Castlegar News, Page 0024, 31-Oct-2007Unbiased by me for your reading pleasure. Comment away.
Income Earnings – Where do you Rank?
By Debbie Pereversoff CFP, CSA
Last week, I searched the internet looking for interesting data from the good folks at Statistics Canada regarding retirement savings. I wanted to find out a little bit about income earnings. Specifically, how much money people make out there, and where do we as individuals stack up?
All the data here is for the 2004 calendar year, which is the most recent income data available.
Just prepare to brace yourself; we'll start with “median” total income. The median is the mid-point, where half the included population is higher and half is lower.
“Total income” in this case includes income from employment, investment, government transfers, private pensions, registered retirement savings plans and other income. What I found out was that the median total income for Canadians was…$24,400. If you made more than $24,400 in 2004 – congratulations - you were in the top half of income earners!
Now, before you calculate that fully half of Canadians work for less than $12.20 an hour, bear in mind that “total income” will capture part-time employees, after-school student jobs, etc. Those people will pull down the average with a low income that may not be representative of hardship. That being said, the bottom half of total income earners is also populated by people who are out of the work force and living on low incomes provided by pensions and government benefits.
Many of those people do indeed have financial hardship.
The median employment income for Canadians in 2004 was $25,400 - that's just counting the working folks. The highest median employment income by province was the Northwest Territories by a wide margin ($35,400), followed by the Yukon ($28,300), Ontario ($27,900) and Alberta ($27,500).
Newfoundland was the lowest at $17,000.
But let's move back to total income for Canadians, and climb further up the scale to see where the meat is. Let's move all the way up to where about 2/3rds of individuals have lower incomes. In 2004, you were in the top third of income earners if you made more than…are you ready? - $35,000!
I know what you're saying. Let's go higher! Okay, let's move up to the top quintile line. At this level of income, 80 percent of people made less than you – the number? – 19.8 percent of Canadians with an income made $50,000 or more in 2004!
Now, although a bit over 12 percent of individuals had incomes between $50,000 and $75,000, the atmosphere thins out pretty quickly above that. Only 7.6 percent of people had incomes of $75,000 or more in 2004. Only 3.4 percent made $100,000 or more. And by the time we get to the $150,000 or more category, we're down to just 1.3 percent of income recipients.
People with 2004 incomes of $200,000 or more were a rounding error: only 0.7 percent made $200,000 or more. And you can be 99.5 percent sure that any randomly selected Canadian earned less than $250,000.
OK - those are the stats for individuals. The nice folks at Stats Canada also track the incomes of various family groupings, so we can get an idea of where entire households compare by income. “Couple families” are couples (married or common-law, including same-sex couples) living at the same address, with or without children. No singles or lone parents are included. The median total income from all sources for all members of such families in 2004 was $64,800. Less than a quarter of such households had total incomes of $100,000 or more and just over 8 percent had incomes of $150,000 or greater.
So, there are the stats, and that's what we make. Now, consider some of the implications of this information. If there were folks who made $50,000 a year and didn't feel like they were making enough to get by (and there are), it would be useful for them to consider that based on 2004 figures, 80 percent of Canadians with an income actually make less than that. If their individual income was close to $65,000 – it would be enough to push them into the top ten percent of incomes, received by Canadians.
Ninety percent of the 23.4 million people with an income in Canada made less. If they felt they weren't getting by at an income level that's higher than that of the vast majority of the people, in one of the richest countries in the history of the world, do they have an income problem or is it a problem related to something else, like choices or expectations?
Looking at the statistics of what we all make, it sure gives you something to think about – doesn’t it?
Debbie Pereversoff CFP CSA is a Certified Financial Planner and a Certified Seniors Advisor with her company The Affolter Financial Group Inc. in Castlegar.
Wednesday, October 31, 2007
This is telling, non?
