Edmonton Real Estate Market Sees Best Start in 5 Years

There were 921* residential sales in the Greater Edmonton area (CMA**) in January, according to a report from the REALTORS® Association of Edmonton today. The number of sales is up from 828 last January and 672 last month, and is the highest tally since 2008. 

Jan13mlssales
Edmonton Residential Real Estate Sales

The average price of residential real estate in the Edmonton CMA is up substantially from last year. The average sits at $328, 525 up from $320k last January – up 2.5% – but down from December’s unusual high of $340k. Single family homes lead the charge increasing 7.7% over last year to $399,832. The median price for residential real estate in Edmonton was $315k, up from $310k last January but down from $320k in December.

Jan13mlsavg
Edmonton Residential Real Estate Average Price

The inventory of homes on the market is down significantly from previous years, and sits at 3,743 compared to 4,265 last year.

Jan13mlsinventory
Edmonton residential real estate inventory

The number of new listings that came on the market was also low compared to previous years – there were 1812 new listings in January compared to 2038 a year previous.

Jan13mlslistings
Edmonton residential 
real estate listings

With demand higher than last year, and supply lower than last year, we could see larger increases in the overall average residential sale price as we head into the spring market. The average price has started out well ahead of last year, so it will be interesting to watch as the year progresses.

Of course, there are more factors at play than just supply and demand. The real question on my mind, is will the demand continue to rise? Is the job market strong enough to keep all the people that moved here last year here, so they start to buy instead of rent. From what I’m reading, the overall opinion is Edmonton will outperform the rest of the country, but that might not be saying a whole lot. Most analysts have forecasted moderate growth for the real estate market in Edmonton in 2013.

*The REALTORS® Association of Edmonton adjusts the number of sales to account for unreported sales at the time of publication (members have 2 business days to report sales to the Association).
**Edmonton CMA includes the City of Edmonton and the Counties of Leduc, Parkland, Strathcona, and Sturgeon and the municipalities therein.

About 

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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73 Responses to “Edmonton Real Estate Market Sees Best Start in 5 Years”

  1. GMNo Gravatar 05. Feb, 2013 at 12:48 am #

    A 2.5% rise in the average price over the last year is considered to be “substantial”?
    Is that even statistically significant?

  2. Inspector GadgetNo Gravatar 05. Feb, 2013 at 8:26 am #

    Hey GM, The median, which is a better indicator than the mean in many ways is up even less…what…1.5%?
    Not even pacing core inflation (poor measure as real inflation is much higher) or tax increases, even with almost free borrowing rates and low inventory.

    Not sure what to make of the low inventory, but I think there is a good amount of shadow inventory trying to wait out this very sticky stagnation. Lots of people thinking the next boom is just around the corner.

    Edmonton real estate…the cost of a home for you to enjoy, but still dead money as an inv

    • GregNo Gravatar 05. Feb, 2013 at 10:16 pm #

      Word.

      If the prices ever start to rise, that shadow inventory will start to sell… and lower them right back down again.

      On the bright side, my rental property is worth more than the mortgage now. I’m only down in value about $50,000 though…

      • TonyNo Gravatar 06. Feb, 2013 at 6:01 am #

        Expect to end up further in the hole as market momentum is negative with lower prices and much higher inventory month over month. The same thing is happening in Calgary as their real estate market is also turning downward. Oil prices should turn sharply lower over the next several years as the worldwide recession turns much worse.

        • wsnNo Gravatar 06. Feb, 2013 at 10:43 am #

          Do you believe in what you say? If so, then go ahead and short crude oil. You will be a multi-millionaire in a couple years.

        • mavvrickNo Gravatar 06. Feb, 2013 at 2:03 pm #

          Well if you believe what you are saying i have a cave in the mountains to sell you, there is a stream near too, lol, you can enjoy your life there while you wait for the world to end, while the rest of us prosper .

  3. bubuNo Gravatar 05. Feb, 2013 at 6:37 pm #

    I thought before the stats were reported related to Edmonton only…. Now we are talking about Greater Edmonton area (CMA**)…

    • Sara MacLennanNo Gravatar 05. Feb, 2013 at 7:54 pm #

      My weekly reports and first monthly report are Edmonton only. Then I analyze the stats the Association puts out, which are for the CMA.

  4. JulnicanNo Gravatar 05. Feb, 2013 at 7:12 pm #

    Funny thing. These sales, as Garth Turner keeps stating that Edmonton stinks as far as sales are concerned and that prices will inevitably come down.
    Who’s right?

    • TonyNo Gravatar 06. Feb, 2013 at 6:07 am #

      Prices are already falling so it looks like Garth is right. While prices may not fall as hard as the rest of Canada the fact is prices will fall in the future. The outlook for oil prices is very negative looking forward. In fact the long decline in oil may have already started a couple of days ago putting it in the 60 to 65 dollar U.S. range at the end of this year.

      • A commong guyNo Gravatar 06. Feb, 2013 at 9:29 am #

        Tony, based on what “fact” or “numbers” you say prices are already falling? compare numbers and give evidence, otherwise your claim that they are “already falling” looks pretty much like what Garth.
        Prices are not jumping nor falling, they are pretty flat and with very small (like 2% or so) increase here and there. So if you are comparing things with the peak (2007) yes, they are lower but over the last 4-5 years it has been a stable market.

