There were 2102* residential sales in the Greater Edmonton Area through the MLS® system in May, up from 1975 last year and 1890 last month.
Edmonton MLS® Sales
The sales curve is almost exactly where Sheldon and I predicted it would be in our Annual Report last January:
Sales Prediction
The average sale price was $348,196 in May, up from $332k last year and $337k last month. The median sale price was $333,900 up from $317,500 last year and $327k last month. A recent report from RBC shows Edmonton is among the most affordable cities in the country, and they expect the market to remain strong here for the rest of the year.
“While housing prices are higher in Edmonton than last month, they are inching up in manageable increments,” said REALTORS® Association of Edmonton President Doug Singleton.
Edmonton Housing Prices
There were 7,935 homes available for sale at the end of the month, up from 7,334 last month and down from 8,180 last year.
Edmonton MLS® Listings Inventory
3748 new listings came on the market last month, compared to 3,495 last year and 3,253 last month. This is really the only stat that is showing some irregularity this year; there was a pretty big jump in new listings in May, but this was offset by strong sales so the inventory didn't jump unexpectedly.
Edmonton MLS® Listings
*We adjust the residential sales total for the current month to account for unreported sales. Every month 6% of sales on average are not reported to the Association in time for the monthly report. The following month the numbers are updated to reflect the total sales during the previous month. That means the current month always looks worse compared to previous months. So far our adjusted numbers have been far closer to the actual numbers than those reported by the Association each month (so far on average I am under reporting by 19 sales whereas the association is under reporting by 95 sales each month).
About Sara MacLennan
Sara MacLennan is the Director of Marketing at Liv Real Estate and a licensed Real Estate Associate. The bulk of Sara’s experience and wealth of expertise lies in on-line technology and marketing both for agents and consumers. Sara is the former National Director for Interactive Marketing for Coldwell Banker Canada where she was responsible for an extensive training program traveling to offices across the country training agents and brokers on marketing and technology. Find Sara on Twitter @edmontonblogger.
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Very interesting affordability report. Edmonton’s affordability is definitely looking better these past few years. However I question that they consider affordability based on 25% down payment. Sure theres lots of people who have that and more but these people already own a home and it’s obvious these people can afford homes.
I think they should base the downpayment on average first time home buyers down payment (which I’m thinking is less that $87k). Maybe I’m thinking of a different metric altogether. But to me when somebody can buy and cover the mortgage for a house for the first time, that’s affordability.
Also what I find interesting is that despite hearing about housing prices going up the areas I have been following have been going down. I think that during 2007 shortage everything went up together and now we’re seeing low end, less desirable locations (also condos) go down. And the high end, better locations continue to move up with wages.
When there’s no food even bread will become expensive. But when there’s lots of food there will be higher price disparities.
So maybe housing will continue to go up and crash at the same time just depends where you’re looking.
I think the good news here is that all of the metrics seem to be fairly stable, which is a good thing. I will take slow and steady over boom and bust any day. Prices are up, but still normal, sales and listings don’t show any sort of panic or greed, and inventory is healthy.
I’d say its a sign that Edmontonians are much more cool-headed than those in Toronto or Vancouver. Makes me glad I live here.
Oh, and as for affordability, I would mostly agree, but remember that affordability should be a based on the cost-income ratio, not on how much monthly payments are, which will vary from person to person depending on how much debt they can manage.
I’d say we’re borderline affordable but improving, as income levels here catch up after lagging behind for awhile.
US economy slowing, China slowing, Europe in a complete mess. I think affordability will be well under control in 6 months ……………for those with jobs!
Affordable are you serious???
I am sorry Sheldon / Sara I have a lot of respect for what both of you are trying to accomplish with your blog here, and this rant is not targeted at you but society itself.
I just don’t understand how ANYBODY can think the current Housing Markets across Canada are sustainable. We are in a place now where the average family can afford a house only by over-leveraging themselves in debt for the next 25+ years, trying to pray/hope that interest rates do not significantly increase.
Taking that all into consideration on top of this the average family will likely also require that both parents bring home an income…
Well I am going to use myself as an example of what a lot of folks in my generation are doing….
