Can You Buy For The Cost of Renting?
Prices are high, and many expect them to come down. That begs a question: if you can buy for as much as you pay rent, should you buy now, or wait?
Case in point: this property is dirt cheap. You could make the argument that its as cheap to buy as to rent. Take a look, click on the mortgage calculator, and let me know your thoughts (yes, I’m trying to spur some discussion – show me the upsides or downsides, whichever you prefer).
90 comments
“Aceto’s former job at ING was chief risk officer. He spent two years in California during the height of the real estate bubble, and felt that Canadians would not be as spendthrift as their American counterparts. But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.”
Slightly off topic, but I thought the above was worth noting from Vancondo
Rob , also:
On the last thread you point out the low MOI
I know most of you real estate pumper types like to make a lot of hay about low inventory, but let’s keep in mind the inventory mushrooms after the crash.
Correct?
In fact a quick study of previous crashes will confirm it.
Also Rob, and you know I don’t ask much of you, but do you think you could get Aaron to post a comment once in a while- this blog is not funny anymore.
Looks like I’m not the only one not visiting often anymore.
Jenny the Troll
I agree w Jenny. This site sucks and is highly suspect.
Now this is the comment that will define the top of the Vancouver Real Estate Market. (Read the last paragraph)
The rebound in the housing market from a low in January has been remarkable and has exceeded any other segment of the economy, said Doug Porter, deputy chief economist at BMO Capital Markets.
“Housing has definitely been at the forefront of any kind of a recovery we’ve seen,” Porter said.
“I don’t think you can find a single segment of the economy, other than maybe bankruptcy lawyers, who’ve thrived more in the last six months or staged a more impressive turnaround.
WTF???? Read that again and think of what he is saying.
I am still sticking to a crash very soon in YVR real estate.
McLovin
Short answer: No.
Long answer: Heeeeeeelllllllllllllll Noooooooo
Seriously though, I think as a general rule right now if you can own a place for the cost of renting it right now then the rent is way too high.
Lets look at this place you point out though. You are talking about the house in Delta right? The link doesnt really work but it is first up on your listings…
Price: 619K (hardly “dirt cheap” Rob. I think the years of living in Vancouver have messed with your perception of cheap. The arizona place you mentioned a while back, now that could be called dirt cheap)
Rent: Who knows? I have no indication of what this place would rent for.
OK so I am going with 25 year amrt with 4.5% interest for 5 years. 10% down. I know for arguments sake you could say 2.25% VRM 35 year amrt but I would rather rent than take a crazy gamble like that.
My calculator tells me monthly payment of 3083. Throw on the property tax of 305/month and a few bucks for maintainence and we have almost reached 3.5K a month.
I could stop right there. I doubt this place rents for 3.5K.
But for the fun of wrecking the prospect of owning this place for less than rent…
No one knows what the future interest rates will be after the 5 years is up. A good place to look would be the last 30 year average. Last I heard it was about 8%.
Lets use 7% to be fair.
Now despite paying 3.5K a month for the last 5 years I still owe $489026.
Now the mortgage is 3762, hope I got a big raise in the past 5 years!
Over the entire term my interest paid will have been 543K. Property taxes of 92K (assuming they dont increase, which they will) and the building is now a tear down as it is 65 years old. On top of that I paid off the 619000 house.
Total cost excluding all upkeep. 1.254 million. And I am left with a piece of land which could be worth anything at this point in time.
Average that out over 25 years and it costs 4180/ month plus all maintance costs, increasing property taxes, insurance and other expenses. Throw in realtor fees when you sell on top of that. And you cant move.
I dont think this could have been the place you were talking about because that wasnt even close.
Ok, I’ll bite…
$169,00 for the honour of living in the most hideous looking building in Maple Ridge, possibly all of the lower mainland, what a treat!
Leaving out any potential capital gains, assuming a $155,000 mort at 4% over 25 years, that’s about $500/month interest, $135/month tax, and $115/month maint fee. $750/month. On Craigslist a decent 2 bedroom in the ridge is renting for $800/month. Of course I haven’t included lawyer fees or the fact that this building is likely to either collapse under it’s own weight, spontaneously combust, or be subject to a huge assessment as they discover it was built by evil gnomes who used cotton candy for insulation. I mean seriously Rob, who designed this monstrosity? I’m nominating it for ‘eyesore of the month’ – http://www.kunstler.com/eyesore.html
But I guess you do save $50/month…
http://vancouver.en.craigslist.ca/van/apa/1466136099.html
This house is renting for $6K per month. I don’t know exactly what this house would sell for but lets low ball it and say it would sell for $2.5 mil as its on King Edward.
Lets say 10% down = $250K + $50K closing costs
Mortgage $2.25 mil @ 4% = 11,900 per month
Taxes and Insurance $1,000 month (I think this is conservative)
Maintenance $500 per month (again conservative)
= $13,400 per month costs
Lets not forget the opportunity cost on the $300K. Assume 4% = $12,000 per year or $1,000 per month. (this money could buy some pretty nice vacations)
So to answer Rob’s question with a real life example – buying this house would be approx. $8,400 more per month to own then rent. This is with record low interest rates and not assuming a new roof or driveway ever.
This means that the house must appreciate $100,800 per year every year just to break even. This is approx. 4% per year! I simply do not and cannot believe this house will continue to grow at 4% a year and be worth $3,047,000 in 5 yrs.
You can use this example with a Yaletown condo or Port Moody home and the numbers are roughly the same. This is the big problem with buying right now. It is so much more expensive than renting that the buyer needs unrealistic and not historically backed growth just to BREAK EVEN! God forbid when the record low 5 yr. mortgage rate goes up.
I am sure this owner is a smart person and is trying to maximize the rent they can achieve. If they could get more, they would but the market will only bear $6,000. This is not historically correct. Rob will back me that for most of the last 80 years it has been cheaper to buy then rent, why now has the equation been flipped on its head and we think this is the new “normal”? Its not! Not only is it more expensive to buy then rent, in most high end places its DOUBLE! This is not normal and will change. I know you have heard it before but its not different this time. Fundamentals matter.
Again, I stick to my guns: Anyone buying anything in Vancouver right now is making a big mistake they will regret. I have been proven wrong in the last 18 months or so but the facts, the ratios and the history are all on my side. It is just a matter of time before prices in Vancouver have a huge correction back to the mean.
McLovin
PS – You can attack my figures but this post is for information only and is not perfect but I think you get the message. I encourage others to come forward with examples.
Wow, for you:
http://www.youtube.com/watch?v=dFplvCb2iJo
Thanks vd. Right on topic, not just for WoW.
Rent for $6000, or own for $22000 / month!
The rental agent makes an airtight case for why RE Prices are too high, NOT that rents are an incredible deal. We’re not NY or London, and they just aren’t enough people here to afford it.
VD, Wow $22K a month to own, $6K per month to rent.
Throw out all the facts and figures, that says it all.
Rob can you remember a time when the price to rent was ever this out of whack?
Renting for 27% of the cost of owning and the experts say our market is healthy and strong. What are these guys smoking?
McLovin
If everyone owns a crappy house in this city now, why vacancy rates are not going up? I dont see too many interesting rentals out there. Seems the market is still tight.
VD, that nails it…that and Turkey’s retort to my (yes, that was me) open house fantasy story…this is the end my friends, it gets crushed from here.