Monday, October 29, 2007
The Bear's Dilemma
Back in 2002 my friend whom I've written about before bought his first house. In 2000, his sister had sold a house she had bought in 1995 for a $30K loss, or 18%. My friend was nervous about the market. He'd had to over-bid to get his house and paid just about the average sales price for an average property in an average neighbourhood. He'd been able to put down a significant down payment and take out a 14-year mortgage for the rest. If the market tanked on him then like it had for his sister, he was confident his financing arrangement would help him weather the storm. Couple that with a fairly nice place that he and his new wife could grow into, and stay for some length if necessary, and his nervousness was abated.
Back then we were talking a lot about the stock market crash in 2000. We figured that, like most cycles in economic history, the bull market in housing was a direct result of capital fleeing out of risky equities into stable real estate. We both saw signs of economic growth in equities and figured that the local RE market wouldn't have legs to sustain the growth it had experienced over the past 18 months. I was decidedly bearish. He owned a house and of course didn't want to see a correction.
At that time, I was earning great money in a job I didn't want to do anymore. My dad was urging me to buy a home. I decided that a mortgage would be a life sentence to a less-than-satisfying job and decided to go back to school and get a university degree to open new employment doors. I could play the what if scenario forever here, so I won't. I don't regret the decision I made. Hindsight being 20/20, I realize I could have done both.
Fast forward to today. We have a rarely witnessed situation: parallel bull markets in both local RE and world equity markets. One seems to have endless legs, the other, I'm not so convinced. RE prices in the western world are correcting: everywhere except Canada. East of Manitoba, the market didn't have the heat that the West did, and manufacturing is getting hammered, so I believe the RE market will soften there very soon. West I don't know. I want to believe that Alberta will continue it's downward trend to a negative year over year loss. But I doubt it will. Currently it's negative month over month; it will take a massive hit for it to go below the 30% or so it had gained already this year.
So what is the Bear's Dilemma? Roger asked an interesting question over the weekend: "how low does the VREB published median price have to go before they jump in?" And that question my friends outlines exactly what the Bear's Dilemma is: when is low enough?
I've maintained on this site for some time that being an owner of a property is better than being a renter. There are many reasons for this:
The trouble for us is we can't find those kinds of places; either we'll be unhappy in the unit/neighbourhood for any great length of time or we'd be stretching our budget to the point where we can't afford to save for our other financial goals, like eating and retiring. So we wait for our income to explode or this bubble to burst. I wonder which will come first?
When prices start falling, how will we judge when is the right time to buy? All around us we're inundated with media extolling the benefits of buying property right now by telling us how good it would have been if we bought a year or more ago. When the market goes down the opposite will be true: societal reinforcer's--media and our peers--will be saying the opposite: "don't buy now you'll be losing money."
To which I state the only answer I can come up with for the Bear's Dilemma: "If you are happy with your purchase, you don't blow your budget, you don't compromise on your retirement and other savings, and you can live in the place you buy for 7-8 years or more, you will have nothing to worry about."
To answer Roger's question: for us, I figure that a 30% correction on the median SFH price in Victoria will give us the legs to get into the market and stay there.
Current median: $520,000
30% correction is: $156,000
New median: $364,000
Is this realistic? We hope so. If it's not, who knows what we'll do.
Back then we were talking a lot about the stock market crash in 2000. We figured that, like most cycles in economic history, the bull market in housing was a direct result of capital fleeing out of risky equities into stable real estate. We both saw signs of economic growth in equities and figured that the local RE market wouldn't have legs to sustain the growth it had experienced over the past 18 months. I was decidedly bearish. He owned a house and of course didn't want to see a correction.
At that time, I was earning great money in a job I didn't want to do anymore. My dad was urging me to buy a home. I decided that a mortgage would be a life sentence to a less-than-satisfying job and decided to go back to school and get a university degree to open new employment doors. I could play the what if scenario forever here, so I won't. I don't regret the decision I made. Hindsight being 20/20, I realize I could have done both.
Fast forward to today. We have a rarely witnessed situation: parallel bull markets in both local RE and world equity markets. One seems to have endless legs, the other, I'm not so convinced. RE prices in the western world are correcting: everywhere except Canada. East of Manitoba, the market didn't have the heat that the West did, and manufacturing is getting hammered, so I believe the RE market will soften there very soon. West I don't know. I want to believe that Alberta will continue it's downward trend to a negative year over year loss. But I doubt it will. Currently it's negative month over month; it will take a massive hit for it to go below the 30% or so it had gained already this year.