I am 28 years old, and have a great job for my age providing me with steady 6 figure income. I have a family with one small child and another on the way… my partner has worked until recently in which she is not transitioning to her new role as a stay at home mother…
I do have significant savings I could use as a down payment for a home “100k+”…. However those savings are in a diversified portfolio earning me on average about a 4% return ” a lot of people do much better”.
We currently rent a townhouse in a nice area for $1200 a month…. As a result we can afford to go on regular vacations, buy our kids nice things, and spend money on other entertainment items as we desire….
When I look at my situation….. why would I change?
1) I have a nice safe roof over my head for me and my family. I do not need to worry about property taxes, maintenance, or any of the other woes that go along with house ownership.
2) I have been able to save approximately 20% of my pre-tax income a month… every year I first start with putting the money in a TFSA, and the rest gets invested safely… So I building wealth much faster than most home owners have been building equity.
3) If I receive a new job opportunity “Which has happened” I have the flexibility to move within 30 days notice.
4) When I look at the future…. Large amount of Baby Boomers retiring with no real financial plans aside from selling off the “equity” in our homes…. Interest Rates heading in only one direction…. rules / regulations for first time home buyers only getting stricter. It just does not tell a story that gives me the warm and fuzzies about Home Ownership.
Sorry for the rant guys… but am I the only one who feels that way?
Renting and proud – No, I feel much the same myself. I have no problem with the idea of short-term loans, but 25 year loans are madness. Rather than rent money from the bank, I have always cut out the middleman and rented property.
No you are not the only one that feels that way!
Me and my husband rent, and would like to buy a house, but both feel that now is not the time for all of the reasons you outlined. We both make a good wage, but the last few years, neither has kept up with inflation or current house prices according to historical metrics. It’s actually cheaper for us to rent now.
Alot of people we know have McMansions, new cars, a collection of coach purses and take frequent holidays. Things we save for, but they spend without care. We’re starting to wonder if we’re doing it wrong. That or “financing your life” is the status quo.
Renting and Proud, you just don’t understand.
This society isn’t run by sound economic rules. It’s run by people. People like Harper, like Obama. Just look that the GM’s bailout. That’s company isn’t self-sustainable and should have just vanished. But no, it’s a democracy and the GM’s employees’ vote made sure there was a bailout and a bankruptcy unlike any other (employees’ benefit kept, but top tier bondholder screwed).
In Canada’s case, it’s worse. We bailed out GM, a foreign company in a declining industry, at 2x the per capita cost of the Americans. Canada’s very own Nortel wasn’t.
The lesson is that those who make policies have totally no regard for justice and economic discipline. It’s all for their personal gain, but in a democratic form, which is still better than North Korea.
If you are able to see the fact that baby boomer aren’t really well prepared for retirement, then why would you expect the interest rate to go up? When they do retire and unable to afford a decent living standard, they will use their voting power to increase senior benefits. Remember that seniors vote more? That cost will have to be on the shoulders of the younger generation.
Fortunately, in Canada, we have natural resources and immigrants, so the government is able to print a lot of plastic dollar to pay for the seniors’ cost without much fear of a total collapse of the currency. The Canadian dollar will be pressed low (at roughly the same level of USD). The interest rate will stay low. Housing price will go up dramatically because people, baby boomers included, will want to preserved wealth in the face of a money-printing spree.
Please spend some time and look at China. There is a major problem with retirement too. No, people didn’t sell their houses. They hold on or even buy more as the government keeps printing to fund any form of retirement.
WSN, De-Nile isn’t only a river in Africa you know…..
Fact is the politicians and old farts in power have already delayed the bursting of this bubble as long as they possibly could.
The ONLY thing at this point which could result in housing increases would be wage inflation…. something any hard-working young person like myself would welcome with open arms….
Reality is the Housing Market is headed for a whole world of hurt….
Ask…. America, China, Australia, and most of Europe how their housing markets are doing currently…..
Wage inflation will come for sure. But doubt if you would welcome it, as real estate price and rent will go up even faster than your wage.
Don’t make the wrong assumption that house price to wage ratio will be kept at a constant. The longer a regime has lasted, the more corrupted it will be and the larger that ratio will become. Until at a point where it bursts for the last time, when there is a violent revolution. We are still at least 100 years (and likely more) from it. FWIW, China has a house (900sf apartment really) to yearly before tax income ratio of roughly 10. No, I didn’t include the peasant workers.
