Saturday, March 5, 2011

Wait or buy: some singular analysis

Interesting discussion in the previous post's comments. Thought I'd try to expand on it a bit with an example I've been working through.

There is, what I think anyway, a great rental property available in the Hillside/Cedar Hill neighbourhood right now. It's listed for $1395 per month. Here's the listing. It's an odd skinny looking place, squished onto an odd lot with little yard space, but it's finished quite nicely and would be suitable for a professional couple or small family. It's only 2 bedrooms, but it's got 2 bathrooms, and at that price point, considering it's the whole house and not a partial suite etc, it's likely appealing to more than a few people. I'm guessing it's likely about 1200 square feet in total.

It also happened to sell in October 2010 for $475,000:

Which gives us a perfect opportunity to run some rent versus own equivalency numbers moving forward for a couple of years. I'm going to use the wait or buy analysis tool that, long-time commentator though MIA for some time, Roger created a couple of years ago. It's the best tool I've seen yet to do a comprehensive analysis easily. I highly recommend it. It's linked to the right under Resource Links.

This first scenario shows rent versus owning with the expectation of a modest 10% price correction playing out over 2 years. It assumes a 20% down payment and a rising interest rate environment, again a modest 2% in fixed terms over two years which is in line with what the banks are talking about.

Even only a modest correction indicates huge savings. Here it is broken down for you dollar for dollar:

I know there's more than a few of you skeptical of future devaluation. I get it. Real estate only goes up in Victoria, the boomers are coming, H.A.M. will save us... so I've taken the liberty to show you what will happen if the purchase price remains unchanged (surely no one is going to argue prices will go up much over the next two years right?). 

If it plays out like this, the renter has essentially gambled and lost a cool $3,000. Here's the detailed breakdown of how that might have occurred:

At least the renter still has their savings in the end to offset some of that $3,000 gamble. Which is a far cry different for the folks who buy today, counting on prices staying flat over the next two years, who if wrong, and only a very modest correction of 5% per year for two years plays out, could find themselves a whopping $55,000 down in the hole.

Feel free to mess around with the calculator. You could say that we're 30% overvalued right now (the Bank of Montreal thinks we are) so we'll see that kind of correction in the near term (I'm not personally thinking it will happen, but you can) and then you'll see a massive monetary gain for the patient buyer who waits a couple of years before buying the home they live in from their landlord who is potentially in financial distress. If this little scenario plays out the renter nets $147,000.

You could also easily argue prices rise with inflation for the next two years, so say 6% in two years, in which case the folks who snapped this place up last fall will be $37,000 ahead of the folks who are renting the place from them, despite having subsidized their lifestyles by almost $500 per month for two years.

Things really don't look so bad for the patient buyers these days. Even in a rising interest rate environment, the risk/reward factors are heavily in favour of the folks renting this place. 


Marko said...

There are also properties in the low 400k range my clients have bought recently that rent for 2k/month.

HouseHuntVictoria said...

I'm surprised by the wide range of rents asked/gotten for properties these days. IMO, the Craigslist SFH rents are not indicative of the market. I look first to the professionally managed properties.

Leo S said...

So of the posters here, how does what you rent compare to what you are looking at buying?

I've said this before, but we rent an apartment but are looking at buying a house. So for us the renting is a no brainer, until we need the extra space.

So, do you rent what you would like to own? Rent less, or rent more?

HouseHuntVictoria said...

As a renter with plans to own in the future, I wouldn't be interested in renting what I plan to own. Renting is about saving money, so I want to maximize the amount of money saved. We rent based on money, not based on wants. Our needs have definitely changed in the past three years because of career demands on space (we need a home office), so we rent more than we did 3 years ago, but we rent considerably less than we'd ever consider buying.

Waiting said...

I'm definitely renting less than what I'd buy. However, I'm also not happy in my rental and looking to move. I've owned in the past and it is very hard to go from being an owner to a renter. I'm not prepared to rent 'less' again but rents for whole houses in the areas we are looking to buy are generally as much as the mortgage payment would be for something that often isn't in great condition. To me, it is worth paying a bit of a premium to own for the sake of feeling settled somewhere rather than feeling like my home is temporary. However, premiums have their limits and if I can save a hundred thousand in purchase price by waiting for interest rates to increase then I will endure another year or so of renting.