How about this for a comparison? New York upper east side 1400 sq. ft rental for $5000 / month, $1000 less than Shangri -la.
http://newyork.craigslist.org/mnh/nfb/1469484154.html
Here’s a ‘comp’ for a 1400 sq. ft apartment for sale also on E.74th. $1,675,000, $6900 / month to own.
http://www.zillow.com/homedetails/200-E-74th-St-APT-2B-New-York-NY-10021/2136690785_zpid/
Steve,
Don’t you know that in a matter of minutes, maybe hours, most of these landlords are going to get phone calls from very wealthy Norwegians just begging them to let their apartments to them for the Olympics?
That’s what’s happening with inventory, it’s being held off. Everyone is holding their breath. By the way, when the hell are the Olympics anyway? Feb 1? Feb 21? And when will this thing finally be over?
As for my previous link above, bear in mind that this is for the uber-high end… 2,600 sq.ft suite. They’ve definitely overbuilt for that but who the heck can afford a 6M unit even if it falls by half?
VD, I agree, and think the hammer falls – any SECOND.
This shit is over.
Rob, excuse my language, I’m an ill educated graduate school graduate…type…u know the type…the type that can’t tipe, I mean type.
I think the collapse is already underway. Rob’s MOI has skyrocketed. Moonshot.
Buying has hit the (proverbial) brick shithouse.
You know what i’m sayin’ mon frere.
Rent covers cost in west Van? My friend bought one house like that in W.V. for 1.2m in 1998, his neighbor was a renter, paid $1200 for a similar building. … Tell me Mclovin, when is the good time to buy?
edit: “West Vancouver” should be “Vancouver West” in post 16.
Sure it would be a good idea to buy it, if you wanted to live in it for that price, for a decade or so. If you want to move anytime soon, it might not be such a good idea. My guess is that anyone who would look forward to living there for the next couple of decades is unlikely to have the DP.
Don’t read too much into the high end of the market. Price to rent metrics will never make sense. People buy $4 million apartments because they can. They don’t buy them to rent out. Most also don’t even have mortgages on them.
Dave? What? Should the price not bear a direct relationship to yield – in all cases?
Davers:
Link seems to work for me. Maple Ridge 2 bedroom for $169,900, dogs allowed, wood buring fireplace, large patio, in-suite laundry.
Purp:
9% downpayment? Building is solid enough and I used to rent if for over $1000/month.
http://vancouver.en.craigslist.ca/pml/apa/1469170542.html
I rent basement suites there for $950 and up
http://vancouver.en.craigslist.ca/pml/apa/1468945881.html
Rentals are restricted in this building, but if they weren’t I’ve got several years of proven income with a rent multiplier of under 170. What percentage downpayment do you need to break even? 30%? If that’s not a buy, what is? If its not a buy, why not? (aside from “Ewww, its too ugly for me to live in!”)
Dave is right.
Rent to price metrics will never make sense in the high end of market. Rent is not the only yield in RE. … It’s the same in stock market, not everybody buy a stock just for the divident.
It’s basiclly a safty measurement, rather than a profit measurement. It is never a vital factor for those who buy high end products with large downpayments.
How long until we see an article like this in the Sun?
http://online.wsj.com/article/SB125841123967851223.html
OK, I know, Sun staffers can’t write that well, so we will never actually see and article like this in the Sun, but I mean in terms of general advice.
Rob – Since you’re the seller’s agent in this case, and assuming I am a young FTB, how do you convince me this is a good buy? Putting the emotional draw of homeowning aside (and my desire to live in building that look like the “death star”), I say to you, “but I have to pay probably about $200/month more than renting, how is this good value for me?” and then I ask “what if I want to sell in a few years and it’s value has been flat or declining? isn’t there a good chance I’d be underwater on my mortgage and forced to stay put?”….”I keep hearing that the van RE market might be overvalued and in a bubble and that interest rates will be moving up in the next few years, why would I risk parking all my money here?”
I know your job is to sell it, and I’m sure someone will buy it and be quite happy living there, there is a strong emotional pull to owning your own place. But if I look from a purely financial standpoint (which is the argument here), I just can’t see it. But please enlighten me!
Let’s try this one … and it’s a real example because I live there:
rent $1,425/mth = $17,100/yr
fees $250/mth = $3,000/yr
taxes = $1,800/yr
price = $400,000
The way that I figure it, my landlord takes in $12,300 annually ($17,100-$3,000-$1,800) and if he financed the entire thing at Prime + 1% his carrying cost is $13,000. So, for the time being, it’s basically a break even proposition for both of us.
I don’t see what all the fuss is about.
-
ex-Banker, you’re not including maintenence costs, house insurance, opportunity cost on his downpayment, or closing costs of buying the place…
#25, how’s it break-even for both of you? Let’s say you live there until his mortgage is paid off. You walk away with nothing, he or she walks away with an apartment that you’ve paid for.
Purp:
As a seller’s agent I don’t convince you its a good buy. I advise you to get an agent of your own or else enter into an limited dual agency agreement with me. I don’t really like dealing with unrepresented people. I like responsibilities to be clearly set out.
That said, this one is justifiable on the numbers, to begin with. Unfortunately, you can’t rent it, so it has to be an owner occupier (if rentals had been allowed I would have considered grabbing this as soon as I listed it, but then I’ve been collecting the rent for several years and don’t have to be convinced of its reliability).
In terms of whether its the equivelant of cash flow neg, neutral or positive, we first have to agree on what a fair downpayment should be to determine if its a good buy. You may or may not have 25%-45% down, but that’s what I use to eveluate investments. If you incur a $200/month loss (compared to rent) because you don’t have the DP, I don’t think its fair to call that an extra cost. You need a DP to buy, and assuming that less than 10% down should cash flow is not realistic. With 30% down on this I don’t think you’ll lose anything.
If you predicate buying real estate on being able to sell in a few years at a higher price I’d have to explain to you something that you already know. Real estate goes up and down in value, is relatively illiquid, and shouldn’t be bought with the assumption that it will be worth more in a “few” years. Its a long term investment, and in this game 5 years is overnight. If you want sure profit within a few years take your brother-in-law’s stock tip, or maybe just buy Panamerican silver.
If you’re buying to live in, and you’re planning on not moving, then you’re not being forced to stay put anywhere, of course. Buy to live in if that applies. Otherwise don’t buy to live in. Ownership isn’t for you.
“But if I look from a purely financial standpoint (which is the argument here), I just can’t see it.”
What part can’t you see? You lock in for as long as you want to protect yourself from interest rate increases. You pay down the mortgage on an accelerated basis so at renewal time you’re in better shape. You pay the same to own as to rent, and the accelerated payments are straight savings. If you’re smart you build in some profit on the buy side. Your only justifiable fear is that the market may drop in the short term future and you may have to sell at that time. Envision that downside and deal with it by either confirming that you aren’t moving in the short term or don’t buy. And that’s the real question: is it ok to buy a dirt cheap property when we’re at record high price levels? We could have asked this question in what, 6 out of the last 7 years and gotten the same response that you’ve given so far. Most of the time events came out in favour of the buyer.
HP’s HillBillyRiviera sub-penthouse rental is currently @ 1.11 SqFt PCM, virtually identical unit on lower floor currently on MLS is priced at @ 713.49 SqFt (based on ask)… based on BCassessment, it costs out @ 561.90 SqFt… I think I’ll continue to rent…
#27
Think harder, the answer will come to you.
