Tuesday, October 23, 2007

What would it look like if we bought in 5 years; Redux

Condo time. Yes, you did just hear me swallow. I've made no pretenses about my apprehension with condos. To me, you're much better off being a renter than an owner of these types of dwellings. I won't get into those details, rather, I'll get into the analysis.

For this one, we had to go waaaaay back. Check out MLS# 225591. It's an older unit (pre-leaky), it hadn't seen a stitch of work in about 25 years. It was downtown, but not "Central Park" or other less than sunny sides of downtown. We'd only consider a downtown condo. In our hunting experience, they don't hang around long, so we'd look at this as a more liquid purchase than a lot of others we could make in this market.

Original ask was $229,900. It sold for $225K. We'd put 5% down and pay cash for closing costs. We'd also have $10-$15K for "updating" which this particular unit needed in order for us to feel good about the purchase. For full disclosure, we actually made the call to put in an offer on this unit after watching it for 3 weeks, but it had a conditional offer accepted that day. That was March 2007. And we're relieved.

Here's what it looks like for us:

We'd pay bi-weekly rapid. Even with taxes, monthly assessment, and bills, we'd fall well under the recommended 30% of gross income (we'd actually be 30% or less of net) which is just fine. On this purchase, we'd even likely go 5-year closed variable which would save us 0.1%. Not much, but it adds up and we can easily handle a 1%-2% interest rate hike.

So what does this look like 5 years from now? Again, we'll make some assumptions similar to yesterday.

Here's the 6% growth side:

Present value (actual): $225,000.
Future value (assumed): $301,100.
Difference: $76,100.
Mortgage principle paydown: $23,500

Total equity: about $100K.

Wow. I am honestly surprised. My risk is roughly half of what it was yesterday. My equity is only $60K less. That's like a kilometer to a mile really. OK. No it's not. But for barely being a blip on the risk factor side for us, I'd say a $100K equity in 5 years is a pretty good return. Too bad I know people who have hit that mark, with less risk, in less time, in better condos, over the past 3 years, and therefore tainting my expectations and those of everyone around us. But I digress.

Let's look at the downside now. There was some reasonable debate about my assumptions on the period 1994-1999 in town. I'm OK with that. Condo's on VREB aren't counted until 1995. So I have to shift my 5 year period ahead by a year. So we'll use downtown units from 1995-2001.

1995: $152,000.
2001: $145,000.
Difference: $7K or a whopping 5%.

This basically means you lost money. But not that much. You'd even come out ahead with equity on the principle pay down to the tune of almost $16K. If we did the upgrades of $10-$15K we figure we'd get 50 cents on the dollar come sale time (conservative) so we'd probably even break even.

I won't be commentating for a while, we're out condo shopping.

OK. No we're not.

What would happen if the condo market dropped 6% annually?

Present value: $225,000.
Future value: $149,000.
Difference less principle paydown: $52,600.

If it was only a 3% drop over 5 years?

Present value: $225K.
Future value: $186,500.
Difference less principle paydown: $15K.

Maybe we'll wait till we sell the place to do renos? Then we'd be even. Or maybe not.

Again, I've left out the taxes, MA and other expenses. This isn't a who wins the wealth war post. Just a little math playing around analysis for you folks to rip to shreds.

4 comments:

happy4 said...

Hi HHV,

Thanks for such a detailed post, it made me think.

I wonder about the bit of info that you didn't include in the TD mortgage terms: * Assumes constant interest rate throughout amortization period.

Looking at your "investment" for just 5 years may be short-sighted in this market. Let's assumme that Victoria is different, red hot, and prices continue to rise modestly or whatever. Say, after 5 years, you want to "cash out" and move to bigger home to start a family. Your home has increased in value, and you've made nominal payments on your principal, providing equity for downpayment. But the interest rates are now 7% and the house that you want to upgrade to has continued to grown in value.

Is it possible that higher interest rates and tighter lending conditions may result in you not only being "stuck" in the home you bought, but paying more for it in 5 years?

I had a look at the B of C's historical mortgage interest rates. The last time interest rates were this low was in the mid-1950s.

By the mid 60's they were hovering around 7%, and pushing 12% by the mid 70's.

http://www.bankofcanada.ca/en/rates/sel_hist.html

(Mortgage Lending Rates
Average Residential Mortgage - 5 years - V122497 -- Jan. 1951 )

hhv said...

Those are very real possibilities.

Village said...

One of the frequent arguments I've had is about interest rates. Generally it goes along the lines of, we won't ever see 1980's style interest rates again. Then me pointing out that with the cost of housing, if you can only squeek in at 5% it is only going to take a bump to 7% to screw you over.

With high debt loads and high housing costs. If interest rates start the march upwards, there is going to be a lot of pain out there. Older owners, without helocs should be fine. But new owners who managed to get in with extremely low rates are going to feel that rate squeeze even with small moves to the upside.

Personally I think central banks will do everything they can to keep rates down.

vg said...

More subprime fallout, Merril writing off $8.4 BILLION, existing housing numbers down another 8%,Amazon numbers disapoint.
The markets are showing sell signals all over due to all this so I bouhgt my first put option ever on the NASDAQ this morning,up 30% fairly quick but I am in it for more than a day, I think the markets may revisit the August lows here in the coming weeks.