Leo S said...

Renting is about saving money, so I want to maximize the amount of money saved. We rent based on money, not based on wants.

Exactly how we feel. Most rent vs buy comparisons are on the same property, which is logical if you are trying to compare apples to apples.
However, I think the majority of people actually rent less than they plan on buying, so the comparison in the end isn't applicable to a real life financial outcome.

a simple man said...

I am renting a house about 75% of the value of the house we would buy.

Love renting for now as there is very little responsibility and a whole lot of living. As a previous owner, it is a great break from all the renos, chores, worries, etc. Plus, I can pick up and move on a whim.

Granted, my landlords could pull the plug, but not without giving me two months' rent for doing so. And, frankly, they want us here more than we want to be here.

And renting right now = saved cash. Waiting = saved cash.

@ Waiting - wait more.

HouseHuntVictoria said...

"Most rent vs buy comparisons are on the same property, which is logical if you are trying to compare apples to apples."

It's the only way to determine whether or not a property is overvalued, as I've tried to do in this post.

The Hipwood place that I've used in this comparison is overvalued. Rent is $1395. Ownership costs, if you use the standard 25% down, 25 year amortization, plus maintenance, insurance and taxes are ($1800 + $90 + $80 + $160) about $2130. That makes this place about 25%-30% more than rental equivalent. About what BMO says it is.

Of course, as you've said, we don't rent apples, we rent oranges, amplifying the savings.

wally said...

Great example and spreadsheet. I'm renting exactly what I would buy. I would consider buying at a tad more than half off as per my last post. I don't necessarily want prices to fall, other than it help our economy grow again - after a painful withdrawal. Besides if they were to fall in half, i might be tempted to buy again. I'm with a simple man as far as enjoying the freedoms of renting.

omc said...

I often wondered who sets the value on the rental market. When ever I have looked $2k would get you a very nice house in Fairfield or Oak Bay. We had seriously considered paying $2.5k for a large waterfront home while the market settled. None of these would be any where near the $400k range to buy.

A friend of mine also rents out a town home in E-town for about $1400/month. This is probably much closer to the ownership cost; not much of a deal.

Rhino said...

"400k range my clients have bought recently that rent for 2k/month"

I call bullshit on that. If its true your likely renting to some very "sub-prime" renters. Might want to advise your clients insurance policies don't cover grow-op damage.

jesse said...

A good jolly analysis...

What I often find amiss in most analysis (and this is not a criticism) is ignoring "long tail" risks and sales costs. When a property is purchased, there is a small but nonzero chance there will be significant cost outlays due to whatever, like a new roof, faulty plumbing, blocked tiles, the list goes on. Add in those expeted value costs and you've shaved a few thousand per year off the cost. Also include boring old wear-and-tear depreciation into the calculations and the #s get even worse.

If for whatever reason you do have to sell, there are transaction costs to factor in. If you need to move, get divorced, become ill, or get sued, a few families will be packing their bags. Not many households will be in this position in 3 years' time, but reduced liquidity and transaction costs is still a risk of sorts and needs to be properly factored in when comparing apples to apples.

Also I wasn't sure if principal payback was factored in. I think it was but I'm not wearing my horn rimmed accounting glasses today.

HouseHuntVictoria said...

Jesse, you should play with the spreadsheet a bit, there's lots to it and multiple pages with different calculations regarding mortgages etc.

I'm confident it includes the mortgage pay down into the calculations. It assumes a fixed rate for the two year period it analyses, so my upped interest rates are applied to the new assumed purchase price at years one and two assuming you wait to buy.

jesse said...

"how does what you rent compare to what you are looking at buying"

I don't rent but some of the housing I was at one point looking at had horrible price-rent, only because they were small properties in areas that were being rebuilt into multi-unit detached dwellings.

In that case, I figured the total rent for a new 3 story build would be $1500 for the basement suites and $2500 for the 3 bedroom upper floors. That's $4000 total rent, but with 3 tenants so a bit more overhead. Based on those rents the place should be selling for about $700,000, probably less given it's already near its full utility given the basement suites. These places sell for about $1.0MM-$1.2MM. This is in the Vancouver area.

When looking at direct rent-own comparisons it helps to look at maximum and best use to do something close to apples-to-apples. That is, don't use what a teardown rents for as gauge of silly price-rent ratios: look at the rents once the lot is rebuilt.

