In the first two weeks of March real estate deals in Toronto were down 11.5%. Sales of single family homes dropped about14%. This is consistent with every other market in Canada. Year/year transactions have plunged from single digits (Calgary) to a withering 40% (Lower Mainland). There is not a single major city or province where the pattern has been breached.
This is spring, and mortgages are 2.99%. Go figure. As night follows day, lower prices trail falling sales. Especially in 2013.
So why would anyone empty their bank account and chunk up on debt to jump in now?
Garth, we really need your help. The area of Toronto that we live in is expensive regardless as to whether or not you want to rent or own. We are busting out of our rental apartment and need to move to at least a 3 bedroom home with 2 bathrooms.
I know you have always written that renting is better, but I cannot find a 3 bedroom, 2 bathroom rental in our area for less than $2,500 which would be more money than a mortgage payment. If you can find us one, I’d be happy to rent for as long as possible until these insane house prices come down. We need to be a min. of 10 min walk to the Bloor subway between Spadina and Lansdowne.
I am really nervous about buying because I’m afraid interest rates will go up in 5 years to the point where our mortgage is unaffordable and it also seems just insane for us to pay almost $700,000 to buy a 3 bedroom semi which will ultimately need lots of work over the years because all of these houses are old!
We are not willing to re-locate by the way. Any insights you could offer would be appreciated. We know renting would be a better option, but can’t justify moving to a $2,500/month rental unit when we could be paying a mortgage.
Is Laura a princess? Whining about rents in an expensive part of a city of six million people and refusing to relocate even a few stops down the subway line to help her family finances smacks of Barbie-ism. But I won’t go there. It’s probably illegal.
Let’s just look at the numbers. Can Laura and her subjects actually buy a $700,000 house in mid-town Toronto for the same money as renting a three-bedroom apartment? Would a move like this make sense over, say, five years – “because real estate always goes up”? Let’s see.
Of course, there are few $700,000 single-family homes in this area for sale, and fewer which are habitable (by people), but let’s assume Laura found one. Putting 10% down (more than the average these days) is a $70,000 commitment. Land transfer tax (it’s double in Toronto) adds $20,200, and normal closing and moving costs would be about $5,000. So the cash required is a little over $95,000. Not insignificant.
That leaves a mortgage of $630,000, to which is added about $17,000 for the CMHC insurance premium (this is a high-ratio borrowing, after all). Financed at 2.99% on a five-year, closed mortgage this would cost $3,061 a month. Add in property taxes (about $6,000 a year there) and maintenance/reno costs (at least $12,000 a year for that quality of housing stock), and the monthly is now $4,561.
Whoops. That’s more than $2,500 in rent money, right? But who cares? We’re building equity!
Not so fast. Renters don’t need to put down $95,000 to move into an apartment, so we need to factor in what that amount of money would make if invested (at 7% in a balanced portfolio). That adds another $554 to the true monthly cost, bringing it to $5,115. Double the cost of rent.
Now, about that equity. Over 60 months Lady Laura would spend $307,680 to house her brood. At the end of that time there would be $553,027 remaining on the mortgage. Let’s assume the TD Bank is correct and houses jump in value by 2% per year for the next decade (although the bank does admit there will be falling prices first). After five years the house is then worth $772,856, or $734,213 after the selling commission. Deduct the mortgage outstanding and the initial downpayment, and the remaining ‘profit’ is about $83,000.
Deduct the profit from the $307,680 paid to live in the house and the net amount is $223,694. Meanwhile to rent for five years at $2,500/month would total $150,000. That means renting is about $73,000 cheaper.
But what happens if the house doesn’t increase in value steadily, and the Duchess sells it for what she paid? Then renting wins by $140,000. And if the house declines a modest 5% because interest rates rise by 2018? Then Her Highness would have saved $175,000 by pursuing a rental.
By the way, I didn’t mention other dangers. What if Laura or her man person lost a job, with a $600,000 mortgage hanging in the balance? Or a job transfer came along and the house didn’t sell easily? Or illness struck? What if this hyperventilating little blog is right and the market slags for five years as society chokes on its own debt?
Methinks Laura has drunk the Royal Kool-Aid. And this is why trouble stalks the realm.