        • TonyNo Gravatar 06. Feb, 2013 at 10:22 am #

          Prices month over month and the fact that many condominiums are still selling for less than 50 percent of what they would have sold for back in the summer of 2007. New house prices will fall much harder and faster than existing ones.

          • wsnNo Gravatar 06. Feb, 2013 at 10:46 am #

            Month over month price goes down during the winter and goes up during the spring. Even a three year old can figure that out.

          • A commong guyNo Gravatar 06. Feb, 2013 at 10:53 am #

            That answer shows you know very little about housing and seasonal prices.

            1) you should compare YOY prices (same months) as the prices always go down in winter and up in spring/ummer

            2)The avg prices not nowhere near 50% of the peak (of 2007). So again, your statement that prices have fallen for some condos to “less than 50%” is as accurate as your understanding of housing market.

      • TomasNo Gravatar 07. Feb, 2013 at 4:04 pm #

        I’m “bearish” on WCS (possibly WTI) price (for good number of reasons), but I wouldn’t bank on a crash anytime soon.

        To quote a CEO of a large Calgary based oil sands construction firm (With respect to new projects):

        “there is caution, and while there is no foot on the brakes, there is foot off the gas on the owner side.”

    • EdNo Gravatar 07. Feb, 2013 at 6:45 am #

      Mr Turner has a very superficial knowledge of the Edmonton market. he just quotes bits and pieces from EREB reports out of context (e.g. ignoring seasonal fluctuations).

  5. mavrick1No Gravatar 05. Feb, 2013 at 7:30 pm #

    Im sorry but dont even mention Garth Turner, he has been predicting a market crash for years. January sales were strong….the stats are right here…. The Edmonton market has been stable since 09, no run up in prices like many other areas in Canada, therefore very little chance of a correction in my opinion, homes are very affordable in Edmonton at the moment.

  6. GMNo Gravatar 05. Feb, 2013 at 7:54 pm #

    It’s harder to sell books if you aren’t screaming about a disaster on the horizon.

  7. Ed GrimelyNo Gravatar 06. Feb, 2013 at 6:54 am #

    http://www.EdmontonRealEstateMarket.com

    Has not been updated since September. Is this project dead?

    I liked what it was trying to do. I hope that it will continue soon.

    Maybe hire NAITstudent to write a macro for his/her class project.

    • Sara MacLennanNo Gravatar 06. Feb, 2013 at 12:02 pm #

      Yes, there wasn’t enough traffic or interest to justify continuing. Is there a particular neighbourhood you’re interested in? I can send you a report…

      • Ed GrimelyNo Gravatar 15. Feb, 2013 at 5:50 am #

        Thank you Sara,

        More interested in breakdown of surrounding areas. Might be more easy to manage if you do not divide it by larger regions. IE Sherwood Park, St Albert etc. If age of home included in Stats, then individual can perform his/her own analysis of what homes are selling for.

  8. Karl HungusNo Gravatar 06. Feb, 2013 at 1:38 pm #

    Keep hoping Tony. Garth turner is the biggest stat cherry picker there is. Worst use of statistics i have ever seen.

  9. mavvrickNo Gravatar 06. Feb, 2013 at 2:16 pm #

    Good artical in the Toronto Star today, http://www.thestar.com , stating that first time home owners are back after a very strong showing in January sales/prices. Very suprising to see any strength in the Toronto market at this time of year.

  10. mavvrickNo Gravatar 06. Feb, 2013 at 2:19 pm #

    Artical is under the business section .

  11. Inspector GadgetNo Gravatar 06. Feb, 2013 at 2:51 pm #

    I have yet to find someone in the blogoshpere who does not cherry pick stats, that is for sure.
    A little like claiming “best start in 5 years” base on sales in a way you must admit though. Without adjusting to the increase in population that claim is not justifiable. There are more people here than any time in the last five years, so if the market was flat it means sales are down, not up.
    No offence to anyone intended, but the real estate boards cherry pick stats, and even come up with new ways to compute them to suit their interests.
    Don’t listen to anyone with a vendetta or a reason to push an agenda that has anything to gain from acceptance of said agenda.
    I read Turner, I read this blog, I read Ben Rabbideau, I even read what the REIN is pushing. I read every opinion on ecomonics I can get my eyes on. After all the information is absorbed you should make your own theory of what will happen in the future and act on it.
    I only preach balance and education, though I happen to be a bear when it comes to real estate investment in Canada at the present time. I was certainly not of this opinion before the run-up here in 07, and have done very well as a result.
    Most people should stay far away from speculation on any investment, because most aren’t willing to do the homework.

  12. wsnNo Gravatar 06. Feb, 2013 at 3:15 pm #

    “Without adjusting to the increase in population that claim is not justifiable.”

    Since when is any kind of investment/price adjusted to population?

    By your logic, back in 2000, Nasdaq wasn’t overvalued at 5000 points because so many wannabe investors jumped in. If you adjust to the increase in stock population, it’s reasonably priced.

    Another example would be Detroit real estate. Hey, it may be 5% of what it used to be, but look at how many people left. With that in mind, it actually went up.

  13. mavvrickNo Gravatar 06. Feb, 2013 at 3:27 pm #

    Inspector with your logic listings are also at an ALL time record low, i mean there are more houses being built every year, so for our inventory to be the lowest in 5 years, hmmm 5 years ago there were 1000′s of less homes in the Edmonton city limits. Your method of thinking works for the bears and the bulls depending on what aspect of the housing market you decide to use.