“In terms of whether its the equivelant of cash flow neg, neutral or positive, we first have to agree on what a fair downpayment should be to determine if its a good buy. You may or may not have 25%-45% down, but that’s what I use to eveluate investments. If you incur a $200/month loss (compared to rent) because you don’t have the DP, I don’t think its fair to call that an extra cost. You need a DP to buy, and assuming that less than 10% down should cash flow is not realistic. With 30% down on this I don’t think you’ll lose anything.”
To be fair Rob, in your calculations, should you not factor in the opportunity cost of the DP? Apples to apples.
Rob, hope you don’t mind this inquiry, but can you shed some light on the run-rate in sales this month (first half) vs. October – will we likely set a new (6 year) sales record? Any comparative is appreciated.
Rob – A lot of good comments, but I’m still not convinced (OK, I understand it’s not your job to convince me). But I agree with #31 that you have to factor opportunity costs of DP. Otherwise, any property at any price can look attractive compared to renting. I can increase my DP to reduce my mortgage costs to $0, and I’d wager in almost all cases the maint/taxes is less than comparable rent. So let’s use your 30% down as an example. $50K down, mort $118,000 @ 4% is $375 interest. Total is $625/month carrying costs. Alternately I’ll rent that $800 place, park the $50K in an investment paying 4.0124% and apply the $17o/month to my rent for a total of $630. So you still end up in roughly the same place today, depending on assumptions. Longer term I may come out ahead as I pay down the principle and reduce carrying costs, but that may be offset by interest rate increases, special assessments, opportunity cost. I don’t see it as clear cut, but you have a lot more experience than me, so I’d love to see how you would calculate out a probably scenario.
I’m not saying that there aren’t benefits to owning, stability, pride, forced savings (I’ve taken advantage of this one myself), but for me the potential risk here would not be worth it, call me ultra conservative. You pointed out that in 6 of the past 7 years we would have come to the same answer, but would we have? What would this place have sold for in 2002? what would comparable rents have been?
MCLOVIN:
“I don’t think you can find a single segment of the economy, other than maybe bankruptcy lawyers, who’ve thrived more in the last six months or staged a more impressive turnaround.
WTF???? Read that again and think of what he is saying.
I am still sticking to a crash very soon in YVR real estate.
McLovin
This is the very same thing that was said about housing here in LA…..it’s the same all around the world…same shit, different lattitude/longitude.
When will the rain stop in this city please…I am having second thoughts now… Maybe it is not the best place on earth after all…
GG/35…. better get used to it… until you do, here’s today’s ‘Moment of Zen’ courtesy the NYT…
…In the current first-year class of rookies, Officer Montilla, 31, is one of several refugees from Wall Street, an uncommon breeding ground for future police officers. He and two academy classmates who had also worked on Wall Street said they had been willing to give up larger salaries partly because they were afraid they would not be able to support their families if the economy continued to slow….
http://tinyurl.com/yfvtqqc
RE : rent $1,425/mth = $17,100/yr
fees $250/mth = $3,000/yr
taxes = $1,800/yr
price = $400,000
… well prime +1 % is 1.50% … can you show me a bank that gives a 30 year loan at that rate? My friend in Seattle closed a 400K loan for 4%, but there is competition and so on. Let’s be optimistic and say the rate is 4%: You’ll have to pay 1600-1800 to the bank in mortage per month + the associated costs … you are clearly better off renting, saving 600-700 $ for 24-36 months will give you 20.000$. By 2011 the same house will be 60K lower minimum… I suspect a flood of houses in the market starting …. hmmm february 2010, and there will be nOlympics
duru2000, the homeowner is also building equity and rent goes up over time.
China’s empty city.
All the houses there are sold, owned by investors – sitting empty. all of them.
http://www.youtube.com/watch?v=0h7V3Twb-Qk&
More Complex 26 … “you’re not including maintenence costs, house insurance, opportunity cost on his downpayment, or closing costs of buying the place”
maintenance costs = fees = $250/mth (so I took that into account)
opp cost on his downpayment (I said “if he financed the whole thing” … ie. no downpayment, so I took that into account too)
closing costs, agreed, so add at least another $10K financed. that amounts to $400 annually so it’s really a drop in an otherwise big bucket.
none of that changes my conclusion.
FTBuyer 27 … “how’s it break-even for both of you? Let’s say you live there until his mortgage is paid off. You walk away with nothing, he or she walks away with an apartment that you’ve paid for.”
You should go back and read what I wrote more carefully. I haven’t and won’t pay a cent of his principal. I said “carrying costs” … ie. just the interest portion of his mortgage. Ultimately he’s going to pay the principal himself. Think about it.
duru2000 37 … “well prime +1 % is 1.50% … can you show me a bank that gives a 30 year loan at that rate?”
Um, not quite sure where you are, but Prime is 2.25% in Canada and every one of the big banks here would fall all over themselves to write a Prime +1% HELOC.
Dave 38 … “the homeowner is also building equity and rent goes up over time.”
Finally someone hit the big point. Atta boy Dave! All other things being equal, rent will go up over time more or less at the rate of inflation. Buying will cost less and less over time.
At a single point in time, renting and buying is the eternal tug-of-war. But over the long haul, buying will win from a strictly cashflow perspective. Rents go up, mortgage payments go down. Period.
Now whether buying is a good investment is another question … but from straight cashflow perspective, buying will eventually win out.
-
ex-Banker 41
Not so fast….don’t forget over time maintenance costs and property taxes will also appreciate. Interest rates are bound to rise, therefore, more than likely, causing a rise in carrying costs. There is also the possibility of RE prices falling in the short to mid term.
This sounds like my brother who would argue against condo owning because you have to pay a maintenance fee, yet had to fork over $50k for a new roof and fence this summer. Don’t forget to add that to the cost of ownership.
Looks like a great deal from a numbers point of view:
Assuming someone pays FULL ASKING price $169,000, at 25% downpayment, 5 years locked in at 4% interest.
Here’s how I look at things:
The interest portion is $422
The property tax is $133
The strata is $115
Total costs out of pocket is $670.
If Rob says he can rent this for about $900, then you are waaaaay ahead. This unit makes perfect sense not only as an investment but for also the bears who want to buy something cheaper than rent.
As for the out of pocket expenses, my numbers are on the high side.
Think about it, the interest portion is $422 per month.
But as each month passes, the interest portion goes down cause the mortgage gets paid down.
Also I am assuming that the owner does not even get any home owner grant on their property taxes and is paying the full amount.
Factor in these 2 bonuses, you are even in a better position.
I find it amusing that some bears are saying how they are using the opportunity cost of the down payment as a way to turn down this property.
Bears have been bragging at how much they are able to save from renting. And when the number makes sense…well you throw in ‘well it’s not justified cause I can get x% returns on my dp”
No one is asking you to put 50-100% on the property. 20-30% is very reasonable.
I shake my head sometimes that no matter how good the numbers look, the bears will always find a reason to not buy.
If the price is right, then it’s cause the location is not good. If the location is good, then it’s cause the building is old. etc..
That’s right, you guys want to have you cake and eat it too.
Thanks, ex-banker, I indeed misread your post.
To the person who called me an idiot, I see you weren’t brave enough to do it using your regular posting ID. Well done, you.
SC – So when are you writing an offer on the place?
Why wouldn’t you include DP opportunity cost in your calc? Is that not real money? Using your numbers, that $42K down payment, earning 5% return is giving $180/month. So $900-$180 = $720. This is vs. $670 for owning, hardly “waaaaaayyy ahead”.