SilverSurfer said...

HHV, could you possibly provide a link to Roger's (or whomever's) spreadsheet so we can do our own relative calculations?

Thanks! :)

PS. Silver@$35/oz. :P

Waiting said...

Maybe I'm overly fussy or looking in the wrong places but I've seen 3 rentals this week ranging from $1800-2300 and I wouldn't live in any of them.

a simple man said...

hi waiting. We have a really clean, nice house in the Estevan area - 4 bedrooms, 2.5 baths. Huge yard, landscaper who takes care of it. Attached garage. We pay $2K a month. We have seen cheaper rent for nicer homes in the area, but didn't want to move to get them. They will come up.

We also saw absolutely horrible homes for the same money in this area.

Marko said...

"I call bullshit on that. If its true your likely renting to some very "sub-prime" renters. Might want to advise your clients insurance policies don't cover grow-op damage."

I call reality.

I paid under 200k for 533 sq/ft condo at the834, similar condos at the Juliet rent for $1000 - $ going to call bullshit on that as well?

A high-end 1 bedroom $450,000 Condo at the Falls is not going to catch $2,000+. It all depends on specific type of property. A $800,000 rancher in south Oak Bay on a large lot is not going to fetch 4k in rent, not even 2.5k.

Two weeks ago I showed a townhome in the low 300ks that is rented for $1,500 to a VIHA employee.
$500 rent per 100k value in property is certainly attainable if you pick the right property.

Frannie said...

We currently rent a 6 BR, 3,000 sq. ft. house in James Bay, $2350. Owners are returning from Montreal, so we have been looking for a new place. Just this week signed the lease on a 3,000 sq. ft., 6 BR place on five acres in Royal Oak area. $2300.

We have never had a problem finding excellent houses to rent, but we do work hard at looking for them. We also have excellent references. We have four kids, so we rent the house we want to live in, but we set a budget and stick to it. Life is what happens when you're busy making other plans. We've owned houses several times, but buying a house of the size we need right now just hasn't made sense since we moved to Victoria for work reasons a few years ago. Renting has, in many ways, proved to be a dream. I may, in fact, find it hard to go back to the responsibilities and costs of ownership. Never thought I'd say that, but it's true.

SilverSurfer said...

Capital Economics put out their "Canada Economic Outlook Q1 2011", which is a 12 page report that happens to include loads of charts related to real estate.

I just love their opening paragraph:

"Overview - Because Canada emerged from the global financial crisis largely unaffected, many Canadians now appear to believe that the economy is somehow invincible. This level of hubris is disconcerting when housing valuations have lost all touch with fundamentals, driven up by a massive surge in household debt. We've seen this story played out in countless other countries and it never has a happy ending. The now inevitable downturn in the housing sector will severly constrain economic growth over the next couple of years..."

SilverSurfer said...

Also check out their blog... plenty of bearish reviews on Canadian real estate with charts galore...

HouseHuntVictoria said...


Link is in the Resource Links on the sidebar of the main page.

Dan.Eliot said...

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Rhino said...

Marko all those examples are strata properties, which will probably also carry a substantial monthly strata fee for the owner.

Alls I know is that most houses your paying 2000 for sell in the 600-800K dollar range....NOT 400.

Maybe its different for condos and townhouses I have to plead ignorance on that.

Just Janice said...

We rent what we'd buy but if we bought it - we'd plan to tear down and build new within 10 years....

wally said...

"$500 rent per 100k value"

Maybe it's different at the Juliet with that new office building across the way, but seems closer to $250 rent per 100k in my area near parliament. The vacant 390k condo I looked at yesterday could possibly get $1100 rent. More than that would be marginal tenant territory. Not sure what the owner was collecting, but for a 3 year old condo there was easily more than ten thousand in damages.

happy renter said...

I rent a newish two bedroom condo in the core right now. When I buy again sometime in the next 2-5 years, I will definitely buy a SFH and my monthly costs will undoubtedly be greater. I rent the condo because condo living is easy and convenient, and I'm saving money. Having once owned a condo myself, I would never consider buying one again. My strata council was an absolute nightmare and I don't need that kind of stress in my life. Renting a condo, however, is stress-free. Townhouses appeal to me, but I can't swallow the idea of taking part in another strata.

happy renter said...