So what is the Bear's Dilemma? Roger asked an interesting question over the weekend: "how low does the VREB published median price have to go before they jump in?" And that question my friends outlines exactly what the Bear's Dilemma is: when is low enough?
I've maintained on this site for some time that being an owner of a property is better than being a renter. There are many reasons for this:
- pride of ownership
- building of financial equity
- flexibility and security in living arrangements
- asset appreciation
The trouble for us is we can't find those kinds of places; either we'll be unhappy in the unit/neighbourhood for any great length of time or we'd be stretching our budget to the point where we can't afford to save for our other financial goals, like eating and retiring. So we wait for our income to explode or this bubble to burst. I wonder which will come first?
When prices start falling, how will we judge when is the right time to buy? All around us we're inundated with media extolling the benefits of buying property right now by telling us how good it would have been if we bought a year or more ago. When the market goes down the opposite will be true: societal reinforcer's--media and our peers--will be saying the opposite: "don't buy now you'll be losing money."
To which I state the only answer I can come up with for the Bear's Dilemma: "If you are happy with your purchase, you don't blow your budget, you don't compromise on your retirement and other savings, and you can live in the place you buy for 7-8 years or more, you will have nothing to worry about."
To answer Roger's question: for us, I figure that a 30% correction on the median SFH price in Victoria will give us the legs to get into the market and stay there.
Current median: $520,000
30% correction is: $156,000
New median: $364,000
Is this realistic? We hope so. If it's not, who knows what we'll do.
Friday, October 26, 2007
Affordable-living
I've said before that I believe that information we get for free from someone who makes a living off of selling something should be taken with a grain of salt, especially when it comes couched as "advice."
I have a lot of respect for the accounting profession. Sure, they were partly responsible for some of the dot.com mess in the US and Nortel in Canada, but those are largely isolated incidents and aren't reflective of what kind of service an accountant can give an individual or family on a financial planning level.
The Institute of Chartered Accountants of BC released a recommendation during the recent BC budget consultations. It contains the most recent income and affordable-living stats for BCers.
Here's what they had to say:
I have a lot of respect for the accounting profession. Sure, they were partly responsible for some of the dot.com mess in the US and Nortel in Canada, but those are largely isolated incidents and aren't reflective of what kind of service an accountant can give an individual or family on a financial planning level.
The Institute of Chartered Accountants of BC released a recommendation during the recent BC budget consultations. It contains the most recent income and affordable-living stats for BCers.
Here's what they had to say:
Real personal disposable income per capita is the amount of income available after taxes and net of inflation. It illustrates changes in potential purchasing power and savings.You can read the full report here. So much for wage inflation being the reason why housing prices are so high. I'm surprised that the COL ratio is so low. This is perhaps because I'm not an accountant or economist and don't understand the stats they used to come up with that. Or it's perhaps indicative of the fact that real rents are considerably lower than mortgage payments and thus drag the 42.1% ratio down to 20.2%? What do you think?
Financial vulnerability is measured by total debt (both personal and mortgage) calculated as a ratio to personal disposable income.
Cost of living is expressed as the percentage of household expenditure spent on basic shelter and reflects the trend in actual household purchasing power.
As a place in which to LIVE, BC enjoyed a decreasing crime rate and decreasing cost of living, increasing disposable income, and high government health care spending. At the same time, however, personal debt continued to grow (largely as a result of high housing prices).
There are, however, areas in which BC still needs improvement: disposable income ($23,339); personal debt (1.24); and cost of living, as expressed by the percentage of household income spent on shelter (20.2%).
When comparing 2005 with 2004, disposable income in BC grew by 1.5%, bettering the Canadian average growth rate of 0.9%. (MY ADD: we're still below national average; Alberta and Ontario beat us by 4.1% and 0.2%; and our disposable income to debt ratios almost twice that of the national average).
BC’s real per capita disposable income rate was 3% below the national average in 2005.
