Occasionally I get e-mails from readers. I got one not too long ago from a couple who had come across the blog in their house hunt. Its contents highlighted a big issue I've had for a long time in the way we calculate price to rent ratios in our market. I understand, without question, the need to compare apples to apples when we use this fundamental metric to track the market. The trouble I have with it though is rarely does it apply in actual purchasing circumstance.
Case in point, this couple who e-mailed me:
Case in point, this couple who e-mailed me:
HHV, long-time readers, never posted, but felt the need to share our buying experience with you anyway. If you decide to write about us, please keep our names out of the post.Done. I'll call these fine young folks Mike and Molly.
We bought a home. We didn't buy it reluctantly, we're really happy now that we've moved in and we've spent our first Christmas in our own place. But we didn't buy a home lightly, we did a lot of research and we looked at a lot of places before we bought. We know we made the right decision for us.
When we started looking we quickly recognized there was going to be a considerable change in our lifestyle. I'm (Mike) a journeyman mechanic and my soon-to-be wife (Molly) is an office assistant in a doctor's office. Together we earn about $65,000 a year. Our families are both on the island and our jobs are here in the city. It's a priority for us to live close to work.
When we went to the bank last spring, we were both shocked to find out how much money they were willing to give us. We didn't have a lot of debt, Molly had about $4,000 left on her student loan, we had $2500 on a credit card from a Mexico trip we took the previous winter and we have a $350 per month truck payment with about three years left before it's paid for. Our last place we rented was a 3 bedroom home, just the main floor, near the Gorge, for $1250 per month plus utilities of about $150. The bank offered us nearly $350,000. We had just a little over $15,000 in my RRSP I planned to use for the down payment. Molly had saved almost $5,000 in a TFSA for the closing costs.
So we started shopping. And it was stressful. We quickly learned we weren't going to be living in a house any longer. We tried to find a townhouse, but the only places we liked close to our budget were in neighbourhoods we didn't, out in Langford or Colwood, far away from where we work. We wanted to remain a one vehicle household, so we needed to be an easy bus ride to Molly's office or, better yet, within walking distance. So we started looking at condos.Here's where I'll jump in to try and turn this long e-mail into a bit more manageable blog post. Long story short, Mike and Molly bought a condo. They bought it in September last year, moved in December 1 and have been happy with their choice. But these lines really caused me to take a step back and consider their circumstances with how we "figure out" market values in Victoria:
We never saw ourselves living in a condo. Quite the opposite really, I hated the idea at first. But after living in rental suites while I was working on my apprenticeship and while Molly went back to school to do her certificate, we were getting really tired of living in places that weren't ours. Our parents were encouraging us, our friends were all buying or had already bought, my boss at work was even trying to convince me to take the plunge. We didn't like that all we can realistically afford is a condo, but that's the way it is here in Victoria and we're not willing to gamble on the market changing anytime soon. We went from a house to a condo, but because it's ours, we're OK with it.I don't think Mike and Molly's experience is unique. I think most people don't buy what they rent.The trouble is, is that they end up comparing what they pay in rent against the cost of buying whatever they can get for the same or very similar money. Their next paragraph confirms this theory for me:
We were OK paying about $1400 a month for our rental home. When the banker showed us how the payments would work on the $350,000 they were willing to give us we decided to spend less. We weren't comfortable with $1700 or $1800 a month by the time we included property taxes and strata fees. So we set a budget of $250,000 to $275,000 to keep the total payments at $1400.See what I mean? While we are here, doing the math on apples, the Mike's and Molly's of Victoria are out there comparing apples to oranges and coming up with the same amount. They know they're not getting the same thing in the end, but that's not what's driving their buying decisions. They can "afford" to buy a home and keep their payments in a range they might be comfortable with today, but they're doing it at the expense of their lifestyles. Some of them may be happy in the long run, others may regret the decisions that led to the changes. But it presents a real issue that makes price to rent comparisons problematic: we isolate apples, compare them with apples, discover apples are X-factor overpriced compared to what someone willing to rent said apples will give us each month versus total cost of apple ownership -- all the while Mike and Molly are out there saying we don't want to rent an apple when we can buy an orange.