I posted about this earlier, but I think it got erased somehow...

There's an interesting new study out on numeracy in Canada. Most fascinating, though, is the fact that this Globe and Mail article links individual numeracy to the financial crisis (and, by implication, to the looming housing crisis):

"The financial crisis of 2008 is often blamed solely on the banking world’s irresponsibility, but individual decisions by people struggling to understand their mortgages, or the true cost of a loan or a debt, arguably helped bring world economies to their knees."

Mapping Canada's Math Skills

a simple man said...

Frannie - you sound a lot like my wife - she is loving the freedom of renting and we are in no rush to sink ourselves into financial servitude any time soon.

And I love the feeling of having no debt at all of any kind.

Our kids don't really care if we are owning or renting - they do care if their parents are stressed about paying bills and have little time to spend with them.

Leo S said...

@Silver Surfer
Also check out their blog

Ben @ financial insights is not affiliated with Capital Economics. They just happen to hold the same views.

@happy renter
My strata council was an absolute nightmare and I don't need that kind of stress in my life.

Some friends had the same experience. Why the heck would you want to "own" a condo when you have only token control over what you do with it, and are at the mercy of a bunch of self-interested wannabe politicians. Freehold or nothing.

Marko said...

"Marko all those examples are strata properties, which will probably also carry a substantial monthly strata fee for the owner."

The latter two examples are but what one of my clients bought was not strata and the tenants certainly weren't sub-prime.

We can spin the numbers all day but it always comes down to each individual situation.

happy renter said...

@ Leo S: "Why the heck would you want to "own" a condo when you have only token control over what you do with it, and are at the mercy of a bunch of self-interested wannabe politicians."

Exactly. The decisions that were made in my building were mind-boggling. Also, the property management company (which I won't name here) let so many things go that they should have been on top of that it was unreal. I'm sure that my experience was relatively uniquely bad, but there's no way I'm signing up for that kind of thing again. It's also just horrific to think that if something goes wrong in your building, you might not be able to sell your condo for a while because every single detail of what's wrong is listed in the strata minutes and might alarm buyers. In my case, there were some people in my building who bought to retire there and planned to be there for 15+ years and so didn't think it was an issue to blow every little problem out of proportion in the meeting minutes. Why would they care? If they're not planning on selling any time soon, then they don't have to worry that potential buyers might interpret their words as "the sky is falling." I could go on...

Waiting said...

Where are you finding your rentals? I've been checking the property management companies, craigslist, usedvic and UVIC off campus daily and there hasn't been anything great. Maybe I just need to be patient.

Catherine said...

Re Owning a condo. We sold our condo in 2001 at the bottom of the market, after the building had been fixed. At the time we just wanted to get away from the condo-nazis and swore we would never own a condo again.

10 yrs later, the place is worth twice what we sold for, so we have a certain amount of regret. But (a) there is still the condo-nazi factor fresh in our minds and (b)who would have guessed that prices would go insane.

So only mild regrets about getting out of a condo. More regrets that we didn't jump into a SFH. On the other hand, where we rent we have great neighbours and great location. We are currently completely and absolutely priced out of the Vancouver market and it will take a serious correction (at least 30%) to get us in, and that's with a pretty decent downpayment!

a simple man said...

Hi waiting - you are looking in all the right places. With all the U students ending their school year and having to give notice this month for the end of April you should see some good options come up - not all student rental houses are terrible.

Patience will hopefully reward you.

How many bedrooms are you looking for - I can keep my ears to the ground around the Willows schoolyard as well and let you know if I hear of anything.

Animal Spirit said...

We're renting less area (1000 sq ft vs 1500 sq ft) and in a different area (Fairfield vs. Fernwood or Strawberry Vale) than where we'd buy. Our rent ($1150) and other home expenses is probably 1/2 of what we're planning on for buying.

Since our situation has changed a lot in the last two years (40% increase in family income, substantial downpayment now available), we're at the point where we can look at places (~600K) that we couldn't afford previosuly, keeping a maximum of 4.5 times gross income for purchase price less downpayment.

Since prices are probably 30% overvalued, for us this means determining if waiting for a 180K drop in price is more valuable than having land to get our hands dirty in.

Waiting said...

@a simple man
I'd love it if you'd keep your ears open for a rental in that area. We need 3 bdrms ideally.