  14. Inspector GadgetNo Gravatar 06. Feb, 2013 at 3:38 pm #

    My point exactly fellas, my point exactly.

  15. mavvrickNo Gravatar 06. Feb, 2013 at 3:52 pm #

    LOL….Nice cover inspector

  16. Karl HungusNo Gravatar 06. Feb, 2013 at 5:19 pm #

    The difference inspector, is that you are allowed to voice your opinion on this forum, whereas a differing opinion will not be posted on Garth’s blog

    • OctopusNo Gravatar 07. Feb, 2013 at 11:40 am #

      Turner’s a hypocrite and a cherry-picker. He’s changed his tune from a crash to a correction to a slow melt to…what’s next? He’s been wrong about the market for six years and has been responsible for people losing tons of money if they followed his advice. What is truly astounding, however, is that there are still people who lap up his kool-aid without so much as an independent thought or a look at his track record. Yeah, just try to post a dissenting opinion on his blog.

  17. DanNo Gravatar 06. Feb, 2013 at 9:34 pm #

    Inspector – that population vs sales statement is ridiculous. The median price YOY is up. That stat doesn’t lie my friend. The average might lie but not the median.

    • A commong guyNo Gravatar 07. Feb, 2013 at 11:30 am #

      The most telling number is price/sqf; that is the closest factor that tells house prices has gone up or down. The avg or median could be going up yet the price of a typical house is flat or lower.
      The notion of a “big house” is very different now than it was in the past, and as it is reported, the avg size of a house is also bigger. That means the avg price should be higher but higher for a bigger, not the same house.

  18. Inspector GadgetNo Gravatar 07. Feb, 2013 at 12:28 pm #

    So Maverick, a person looking to invest in real estate who listened to Garth Turner 5,4,3,2,1, years ago and lives in Edmonton has lost money? Not a chacne. The only people I know who are underwater on property investment in Edmonton did the opposite of what he preaches.

    I will acknowledge that if a person did not buy in Toronto, Vancouver or parts of Sask during that time they would pay more for the same house today. That does not mean that they will cash out at todays prices, which in Van are falling like a rock and teetering in Toronto.

    Like I said I read them all, and although Turner is quite colorfull in his writing and the way he expresses his opinion anyone who followed his advice in Edmonton has been 100% bang on right so far. We have had our correction, and have had years 5 years of stagnation since. Only time will tell if the big markets get there, but it is starting to look more and more likely.

    By the way, if you read carefully Turner is not against owning real estate if you can afford it and it is a healthy % of your portfolio.

  19. SpudNo Gravatar 07. Feb, 2013 at 1:45 pm #

    Inspector you say that you preach balance and education. Then you subtly say you did very well out of property as some way of giving your opinion some sought of weight or credibility. It doesn’t take much for you to show your bear persona when pushed and pro garth slant. Humorous!!

  20. mavvrickNo Gravatar 07. Feb, 2013 at 2:03 pm #

    Couple of points Inspector, there were plenty of oppertunities to make money on real estate in Edmonton over the last 5 years, i know many who did…..as you are aware the seasonality of the Edmonton market has some pretty big sings from winter to end of spring. But not everyone as you state, was able to do so…..just like in any investment, not everyone wins.
    Second i do believe that most people who listened to Grath over the last 5 years have lost money if they are renting….very good chance of that when compared to owning , With a flat market and extremely low interest rates compared to rising rental rates and zero oppertunity of any return…..we could go back and forth on this forever in these conditions….prove to me that Grath was right over the last 5 years? You can’t, there was certainly no crash. All i can say is that if you had bought a property over the last 5 years and used common sense when buying, more than likely you can still sell it for what you paid, in many cases more than you paid if you used your head, and you will have paid down the principle…..more than you can say about renting.

    Inspector i have to also say that i’m not expecting a big % increase in the edmonton market this year, i think it will be pretty flat for the most part, but in a flat maket with interest rates at this level you are far better off to buy. Of course there are exceptions to that, if you really can’t afford to buy a house…don’t …….owning is a privilage not a right.
    One last thing…..too many prople buying homes as investments only……i mean you have to live somewhere…..own any home long enough and you will make money 100% of the time, that’s a fact. Show me a senior who has never owned a home in their life who is financialy independent and able to comfortly retire..? I honestly have never seen it before……

  21. Inspector GadgetNo Gravatar 07. Feb, 2013 at 3:53 pm #

    As always it seems the opportunity cost of captial is left out of the equation.

    Here is a scenario for you to ponder about always making money on real estate:

    Bought a home in Toronto in the 50′s for $18 000, fixed term 25 years 5%. Lived in in the entire time, kept up to date with renos whole time.
    Sold same home this year for $600 000.

    How do I know these numbers? Grandma finally sold her house.

    Good investment or bad investment, stricly on the money side (not the warm fuzzies of memories etc)???

    Don’t forget to ad up all the odd and ends like garden tools, sod, fertizer and on and on., roof replacements, furnaces, remodelling, driveway redo’s, taxes, and one major reno so the real straight cash cost of ownership is around $150 000-$175 000, and don’t forget the cheque to the agent for $30 000.

    Did Granny make money or lose money on the investment? Consdering what the home would have rented for all along and taking all the extra money and putting it in an index of the TSX (just for example), even after the market crash of 07 the renter is ahead not just by a little, but by a couple times.