BC’s higher disposable income gain is attributed to the 10.3% cut in real direct taxes (MY ADD: not income growth!)
Financial vulnerability is measured by total debt (both personal and mortgage) calculated as a ratio to personal disposable income. BC’s debt to personal disposable income ratio rose by 6% last year (the highest increase in our comparison), reaching a record high of 1.24 and leading our comparison for the tenth consecutive year. This increase was primarily due to increased mortgage debt, which rose by 11.7% in 2005.
Vancouver is the least affordable city in Canada and the 15th most expensive city in the world. Owning an average home requires 42.1% of British Columbians’ (not Vancouver, that's BC-wide) median pre-tax household income. Not surprisingly, mortgages comprise 75% of BC’s total debt.
BC’s cost of living in 2004, as expressed by the percentage of total household spending on shelter, was 20.2%, comparable to Ontario’s rate of 20.5%. This is not surprising given that both provinces have the highest housing prices in the country. (While housing prices in BC are 25% higher than in Ontario, other costs, including taxes, water, fuel, and electricity are lower in BC). (MY ADD: That ratio must be dragged down by real rents).
BC has less post-secondary educated citizen's than Alberta, Ontario and is below the national average.
BC’s wages, adjusted for inflation, decreased by 0.5% between 2004 and 2005, dropping to $21.05 per hour as a result of strong growth in the wholesale and retail trade sectors, which typically pay lower wages. (MY ADD: that number, based on a 40 hour work-week and 52 weeks/year = $43, 784 gross annual average income).
The number of British Columbians working in construction trades grew by 16.7%
in 2005, which led to an increase of 4.1% in average hourly earnings in this sector from January to November 2005.
Thursday, October 25, 2007
Why this is actually irrelevant
Hence why they did it. H/T VG.
CMHC is an arms-length crown corporation. What this means is that they receive no government direction, and they don't, and that they receive little government funding, and they do; so they must be self-serving and self-sufficient, and they are.
I do agree with Mohican over at the Financial Planning Personal Sanity blog, it is nucking futs. But that said, I don't believe this will have any impact whatsoever on the Victoria real estate market. And here is why (Yes, I've purposefully picked the cheapest investment property I can think of):
2-bed 1-bath condo worth $200K with $1200/year property tax and $150/monthly assessment.
With a 0% down mortgage you'd be mortgaging $215K ($15K insurance premium to CMHC) for a monthly mortgage payment of:
Say you're a RE "investor," you take out this mortgage on this dumpy condo, you rent it out for market rates of around $1.25/SF. So you're getting around $1000/month. But you're paying out
$1222 in mortgage, $100 in tax, $175 in MA for $1497 or a $500ish loss every month. Let's say you squeak out a bit more for rent. You won't get $500, maybe $200. That's irrelevant.
The only "investor" for this deal is actually a speculator betting that they'll make their money in inflation and mortgage paydown. CMHC already ate up 7.5% of your inflation (before interest) and considering that condos are overbuilt and already coming down in price (new ones especially) I don't think we'll see too many banks willing to do this deal. So the "investor" will have to go to the alternative market which means they are paying more interest (not to mention that alt-mortgage funds are extremely threadbare with the credit crunch) and their already negative margins just got more negative.
Now this new product may have broader implications in other segments or markets, but in the local Victoria rental pool where rents are barely 60% of carrying costs for the most part, a 100% down mortgage makes no economic sense whatsoever.
Anyone stupid enough to get into this product deserves to lose their shirt when the market corrects. CMHC may get caught holding the bag, but the debtors get taken into bankruptcy first. The premiums that CMHC will charge are designed to make them money. Pure and simple. This is a huge risk that they are aware of; they built that into their business model. In other less-inflated markets, pretty much anywhere east of Manitoba, this product will be a big time money-maker with limited market implications. CMHC is facing increased competition, they got some free advertising today, I doubt if they got much else.
CMHC is an arms-length crown corporation. What this means is that they receive no government direction, and they don't, and that they receive little government funding, and they do; so they must be self-serving and self-sufficient, and they are.