@ Renting and Proud, your opinion is logical and a reasonably accurate assessment of the economics involved here. I am in a very similar position as you (except I don’t have children), and I am almost certain you and your family will be better off by continuing to rent and intelligently invest your savings, rather than leveraging yourself to the hilt on one particular asset class at an essentially random point in time in your life. Anecdotally, I work in finance and rent an apartment, for many of the reasons you outlined. My boss, who is 50+ years old, successful in his field, and earns a sizable annual income, also rents because he views it as a financially better decision for him and his wife.
However, you typically will find such realism is not welcomed here by many posters, nor particularly encouraged by the blog owners (which is fine, it’s their advertisement/blog).
@ wsn, I agree with much of what you say regarding modern government, however interest rates such as fixed-rate mortgage rates are decided by the bond markets. They are not under the sole, or even majority, control by central banks, which are also in most cases at a reasonable arms-length from elected governments. The idea that Canada’s government will be able to perpetually prop up the housing market is very unlikely to materialize. Also, I think many of the Canadian government’s recent actions and policy changes by CMHC indicate they see the writing on the wall and are positioning themselves to appear as having “done something” to try to prevent overvaluation. Too little, too late, of course, but it’s all about optics for them, not results. But I think it indicates there is a limit to how far they will go to distort the market.
However, that won’t stop them from increasing government benefits allocated to baby boomers, as you mentioned. I think it is reasonable to expect our government to favor baby boomers (particularly those with far too much % of equity in real estate) via their public service programs, but it is pretty far stretch in my opinion to expect them to be able to manipulate real estate prices across Canada in perpetuity.
In sum, keep renting. Make yourself and your family better off. Just be prepared for a lot peer pressure coming from the other direction.
GoodWillRenting, don’t tell me you are still using fixed…. oh you are renting.
Variable rate is controlled by the central bank. Mine is prime – 0.9 from one of the big five.
wsn, you are incorrect.
Central banks determine their target overnight rates. They do not determine reference interest rates such as Canada’s prime rate. Canada’s prime rate is essentially an average of the consumer interest rates charged by our big 5 banks.
For example, right now, the Bank of Canada’s target rate is 1%. Yet the prime rate is 3%. Banks could decide to make prime 3.25% while the BoC’s target rate is 1%. Likewise, they can choose to charge prime – 1% for a mortgage, or prime, or prime + 1%, or any other price the market will bear.
Long story short, central banks do not control your variable interest rate on your mortgage. They absolutely can not manipulate the market for perpetuity.
GoodWillRenting, you still don’t understand. Learn from the still very recent US financial bailout. When the government feels a need for lower rate for the home owners, it will issue a large amount of money to the banks at vitually no cost but with a condition that they must pass most of that low rate to home owners. The North American banking system isn’t as capitalist as you thought.
I completely disagree. I suspect most finance professionals would as well.
Central banks are seperated from governments in virtually all countries. Just because elected governments want a specific financial outcome in order to ensure they receive votes, central banks will are not under government control. Central banks will not print money at the behest of government long-term.
Also, just because central banks lower rates drastically in times of tight credit conditions and recessions, does not mean they can fully manipulate the rest of the credit market for perpetuity. For example just because the Fed has lowered its overnight rate to near zero during the US recession, does not mean they will keep it there forever, or even that emergency low rates and adding liquidity via QE can dominate the market long-term. Certainly the Fed has failed to achieve some of its intended results with its actions since the 2009 credit crunch hit.
For example, you say banks are getting money at virtually no cost from the Fed. That is true, but the central bank can not force them to loan the money to would be borrowers (certainly not at specific rates). The market ultimately determines the market-clearing amount of credit in the system, not governments.
Of course if there is some sort of unprecedented political shift in the world’s leading countries, that could change. But very unlikely.
For example, you say banks are getting money at virtually no cost from the Fed. That is true, but the central bank can not force them to loan the money to would be borrowers (certainly not at specific rates)
Why would a bank borrow money and not lend it out? It would cost them money and a bank is in business to make money, not lose money. If you didn’t know they make money from the differential between what they borrow at and what they lend at. They also make money from fees, but the majority is made from lending.