    Most comfortable retired people have owned primary residences, it is true. But that does not mean that they are comfortable because they have done so.

    I own my house and a rental in Edmonton, both bought at strategic (when noone wanted them) times and because I can easily afford to AND I have other assets in my portfolio. I have also rented as a successful employed adult in Canada’s largest city. I added more gains to my net worth during the renting years (and putting the difference in to investments) by a fair margin than owning good well bought real estate here.

    Real estate heads have one thing in common for the most part, and that is they only know real estate. I know lots of them…own a few rentals, know a sketchy mortgage broker, think they are players…but try and talk about the way the economic world works and they get all emotional about it, due to their lack of knoweldge. Real estate is simple, simply said.

    I love having some real estate as part of my portfolio, but almost everyone who fails to diversify will eventually fail, always have, always will.

    Your results may vary.

    • wsnNo Gravatar 07. Feb, 2013 at 4:16 pm #

      “Did Granny make money or lose money on the investment? Consdering what the home would have rented for all along and taking all the extra money and putting it in an index of the TSX (just for example), even after the market crash of 07 the renter is ahead not just by a little, but by a couple times.”

      Please show your detailed calculation to be even remotely credible.

    • LeeLeeNo Gravatar 07. Feb, 2013 at 8:49 pm #

      anyone older than 40 years old should have made money in any investment…you don’t even need to look and still make money in real estate / stocks / buy random stuff

    • a common guyNo Gravatar 08. Feb, 2013 at 12:31 am #

      Inspector, let’s do the math with the numbers you have provided:
      although the cost of owning is not as what you say (it’s way less) but let’s work with your numbers. That 600k sale price minus all those expenses you claim should give you 400k net over a 18k purchase price, that is over 22 times grow.
      Now if you check the TSX from 1960 to now it has a grow of about 24 times, BUT:

      - if you had put your money in stock you should still rent a place all that 50 years; if you buy a house your are typically done paying your mortgage after 20-25yrs (or much sooner); so all those 20-30 years that you pay rent vs living rent free in a house make a HUGE difference.

      - The money you get from stock is NOT tax free, but the gain in your own resident is tax free. That’s a HUGE difference again.

      So perhaps, you can do the math and tell me whether a renter is ahead as you claim :-)

  22. wsnNo Gravatar 07. Feb, 2013 at 4:29 pm #

    I find this website to be a very useful source of house price:
    link to housepriceindex.ca

    It only studies properties with 2 or more transactions on record, thus finding the price change for the same property and then combine that curve to aggregate.

  23. Inspector GadgetNo Gravatar 08. Feb, 2013 at 7:23 am #

    Ummm,,

    $600 000 minus

    $30 000 to relator
    AT LEAST $160 000 in inputs (or do you not count the major reno a few years ago for $70 000 as an input? Taxes alone on this property in the GTA were nearly $4000 a year. Believe me the $160 000 is real. Anyone not spending that on their home in over 50 years would end up with a condemed knock down.This was worth $600 largely because of the inputs.

    Real Gain from 50 years of ownership is $410,000. Yes, tax free.

    Please don’t tell me the inputs matter, my Granny had most of the old weathered reciepts in a box.

    Oh, and buying in the fall and selling every spring the last 5 years to make money? Ha! Now that is funny. How would oone be paying the agent, fairy dust? Let me guess, you have such an eye for property that you unload them on Kijiji for big profit every year? Now THAT is over the top.

    In the meantime, I am off to Lake Louise to enjoy the mountains and not worry at all about what happens as I am covered either way.

    • mavvrickNo Gravatar 08. Feb, 2013 at 8:29 am #

      Inspector, there are many people out there who have made great money in the Edmonton market playing the seasonality + renos game and making money even after closing costs over the last 5 years, just because you find that impossible does not mean it cant be done. The same could be said of your statement claiming that people should rent and invest all their money in the stock market, while i do believe that on occation this can work with some individuals the vast majority would not be able to succeed doing this, would your Granny of known how to play the market through all the up’s and down’s for all those years? lol….we all know the answer to that….it’s laughable….just admit it. Real estate for the vast majority is one of the safest bets out there, period!

      • GMNo Gravatar 08. Feb, 2013 at 8:49 am #

        If I could play Devil’s Advocate for a moment here, mavvrick…
        There is no such thing as a “safe” investment. Just ask homeowners in Las Vegas.
        Yes, I agree buying a house is a good idea, but be careful. Nothing is safe these days.

        • mavvrickNo Gravatar 08. Feb, 2013 at 9:01 am #

          I fully agree GM……..i am merely stating that it is “safer” than most….certainly safer than the inspector’s proposal.

  24. Inspector GadgetNo Gravatar 08. Feb, 2013 at 9:22 am #

    So the market index beats housing for 50 years, but it is less safe…not sure I follow.

    I am not talking about stock picking, but having a professional (not to be confused with mutual fund salemperson) do the investing for you. Diversified investments paid attention to by someone who knows better than you.

    For those that still think house flipping is the way to go, this morning I am packing the car and listening to the radio and I just heard an ad for the guy from “Flip this house” is looking for a select few people to start making big cash flipping houses right here in Edmonton! If you want to make big money in your spare time with no previous experience you should sign up to his free seminar!
    I trust that more than a few of the posters here will be attending? It sounds so easy!