To Ex-B and Dave’s point, over time the mortgage costs should reduce (though there are some risks of increases along the way). But this option means you are in for the long haul in this unit to realize any gains. Are there other intangible benefits to owning, sure, and if it makes sense to you to be fixed in a 2 bed condo for the next 20+ years, so be it.
SC – 43
The opportunity cost is a real factor when making the rent/buy comparison. If you choose to ignore it, good on ya. For me, I like to take it into account.
I agree though, that one example is a good buy. But, that is one example. Everyone’s position is different and might not be able to take advantage of a situation like that. There a also a great number of examples that make zero sense from the rent/buy comparison.
The relative cost issue is only one side of the argument. If a buy a place, nobody can make me move out except the bank. And they won’t do it for reasons such as wanting to renovate the place so they can jack up my monthly payments.
FTBuyer – and when there is a special assesment then you are stuck with it. Your tenant can just pack up and move to another place. It works both ways. There are pros and cons to both sides.
I don’t know which bank you have worked ex-banker but you know as well that the prime rate won’t stay that low for long time, check ScotiaBank report that is bracing for 1.25% raise in one year. So let’s get a realistic view (fixed closed rate) here:
http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=mortgage_closed_long
German Guy:
Its going to stop around April. Throw away your umbrella now and get used to it. You aren’t made of sugar and you won’t melt.
duro2000:
We don’t usually have 30 year fixed mortgages here. 5 years is considered long term, although you can get longer. Best not to do projections on a variable rate, though, as I’m sure you agree.
Purp:
“Why wouldn’t you include DP opportunity cost in your calc? ”
Why would you, or maybe I should ask, why do you think we aren’t? Let’s say rent = mortgage costs, and forget for the moment mortgage paydown. We’ll just equate the two for simplicity’s sake and say that you’re tossing both out the window. If you do through rent you’ve got $50,000 to invest, and you’ve got that earning you 4% or $2000/year. If you do it through a mortgage you’re investing $50k in your property. Less secure than your 4% return, but possibly more lucrative. Rent = rent, but does op cost on your foregone 4% investment = the return on your $50k invested in your property? Well, based on the last year, the average price for apartment properties was $ 386,839, and now its $429,777. That’s $42,938, or 11%. 11% on a 25% downpayment is 44%. I’m not saying you’ll get that this year, or that you’d get it on that property, but it is what it is. Your 4% may be very secure, but you can’t argue that an investment in real estate doesn’t also have the potential to generate a return. Does that handle the opportunity cost issue?
Anyway, I’ve gotta run to the bank, but let me say this: real estate is a good investment when bought wisely. There’s no question about that, and trying to disprove it is like farting into a stiff breeze. It may not be the best one, but its a good one. I know. Don’t waste time arguing againts what’s obvious.
On the other hand, what’s not obvious about this place? Why, when we have record values, can we find a place that you can buy as cheaply as renting? What are the implications? What can we learn?
Not Much of a Name:
A special assesment may be unplanned, and may surprise some (it doesn’t do taht to everyone) but you’re not just throwing money away. You’re buying an asset that adds value to what you already have. If you just paid a SA this year, you actually could get a tax credit.
FTB/47,
Bull. If you have your financial and personal s**t together, you’re a desirable tenant, and it’s not too hard to put together a good, friendly, long-term landlord-tenant relationship. If so, you don’t have to worry much about being thrown onto the street on short notice. It can be a pleasure for both sides, like any other professional relationship, and both sides have good incentive to make it last.
Rob – 50
Agreed that RE can be a good investment “when bought wisely’. However, how many wise decisions are being made now? We won’t know for years to come.
I would argue that a SA is buying an asset. Ask those who own or have owned leaky condos. Has the $100k+ that some put into repairs been added to the value of the condo? No…in that case it is money thrown out the window.
Has anyone noticed that if you get a 30 DOW chart and a ruler, there is a very clear trend line that goes up to 1995. Put your ruler on that and it takes you to just below where we are now. So what? Trend lines seem to have a certain magnetism. Now get a chart for Vancouver RE and a ruler and draw your own conclusions.
#51, yes that’s true. In fact that’s the very position I’m in right now. However, it certainly happens to other people. Like many in the West End, for example. Would you like a link before you call “bull”?
duru2000 49 … “I don’t know which bank you have worked ex-banker but you know as well that the prime rate won’t stay that low for long time, check ScotiaBank report that is bracing for 1.25% raise in one year.”
Now, now, there’s no need to get all testy. We’re just spit-ballin’ here.
Feel free to run the numbers using a 5 year fixed at 3.99% (best I could find on short notice). If my landlord financed 80%, it’s still a toss up between rent and buy. No winners or losers, just a toss up. And as Turkey pointed out in 51, it can be a mutually beneficial arrangement for both the owner and the renter.
ps. I’d love, love, LOVE to have a bet with you about interest rates. Apparently you believe Scotia’s opinion that Prime will be 3.50% this time next year. I think we’re in for a long (painful) recovery with low rates for quite some time, so care to make it interesting my friend?
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Newcomer 53 - “… get a chart for Vancouver RE and a ruler …”
You owe me a ruler man. I just broke mine trying to do what you said
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FTB/54,
Nope, I’ll cheerfully acknowledge that there are always exceptions. (I could argue that the people you’re talking about clearly don’t have healthy relationships with their landlords, since they’re being booted, but that’s probably unfair, and I can’t vouch for either party.) Maybe your landlord is forced to sell the place for totally legitimate reasons: too bad, them’s the breaks.
However, you can find exceptional scenarios for your generalization in comment 47 as well. You say only the bank can kick you out? So can the government, and so can the unexpected. Living in the path of the future Evergreen line? House built near an unstable embankment? House fire? Surprise, you don’t live there any more.
Basically, I don’t think your point is very relevant. I’m not worried about losing my landlords — and it’s not that hard to gauge the risk when you look for somewhere to live, especially with such a big, O-shaped trial coming up early next year. Given how much time people spend looking for somewhere to rent or own, a little diligence isn’t too much to ask.
57, sorry, I was saying that I’m in the situation where I have a good relationship with a long-term landlord, not that I’m in a position where he’s selling from under me. You’re of course correct, it’s all swings-and-roundabouts, and there are exceptions everywhere. I’ve dealt with many landlords, and in my experience (the current one being the only exception) they’ve mostly stopped caring once they’ve got the security deposit and a stack of post-dated cheques in their pocket. Perhaps I attribute too much value to the idea of being independent, but I’m sure I’m not the only potential buyer who thinks this way. That’s not to say I’m ignoring direct cost comparisons.
58,
Fair enough. I’m only being a stickler since my landlord dropped everything last Sunday in order to come by and fix my (his) furnace. I’m now toasty warm, free of charge, and I feel obliged to defend him.
Some interesting points brought up, and a few glaring omissions as well.
About being kicked out by your landlord, and the security of owning… can be nicely countered by what about being losing your job here, being offered a plum job elsewhere, getting married, divorced or a new child and being forced to sell at the worst possible time?
After paying your landlords mortgage for 35 years… (to start with, it is absurd to stay in one place renting that long unless there are non-financial reasons in play, but ignoring that) very few buildings being built here/now will be standing after 35 years, so you have nothing but the accumulated saving and your landlord has a small-part interest in a hole in the ground. Bit of a wash on that one.