If they try to jack the interest rate, competition steps in and takes market share and revenue from the offenders, ie. the BMO 2.99% five year mortgage.
If I were you I would read a little more on how the banking system works. It’s not as cut and dry as you seem to think it is.
Because they believe the credit risk is too high for the market clearing interest rate, and/or market conditions do not warrant loaning funds at sizable volume at that time. The bank may also be concerned it cannot fund all of its loans should its deposits wane. It may also be concerned about liquidity risk, especially during time of tight credit. The bank may also be concerned about its interest rate risk and different banks may have different interest rate outlooks/opinions.
Anyway, that is precisely what happened during the 2009 credit crunch. The Fed tried to force liquidity into the system but banks would not lend money en masse. Thus the Fed had a very difficult time resolving the credit crisis. This has been widely documented in financial media. Popular opinion in the US was very negative against banks; sentiment was that banks were bailed out but then were hoarding the money while retail banking customers suffered without access to credit.
I work in banking and am a financial nerd. Comments like yours are why I typically stay away from this blog. So long.
What? So they still borrow money from the central bank, but due to market conditions they don’t lend it out? They just sit on it. Wow… In reality they don’t borrow money unless they have a market. ie. they can lend it out.
Oh and bail outs where meant to increase capital reserves, not to lend to retail customers. The low interest rate policy were meant to stimulate leading,. During that period recapitalization was the priority, not lending. Media or more correctly, certain political motivated media, made it look like the banks were hoarding, when in reality they weren’t, they were recapitalizing. Back then the banking system was on the verge of collapse and would have, if not for the bail outs. Read about the mark to market rule and the effect it has on a banks capital assets, hence the need to make recapitalization a priority.
GoodWillRenting, thanks for the great reply…
Of course I face peer pressure from my peers every day “most of them are 45 + years old”. They see young people like myself with their attitudes towards home ownership, and they know it puts their own equity at risk….
Well until things change drastically I will NEVER buy into the Pyramid scheme we like to call the Canadian Housing Market….
Also I agree with what your saying about the Baby Boomer Generation to a point…. Look at how Obama inspired soo many young people to vote during his last election…
Fact is the people who make the money, for the most part at the people who have the power.. Over the next 10 years you will see a shift in power from the “Baby Boomer” generation to my generation…
All I can say about that is… better start applying at Walmart because I will not be voting for anyone to be enjoying a free ride.
If your in your 50′s with no sound financial plan for retirement… than you deserve to be poor and destitute during your Golden Years…
I am in my mid 30s. I sure hope the burden of the Baby Boomers won’t fall onto our shoulders. But it will. Just look at the last Alberta election. The supposedly right wing province chose a party that promised to spend more instead of keeping a balanced budget in a democratic election. What else can I say?
If you say the house price won’t go up forever, you need to understand the context, i.e. in terms of what? In terms of gold, true. But in terms of plastic bills? False.
People who didn’t buy 10/20/30/40/50 years ago found themselves paying landlords for this many years without any returns.
You are a fool to skip your very own retirement investment. If you are so proud of renting why are you on this blog at all? Keep the sour grapes for your kids. You are more than welcome to help your landlord’s to retirement.
We are not even in a housing boom (yet) in Edmonton. Feeling sorry for all those who can’t afford a reasonable down payment. Mortgage rate will eventually go UP and your payment to the bank will eventually go UP, even the housing price goes DOWN at the same pace.
I’m glad you feel that way, cause someone like you will end up paying off my mortgage for me, and I will reap all the profit when I sell my house, off of YOUR money. Renting is like throwing your money into the fireplace. Yes you get a roof over your head, but that is all. You as the renter are still paying off a mortgage, just not your own. Why in hell would I want to use my money on a monthly basis to provide home equite to someone else? Dumb move and really dumb strategy. That said, I thank the universe for people like you, as this is exactally how I am able to retire at 50, cause you paid off my property(s) for me. Thanks!
As a landlord, we thank you renters for paying down our mortgage; certainly your logical thinking has no flaws from our point of view, so please keep renting
You’re Welcome! As a renter, thanks for heavily subsidizing my cost of living and allowing me to keep my equity liquid! I guess its a win-win for everyone!
Let’s do some math. Take a 3bd semi-detached house at $300k today. The rent on that is around $1500.