    The only people I know that make money in a market like this have an inside line on houses about to go to market. Without spelling it out for you the house cannot hit the market…you need to get to the seller without competition and pay less than market for it.

    Lets see, who in the real estate game might have access to information like that…..hmmm….

    Ever wonder why most of the houses on the MLS map are either crap or overpriced? Most value properties with potential for a flip never seen MLS. Go ahead, ask me how I know.

    • A commong guyNo Gravatar 08. Feb, 2013 at 9:59 am #

      Inspector,

      I have now serious doubt about your ability to do simple math let alone making wise decisions as an investor.

      To prove how wrong you are when you claim “even after the market crash of 07 the renter is ahead not just by a little, but by a couple times” I am going to do the math for you and with YOUR OWN numbers.

      So your grandma bought a house for $18k 50 years ago and after all the expenses her net profit is $400k. To simplify matter say she bought it cash since if she didn’t have the cash she wouldn’t be able to put it into stock either.

      Let’s suppose she had put that $18k money into TSX as you say. That index was around 500 in that time (higher in fact, but let’s say 500). That’s an increase of 25.4 times or 6.7% per year on avg.
      Note that there is a tax on this at 50% and with a typical tax bracket that should translate to 15% tax in effect (combined) that should yield you about 5.7% per year after tax.
      Now I suppose you agree that the cost of rent of a house is about 5% of the value of the house (a $600k house rent is easily $30k/year). So there goes 5% of your return just to pay for rent each year and you are left with 0.7% (if you are lucky). Let’s forget about all the costs associated with moving these years (you don’t expect here to have lived there as a renter for 50 years!) and you are left with a whopping $25k at the end of those 50 years on your investment of $18k.
      Compared to the case of your grandma that bought the house, she is ahead of the renter by a factor of 8 times at least.

    • GoodWillRentingNo Gravatar 08. Feb, 2013 at 10:07 am #

      Inspector, spot on about the long-term returns of the broader stock markets relative to real estate. In the long-run, saving and investing in the broader equity indexes is far superior to buying a consumer good such as a principal residence.

      Also, I see nothing contentious about the past 5 years of Edmonton real estate history (at least for condos, which is what I would be interested in if I were to buy). All anyone here needs to do is look at the charts posted here for price per square foot.

      Anecdotally, I graduated university about 5 years ago, in the height of the housing market. I was leery of the housing market since I work in finance and understood (albeit not very thoroughly at the time) the risks involved. So I decided not to buy, unlike most of my friends, and instead saved my money diligently and invested it in financial assets.

      Had I opted to buy then instead of renting these past 5 years, my net worth, which is now into the six figures, would be substantially less. Now with experience and a decent salary, I’m saving about $2500 each month, so even assuming modest returns going forward in another 5 years my net worth should meet or exceed the average detached house price in Edmonton.

      So, it begs the question, what on Earth is so wrong with renting?

      But, real estate is a highly emotional asset, perhaps the most emotional of all. So, logical arguments such as this (and yours) tend not to be well received here. Human nature definitely has its quirks.

  25. Inspector GadgetNo Gravatar 08. Feb, 2013 at 10:52 am #

    Good on ya Will!

    You are very far ahead of so many of your cohort in this city. As I have stated many times before I know a small handful of people your age who jumped in on the advice of a realtor, mortgage broker, or well intentioned but undeducated parent….classic buy now or be priced out forever! They are all very much underwater on properties they don’t even want to live in.

    As for your math common guy, you are leaving so many things out of the equation I won’t even touch it. You are right, buying houses is the path to riches.

    Picking up the kids at school shortly as today is a short day and heading to the mountains! Hope my renters don’t have an issue while I am gone!

  26. SpudNo Gravatar 08. Feb, 2013 at 12:38 pm #

    Gadget I’m tipping you’re heading to your shift at 7 eleven

  27. A commong guyNo Gravatar 08. Feb, 2013 at 1:01 pm #

    “As for your math common guy, you are leaving so many things out of the equation I won’t even touch it. You are right, buying houses is the path to riches.”

    You are quoting me on something I never said, that’s a cheap shot.

    I worked with the numbers you provided and the assumptions you laid out (putting money into TSX 50 years ago instead of buying the house, the cost of buying, selling, and maintaining all were your numbers).
    You claimed “the renter is ahead not just by a little, but by a couple times.” and it obviously is nowhere near close even.
    You tell me what is wrong and if you don’t have a good reason to add

    • GoodWillRentingNo Gravatar 08. Feb, 2013 at 4:13 pm #

      Well for starters, it’s incorrect to reduce the portfolio rate of return by 5%.

      The purpose of a buy vs rent analysis is to determine whether it is better to pre-pay your housing costs up front, or lease your housing and invest your funds elsewhere.

      Not to draw-down on the invested funds annually to pay for your housing expenses. To help you understand, consider if in fact someone did this, they would then not have to pay rent out of their wages (i.e. it would be paid for by their investment returns). Thus they could then contribute the amount of rent money freed from their wages to their stock portfolio each month. The two cash flows net to zero.

      Obviously, it’s much cleaner just to apply the full rate of return to the portfolio and let the rent be paid with wages.

      The key to understanding why stocks beat houses long-term, is to recongize that as the invested funds *compound* at 6.7% annually, that is what allows them to grow to a future value much larger than the house. Your incorrect method allowed compounding in the house’s sale price, but not in the stock portfolio’s value.

