Why it's better to rent

http://realestate.yahoo.com/promo/renting-makes-more-financial-sense-than-homeownership.html?ref=vancouverhousingcrash.com

Parksville Condos sell for up to 34% less at auction

"Bluesman" posted this gem today on the Vancouver Condo Info blog:

Hey folks,

I just went to the auction at River Rock Casino in Richmond where they were auctioning the 5 condos from Parksville (Onyx at Craig Bay) and the bidders were either at the Richmond location, a Parksville location, a Calgary location, on the internet or submitted a bid by proxy.

It turns out the first unit listed at $545,000 went to a Parksville bidder for $480,000 (12% haircut), the next one listed at $535,000 went to a bidder for $380,000 (a 29% haircut), the next one listed at $435,000 went for $350,000 (20% haircut), then next one listed at $425,000 went for approx. $325,000 (memory failed on that one--approx. 23.5% haircut)and the last one listed for $425,000 went for a mere $280,000 (a 34% haircut).

Two went to Parksville bidders, two to Calgary and one to an internet bidder.

Does this mean the end is nigh for BC real estate? You be the judge. The investors who bought these properties bought them through an auction - they paid, in effect, the highest possible price.

Welcome to Switzerland, land of happy renters

I'm traveling in Europe at the moment. What a different world.

In Zurich, Switzerland (rated as the best city in the world in 2003 - http://news.bbc.co.uk/2/hi/europe/2815625.stm), about one third of resident own their homes. The rest rent. Why? I asked someone from Zurich.

"We choose not to own because it would be too expensive. Property taxes are high, and there are many problems in maintaining a property. Why would you want to own?"

Let's remember that Switzerland has an unemployment rate of only 3.1% (and Zurich's rate is even lower). House prices in Switzerland have only increased 19% since 1997, and that's despite the fact that in Switzerland you can write off your mortgage interest.

Interesting. And you know what really blew me away? My friend from Switzerland said, "In Zurich, you can rent very nice flats. Why would you want to buy one?"

Perhaps this is what happens in a society that has been around since 1291.

Question: Isn't home ownership like paying yourself?

This email came from a parenting mailing list in Vancouver. The identity of the poster will be kept a secret:

From: A. M.
To: Parenting List
Subject: Re: Renting v Buying?

Ken, thank you for the fabulous links! This conversation has been taking place a lot in my circle of friends now that we're all reaching the almost-thirty-have-children-want-a-house
+phase of life :)

Two thoughts.

Though home ownership is by no means ideal, what about the arguement that as a homeowner, the money you put out as your mortgage payment is money that, essentially, you are paying to
+yourself? There is zero ROI in a rental situation. Even with the unbelievably ridiculous house prices in our community and the hidden costs associated with homeownership, at the end
+of the day a homeowner has something to sell that has the potential to return some if not all of their investment and their costs. A tenant gets nothing but a damage deposit to roll
+forward into their next rental.

My other thought is that it's difficult to do a rent vs. buy comparison using readily available market rent indexes (um, can we say CMHC?). For example, a three-bedroom apartment unit
+off the Drive has a $1200 market price tag for 2008. In the "real" world, a renter will pay at least $1800 or more for that space. Just as the price of houses is not very
+"reasonable", so, too, the reality of renting.

I live in a co-op. We feel extremely lucky because we're educated, working people who can't afford the rents being charged in our area nor can we afford to buy a house. At some point
+the housing climate will have to shift and prices will have to either plateau or come down because working families are being driven out of the city in droves which is not a problem
+that can be solved by densification or by the paltry social housing initiatives currently on the agenda. Retention strategies will someday have to begin reflecting the economic
+reality of Vancouver's citizenship.

Cheers!
Angela

And here is my reply:

First, let me say that if house prices are reasonable when compared
with rents, it's almost always a good idea to own. Home ownership
generally provides better security of tenancy (because you literally
own the title to the property), and a pride of ownership that is hard
to put a price on.

In 2001, the house price to rent ratio in Vancouver was low enough
that home ownership was a good choice when compared with renting --
even without considering the other benefits to owning outlined
above. For reference, the ratio was 16.6 on an annual basis: that is,
the median home cost 16.6 years worth of rent.

Today, the price to rent ratio is higher than 27 - almost double what
it was in 2001. That means if you rent a house, it will take 27 years
for you to have fully covered the purchase price of the house. Put
another way, if you own a house and rent it out, it will take 27 years
for the renter to pay back the purchase price -- and that does not
include taxes, maintenance, selling costs, etc..

In terms investors will understand, the price to rent ratio of 27
implies a simple ROI of 1/27 =3D 3.7%. Compare that to the return from a
riskless 5-year GIC, which is 4.4% (see
http://money.canoe.ca/rates/gics.html), and you'll see why investors
are starting to question seriously whether houses are a good investment.

