Wednesday, April 15, 2009

Here it is...

OK - here are some buy/rent comparisons. The results may surprise you. My conclusions at the end will surprise you even more.

They are just random cases I found on the net, and I have applied my less than perfect analysis to them.

I read some posters state that a house should sell for 200X it's rent or some such simplistic formula.

In fact the relationship between renting and buying is very complex, and there is no 'right formula', it all depends on what is happening to housing and the economy. I will explain this all at the bottom.


I have used the ING 5 year fixed @ 3.9%.

Some folks will compare mortgage payments with rent. However some of the mortgage payment is used to pay down the debt. This is a way of 'forced saving'. Over time the debt will diminish, however over time, rents generally go up. So I have put down the amount the debt is reduced for the first year of the mortgage as an indication. I think this gives you a fairer comparison. (I am a fair bear after all)

I have assumed a 20% down-payment +/- for rounding.

I may have played down the costs of owning. A new roof would set you back many thousands, as would any significant repairs.

Lets look at a few examples:

1) Small Condo in Coal Harbour:

# 807 555 JERVIS ST, Coal Harbour, Vancouver West, $358,000.00
HARBOUR SIDE PARK. Located in prestigious Coal Harbour just steps from Stanley Park, Marina and best downtown living. Updated kitchen/bathroom w/granite countertop. Hdwd flr. 1 parking/2 storage. Rent $1300/mth.

Rental cost: $15,600 a year

To buy:

Assume 20% down ($70,000)

Lost opportunity @ 1% = 700 a year
Mortgage on $288,000 = $18,000 a year
Strata fees = $2444
Repairs = $500
Taxes = $1200

Total = $22,844

In the above example nearly $7000 would be applied to reduce the loan. So there is no significant difference between the two.

2) Port Coquitlam home:

2100sf. house on an 8100sf. lot with 4 bedroom and 2.5 bath. House is like new with hardwood floors, granite counter top, island kitchen, vaulted formal living room, two gas fireplaces, master bedroom with ensuite bathroom, attached garage, and alarm system. Fenced back yard with large inground saltwater pool, sunken deluxe hot tub, garden shed/pool house, garden area, nicely landscaped with stamped concrete patio. To keep the yard beautiful the property has inground irrigation system. House is on a no thru road 1 min. walk to bus stop, close to park and school. 5 min. from Home Depot. Available June1, but flexible. No smoking and no pets please. Reference a must. $2100 +util

For Sale Comparison few doors down: V757487 $532,000

Rental cost: $25,200 a year

Owning with $100,000 down.
Lost opportunity on D/P = $1000
Maintenance etc= $2000
Mortgage on $432,000 = $27,120
Taxes (estimated) = $2200
Total = $32,300
However $10,000 of that will reduce the debt.

3) Large Luxury House in West Vancouver:

$41,880 a year.

To buy something equivalent look at 1265 INGLEWOOD AV, Ambleside, West Vancouver, (V724242) $1,288,000. Same area, though the rental property has a view. The property for sale is assessed at $1,127,000 and last year's taxes were $4241. (source:


Lost opportunity on D/P $200,000 x 1% = $2000
Mortgage on $1088,000 = $68,300 a year
Maintenance. Roof/yard work/painting etc = $2000 a year

Total = $72,300 a year.

However $26,000 of this is applied to the reduce the loan. So the difference is not that much.

Ok now for the chat:

As you can see, once we account for the amount which is used to pay down the debt, the cost of renting and buying are remarkably close. This has not been the usual case in Vancouver. There has been a premium to buying due to several reasons:

1) Due to limited land, population growth and inflation, property has trended up, leading to capital appreciation.

2) This capital appreciation is a tax-free gain and as such was regarded by financial planners as one of the best ways of accumulating wealth tax free.

3) When you rent -there are many tangible costs such as moving expenses and intangible ones such as being at the whim of your landlord for lease renewals and the anxiety of frequent moves, stability for schooling, neighbours etc.

Because of these, renting has been cheaper than buying for as long as I can remember. However as the lunatic boom of the last few years got going and everyone wanted to get on the capital appreciation band-wagon this difference expanded to 100% or more is some cases.

So how did we end up near even now?

1) Prices have dropped

2) Mortgage rates are at remarkably low rates.

3) The 'lost opportunity' on the down-payment is very low (unless you can time the stock-market)

So is this the time to buy?

There is no magic formula for when to buy. The most important factors are the mortgage interest rates and the state of the economy.

The fact that rent/buy costs are so close, is a sign of how unusual (and potentially bad) our current situation is. If things weren't bad- interest rates would not be so low, and yet house prices are dropping even though it costs as much or less to buy than rent.

If you expect rents to drop, prices to drop, no bonus or worse no job-do you buy- whatever the comparisons?? No!

It is the current uncertainty that is causing the rent/buy parameters to get so close. While it has stimulated some demand, I would expect the uncertainty to trump it very soon...perhaps this summer.

I expect that by the time this is all over we will see rents and prices fall further and just as a pendulum swung too far to one side, it will then swing too far to the other side and there will be a period when it will be CHEAPER to buy than rent! A complete repudiation of the bubble we just had.

However this is just may opinion, and worth as much or as little as anyone's. Opinions welcome..