I do agree with Mohican over at the Financial Planning Personal Sanity blog, it is nucking futs. But that said, I don't believe this will have any impact whatsoever on the Victoria real estate market. And here is why (Yes, I've purposefully picked the cheapest investment property I can think of):
2-bed 1-bath condo worth $200K with $1200/year property tax and $150/monthly assessment.
With a 0% down mortgage you'd be mortgaging $215K ($15K insurance premium to CMHC) for a monthly mortgage payment of:
Say you're a RE "investor," you take out this mortgage on this dumpy condo, you rent it out for market rates of around $1.25/SF. So you're getting around $1000/month. But you're paying out
$1222 in mortgage, $100 in tax, $175 in MA for $1497 or a $500ish loss every month. Let's say you squeak out a bit more for rent. You won't get $500, maybe $200. That's irrelevant.
The only "investor" for this deal is actually a speculator betting that they'll make their money in inflation and mortgage paydown. CMHC already ate up 7.5% of your inflation (before interest) and considering that condos are overbuilt and already coming down in price (new ones especially) I don't think we'll see too many banks willing to do this deal. So the "investor" will have to go to the alternative market which means they are paying more interest (not to mention that alt-mortgage funds are extremely threadbare with the credit crunch) and their already negative margins just got more negative.
Now this new product may have broader implications in other segments or markets, but in the local Victoria rental pool where rents are barely 60% of carrying costs for the most part, a 100% down mortgage makes no economic sense whatsoever.
Anyone stupid enough to get into this product deserves to lose their shirt when the market corrects. CMHC may get caught holding the bag, but the debtors get taken into bankruptcy first. The premiums that CMHC will charge are designed to make them money. Pure and simple. This is a huge risk that they are aware of; they built that into their business model. In other less-inflated markets, pretty much anywhere east of Manitoba, this product will be a big time money-maker with limited market implications. CMHC is facing increased competition, they got some free advertising today, I doubt if they got much else.
Wednesday, October 24, 2007
More reasoned than me
Further to last Friday's post, this letter appeared in the Kelowna paper today:
Strathmore condos in Langford dropped their prices today.
The Daily Courier (Kelowna), Page A11, 24-Oct-2007Mo, I'm guessing you'll have line-ups of Realtors wanting to sell your home. I'm pretty sure that in your neck of the woods they've been too busy selling homes to read the paper.
History shows house prices will come down
By Mo Rajabally
This letter is as a result of The Courier's Steve MacNaull's Home out of reach' piece (Oct. 16) and Damon Enns' letter 'Home aren't out of reach...' (Oct. 18).
The intent is to caution any person who may think it is now or never time to own a home. I have lived in this valley for 32 years, and I have observed the ebb and flow cycle of real estate. It is not a line that goes straight up indefinitely. At most, it plateaus and perhaps gradually, it comes down.
The backbone of any economy is the middle class. I would like someone to tell me if this class has had a 10 per cent pay raise per year over the past five or six years.
This is how much the value of real estate has appreciated in Kelowna. When I read the statistics Irene Wilkinson of Express Mortgage Services provided (Courier, Oct. 18), I shudder. Now that the price of a home has jumped over the $500,000 mark, what will be the average mortgage with a 10 per cent down payment?
And, how could a young couple with two incomes pay a monthly mortgage of over $2,689? What happens if there is an accident, an illness, a transfer, or worse still, a loss of a job, not to mention an interest rate hike?
I remember being told in 1988 by a real estate agent if people didn't buy a home then, they would never own one.
Soon after, the market had peaked and I had sold my home. I rented for a year. The following year I bought a lot half the asking price when it came on the market in 1988 because the market had taken a plunge.
It is going to happen again; at least this is what I think, but perhaps not to the same extent. I would request any economist/statistician from UBC Okanagan, or Okanagan College, to do the math.
Of all the baby boomers retiring all across Canada, what percentage would retire in Kelowna?
Also, how many people in Kelowna have cashed in on their house equity and have moved on to cheaper locations?
Everywhere I go, I see apartment buildings, townhouses, and single-family homes under construction.