Now suppose you buy that house with 20% down (that is 60k) and take a $240k mortgage at 4% with 10-year fixed rate (if you want to be conservative). The mortgage payment on that with 25-year amortization is $1261. You would pay less than $250 so you are about the same as your rent. You pay utilities in either case.
After 10 years your mortgage balance is about $171k. So even if the prices don’t go up, you have an equity of around $129k (which is more than double your down payement). That’s a return of around 8% per year. Note that I assumed house prices don’t go up in 10 years.
If you have been renting, I think it’s a safe bet that your rent doesn’t stay the same in 10 years.
If you are going to tell me that the house prices are going to be lower in 10 years then I ask show me a 10 year time frame in the last 40 years in which the house prices are not higher after 10 years (I can show many that the prices are much higher after 10 years).
Now you tell me how is renting in this case financially smarter?
In the above I meant $250/month tax.
I appreciate your attempt at a rational, mathematical discussion of this topic, which is often loaded with emotional cheap shots here.
Your buy vs lease analysis is a good start buy you need to include many more relevant factors before coming up with an accurate result. For example, the opportunity cost of your downpayment, monthly principal payments, maintenance on the real asset, any rental income on the real asset, property taxes, condo fees, etc.
You are correct costs that will be identical or discretionary options can be excluded (i.e. utilities if identical, cable TV, internet, etc).
Often one of the most important factors is the opportunity cost of funds. If you are expecting housing prices in Edmonton to remain flat for 10 years, why would you want to invest your downpayment and monthly savings into that asset class? Unless renting a house is extremely expensive relative to all-in costs of owning, far better to allocate your capital to financial instruments that will yield a better return, while providing much better liquidity, lower transaction costs, diversification, etc.
I agree, how about let’s assume both home owners’ real estate and renters’ stock investment are both at their long term historic average of 7% and 9% respectively?
I think the necessary assumptions for this type of calculation are best determined on a case-by-case basis.
For example, a young person like myself will have a different investment time horizon and opportunity cost of capital than a baby boomer who needs to access their funds in a couple years.
But yes, using long-term averages as proxies is a good start.
Really? I’d like to hear of an investment option that gives you an 8% return with the assumption that market remains flat for the next 10 years! (same assumption I made for house prices). Which companies give you 8% dividend?
You talk about different costs/factors yet don’t provide some calculation to prove what you claim.
I agree that stock market is very easy to transfer and lower transaction costs, but if you don’t plan to cash out soon (long term investment) then I don’t see the advantage.
If you don’t have the down payment to start with that’s one thing, to argue that buying renting is financially smarter is a different thing.
There are a lot of free resources available online if you want that kind of data.
Here is one example:
link to moneychimp.com
Western stock markets are generally expected to generate annualized real returns somewhere in the range of 5%. wsn’s assumption of 9% is reasonable assuming its a nominal rate of return (i.e. inflation included).
As I said, I don’t think it’s a good idea to debate specific buy vs lease assumptions in a public forum. The assumptions will be unique to each individual situation and market expectations. So I just stated some of the relevant factors that should be considered and think we should easily be able to agree on that and leave it there. Certainly property taxes, maintenance costs, opportunity costs of capital are relevant factors to consider here.
Regarding transactions costs, most real estate agents charge fees such as 7%/3% or flat rates such as 2% of sale price. Someone like Sara who knows the real estate marketing business, feel free to provide more detail.
By comparison an individual investor can sell a stock or ETFs via a discount brokerage for a $5 flat fee. This is an advantage for this asset class because the investor can adjust their portfolio when necessary without transaction costs ruining their return. Real estate does not afford this advantage, unless owned via a financial vehicle such as a publicly traded REIT.
Also, diversification. Instead of having all your net worth in one particular house in one city, bought at one time during your life, you can have your funds diversified into 100s or 1000s of different companies that generate real economic value from all over the world.
To A commong guy –
I noticed you didn’t mention anything about maintenance expenses.
I’m curious — how long have you owned your rental property for?
If you have good renters (i.e. watch to whom you rent it) the cost of maintenance is really low. I have several rental properties for several years and had one bad (really bad) renter that did cause some damage (close to its security deposit). For most others the cost has been less than a couple of hundreds a year (or zero).