      To make it apples to apples using that method, you would have to assume the owner took out a HELOC for the amont of annual rent he would have paid each year, and then say, blew the money in Vegas (a good life, to be sure, but would not leave much for old age).

      Here are results of an example calculated properly: link to online.wsj.com

      (Note: This is to show the correct methodology only. I’m not comparing California to Alberta.)

      But we can also use basic logic to realize that in the very long-term, stocks must always outpeform housing. Why? Because if it were the other way around, eventually our “economy” would consist solely of houses with very high price tags and no businesses that actually produce goods and services.

      It’s an impossibility for housing, in aggregate, to appreciate faster than the productive areas of the economy, as measured by the publicly traded firms, in the very long-term.

      • A commong guyNo Gravatar 08. Feb, 2013 at 4:25 pm #

        GoodWillRenting

        I don’t know who gave you your university degree. Let me go over the steps one more time hopefully you see your flaw:

        I have $18k and you have $18k.
        I buy a house with that money, you put it into TSX.
        We both have wages.
        You have to pay rent and I don’t.

        Now whether you pay that rent from your wages or you pay it out of that return does not matter. The fact is you are out each year equivalent of 5% of that return. if you prefer to keep it there and reduce your wage, then hey, guess what I could reduce that amount from my wage and put it into stock too!!!
        If you don’t get this simple fact I don’t know what to say!!

        • GoodWillRentingNo Gravatar 08. Feb, 2013 at 4:58 pm #

          I was civilized towards you in my post, so I don’t see why you need to be rude to me.

          Your incorrect method is in effect making the renter pay twice for their rent.

          I’m not really interested in explaining this to you further if you can’t be mature about it.

        • GMNo Gravatar 08. Feb, 2013 at 7:29 pm #

          In all fairness, common guy, GoodWill may have a point if house prices are falling.

          If house prices are rising then it’s a different story. It’s all timing – just like in the stock market.

          If I had bought just before the big crash in the market 5 years ago the calculations would all be different too. Again, it’s timing.

          So you’re both right, depending on when you decide to buy or rent.

  28. a common guyNo Gravatar 08. Feb, 2013 at 7:43 pm #

    GM,

    If you have followed my comments on this blog, I have never said everybody should buy a house in any conditions. Similarly, not everybody should try to invest money in stock.

    This was all about the story of IG’s grandma.
    IG’s made a claim that for his grandma if she had rented and put the money in TSX instead should would have been a couple of times ahead. I tried to show to him how incorrect he is in that claim (he can’t do the simple math of his own numbers).

    • GoodWillRentingNo Gravatar 11. Feb, 2013 at 9:12 am #

      Yes, but you tried and failed.

      The whole point is to see if his grandma would have been better off to invest her money in the stock market during the time period he stated.

      Not to forgoe the long-term compounded returns and spend the money in the present time on rent.

      Despite clearly explaining it to you, you ignore all logical proof before you, and seem more interested in trying to draw attention to your perception of Inspector (and myself?) as stupid, incapable of doing “simple math”, etc.

      Let’s return to the actual problem to be solved and skip the needless insults. If you think about this problem this way you should see your method’s flaw: suppose the stock market returned 100% per year. Or 1000%. Or an infinite return. Obviously then all his grandma would need to do is pay her rent now, and save and compound her savings to a much larger future value. It’s (very) basic calculus. If the rate of return in the stock market is very high, it’s always better to pay rent and invest her savings in stocks instead of a house.

      But obviously, the stock market return that should be assumed is not 100%.But, at what X% annual return vs real estate returns does investing in stocks become better than investing in real estate, even when rent is paid? Answering that question is the entire purpose of a buy vs lease analysis for optimal capital gain. If you choose to completely forgoe that X% return and instead spend the money in the present, the entire question is changed before it starts, and an incorrect answer can result.

      I sincerely hope this explanation has helped you. And to be clear, I’m not interested in your opinions or insults regarding my intelligence, or that of anyone else’s here.

      • GMNo Gravatar 11. Feb, 2013 at 9:58 am #

        You guys might as well just give up.
        The rent vs buy argument is like trying to convince a die-hard Liberal the merits of voting Conservative or vice versa. Each participant has their mind made up from the beginning and no amount of explanation / argumentation is ever going to change their mind.

        So just do what you believe is going to work best. You’re never going to change each others’ minds.

        • GoodWillRentingNo Gravatar 11. Feb, 2013 at 10:44 am #

          Yes, but hopefully basic facts and logical truths can be agreed upon by all.

          2 + 2 should = 4, regardless if you’re renting or buying.

          Isn’t that supposed to be the purpose of a blog? You know, reading and writing, to learn things?

      • A commong guyNo Gravatar 11. Feb, 2013 at 11:37 am #

        Will, I don’t know you and you don’t know me, but let me tell you these types of math problems are my bread and butter. I might have not been good at explaining it to you or I might have made a mistake that you can point it out to me. I will try one last time to go through all the detailed calculations:

        Assumptions: the particular case of grandma of IG

        Goal: Find out if she would have been better off investing her $18000 in TSX vs buying a house as she did.

        Given that now we know the history, there is no prediction, it is working with known variables.

        Known values:
        Cash value on hand 50 years ago: $18000.
        The net profit (as IG said) on that real estate at the end of 50 years: $410,000 (including all fees and expenses of keeping the house).