Will they all be sold at the asking price? Well, it depends on what the market will bear. There is always the possibility some developers could end up holding a bagful because they have missed the last ferry.
The one thing we have going for us in Canada right now is low interest rate and a solid economy.
Recently, MP Garth Turner, visited the Valley. I used to read his investment newsletter and even read his column in one of the local papers.
He warned Kelowna the boom could not continue. Frankly, one does not have to be a rocket scientist to know there is always a goal post and that the sky is not the limit, except perhaps if you sell real estate.
I would, however, caution any prospective buyer to make his or her own decision and not to rely on my observations and comments.
Now I believe in the process of writing this letter, I have created a problem for myself.
Will I find a real estate agent to sell my home? Well there is an open invitation.
Mo Rajabally,
Kelowna
Strathmore condos in Langford dropped their prices today.
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.
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.
Monday, October 22, 2007
What could it look like in 5 years if we bought today?
I'm going to revisit a purchase plan on a SFH. I'm going to use an MLS listing that has sold, but I think we'll see more of these types of sales situations so it may be indicative. Or it may not be.
Here it is: MLS# 231005. Original asking was $419,900, it sold after 108 days for $371,000. I picked this one on purpose; if we went after a house we'd be looking for a "motivated seller" so this fit.
Anyway, here's our particular economic situation with it: 5% down, 25 year amortization, 5.85% locked-in over 5 years. It looks like this:
We'll pay bi-weekly rapid. We won't overpay our mortgage because we prefer to max out our RRSP contributions. Any disposable income left over will go into other investment products, not the mortgage. You can debate the intelligence of that, but at relatively cheap money (5.85%), paying down the mortgage isn't huge on our priority list. We anticipate feeling comfortable in this house in this neighbourhood for 5 years.
Assumption Scenarios
Growth continues as it trends right now, roughly 6%/year.
Current value (actual): $371,000.
Future value at 5 years (assumed): $496,481.
Difference: +$125,481.
Mortgage principle paydown: $36,000 (approximate)
Total approximate (possible?) equity at sale time: $160,000 ish.
Now of course you're thinking, $160K, no wonder everyone's getting rich off real estate! It's not that simple though. We have all sorts of other considerations here: taxes, interest, maintenance, months of vacancies etc. Here's the thing: we can afford the monthly payments on this. We can do so without sacrificing our savings, but the days of eating out would be done.
The rental income on the suite (1-bed) we'd calculate at $800/month. That's the high side of the rental market, but it's in a convenient location, we'd clean the place up and replace anything needed. We pay close to that now, so we anticipate being able to have that kind of income come in. That income would go directly towards maintenance of the house and property taxes. Our tax bracket wouldn't change, so our taxes would be based on an additional $9600 to our income, which we can eliminate by maxing out our RRSP contributions--we both have ample room from our years in college and low-income employment. The room is there for five years.
So why wouldn't we do this? It looks like a no brainer on paper. Even for a boisterous bear like me.
What if we changed the assumptions to something like this:
We experience a moderate correction of 6%/year. I don't think even an ardent bull could argue that this is well in the realm of normal possibility and is fairly indicative of the 94-2001 correction which witnessed just modest price reductions. When compounded though, those modest corrections can hurt.
Current value (actual): $371,000.
Future sales value at 5 years (assumed): $245,519.
Difference: -$125,481.
Mortgage principle paydown: $36,000 (approximate).
Approximate loss: $89,481.
Again we've used the rental income to cover taxes and maintenance as a simplistic way to remove those variables out of this complicated analysis. Regardless. When the market increases, you obviously come out ahead. But when the market decreases, you really do get hurt if you have to sell.
If you don't have to sell, you may find yourself living in a place with negative amortization, so you can't go get a HELOC and renovate to make it more comfortable.
It's this possibility that keeps us out of entering into this kind of scenario. It is just too much risk. That 6% decline over 5 years is a compounded 30% correction. That could very well be a reality. It could be less, it could be more, it could be faster, it could be slower. Even if we halved that assumption to 3%, that would still be a $30K loss all things considered. That's my master's degree I want to do over the next few years. That's approximately one-third of our income. That's a lot of money. Did I say a lot?