Also, rents don’t “always” go up. Ask any landlord in the bubble states what rents have done recently. The past 25 years are only a tiny slice of a far bigger history. Anyone out there really think history is over, and no surprises left? Wanna bet?
In a perfect market (ain’t gonna happen!) interest rates are adjusted by precisely the inflation rate, as are rents, so in a high-inflation environment your payments will balloon and the total amount paid in interest over the life of the mortgage will be much higher. Without wage increases keeping up with inflation rents can’t rise to suit. As there is no prospect that low-wage countries worldwide are going to stop competing for our jobs I doubt we will see strong wage increases for many years to come. Also with as many highly-leveraged renters-of-money-from-the-bank “owners” as we have in this market, expect a lot of distress sales to drive the prices down. Inflation is not the panacea some seem to think it is.
re: special assessments
a $50K- $100K special assessment won’t add
equivalent value to the unit, if anything the word
“rainscreened” is the kiss ‘o death to any potential sale
most concrete buildings are designed to last at least 65 years
yet the structural warranty is only 10 years and that is only
because it is mandated by the province……
caveat emptor!
“most concrete buildings are designed to last at least 65 years”
True, true… But how many years are they BUILT to last in the best place on earth?
And special for German Guy. I don’t know about you, but in my mental image of “the best place on Earth” it doesn’t rain as much. And there is less gang warfare, you can buy real cheese, good bread and wine in more places for less money, and you can sit in a lovely park and enjoy it without fear of cops dumping your wine on the ground. Coming from Europe, is that last one ridiculous or what?
AC/62,
I’ll second that, and third it for good measure. I spent a day at Buntzen earlier this summer, and the place was crawling with cops in full swagger. They even went out on a friggin’ boat and zigzagged between the dinghies on the lake, searching every one. Turns out there was a boozy party the previous weekend when they weren’t around, and they were willing to take their revenge indiscriminately, a week too late.
It also turns out that since Buntzen is property of BC Hydro, and since Hydro has been privatized, they have the right to search you without permission. You may have the right to leave, if you want to.
Turkey:
Oddly enough, but not odd once you’ve experienced and learned a bit about it, in Europe there are far less problems with drunken rowdies. It’s a cultural thing.
Please note that the UK is NOT Europe. Plenty of lager louts there. During our last Europe trip we only saw one group of that nature, and from their accents they were British.
Incredible, the Vancouver market is going ice cold, like practically overnight it is like it just stopped all real estate talk just like died.
This market has entered a new phase – comatose.
Rob says “…real estate is a good investment when bought wisely.” Sure no argument there and no desire to fart into a stiff breeze.
Rob says “If you do it through a mortgage you’re investing $50k in your property. Less secure than your 4% return, but possibly more lucrative.” – Well there’s the rub isn’t it, how ‘lucrative’ will real estate be over the next 10+ years? Obviously buying on margin can be very lucrative, it can also be very risky. I know what you’re thinking, has this bubble been inflating for 6 years or only 5? And to tell you the truth in all this excitement on RE blogs I’ve kind of lost track myself. So the question you have to ask yourself is, do I feel lucky?
Rob,
I see it now, must have been the browser I was using before. (old computer with an old IE)
Does that place really rent for 1K? I rent a 2 bedroom in east Van (near commercial) in a 14 year old building for 1200. Same footage but only 1 bathroom (meaning the rest of it is bigger?). It has a fireplace (gas included in the rent as it is part of the strata fees!) storage, underground parking and a nice little patio and garden in a closed off courtyard.
This is no special deal either. Just moved here in september after finding the place on craigslist. My question wouldnt be why is it so cheap, my question would be what is so special that can justify 1K/month way out in maple ridge.
Also it doesnt look terribly cheap. When I was looking in early january I found a place in north burnaby (2 bed, 1 bath, 800sf, built 1982) for 199K. It was a good neighbourhood too, I know I lived 8 blocks away for 22 years.
Granted this was in the down market, but that means I could probably have gotten another 10-20K off the asking price.
Math aside I dont think it would be worth paying 1K/month to rent or own this place. Then again I am used to being closer to the city so I may be missing something about living in the far out lands.
64, yes there are lots of louts in the UK but I think you’ll find it’s illegal to drink in public in many places there too. Unfortunately cheap Ryanair flights have exported the problem to many of the major European cities on weekends too. Many seem to beof the opinion that the rest of Europe only exists as a destination for cheap stag/hen parties.
65, you’ve obviously not seen the front page of the Georgia Straight, or been reading the Vancouver Sun
ItsFreezingSugarPop said:
Incredible, the Vancouver market is going ice cold, like practically overnight it is like it just stopped all real estate talk just like died.This market has entered a new phase – comatose.
LOL. I believe you have slipped into a coma my friend and haven’t been outside in awhile. Multiple offers a-plenty. Don’t go towards the light!
ABC – MOI is 4+!:)
Breaking News
New home buyers take risks with low mortgage rate
Many Canadians taking on extended terms with no down payment at low variable rate. But what will happen when rates inevitably rise?
Steve Ladurantaye
Mike Averbach says he has never been busier.
The Vancouver mortgage planner has been doing brisk business lately as would-be homeowners scramble to secure cheap mortgages to get in on a real estate market that has quickly and sharply rebounded from the economic slump.
The flurry around Mr. Averbach’s business illustrates the efforts some first-time buyers are going to in order to win rich bidding wars.
It’s these buyers who have raised fears of a bubble, negotiating mortgages at historic lows, opting for 35-year terms and making small 5-per-cent down payments to keep monthly outlays down and put previously unaffordable homes within their reach.
“They are taking advantage of things that are a lot more attractive initially but they could find themselves in a position where they couldn’t afford their mortgage if rates start to go up,” Mr. Averbach says.
“ In the short term, these variable rates are pure gravy to borrowers. ”— Scotia Capital economist Derek Holt
While home buyers have been pulling the housing industry out of a slump with their enthusiasm, there is growing concern that today’s price gains, fuelled by cheap money, may be setting the stage for a different sort of crisis two to five years from now when their mortgages reset at higher rates.
These homeowners could be forced to put their houses on the market and sell them for less than they paid, dragging down prices everywhere.
http://www.nytimes.com/2009/11/18/greathomesanddestinations/18gh-what.html?8dpc
AC+Turk 62/63/64… Ditto BigTime… Did a brief stint behind the ‘IronCurtain’ in 87. You simply wouldn’t believe how well you could live/eat in Prague&Budapest then for the money (absolute chump change by the then prevailing standards of late 80’s NorteAmericano)… On returning to the GreatWhiteNorth in time to catch what was probably the last great WhiteRock SandCastle festival I was dismayed in the extreme by the surf-side ’shock&awe’ tactics of the GendarmerieRoyalDuCanada policing the event… Helicopters, dogs, random searches… I’m not kidding, all that just to enforce the alcohol bylaws. Seriously, CheckPoint Charlie was less hassle. It was an epiphany.
Purp/66…. Kudos! This one’s for you!
http://tinyurl.com/7crsu8
And for the rest of you… a SOCAL RE ‘Moment of Zen’…
…”Levin’s filing claimed that starting in 2005 and then “with increasing urgency” over the next two years he “implored Coppola to stop buying real estate and urged him to reduce his real estate holdings, warning Coppola that the financial press was filled with references to a ‘real estate bubble.’”…
http://tinyurl.com/ykds536
@71,
)
Get this: now we are preapproved for $600k mortgage, and two years ago, when we started looking to buy – it was “only” $400k! Our salaries are almost the same, and yet now we could “buy” a property priced over a half a million. C-mon! I told mu husband – I whink we will be renting for a while
A bank is a place where they lend you an umbrella on a fair day, and want it back when it starts raining.