Rent if you think it is the smart choice…buy if you think it is the smart choice, who cares weekday anyone else does.
All I hope is that people I care about learn about the financial differences between the two before they make the decision.
Sheep always get slaughtered.
what I would like to know is why all of these happy renters are even reading or commenting on this blog. After all, it is a REAL ESTATE BLOG, not a RENTERS BLOG.
Well, ask you and shall receive.
I work in finance and am interested in the markets for the sake of interest.
Also, I live in Edmonton and I am proud of my city. I want to know what is going on here.
I am also interested at some point to buy real estate in Edmonton if it makes financial sense to do so. In order to make an informed decision, I need to know the condition of the market.
This happens to be a convenient place to get some of the necessary data while hearing anecdotes of what others think. However as the comments here tend to quickly sprial down into obtuse “thanks for paying my mortgage, renter” jabs from current real estate owners.
So, I tend to just digest the stats each month instead of bothering to comment most of the time. Not a lot of value added by hearing the same immature, flawed arguments over and over again.
birdlady, as a home owner I will have to disagree.
1) Renters are clients of real estate investors, so their opinions matter.
2) Even a negative view of owning a piece of real estate is still an opinion about real estate. So that matters too.
With the Alberta economy on the rise, it does makes sense that residential housing is also increasing.
You have natural gas looking to retest the $1.90 U.S. level. Oil will probably retest the U.S. 35 dollar level. The stocks markets will probably fall for the next 5 years year after year. The world is in a deflationary spiral, all of this is bad news for Alberta and especially Fort McMurray.
Does anyone here read the paper anymore? Do you see whats going on in Alberta these days? If you want to rent then fine, its a fine strategy. But if you dont think alberta is the most affordable compared to the rest of canada then you’re delusional.
- Alberta’s economy expanded at a rate of 5.2% in 2011. (Tops in the country)
- 80,000 jobs created in the last year
- Lowest jobless rate in the country, 4.9%
- highest wages in the country by a wide margin
The average Alberta’s worker’s weekly pay was $1056.87 in March according to ATB Financial Economics. Thats 20% above the Canadian average and up 3.3 over the year. So yes, wages are going up.
Renting and proud, the townhouse you’re renting is probably in the $250,000 range right? Correct me if I’m wrong though, its just a guess.
If you put down just 10%, and had a interest rate of 4% with 25 year amortization, you’re telling me you wouldnt be able to afford a mortgage payment of $1183.55?
It’s more like 2.1% if he applied for that mortgage last summer.
I remember when Canada Trust (as it was then) was paying me about 8% on term deposits, back in 1992 – 20 years ago. I wonder how much they were extracting in return for mortgages. If you take a 25 year loan, you’d better make sure you can handle realistic interest rate hikes for substantial periods.
Last time it takes like more than a decade for the rate to go from 2% to 10%. The thing with a low rate is that you pay down the principle amount so fast. A lot of the loan is chopped off even at the 5 year mark.
As long as you have a reasonable down payment (i.e. 20%), your risk is virtually zero because by the time those 5% down payment guys are in trouble, the government will have to lower the rate again.
Only 15% of a 25 year loan is paid off after 5 years. This figure is not really sensitive to the interest rate. What happens when the interest rate rises is that monthly payments increase.
Unfortunately, the risk of forced sale or even foreclosure is all too real unless you have the luck to have a guaranteed income.
link to edmontonrealestateblog.com
Ed, by the end of the first 5 year term, you are at that 85% inital mortgage. Also assume that your wage increases at 3% per year, so after 5 years you make 15% more (use linear addition for simplicity). Your debt to wage ration has just improved by more than 30% in five years! Not to mention that in the current economy, 3% is a really conservative estimate.
It all depends on personal preference on whether one decides to rent or own. I work with some people who make a very good income that choose to rent simply because they don’t want to be tied down to a mortgage. Another factor to consider is mobility. Some people may want to travel with their job or work overseas for a period of time versus settling down. I personally think we’re going to see more people choose to rent over the coming decades. I think that many of these will be baby boomers who decide to cash out of their homes and will be looking to settle in well designed rental buildings.
It never fails to fasinate me how emotionally charged people get about real estate, on both sides of the “mortgage” fence!
Thanks Sheldon & Sara for providing a place to discuss!