All signs point to a slowdown in both sales and growth. All signs point towards a looming economic downturn. Dodge is calling on the government to let the market correct the debt crisis, which means some pain is predicted, including raising interest rates. The federal government is trying hard to orchestrate their own defeat because come October 2009's scheduled election there is a highly likely scenario of a less-rosy economic (dare I say recession?) situation.
And this analysis is why we will rent for at least another 6 months. Unless we buy, gulp, a condo; which we'll run over tomorrow.
Here it is: MLS# 231005. Original asking was $419,900, it sold after 108 days for $371,000. I picked this one on purpose; if we went after a house we'd be looking for a "motivated seller" so this fit.
Anyway, here's our particular economic situation with it: 5% down, 25 year amortization, 5.85% locked-in over 5 years. It looks like this:
We'll pay bi-weekly rapid. We won't overpay our mortgage because we prefer to max out our RRSP contributions. Any disposable income left over will go into other investment products, not the mortgage. You can debate the intelligence of that, but at relatively cheap money (5.85%), paying down the mortgage isn't huge on our priority list. We anticipate feeling comfortable in this house in this neighbourhood for 5 years.Assumption Scenarios
Growth continues as it trends right now, roughly 6%/year.
Current value (actual): $371,000.
Future value at 5 years (assumed): $496,481.
Difference: +$125,481.
Mortgage principle paydown: $36,000 (approximate)
Total approximate (possible?) equity at sale time: $160,000 ish.Now of course you're thinking, $160K, no wonder everyone's getting rich off real estate! It's not that simple though. We have all sorts of other considerations here: taxes, interest, maintenance, months of vacancies etc. Here's the thing: we can afford the monthly payments on this. We can do so without sacrificing our savings, but the days of eating out would be done.
The rental income on the suite (1-bed) we'd calculate at $800/month. That's the high side of the rental market, but it's in a convenient location, we'd clean the place up and replace anything needed. We pay close to that now, so we anticipate being able to have that kind of income come in. That income would go directly towards maintenance of the house and property taxes. Our tax bracket wouldn't change, so our taxes would be based on an additional $9600 to our income, which we can eliminate by maxing out our RRSP contributions--we both have ample room from our years in college and low-income employment. The room is there for five years.
So why wouldn't we do this? It looks like a no brainer on paper. Even for a boisterous bear like me.
What if we changed the assumptions to something like this:
We experience a moderate correction of 6%/year. I don't think even an ardent bull could argue that this is well in the realm of normal possibility and is fairly indicative of the 94-2001 correction which witnessed just modest price reductions. When compounded though, those modest corrections can hurt.
Current value (actual): $371,000.
Future sales value at 5 years (assumed): $245,519.
Difference: -$125,481.
Mortgage principle paydown: $36,000 (approximate).
Approximate loss: $89,481.
Again we've used the rental income to cover taxes and maintenance as a simplistic way to remove those variables out of this complicated analysis. Regardless. When the market increases, you obviously come out ahead. But when the market decreases, you really do get hurt if you have to sell.
If you don't have to sell, you may find yourself living in a place with negative amortization, so you can't go get a HELOC and renovate to make it more comfortable.
It's this possibility that keeps us out of entering into this kind of scenario. It is just too much risk. That 6% decline over 5 years is a compounded 30% correction. That could very well be a reality. It could be less, it could be more, it could be faster, it could be slower. Even if we halved that assumption to 3%, that would still be a $30K loss all things considered. That's my master's degree I want to do over the next few years. That's approximately one-third of our income. That's a lot of money. Did I say a lot?
All signs point to a slowdown in both sales and growth. All signs point towards a looming economic downturn. Dodge is calling on the government to let the market correct the debt crisis, which means some pain is predicted, including raising interest rates. The federal government is trying hard to orchestrate their own defeat because come October 2009's scheduled election there is a highly likely scenario of a less-rosy economic (dare I say recession?) situation.
And this analysis is why we will rent for at least another 6 months. Unless we buy, gulp, a condo; which we'll run over tomorrow.
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