@75 : Well, they don’t really care if they get the umbrella back, because they can always get another one from the gov’t.
Davers:
Rent doesn’t drop that much when you move out of the city, at least in my experience. Remember, rents are based on cash flow, while purchase price is based on the ability to mortgage and downpayment. The result is that there’s more room for price variation in buying than in renting, not so much because there’s a lower limit for rent but an upper limit for it. I can make you pay twice as much to buy on Commercial, but I can’t make you pay twice as much to rent. However, I can pretty much force someone to pay as much rent in MR as you pay on Commercial (provided there’s still demand). Am I explaining that well enough?
Purp:
“So the question you have to ask yourself is, do I feel lucky?”
In one sense that’s the essence of the question “Do you buy when the metrics say buy even when the market’s at record price levels?”
On the other hand, do you have to feel lucky if you know you can lock in some of the variables (you’re going to stay there long term, you’ve got a long term mortgage rate, etc)? If the market doesn’t go up you don’t get the capital appreciation on the DP, but you’re paying the same to own as you would to rent, and you aren’t crystallizing your loss because you’re just sitting there, living your life, waiting for everything to come back. (In that sense, when you’re buying to live in, you can see why I can argue that investment metrics, while important, aren’t paramount – lifestyle really is, because being able to hold long term as comfortably as possible really improves the chances of success).
Taking care of the potential downsides is a big part of the equation. Another thing to remember is that leverage on real estate is a key, almost fundamental ingredient to the plan. Its not the same as buying on margin, because the bank can’t simply call the loan when they want. However, it does have its own downsides (will rates be higher in 5 years, can I pay down enough principal, etc) that you have to weigh them. The effects of leverage go both ways (as anyone here will be happy to tell you) so its critical that you do as much as possible to ensure that you, and not the market, choose your exit point (even if its 25 years from now).
Sound crazy? Imagine I buy in year 0 for $100,000 with 25% down and I break even cashflow wise. Years 1 through 10 I see no appreciation. Years 11-15 I see the value double (we just saw that). After 15 years the place is worth $200,000. My DP was $25k and the place carried itself. Say we didn’t pay down any mortgage or get any tax benefits, or anything. I sell for $200k, repay the $75k mortgage, replace my $25 dp, and have $100k profit. That’s 400% over 15 years. The property had to go up, on average, over 15 years, 4.75% per year. You get about 9.75% annually on your investment. Not bad (and remember, there was no mtge paydown, no increased rents, no tax benefits, nothing – just 4.75% per year, long term).
But, if you had to exit in year 9 you’d have made nothing, and that’s with a market staying even or going up. If it went down in year 9 you’d lose. Being able to hold can’t be over-emphasized.
Turkey/HP/AC:
“crawling with cops in full swagger”
I love the Mounties, but let’s face it – they’re in need of a major priorities re-jig just about now.
Blueskies/NMOAN:
If I buy a property that I know has an envelope assessment coming, do I price it in, and when I get the envelope do I recover my investment? (Answer? Yes, been there, done that). That’s buying wisely.
For people who got surprised with special assessments through the ’90s I think we have to admit – they never saw it coming. Hard to criticise them for not knowing about leaky condo. However, I remember looking at one on 8th and having the owners say “so, with the assesment coming and prices so low, should we just buy another here?”
Other assesments, like re-plumbing or re-roofing, really can’t be looked at as surprises, and while they don’t add value as transparently as you might think, they are something to consider when comparing properties.
AC:
“After paying your landlords mortgage for 35 years… (to start with, it is absurd to stay in one place renting that long unless there are non-financial reasons in play, but ignoring that) very few buildings being built here/now will be standing after 35 years, so you have nothing but the accumulated saving and your landlord has a small-part interest in a hole in the ground. Bit of a wash on that one”.
Um…what? First point, most investment mortgages get paid off (unless they’ere being re-mortgaged for leveraging new buys) in under 20 years. I’ve seen it happen many times. Second, I rent lots of 35 year old plus buildings, and they generate good cash(in fact, I’m paying rent in one built in 1969, and its going nowhere unless this neighbourhood gets re-vamped – the building is still functional and generating cashflow. Most buildings here get torn down before the effective life is over. Third, I have seen one tenant move in with a toddler, stay in the house until the children are adult, and then purchase the house from the owner. Same guy effectively bought the house twice. Of course, if he had moved, and I replaced him with a new tenant, and then #2 moved, and then I replaced him with #3, what’s the dif? 3 tenants buy the house for the owner. It was still rented the whole time.
Rent vs. Own and security? Let’s not try to disprove the obvious. Owning and renting are both great solutions to the housing challenge. The fact that I love renting and Turkey and AC are more than happy renting proves that. We’re all relatively intelligent and we choose different solutions to the same challenge. Clearly both solutions work and confer benefits.
#74, nobody is forcing you to buy a place for the maximum you’re preapproved for!
FTB @78,
True. What we would like to own we can not afford at 6% rate, so we won’t fall into this low interest rates trap.
77 anon (is that you rob?)
It kind of makes sense, but it kind of doesnt. Basically what you are saying is the price/rent ratio gets more out of wack the closer you get to the downtown core? That doesnt make much sense but it is actually true to some places I have been looking at. Then wouldnt it mean the closer to Van you are the more you are being ripped off (if you buy)?
In theory if a place is worth twice as much then it is twice as desirable. (as a side note the place I live in is worth about 280K so 65% more than the MR place). If a place is twice as desirable to own, then wouldnt it be twice as desirable to rent as well? therefor demanding twice as much rent? I cant imagine someone paying that much for a place in MR. I looked on craigslist and there are a few 2br for 800 but not as much as I expected. I didnt mean to call you a liar, i just have trouble believing the extra demand to live by commercial vs MR only gets a $200 difference in rent.
Even location aside I would bet my place could get an extra couple hundred a month based on quality alone. It has new floors, fresh paint, washer/dryer, dishwasher and much more updated look.
So basically if you find someone with 30K in the bank and thinks it would be fair to pay 1K a month rent for this place then yes, it is a good deal, especially in the current market. However I still dont think it would be worth 1K to rent, so I wouldnt buy it.
Anon (Rob) – “when you’re buying to live in, you can see why I can argue that investment metrics, while important, aren’t paramount – lifestyle really is, because being able to hold long term as comfortably as possible really improves the chances of success” — Totally agree here and then you follow up with “Being able to hold can’t be over-emphasized.” — Again totally agree, and this is what worries me about lots of FTBers, that they are sold on getting into a ’starter’ home because they can afford it now, but not planning for being forced to stay in the place for longer than they’d like (because of negative equity) or having to deal with life changes (job loss, divorce, growing family etc.). When we bought our current home and I was a more naive about RE than today, several agents we talked to were pushing this thinking very hard with lines like, “Oh, you just want to get in the market, you’ll be moving in a few years into something bigger anyway, but you want to start building equity”. Luckily it turned out OK for us, but I’m concerned about some friends who’ve bought recently under the same pressure of just ‘getting into the market’.
Davers:
Yup, 77 was me. No idea why it turned up as anonymous.