When discussing about “to rent vs to own”, the premise should be strictly bounded by whether it’s a good financial move disregarding personal needs, i.e. does not want responsibility, restricted mobility, added weekly commits (chores), etc. The assumption should be that person looking to buy/rent has full capability to buy at current price. If you bring in personal preferences into this discussion then there’s no point in arguing because everyone has different needs.
I completely agree, however the way things have been going the assumption that the person looking to buy can afford to has become a little questionable.
This is because when people buy, they often buy more than they can afford, and justify it by equity. For example, if a couple spends 20% of their income on housing while renting, and saves nothing, It’s not really correct to say that they can ‘afford’ to spend 30% of their income on housing when they buy, even though everyone says they can.
In a normal market like we have in Edmonton right now, paying 30% to own is better than paying 20% to rent and not saving anything. Why? Because 1/3 of that money spend at the beginning of a 25 year mortgage goes to paying down principal. People that quote rent or own numbers always forget this. Owning is a forced saving program for those that don’t know how to save. When you have a mortgage the principal paid increases every month while the interest you pay decreases. So that 1/3 ratio increases slightly every month until the mortgage is paid at which time you have a savings plan of what ever the property is valued at. Even if the property never went up in value over the 25 years you would still have the value you paid for it, hence the force saving plan. If you rented and didn’t save anything for 25 years you would have nothing, except an extra 10% to spend on stuff every month. So over the long term It would actually cost you way less to own than to rent.
People that are on the renter side always harp about rising interest rates but forget to mention rising wages. They also forget that rents rise with time also. So in the long run the ratio of 20% to rent or 30% to own doesn’t really change, except that in 25 yrs or sooner, if you own, you would have the value of property saved, while with renting you have nothing.
If you saved and invested the extra 10% while renting then things would be different, but you asked the question; “if a couple spends 20% of their income on housing while renting, and saves nothing”.
Hope this helps.
I agree with you, but many of the young couples I know aren’t prepared for the forced savings aspect of ownership. I concur that ownership in a way forces people who are less financially mature to grow up, which is a good thing.
But many of these young people don’t realize that the forced savings aspect of a mortgage is somewhat modest at first. Add to this that homeownership – regardless of equity – then opens up more credit availibilty, which is often abused to offset the changes in lifestyle that having less disposable income should bring.
My point is that anyone who isn’t already saving the equity that they could be building in a home, probably isn’t ready for the responsibility of homeownership.
For the financially mature, the question of rent-vs-own shouldn’t be about affordability, but whether to put savings in bricks or bonds.
The discussion is not about whether people should over extend their “affordability” by buying something they can’t really afford. The discussion is only about whether it’s better to “rent or own” given you can afford the property. It is exactly the factors that you’ve listed above that should be left out of this discussion because they bring in too many variables that are unknown. Like I said, there is no point in arguing about this topic if we bring in unknown variables because the conclusion will fluctuate too much depending on the value of the variables.
I agree with you,
I was only pointing out that many people get confused with talk about ‘affordability’. Just because something is affordable doesn’t make it a good deal. Likewise, just because something is unaffordable doesn’t make it overvalued.
Buying a lottery ticket every week is affordable, but its a terrible retirement plan. Saving half my income for retirement is a great plan, but that doesn’t mean I can afford it.
They are two separate discussions, and should be kept separate.
I feel like I didn’t explain myself well in the below post.
What I mean is that I agree, that with the assumption that one can afford the property in question in a rent-vs-own scenario, the decision should be purely financial.
All I mean is that sometimes the assumpiton is not valid. Buying may make financial sense, but if a person can’t afford to buy it is irrelevant. People need to look at the desision to buy by asking these questions in the correct order.
Do I want to buy?
Can I afford to buy?
Does it make financial sense to buy?
If either of the first two questions are no, then people shouldn’t even bother asking the third.
For someone that rents and doesn’t save, but some how has saved up a down payment and wants to buy, then they would answer those questions as follows.
Do I want to buy? Yes.
Can I afford to buy? Yes, it’s only 30% of my salary.
Does it make financial sense to buy? What does that mean?
‘Only’ 30% of income is a big deal for most people, and not everyone can afford that. For someone who has student loans, a long commute or an insecure job 30% on housing is nowhere near affordable.