        Suppose there was an identical house next to the grandma’s house and I had $18000 cash on hand and I decided to rent that identical house all these 50 years and instead of buying put that $18000 cash into TSX and don’t touch the return. Call this house B and the grandma house A. Note that I am assuming these two houses are identical (worth the same each year) and I have rented all these years the same house.
        My total investment in TSX (from that initial $18000 cash) with compound return would be about $457000 after these 50 years (look TSX history and values). Looks ahead of the grandma but bear with me.

        Note that it is reasonable to assume that the rent of house B is about 5% of the value of house each year. So, I need to put aside 5% of the value of house (each year) to pay for the rent. You say I pay it out of my wages, fine, let’s do that. To have a fair comparison suppose that the grandma must put equivalent of this rent each year to be comparable to my situation who is renting. (note that all other expenses for house keeping/renovations are computed in that net profit of $410k as IG said).
        So we start with identical initial investment ($18000), we both take 5% of the value of the house out of our wage and put it somewhere else (I pay it as rent, she puts it into a bank account with no interest paying on top of that, I know she could do better but let’s say she gets zero interest on that).

        Now I suppose you agree that we should see how much she has put into that account over all these 50 years, right?
        (again both of us put an equal amount into investment, we don’t touch it over the 50 years, we also take an equal amount out of our wage and put it elsewhere, I pay the rent she puts it into a bank).

        Note that the increase in price of house (A and B) is 600/18=33.33 times over these 50 years, which is an avg of about 7.3% each year. So the value of the house in year i of these 50 is: 18000 * 1.073^i.
        Since the rent is about 5% of the value of house each year, the amount of rent in year i will be:
        18000*1.073^i * 0.05 = 900*1.073^i
        I suppose you can sum this up over the range of i=0 to i=49 to see what is the total amount of rent in this 50 years but to simplify your life this adds up to about $417000 in total rent paid over that 50 year period (if you want I can provide that formula from 1st year math but I suppose you can look it up). That is, the total amount the grandma has saved in that 0% interest paying bank account.

        If you tally up the numbers, she has a total of about $827000 in the house and rent saved vs. $457000 that you’d have in TSX investment.

        Please do yourself a favor. Check these numbers, if you are in doubt in calculations ask. If I am wrong point out where is the mistake and I will be brave enough to accept that.
        If I am right be brave enough to say so.

        • A commong guyNo Gravatar 11. Feb, 2013 at 11:39 am #

          Forgot to add: you pay tax on divident (i.e. TSX investment) whereas you won’t pay tax on that $410,000 net profit of selling your house at the end of 50 years.

          • GMNo Gravatar 11. Feb, 2013 at 12:08 pm #

            Did you include property tax, maintenance, insurance, etc in your calculation?

            Also, did you include reinvestment of dividends in the TSX investment?

            How about if grandma had to move 5 times in those 50 years? It’s not unheard of. I’ve moved 5 times in the last 15 years. So there would be real estate fees, lawyer fees, moving fees, etc.

            What if grandma bought her stocks at the peak of the market and lost 90% or what if she bought at the low of the market and made 1000%?

          • A commong guyNo Gravatar 11. Feb, 2013 at 12:28 pm #

            GM,

            Go back and read the story from the beginning before posting. The sale price of house was $600k. The $410k was to take into account all those expenses over the years (including maintenance, tax, etc), as IG himself puts it:
            “Real Gain from 50 years of ownership is $410,000. Yes, tax free. :”

            As for moving over the 50 years: read again. We are talking about what has happened not assumptions or hypothesis (she did live there 50 years). The question was whether she would have been better if she rented. And BTW, we assumed the renter was also the same place for 50 years (don’t you expect the renter to move?!?! Geeez!).

            The “what if grandma bought ….”, again this is about what has happened, not “what if”. She did buy it and lived there. The price of stock at that time is also known. The claim IG made was: she would have been a couple of times ahead if she had invested in TSX instead.

          • GoodWillRentingNo Gravatar 11. Feb, 2013 at 1:13 pm #

            Yes, this example is supposed to use the assumptions Inspector already stated.

            However, Common Guy, you changed your new methodology from the previously incorrect method in your first post.

            This explains the drastic change in your results.
            Initially, you stated:
            “[The renter is] left with a whopping $25k at the end of those 50 years on your investment of $18k. [The Owner] is ahead of the renter by a factor of 8 times at least.”

            But now, your results have changed to:
            “827,000 in the house vs. $457000 that you’d have in TSX investment”.

            This massive 8x difference was caused by the mistake I pointed out. You (inadvertently) penalized the effect of compounding on the rental side of the calculation. That’s what I felt compelled to point out since you challenged anyone to find errors in your post.

            Anyway, the conclusion is of course either buying or renting could come out on top in any given example’s assumptions, but it at a minimum needs to be calculated correctly. Beyond the basic correct method, we are dealing with arguments about reasonableness of assumptions, which in this example are pretty coarse and I don’t think any of us really want to spend time debating in a forum like this.

            I grew up in blue collar family but have studied and worked in finance for years now, at times for well known firms. This stuff is my bread and butter too, and everybody makes mistakes.

        • A commong guyNo Gravatar 11. Feb, 2013 at 2:01 pm #

          Will,

          Let me explain that the difference in the two methods is not caused by a mistake on my part; is because in the new method you are bringing in the extra $417k cash (wage/rent) into calculation and it is not purely based on your $18000 start up fund.

