I thought it prudent to run a similar set of numbers to those I did here a few days ago. We'll work with similar assumptions:
- Annual income of $72,000
- Condo purchase price of $230K. Why that? It's well below average, but if we really bought a condo, we'd refuse to spend more.
- We'll continue to use 10% down payment, because it isn't that big of a stretch, and I'm guessing there are more than their fair share of people (kids) out there who have gotten $25K "gifts" from parents to get into this market before they are priced out forever.
- Again we've used 30 years for amortization; likely this is average these days.
So we find something we can live with and go get the mortgage. Posted rate was 5.85% for five years, we get 5.25%. Here's what it looks like:
Again we'll pay bi-weekly. So we give the bank a total of $1048.46/month. I'm assuming an average annual property tax of $1200, this is an unscientific average based on "observation" rather than calculation, we'll do the same with strata fees or monthly assessment at $175/month.MA's in this town vary incredibly. We've seen them as low as $113 and as high as $280/month. Most hover about $20 under $200. We'll use 0.05% as the maintenance charge: while the MA covers common maintenance, it won't replace appliances, floors, paint and fixtures, which in our experience walking through condos in this price range all need replacing. We'll call that $1150/year or $96/month.
Total monthly ownership related costs then are: $100 + $96 + $175 + $1048.46 = $1419.46. This represents roughly 24% of our pre-tax income. This falls well into our fundamentals (33% of gross income). We could even qualify for much more of a purchase price with the bank if we chose.
Scenario Two: Five years later
Again the interest rate has crept up to historical norms of 7.5%. We've managed to "build" $16,561 in equity out of the roughly $70K we've given the bank thus far. Here's what it looks like when we go to renew:
No surprises here: our monthly payments have increased with the hike in interest rate. Now we're giving the bank $1286/month or a hike of almost 20%/month all because of a 2.25% interest rate increase. We'll keep similar numbers for the other "ownership expenses" and increase our income with inflation to $6500/month.Now we're out of pocket $1657/month for our housing costs which is 25% of our pre-tax income. Again this is all keeping within those sneaky fundamentals we keep using in our calculations, and despite a 20% increase in mortgage payments, we are only eating into an additional 2% of our gross income.
Now looking at these calculations, we can see where there are some "issues". For laziness's sake, we didn't "calculate" increases to taxes, MA and maintenance charges, simply because using inflation numbers here will likely prove incorrect: taxes, maintenance and MA charges increase or decrease arbitrarily not based on CPI. I don't think one can predict any changes in these areas. Instead we'd just have to hope they aren't drastic changes and adapt. We think that fairly easy and affordable to do when it comes to making this kind of a purchase in this market.
If you're new to this blog, you may be wondering why we haven't jumped at buying a condo given these financial circumstances. Truth be told, we're close to that $72K income (I used that because it is somewhere between the median and average household incomes in Victoria, not because it's ours). That said, we actually will make a fair bit more than that this year, so in fact, if we spent $230K on a condo right now, we'd be well under the financial fundamentals we like to use so much. So why haven't we done it yet?
Because there is no way that we would spend that much money on the junk we look at in the neighbourhoods available to us in that price range in this market. Since February 2007, we've watched the low-end condo market have a sales to list ratio of about 50%. That means for every 2 condos listed, only one sold. Sure some were pulled off market, but they didn't sell. Guess what we think that means? You bet, a correction will have to come if that sales to list ratio is to gain and not lose. Can we predict when that will be? Nope. But we can be patient because despite those numbers it still is cheaper to rent a 2 bed 1 bath condo in this town than it is to own.
I can say this with all certainty. The first property we looked at was a 2 bed one bath condo of just under 700SF. The landlord wanted $975/month in rent. It was a nice place in a central location. She had no trouble renting it. She's our Realtor now. She found us the same suite, 1 floor up in the same building for sale at $230K (we had the option of buying before it got listed). It has a MA of $170/month and just over $1250/year in taxes. Surprise, surprise, really close to the numbers we used in the calculations above: Own = $1420/month, Rent = $980/month. I recognize this is anecdotal. But we also originally thought she was asking way too much in rent for her place.
