News: Third of Canadians now expect house prices to fall

Hi Garth

Thanks for writing the Greater Fool.  It was excellent reading for a potential first time buyer like myself.  But I’m still left with a pressing question around my upcoming move to Vancouver BC.  While I appreciate that you are unable to provide individual advice to every reader, if you do have time, I would appreciate any insights you might have on my situation based on what has developed since you finished the book. Currently I am a renter in Seattle WA finishing up my studies before taking a job in Vancouver.

To rent or buy a condo? In favour of buying:

From talking to friends there, the rental market is still extremely tight (one was reduced to wearing a sandwich boarder while grocery shopping, adverstising her need for an apartment to rent). I want access to easy transit to UBC and the airport (so I can ride my bike or take the bus to work), hopefully maintaining value as outlined in your book (i.e. urban core, access to transit).

Some friends have suggested renting for a year but it seems like a hassel (time and money) to move twice (if I do indeed buy after a year). Prices are dropping into a range I can afford (pre-approval for $320,000-340,000 morgage) and I have enough for 10% downpayment. My initial appointment is for 5 years so I would plan to keep it for that long.  My financial planner was supportive as long as I viewed it a home versus an investment.

But on the flip side, I have enjoyed being a renter and your emphasis on the illiquidity of a house got my attention. Bascially I feel like I would finally like to have my own place but I’m not sure I fully understand the math on ownership. Any insight would be greatly appreciated.

Kerry

Dear Kerry:
Thanks for the kind words about the book. This is the cool part of doing a project like that – getting to meet people like you and helping a little, if I can. So, girl, what have you been smoking there in Seattle?

First, let’s do the math. I figure you can get a nice one bedroom-plus-den unit in downtown Van in an almost-new building for $1,800 a month. At least that’s what I hear, and a quick search turned up a few. With the way the market’s going, I’m sure there will be more each week for you to choose from.

Now, let’s say you bought the same unit and got a good deal (at least for now) at $400,000. With 10% down, or $40,000, you’d have a $360,000 mortgage. That home loan at the current five-year rate, with an am of 25 years, would cost you $2,566 a month. The lost earnings on the $40,000 at a 5% return would be $167 a month. Strata fees, another $200, and ditto for property tax, which is running about 0.06% of current condo market values in Vancouver. That comes out to $3,133 a month, or damn close to twice the rental rate. Oh yeah, and you’d need about $10,000 more in cash to close the deal, for BC’s transfer tax, legals etc. Of course, I have not added in any overhead for insurance or utilities.

So, to summarize: The cost of renting – $1,800 a month, $0 down and no equity. The cost of buying – $3,133 a month, $50,000 down and $10,000 equity.

But we’re not finished.

With renting you don’t have any debts. With buying, you have a mortgage of $360,000 which you have to pay back, cannot escape, and the interest rate on which can be reset higher upon renewal. With renting, you can move out when the lease is up. With owning, you can’t go anywhere until you list it, go through a few months of showings, finally accept an offer and then close the deal a month or two later. With renting, your living costs are subsidized by a landlord. With owning, you are your own landlord. With renting you can get your shower, toilet, fridge or dishwasher fixed for free. With owning, you pay everything. With renting you have liquidity, $50,000 in the bank, mobility and choice. With owning you are wedded to your condo, which took all your money to purchase and you can’t move back to Seattle without selling it – or renting it out for $1,800 and subsidizing someone else.

But that’s not all.

As a renter, you cannot participate in the endless year-over-year appreciation of the Van market, where the average house price is going straight from $700,000 to $1.5 million. This is because of immigrants, world-class people on Robson, mountains invading the core, the sure-thing 2010 bonanza Olympics thingy, and armies of rich Boomers in RVs making the trek from Mississauga over the Rockies. None of those fabulous capital gains will be yours. But as a renter you’ll also avoid what might be coming, which is a 40% decline in the value of Vancouver real estate making it possible, once again, for average people to avoid average homes. Especially condos. As an owner, you won’t.  So much for that equity.

Good luck with the choice, Kerry.

PS – Get a new financial planner

Garth