“Basically what you are saying is the price/rent ratio gets more out of wack the closer you get to the downtown core?”
You could say that, and in fact you could prove it pretty easily.
“That doesnt make much sense but it is actually true to some places I have been looking at”.
Makes lots of sense. There are many compnents of value, and cash flow is only one. You remember the 1st rule of real estate, right? Cash flow, cash flow, cash flow? Wait, that’s not it. Its location, location, location.
“Then wouldnt it mean the closer to Van you are the more you are being ripped off (if you buy)?”
Not ripped off. You get what you pay for. Property can’t move. Where would most people rather live, Kits or Maple Ridge? Pretty simple to answer that one.
“If a place is twice as desirable to own, then wouldnt it be twice as desirable to rent as well? “ Absolutely fair comment.
“therefor demanding twice as much rent? ”
You might demand it, but can the tenant pay it? $2000 for a older, sightly roughed up 2 bedroom? Tough to get. Why? Two reasons. First, you can’t mortgage rent. It gets paid out of what people earn in real time, as it were. Second, you don’t reduce your rent costs by buying a piece of the property up front with cash, that is, by putting a down payment into the mix. Where does the “down” part come from? I don’t know, but I’d suspect its rooted in the fact that the DP pays the total debt “down”in advance, thus reducing the monthly cost. Bottom line, you are limited in how “affordable” you can make rent, but mortgaging, and then variations of terms (amount down, rates, insurance, amortization periods, terms, etc) give you way more room to manouvre with buying affordability, and that clearly pushes prices higher and creates more of a gap between renting and buying.
Sound unfair? Remember, when you buy you purchase a lasting asset (land) and when you rent you purchase the use of the asset for a fixed time. One is lasting, the other is not.
)
Something else to think about. The are you like, Commercial Drive, is what, 6 blocks wide by say, 30 long? Not a ton of supply. Strong demand is relative. You’ll pay more, I suspect, to live in North Van, and what’s more, demand for rentals is plenty strong in MR/PM. What’s my point? You think your neighbourhood is valuable because you like it. That’s emotion talking. I know plenty of people who wouldn’t live there if you put a gun to their heads. (Don’t get me wrong – I think CD is a solid area to buy, lived there and tried to by a place on McSpadden by the park for $75k back in the late ’80s. Still, the Drive’s edgy fringe pedigree is getting pretty lawyered down, don’t you think? Kits West, no?
Purp:
“When …I was a more naive about RE than today, several agents we talked to were pushing this thinking very hard …Luckily it turned out OK for us”
OK, wait a second. You were naive, they gave you advice, they turned out to be right, so it was obviously….luck? Maybe it was just good advice. How long ago did you buy? Were you able to buy for as little as rent? How much money have you made so far?
Your friends who bought recently have, depending on how recently they’ve bought, already probably recovered transaction costs. According to a few on the blog they’re looking at continued gains as a result of low rates into the future.
Don’t get me wrong. I don’t tell anyone to ignore potential downsides (Hell, I write that kind of advice down and publish it on the internet), and I’m clearly busting your chops a little, but sometimes we need to step back and recognize a few things.
A lot of bears wouldn’t buy anything, anywhere, for any reason. I’ve just showed a well priced property that can be bought for the price of renting, and nobody here said “Hey, its a little beat up. Why don’t I grind Rob on price a bit, predicate the buy on a 5 year rate, but buy it on a variable rate, reno it and flip it? I can work over his seller, and even tell Rob that if he cuts his completely negotiable commission somewhat I’ll list it for sale with him in 6 months. Because of our forgiving tax laws in this country I’m sure I can get away with at least one flip without getting CRA upset with me”. Instead I’ve been told that its not a desirable property. Go figure.
Someone wrote here not long ago that the government, CMHC, banks and realtors were responsible for this “bubble”, and that the poor buyers and sellers were victims. That elicited zero response from anyone, despite being patent crap. Sellers have been victims? I guess because they sold too soon and didn’t make as much as possible? Buyers have been victims because they’ve bought and, as of today, not only not lost anything, but occasionally made great money?
I guess what I’m saying is that the belief that we’re out of whack with fundamentals and something has to give sometimes morphs into a belief that reality isn’t real because it doesn’t conform with our opinions. We should guard against that a little.
rob,
I completly agree that different people want different things. What I have trouble wraping my head around is why a potential buyer looks at a place and says “yes that place is worth X dollars, and I will pay it, and I think it is worth twice as much as a place way across a bridge.”
Yet a renter would be looking around in and say “this place way across the bridge is nice, and I will save 200 bucks a month by not living on the other side of this bridge”
I just have trouble getting why the buyer thinks double prices in places closer to the city are ok while you will be hard pressed to find a renter who will pay 25% more to rent closer to the city.
You made a good case for it and clearly this is pretty much a fact, I just still dont quite get it. (you can stop trying to explain it, i understand what you are saying, i guess i just have a different point of view than the masses.
and as a clarification I live at nanaimo and broadway (across from the building with all the tarps). I just say commercial drive because that is where i was originally looking, and it is still only a 7 minute walk away. It actually worked out pretty well because it seems the less desirable things around commercial dont make their way out this far. (I dont necessarily mean bums, just the ultra run down buildings, loud drunks peeing on things and police parked at the corner 30% of the time)
rob
Just read what you said to purp (I cant sleep) and I just had a quick comment. I agreed that the place is a good value IF you find a person who thinks it is worth 1K a month to rent. Clearly there are people who think that, so for them it is a good value.
The trouble is that I hate the bridges. I work all over the city (and province sometimes) and have to cross them all the time. Even going out of vancouver in the morning and back in during the afternoon the traffic still sucks. I also dont like any areas past the bridges. They dont really have what I am looking for and virtually all friends and family are on the mainland.
So… if you find a place in burnaby or east van (preferably the north side of both) that has simmilar metrics as this one you state, I would be interested. Even though I expect values to drop, if I could get into a place for simmilar to renting costs (using a 25 year ~5% fixed rate, VRMs are like playing russian roulette right now) i would consider it for a while.
The trouble is I havent found any places anywhere close. Interest, fees, tax on the 1200 place i rent is 1425. Forgetting all other costs of renting it still isnt close.
I would consider it if I found a place I liked for a price I liked, regardless of the market, but they just arent out there in what I am looking for.
Ok, the apt. for $169,000 would be good for someone who is either trying to get into market,has a dependent or has a good chunk of the price in his pocket.I think it’s safe to assume that after the olympics blow, (which they will), there will be all sorts of DP’s and others that want to stay in theVancouver area,which would possibly cause a small shortage of either lower priced homes or even rentals for fixed income retirees from all over the place. Bang for your buck? probably not, not compared to what deals I’ve heard about around my neck of the woods. (mid Vancouver Island)Assuming you did not need to commute to the mainland for work etc. on a frequent basis . M M
Davers:
I guess what I’m saying is that rents hit a maximum level that’s dictated by the state of the economy and wages, and by wages across a broad spectrum of the market. If unemployment goes up rents feel pressure to go down because lots of renters are short of funds.
What that’s created in the Lower Mainland is a situation where rent is cheap relative to owning, but is absolutely expensive, so there are more people living with less and paying lots for it. Is there anyone out there who thinks they’re paying toolittle for rent if we exclude the argument of comparing rental costs to ownership costs? Probably not. Bottom line – I don;t think rents vary so much because we’ve pushed all of them very high, which tends to flatten the line.