Is pride of ownership worth $440/month or a 30% premium. Maybe. But if you feel as certain as we do that the condo market especially will be hit with a correction (how big?) then you'd better be certain it's worth more than a 30% premium because it may end up costing you closer to 50%.
After several conversations with our agent, we learned she paid $160K for her place in the same building 2 years ago. Using those numbers, she's still subsidizing her tenant's rent. An investment property indeed.
11 comments:
Hi HHV,
Good evaluation.
My only quiblle is that its not really fair to include the part of your mortgage that goes to reducing your principal as a "cost" except when considering your cash flow. You'll pay an average of $243/mo into your principal that first year, so you are paying $200/mo for the pride of home ownership. You presumably get to keep the $243/mo.
Over five years, you'll have to pay in bank interest, maintenance, and taxes $10380 more than if you'd rented. To make that up, your condo would have to appreciate on average 0.9%/year.
After that, your appreciation would also have to beat the stock market or whatever else you'd have invested your downpayment and principal payments in. It would also have to cover the ~5% you'd have to pay in RE commissions if you sold at that point (say $13k on $270k). Lets say a 7% stock market, you'll make $16k over five years (slight exageration). So, in order to sell after five years, your house needs to appreciate 10k+13k+16k=39k, or an average of 3.2% a year.
It may not be reasonable to expect that on a 5-year time scale. You can make life easier on yourself by putting 25% down. I also wouldn't buy something that I wouldn't be happy in for 10 years or so, in case the market stays depressed for a long time. Over 10 years the calculation is much more in your favour (interest goes down, rent goes up) and historically Victoria has always managed at least 4% over 10 years.
Great calculations HHV,makes you want to plunk down all that cash and be a landlord with a negative cash flow.
Here's an anecdotal story I meant to post last night. A relative just moved to Saskatoon this past year and bought a new place in February which is to be built this summer. Because of the demand and lack of labor the price per sq foot has jumped $70 per Sq ft since he bought and the builders are booked for the year so you are SOL til 2008.
On top of that in the lake country outside(north?) of Saskatoon apparentley the big Alberta money is on a buying spree where the cottages are on these remote lakes and paying up to $700,000 each just to get the choice places.
I tell ya this has bubble written all over it when you want to plunk that much cash down to watch the beaver and muskrat play and the whitefish leap for like 3 months of the year. Hey you could get all that at the Sunriver bog for half the price couldn't you ? :)
jmk:
cheers. I don't disagree with much of what you posted. It's quite a bit more complicated than my evaluation of course, but we can argue over details like amateur economists do all the time. I don't plan to go there.
"My only quiblle is that its not really fair to include the part of your mortgage that goes to reducing your principal as a "cost" except when considering your cash flow. You'll pay an average of $243/mo into your principal that first year, so you are paying $200/mo for the pride of home ownership. You presumably get to keep the $243/mo."
my only issue with this statement is that it assumes that the $243/month is a constant. That's a market valuation and could just as easily climb as it could go down or stay flat. Given that it has climbed now for 5 years, I'm willing to bet it goes down considerably. That's the point of the post.
You're right about timelines. If we're happy in the unit for the next ten years, and we put 25% down (that's a big jump from $23K to over $50K, that I imagine a lot of people don't have) then it makes sense to buy now anyway. I've never argued against ownership over the longer-term being better than renting. I likely never will. But I don't see condo ownership as long-term.
Hi HHV,
With respect to your quibble on taxes: taxes are going up, and going up dramatically in the next few years (the "secret" that elected councillors, real estate agents, and developers don't want you to know about, cause it will throw their handy calculations out of whack!)
I think the one thing that all these new home buyers are missing is the hundreds of dollars per year the new sewage treatment plant(s) are going to add to each and every homeowners tax bill.
