast, BC: Is today a good time to buy?
Yep, a great big oooops for the owner. As a renter, Jimmy, you are laughing, laughing, laughing...Big Grin
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03-30-2014, 11:38 AM, (This post was last modified: 03-31-2014, 04:03 AM by Skook.)
#4
RE: Sunshine Coast, BC: Is today a good time to buy?
As an aside, I did not interpret that particular paragraph in Pinto's post as an answer to the question "Is it better to rent or buy?". My interpretation was - is the particular house you're interested in buying priced at the right level when it comes to this issue of the "home's gross yield...before ownership costs" and that this in turn "will gauge the sustainability of home prices at a neighbourhood level."

Would that be the same as asking "Is it better to rent or buy?" Perhaps, I am misunderstanding what Pinto is implying here. Does anyone have any thoughts on this?

*********************
Okay, the wheels are turning now - I think.

Let's look at Wakefield Beach, again. So, a townhouse recently sold at $435,000. Now, if we take that annual rent the owner in the example above managed to get, can we determine if the price paid by this new buyer for his unit is sustainable within the Wakefield "neighbourhood" (these townhomes are essentially all the same). In other words, if they had to sell suddenly within a year or so could he/she expect to recoup what they paid. Here's the calculation:

$1700 X 12 = $20,400 divided by $435,000 = 0.047 X 100 = 4.7%

So, even at $435,000 according to Pinto, that townhouse just sold was overpriced. Wow, this is really interesting.

Am I understanding this correctly? Any thoughts?
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