So, to answer your question about home owners "paying themselves,"
let's do a bit of calculation to find out how renting differs from
owning in today's market. Let's assume our intrepid home-renter/owner
has $100,000 saved up for a down-payment and likes to invest
savings conservatively in GICs.

And let's also assume that our friends earn $150,000/year. That's
about what's needed to afford a 25-year mortgage these days.

SCENARIO 1: RENTING

- Let's rent this PNE beauty at Trinity and Renfrew -- excellent location:
  http://vancouver.en.craigslist.ca/apa/700491927.html
- Monthly loss from renting: $2,500
- Now, because the down payment is being saved rather than spent, we
  need to include the interest we're getting on it:
  Monthly interest on a 4.4% GIC on $100,000: $367
- Tenant insurance: $40
--------------------
Net Loss from Renting: $2,500 rent + $40 insurance - $367 savings interest=
=3D $2,173

SCENARIO 2:

- Own a similar charmer in the same neighbourhood. This one goes for
  $685,000 - a bargain in today's Olympic market!
  See the MLS listing here: http://tinyurl.com/3mzxqv
- For the mortgage, let's get the best 5-year rate
  possible. According to canadamortage.com, that's a 5.49% 25-year
  mortgage. See http://www.canadamortgage.com/calculators/convhighratio.cgi
- Now for the costs:

 + Mortgage Interest: $2,690 (note, total payment is $3,639/month )
 + Property Taxes:    $2,593 / 12 =3D $216
 + Maintenance:       $250 (I'm going REAL easy on maintenance)
 + Insurance:         $200 (I used Kanetix.ca for this - great site, btw)
--------------------------
Net Loss from Buying: $3,356

DIFFERENCE BETWEEN RENTING AND OWNING:

$2,173 - $3,356 =3D Owning loses $1,183 MORE every month than renting

I still haven't counted for the $20-30K it's going to cost the home
owner to sell this place one day. And the maintenance estimate of $250
is probably inadequate. Every 20 years, you have to spend $15-20,000
on a new roof, and this MLS listing probably needs one before you move
out. Home owners -- just ask your parents -- can tell you that there
are lots of hidden costs to ownership.

AND I still haven't addressed what happens if the market value of the
house changes. If you bought even two years ago, the increase in
property value would have handsomely paid for all your mortgage
interest, taxes, and maintenance.

Will that happen next year? Who knows? But the fact that house prices
have shot higher in relation to rents than they ever have in the
history of our city indicates that the tendency is probably to the
downside rather than the upside.

If you were to borrow $585,000 with $100,000 down, you would stand to
lose nearly $70,000 if this house loses just 10% of its value. Ouch!

So to answer your question:

> Though home ownership is by no means ideal, what about the arguement
> that as a homeowner, the money you put out as your mortgage payment
> is money that, essentially, you are paying to yourself?

Whether you own a house, or get a mortage, you're paying rent to
someone. If you get a mortgage, you're renting money. If you're
renting a house, you're just renting the house.

Another way to look at it is to consider the hypothetical situation
where you are the landlord, and you are also the tenant. It's a silly
situation, but it's valid.

If you had to spend $3,356 a month to own a place that you then rented
out for $2,500 a month, would that be a sensible thing to do as a
landlord? I don't think so either.

> My other thought is that it's difficult to do a rent vs. buy
> comparison using readily available market rent indexes (um, can we
> say CMHC?). For example, a three-bedroom apartment unit off the
> Drive has a $1200 market price tag for 2008. In the "real" world, a
> renter will pay at least $1800 or more for that space. Just as the
> price of houses is not very "reasonable", so, too, the reality of
> renting.

The CMHC figures are always out of date, but in general there hasn't
been a strong upward trend in rental costs, despite a fall in
vacancy. Why not? Probably because the population of BC hasn't been
increasing much in the last few years. The fall in vacancy has
resulted from many units being under construction or renovation.

You should do your own comparison. Use Craigslist. Call around. Find
out what it would cost to rent the house you're considering buying.

> I live in a co-op. We feel extremely lucky because we're educated,
> working people who can't afford the rents being charged in our area
> nor can we afford to buy a house. At some point the housing climate
> will have to shift and prices will have to either plateau or come
> down because working families are being driven out of the city in
> droves which is not a problem that can be solved by densification or
> by the paltry social housing initiatives currently on the
> agenda. Retention strategies will someday have to begin reflecting
> the economic reality of Vancouver's citizenship.

You won't have to wait long to know that house prices are coming
down. Look at this graph of listings versus sales over the past four
years:

http://2.bp.blogspot.com/_rt16FZ_z1N8/SERBHlfZNyI/AAAAAAAABAw/_SUERWrtQRw/s16=
00-h/REBGV+Active+Listings.JPG

The sharply increasing green lines means houses are going on to the
market, but aren't coming off. Oops!