From Vaughn Palmer's column on April 7, 2007:
"Costly and contentious, capital region's sewage plan will stumble ahead"
When the federal and provincial governments agreed to help pay for sewage treatment in the provincial capital last year, they did so without knowing what the promise would cost taxpayers.
The ballpark number -- $500 million, split three ways -- was derived from a report from the Capital Regional District.
But that was so far off the mark as to be grossly misleading.
Today, with planning still "at a very early stage," the regional district estimates the project will cost three times as much.
That's $1.5 billion. The provincial and federal governments on the hook for half a billion dollars each, local government to cover the rest.
Still, senior governments say they're in. "Unequivocally," says federal cabinet minister Gary Lunn, whose riding is in the capital region. "It's something in our fiscal framework."
Provincial Environment Minister Barry Penner likewise says, "we have not withdrawn our support," and he could scarcely do otherwise.
It was his government that last summer rang the alarm bells about rising pollution levels at the capital's sewage outfalls and ordered the regional district to get cracking on a treatment plan.
His only caveat is that local government review the project as a public-private partnership as a way of maybe minimizing further cost inflation during the construction stage.
As for the communities that will be stuck with the remaining third of the bill, local leaders are trying to lowball the impact on property taxes.
The current projection sees an average hike of about $500 a year. For comparison, the city of Victoria calculates this year's increase in property taxes at four per cent, or $62 on average.
On that basis, sewage treatment would boost a typical property tax bill in the capital city by almost one-third. Some lowballing.
VG,
but i thought everyone wanted to live in victoria... makes the $500K condos seem like a good deal now don't it. instead of muskrat love, you can watch crack-head junkie induced screaming fits. Ah, good times indeed
"VG,
but i thought everyone wanted to live in victoria... makes the $500K condos seem like a good deal now don't it. instead of muskrat love, you can watch crack-head junkie induced screaming fits. Ah, good times indeed."
Exactly HHV, just like the other day driving thru town on Pandora and Wharf and a crack head female trying to get the monkey off her back held up ten or more cars in lane of traffic for a whole light change and then some more on the second light while they flipped out in the middle of the cross walk at 2 in the afternoon. Just the area of town I want to buy an expensive condo in the Sonhees so I can stroll across the bridge and experience this on a regular basis. Ahhh Victoria,home of the newly wed,nearly dead and nearly dead crack/meth heads,no life like it.
loopy,
you are right. i wrote about that back in march... here.
regardless, it's unpredictable at best. if it's a $500 charge that may work to $300 on a condo?
Hi!,
My friends parents came here from Winnipeg from January to March to check it out. They stayed in a lovely building downtown. They were afraid to go out because of the druggies.
It rained for 3 months straight and my friends mother got very depressed. Not only was she afraid to leave the building it rained.
They are well-to-do people but found the real estate way too high.
They have decided to go to Scottsdale next year.
I have met many people who say they won't go downtown anymore due to all the addicts. Who wants to live like that?
Corner Store Conversation,
Guy 1: Did you buy all those rental properties you wanted.
Guy 2: Sure did. I am convinced that rents will go up to London UK prices here.
We now now know that this is the beginning of the end.
Just a comment on yields from rental condos - especially as the UK was just mentioned. I'm living in the UK and follow the market here closely, and there was a little-noticed article in the FT a couple months back that noted that the return for flats (the equivalent of condos, more or less) over the past 4 years or so was flat to slightly negative. I believe about -0.2%. This in a housing market that is inarguably more pressured than BC and equally inarguably has experienced more of a boom over the last 5 years with no end (yet - but it's coming) in sight.
Thus I would certainly expect lower appreciation in BC for condos.
Sam,
That is true. This guy was comparing Victoria to London?????? I know London very well (lived in France for 15 years - husband from Surrey) and how someone could honestly think that London and Victoria are one of the same is very scary.
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