Buying In An Overvalued Real Estate Market?

By: ispeculatornew
Date posted: 12.17.2013 (3:00 am) | Write a Comment  (1 Comment)

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It’s not the first time that I hear about the Canadian housing market being overvalued. Deutsche Bank came up with a simple yet powerful way to determine if prices were overvalued or not. How?

They use 2 key metrics:

Home price/rent (vs historical average): In theory, the ratio between buying and renting price. Why? Because it does not make sense for prices to increase much more rapidly than rent, that has proven to be unsustainable.
Home price/income (vs historical average): If income is rising by X%, real estate prices should increase by more or less that % as well. If not, it would generally mean that the population is using more debt to afford the expense which is obviously not sustainable.

So the economists looked at metrics for the 2 by country and used the average between the 2. The result?

real

Canada which is very frequently in the discussions of the most overpriced real estate (with Australia) is on the very top of this list.

canada

That is more source of concern for me as I continue to look into buying real estate. Does this mean I should postpone my plans? It’s certainly tempting. I could even look into buying in a country where prices are too low. I doubt buying in Japan or Korea would make sense but seeing that US prices are below historical prices makes it tempting.

Would you still be willing to buy real estate in a market like Canada? Or you’d try to get into an undervalued market even though it would be more complex and costly to do?

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1 Comment

  1. Comment by Drexel Agner — December 17, 2013 @ 11:51 am

    Dear IS,
    I own a rental in the city of Yakima WA. I have owned it for a year now and it is not the first time I have owned a rental. I owned one on the Olympic peninsula years ago and although I didn’t do so well with renters I made a killing when I sold it a couple of years later. My current rental I kind of “backed into” in that I had not planned on renting it but moved in with a lovely lady. My choices were to rent or sell. I am 75 years old so the pros and cons are different from yours.
    The pros were:
    I had paid over 40% down to get in so I would certainly receiving significant income from rent even after all the expenses.
    All the upgrades on my house would be tax deductible and there is always a chance I might want to live in it in the future.
    Here in the US the interest, insurance and upkeep including Jose the gardener are tax deductions.
    The cons were:
    I live two hours away so need a property management company to mange the property (discussion on property management later) which will cost me 10% of my rent.
    Having a chunk of cash after the sale of my house might be smarter for me at 75 so I can indulge in travel and good single scotch whiskey that I cant now. I am NOT a firm believer in ‘leaving my kids cash’ especially if they dont really need it.
    Tenants might tear-up your house or yard well beyond what ever security deposit the put down especially if they have animals plus the fact that even renters hate to have renters living next to them (a thought in case you ever move back into the house – you thought your neighbors were aloof before?).

    A couple of thoughts about property management. If you feel OK with nagging or threatening people for rent and you can do minor home repairs then, if you live in the same city, you can skip a property management company and their 10% fee. When I owned my last rental I discovered that I just dont have the heart to nag, threaten or evict another human. I cant even drive a nail straight so home repairs are like brain surgery to me and I aint no brain surgeon. Property management is fine for me, they found renters in less than a month, take care of all of the repairs, I just have to pay for them (tax deductible) and the phone calls requesting them. The PM take pictures throughout the house before the renters some in, hold the security deposit in escrow, do the nagging, threatening, eviction and re-renting. You on the other hand pay the PM a tax deductible 10% and sit back with very few worries and get a monthly check.

    A couple of thoughts on buying a house to rent. I think slum lords probably make the most money but I bought houses I would (and in the case of my current rental ‘did’) live in. Look for a special situation, an attractive house in a good neighborhood that has no imminent need for expensive repairs unless you can, like I did, use that fact to negotiate more off the price of the house than the cost of the repairs. Look for people who are desperate to get out from under the mortgage. You will know it when you see it, old people who are moving into assisted living, a divorce, job loss, an estate sale where the heirs just want a quick sale and a check. Don’t be afraid to ‘insult’ someone with a low-ball offer regardless of what the real estate person tells you – they after all get a percentage of the sale so more is better. I always look at the real estate agent as the seller’s agent although this is not always true if you are lucky it is a good mind set.
    Don’t buy just to get the ‘looking for a house’ over with. Do NOT buy unless you get the special situation, those situation add up to huge savings and more rent in your pocket by far.

    Good Luck should you decide to become a landlord.

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