Ownership requires fewer players and can have a greater variation. I sold a place in Kits a few years ago. Crazy price that couldn’t be justified except…the buyer was 50ish, wanted to live in that area, didn’t want to change lifestyle, had a good paying job and had a baby boomer inheritance. The buyer was very knowledgeable about the property and the area and wanted to be there. The buyer could have spent the money more carefully (read – pay less, live elsewhere, and have more toys or other investments) but didn’t want to. Buyer was happy to maintain current lifestyle but cement the location. Result? Buyer paid top dollar, and was able to because of the inheritance, the ability to mortgage, and low rates. None of that is available to the average renter, and what’s more, not all three are avaliable to all buyers. That means only a few can afford to buy the most desirable areas, but they can affor to pay substantially more than most other buyers, and marginally more than their direct competition. Those who can’t win those competitions pay less but live elsewhere. The result is that the line for buying isn’t as flat. IF we made all buyers pay the maximum (and by maximum I mean we made them go 40 year ams, steal their parents wealth and sell their first borns) there’d be no dif in sales prices due to location (unless some first borns sold for more than others…:-) )
Is that any clearer?
mook:
” Ok, the apt. for $169,000 would be good for someone who is either trying to get into market,has a dependent or has a good chunk of the price in his pocket.”
Absolutely. There is a piece of land for every user and a user for every piece of land.
Rob,
It makes sense, I guess I just find it weird that people dont do a rent/buy comparison. If you want to live away from Vancouver then comparing renting and buying would become considerably closer than doing the same calculation in say, Vancouver West. If someone wants to live in the outer reaches of the city, I could see the logic in buying. I wouldn’t necessarily do it in every case, but it makes a hell of a lot more sense than buying in Vancouver right now.
The thing is that lots of my co-workers live out in Langley and MR because they couldnt afford a place closer to the city, even though they would have preferred to live in Vancouver. (I am talking owning, not renting). It all just seems so different than the way I would do things.
If I want to live in an area I have to make decisions on what is important. Lets say I want a 4br house or duplex, because my imaginary kids are getting sick of sharing 2 bedrooms between the 3 of them. (say I rented before). I pick my area and start looking. In this case there is no compromise on size as I need the 4 bedrooms. So my first choice is to own since I am reasonably certain I will be staying in the area until my kids graduate high school.
Now if my area was east van, I find I cannot afford to own any place in the size I need. I now have to look further outward or look at rentals. If I look at rentals I find I can afford the area and size I want. Also I find that to afford the size I want I need to go to surrey, langley or MR.
I (theoretical me) work downtown which is why I chose east van. I can skytrain to work, the imaginary wife works part time at different locations. She can take the car, I transit, I live where I want and am happy. The kids can also walk to school and there are more after school programs for them to do. (this is changing, as more schools are being built in the far burbs, but I still think it is a factor)
In the far out burbs the kids would need a ride or bus to school, we would need a second car for me to drive, and with that I would have far less time at home as the commute sucks. I could take the WC express if I live close to a stop. But, I would own.
I guess I just put less value in owning than most people, because I would much rather take the renting in this scenario. Extra costs of the second car, driving the kids to school (maybe, depending on where in the burbs I am in relation to the schools) and the less time at home with family sound like a hefty price to pay in order to own.
Even though if I rent I could be forced to move, I will most likely be able to find a place in the same school district. This would probably not happen as I would be a good tenant, keep the place in good shape and pay the rent on time. I could have to move for other reasons, but I think the risk is worth it in order to live where I want. My parents neighbours rented the place next to us for 14 years and raised 2 kids until they finally bought the place from the owner. They bought back in 99, so this probably wouldnt be possible today.
There are a million things that can change in this scenario, but due to the higher prices closer to the core, I would imagine plenty of buyers in the far burbs would rather live closer to the city, they just really want to own.
When I ask co workers why they didnt rent closer to the city if they wanted to live there they reply with “nah it was time to get a place of my own, I couldnt keep throwing my money away on rent”. I really wanted to pull out a calculator and see how much they are “wasting” on taxes, interest and maintenance, but decided against it for obvious reasons.
It just seems to be in peoples heads that renting is for when you are a single 20 something and owning is for when you have a spouse and kids. No exceptions. It has just been drilled into our heads that renting is a waste of money and owning is the sure way to go if you know you want to stay here. The reason for this is that it probably made way more sense when our parents were buying, so they pass this logic along to us without realizing things may have changed since then.
You mentioned before I like living closer to the city for emotional reasons. I would agree because I was raised in north Burnaby and enjoyed being close to lots of things. But I think most people raised in the GVRD grew up near the city because a good chunk of the population (higher % than today for sure) lived on this side of the bridges. So wouldn’t they share the same emotional attachment to the mainland?
I understand everything you have said and pretty much all of it makes sense. I had a thought that if 15 years ago rent in Vancouver was 700 and MR was 500 for a similar place then that is a 40% increase to live in Van over MR. As time goes on rents increase with wages by 500 in each place. Now the difference is only 20%, but still the same $ value different. Which makes sense right?
I guess the part I don’t understand is why people don’t consider renting where they want instead of buying where they don’t want. This just boils down to different points of view I guess. And who knows maybe if I was in the scenario I mentioned above I would change my mind as I would feel differently.
Thanks for the interesting conversation.
I think the way I looked at it was,(post 30yrs. old) Owning is an investment which you have no choice to pay off ,and when it’s paid off ,you have something you can sell,hopefully,
( and as I see it, how it looks in the moderate future), justify itself as a sound if not reasonable investment. The arguement that there are better returns in other investments,seemed to pertain to people who , 1; had a nest egg(ie. inheritence) which would prevent them from diping into thier portfolio to cover unexpected expenses,or, 2; had a free place to live where they could, if desired changed lifestyles without compromise,(start family,launch buiss., etc). That said, nothing is written in stone,and markets change,Gold could one day be 65 dollars an ounce again like in the early ’80’s , but in all likelihood won’t. Mike
I forgot, equity is equity, just like the saying, “if you ain’t payin’ taxes, you ain’t makin’ no money” , meaning , loans are easier to get for anything, if you can prove your worth or earning history.
Rob – “OK, wait a second. You were naive, they gave you advice, they turned out to be right, so it was obviously….luck? Maybe it was just good advice. How long ago did you buy? Were you able to buy for as little as rent? How much money have you made so far? “ Like I said, we’ve done OK in terms of capital gains (of course it’s not real money until we sell). Rent vs. Sell, not sure, but we’ve sunk a ton of money into the home to bring it up shape, so I’m guessing we’ve paid more buying (like I said I was naive and didn’t do all the calcs). We bought in 2004 and I was convinced that we were near the top at the time because things were already detaching from fundamentals. Obviously I was wrong, but would it be prudent to assume another 5 years of increases if I were buying today? Because of the higher prices it’s an even greater risk today since even a small % drop can translate into a much larger loss should I be forced to sell. For this reason I think the rent vs. own debate needs to be very one sided and low risk on the own column to consider buying if I were an FTB. As an investment decision it’s probably a lot easier since if the metrics make sense you’re main risk is being able to find renters. As long it’s cash flow positive you can hang on through price dips and not be required to sell it as you might your prinicpal residence due to life’s circumstances (more space for family, job change, etc.). But I was looking at your examples through the lens of a principal residence, not an investment opportunity.
Overall, I really liked your post and I don’t think we disagree on much.