Craig said...


That's encouraging. We're looking for a min 3 bed house in the Oak Bay to Gordon Head area starting this summer with a budget of $3000 or so but we're not seeing anything on Craigslist or the prop man sites. We have till June to find something so not panicking yet. But still not feeling very hopeful either.

a simple man said...

@ waiting - absolutely my pleasure to do so.

@ Craig - with that budget and that time frame you should have no problems. I have seen great places around the marina for under $2000 in the last 6 months. Rest easy for now.

SilverSurfer said...

Hmm... Now I know how Victorians and Vancouverites do it!

I have a feeling The Lending Tree will need to open up a few branches in Victoria a couple of years from now.

Waiting said...

Wow! It's like Christmas in March! We looked at 46 Howe (ml#289675) last year for $750,00 and I saw it re-listed this morning for $629,000. That's a nice price drop!
I imagine the next door neighbours whose house is listed at $889,000 won't be too happy though.

Marko said...

Monday, March 7, 2011 9:00am:

MTD March
2011 2010
Net Unconditional Sales: 119 789
New Listings: 297 1,719
Active Listings: 3,638 3,712

Please Note

•Left Column: stats so far this month
•Right Column: stats for the entire month from last year

omc said...

Wild guess time!

I'll say 630 sales, and active listings going over 4k by month end. it is the cusp month; sales and listings won't be linear.

Leo S said...

Pretty strong sales to start the month. That extrapolates linearly to 684.

On the one hand sales are usually still accelerating in March (except last year when it was the peak), so one would expect daily sales to increase through the month. On the other hand we have that pesky rule change on the 18th... I'll be pessimistic and predict 700 sales.

Alexandrahere said...

Hi everyone. Here are my stats for the week of 28 Feb - 6 March.

SFH: Min 2 beds & 2 baths priced between $375K & $775K in the core areas of Victoria, Oak Bay, Esquimalt,Saanich East & Saanich West.

New: 35
Sold: 25
P/C: 25
OM: 6
Avg Sale Price: 563
Med Sale Price: 562
Four homes went for below assessment & 8 sold having suites advertised.

Condos: I have new criteria: Priced between $250K and $580K, min 2 beds and 2 baths and in most areas of Victoria (not downtown)& Saanich East, all areas of Esquimalt and Oak Bay and Gorge,Tillicum & Interurban areas of Saanich West.
New: 37
Sold: 7 apts & 3 townhomes
P/C: 12
OM: 8
Avg Selling Price apts: 326K
Med selling price apts: 295K
Avg selling price t/h:397K
Med selling price t/h: 383K
One apt style sold for under assessment & 2 out of the 3 townhomes went for under BC assessment.

In the past few months, in my areas of interest, the majority of townhomes are going for under BC assessment

Just Jack said...

It seems to me that most of the prospective purchasers are out looking for deals. Perhaps that's why you see almost 30 percent of the sales below their assessed values.

Exceptions such as Fernwood exist, but I think that's just a matter of people trying to move up the housing ladder from a condominium. The prices in Fernwood are a short term fad that will reverse itself quickly.

Back in the days of conservative Canadian banking, this Fernwood bubble would not have been so dramatic. The bankers were not shuffling the risk off to CMHC, so they had appraisals done. Now you pay $675,000 for a hundred year old home on busy Fernwood street or $581,000 for a home with very little yard space on a dodgy part of Haultain and no one questions the price.

We are so American.

I only wish that it would be the banks that would wear this housing disaster rather than the taxpayer. From what I see in the outlying neighborhoods and in the weaker market segments, the correction in prices has the potential to be massive and quick.
People who bought in the last three and four years will be reluctant to sell their homes at a loss. But there are many times more people who have owned for a decade or more and will be willing to drop their price to get out of this market and possibly rent back their home.

Half a million in cash is worth more than half a million in equity.

barmour said...

As a pending young retireee from Alberta who is planning on moving to Victoria soon, I have to say that the analysis on this blog is overly complex.

For example, I plan to sell my Calgary home, use $300k from the proceeds to buy FIE (bank stocks and bonds) and receive a 7% (fixed) dividend. I will pay a small amount of tax (~5-10%) and then spend the rest on rent -- about $1600 per month.

No matter how you slice it, a half million dollar place can be rented with $300k parked in the stock market -- why buy at all?