Also, not everyone who buys have saved their downpayment through discipline. Some have RRSPs that their employer gives them, others borrow the downpayment from family, some have a windfall from working in Ft. McMurray for a season.
The last question is what I think John is talking about, Assuming a person can afford a house, can they build equity faster by buying, or by leasing and investing in other places?
I feel I should clarify on the assumption of “can afford”. By “can afford” I mean this person can comfortably purchase this property without changing his current lifestyle. Which means he’ll pay same amount of mortgage as he would rent. Which means all his expense remain identical to his current state of renting. Which means his daily responsibility will not be any different. If this person is presented with an opportunity to purchase a property then purely based on a financial prospective, should he buy to live or continue to rent?
Yes, exactly. I totally agree with that. Once that assumption is valid then it comes down to just the math. It takes 2 minutes to do the calculations, and there’s no arguing with it because the metrics will be the same in all cases.
There is a very nice rule of thumb I’ve often heard before: 16. That is, the ratio of purchace price to annual rent should be about 16. If it’s higher, then renting is the better choice, if it’s lower, than buying is better. If it’s equal, then its neutral. This is the same for both landlords and prospective buyers.
For example, if I could rent for $1,000 per month, then I would expect to pay about $192,000 to buy. If I bought a rental property for $500,000, then I would set the rent at $2,600 per month.
Thanks Nathan, that’s a good rule. Could you explain a bit more into how that rule came about?
For some reasons some renters are trying to talk us down because they can save a lot of money and invest 100% of their income into stock market with guaranteed 9% returns. Are you kidding me?
You can easily renting a house for $1600+utilties; or you can rent an apartment S hole for $1000+utilities.
I can own a brand new house with some warranties for $1600 mortgage+utilities; or I can own an S hole condo on $900/month mortgage and collecting $1000 rent from suckers.
As a banker of 24 years, I have been enthralled with this blog and the divergent and in some cases very methodical justification of position. Now I would like to make my case in the simplest of terms that should clear the air. All residences in Edmonton and for that matter the rest of the world are owned by two classes of home ownerships. They are the single home owner and the investor home owner. Their costs of home ownership are the same and ebb and flow equivalently based on taxes, interest, down payment, maintenance and up front costs and down payment. The only difference is that the investor homeowner reaches to a different method of handling the carrying costs – the renter. The renter pays the cost of carrying the home plus usually a small to modest monthly profit each month. The single homeowner owns the house for two purposes – to diversify their investment portfolio and secondly to put a roof over their head. The investor homeowner owns the property for the same purpose – to diversify their portfolio but they get the renter to pay for this investment. The renter gets nothing over the long haul other than no long term liability. As far as interest rates go, it is a moot point except from the point of view of carrying costs but remember, if the investor homeowner’s interest rate rises, they simply pass this cost on to the renter. The only real issue in the discussion about renting vs homeownership is monthly affordability. Don’t take on more mortgage than you can comfortably afford. the reality is the first 5 years are the toughest and then as your equity builds, your options improve if their is a change in family situation. Real estate is driven by the same two emotional triggers as most investment tools – greed and panic. When real estate is going up everyone wants to jump on the bandwagon and share the wealth – this is what happened in the US. When you see your neighbor who works in a middle class job invest his hard earned money in one or two extra investment homes with the assumption that his property is going up 10% in value every year, you know the real estate prices are going up too fast and watch out. In the US you now have seen the reverse in this cycle. When real estate prices moderates, this class of people panic and everyone wants to dump their real estate which escalates the drop in value. The only long term risk in real estate is over extending yourself and dreaming about being an investor owner without the necessary protection in the inevitable cycle of real estate. Real estate will go up and it will go down but for the long haul – 10 years or longer, the real estate will always go up. Most people don’t realize it but the all homeowners in the USA who bought a home prior to 2003 and didn’t take out any second mortgage to gamble on buying a second house still has equity in their house. The majority of the people who got burned in the US were people who jumped on the bandwagon and remortgaed their home once or twice to take this new found equity out to reinvest in additional homes and got nailed when the market started to correct and then panic set in. The motto of my comment – home owneship is an excellent long term investment but don’t take more risk than you can handle.
Awesome analysis… Thanks Alan!
Jag