          If I give you only $18000 to invest and provide a shelter for yourself (i.e. pay your rent) for the next 50 years and all your wages are for other purposes you really end up with $410k in the grandma case vs. $25k or so in the investor (TSX) case. If you have invested $417k (in rent) plus $18k initial value and you are left with $457k at the end, you tell me how much return have you had on that investment.

          Once you bring in an extra $417k in total rents then

          • GoodWillRentingNo Gravatar 11. Feb, 2013 at 2:37 pm #

            Yes I understand completely the distinction for paying for rent out of the 18K instead of paying for it with wages. What I was highlighting is the economic cost difference between the two is huge.

            But you glossed over the fact that paying for the rent with TSX returns is grossly more expensive economically than paying with wages. The critical effect of *compounding* for 50 years is forgone with this decision. That’s why I used the examples of 100%+ TSX returns to make this additional cost assumption obvious.

            It certainly is not the example Inspector asked about. He was referring to growing the house payment equity capital in the TSX, not funding a lease with it. It makes a huge difference, and if it’s not an “error” at the very least it’s a huge change in assumptions from the original post.

          • A commong guyNo Gravatar 11. Feb, 2013 at 2:49 pm #

            dear Will,

            I have not changed my story or assumptions in any way.
            You can call it whatever you like.

            I bring back what you said a few posts earlier:

            “The key to understanding why stocks beat houses long-term, is to recongize that as the invested funds *compound* at 6.7% annually, that is what allows them to grow to a future value much larger than the house. Your incorrect method allowed compounding in the house’s sale price, but not in the stock portfolio’s value.”

            You show me how does the invested fund grow to a future value “much larger than the house”.
            The simple fact is, that initial $18k of grandma paid her rent ($417k) plus gave $410k TAX free net at the end.

            With your method (or I should say IG’s method) of $18k into stock, you’d still have to pay $417k in rent and would get $457k at the end (taxable). Even if tax-free, that would be $22k net increase at the end.

            I am done! good luck renting….

          • GoodWillRentingNo Gravatar 11. Feb, 2013 at 3:40 pm #

            I think we are talking about different things.

            I was just pointing out how you used inconsistent and (in the case where compounding is excluded from the rental side, incorrect) methods. You asked for people to comment on what was wrong with your first post’s method.

            I didn’t intend to say the specific, coarse assumptions of Inspector’s example lead to a much larger value for his rental side of the equation rather than buying. I suppose I could have better worded my response: all I meant to say was that’s the key to understanding *how* renting vs buying can end up much better.

            Anyway, that’s the source of your clearly erroneous (i.e. 8x better on the buy side) results on the first post. Both sides need to be apples to apples.

            I’ll take your good luck comment at face value, since I already stated I graduated at the height of the market in 2007, and by renting and not buying since then, my net worth has grown much faster as a result.

  29. wsnNo Gravatar 09. Feb, 2013 at 1:09 am #

    Just want to share my two cents, as both a home owner and a stock investor. Currently my total stake in the market is roughly equivalent to a brand new 1-bedroom apartment not in downtown.

    1) Nominal return. Stock is at roughly 9% per year and real estate at roughly 7%. Those are long term statics, no dispute.

    2) Mortgage. Suppose I have $60k, I can easily burrow $240k from a bank at <3% right now to buy a half-duplex. The total stake becomes $300k. I will gain 7% of $300k. On the other hand, I don't believe any bank would lend you $240k to invest in stocks. The stock's 9% is on $60k, and need 88 years to catch up.

    3) Rent. Rent is typically measured as a fraction of house price. Typically house price = monthly rent x 150 ~250. During high inflation and high interest eras, the ratio is lower. During low interest eras, the ratio is higher. Let take 200 as a long term value. That's equivalent to 6% cost per year (0.5% per month). If you compare that to owning a house with a 6% mortgage rate. Owning a house wins, because the mortgage interest cost is calculated based on the initial house price. The rent cost is 6% of the current year's house value, which itself increases 7% per year.

    4) Upkeep cost of real estate. There is plenty of costs associated with a house. Due to the inflation, it makes more sense to assign a percentage cost instead of a fixed number. Roughly 2% per year is needed to cover the property tax and home improvement projects. The pushed down the YoY return from 7% to 5%.

    5) Upkeep cost of stocks. The stock index may be performing at 9%. But if you are a real stock investor and not just bluffing, you would know that an index fund/ETF will always underperform the actual index.
    - 1% due to the management fee
    - 1% due to the change of composition of stocks in the index (For example, Goodyear was kicked out of DOW 30 because the company kept shrinking and was replaced. There is no cost to the index. But there is a real loss for the fund.)
    Thus the index fund's true return is also reduced from 9% to 7%. You will need 86 years to catch up to the home owner this time.

    6) Taxes and fees. Paying $30k realtor fee on a $600k property is very close to being stupid. Right now you can list your property on MLS for $1200. Just price it reasonable, that's all. On the other hand, the capital gain tax on stocks is not avoidable in any form.

    7) Stupid people. If someone locked himself in a 6.5% mortgage these days, I can only say that serves as a perfect example why it actually makes sense for him to buy a house. I can assure you, he will probably lose everything in the stock market. Trusting the index and not touching anything that's dangerously attempting needs a lot of self-control and intelligence. Something the 6.5% crowd lacks.

    Conclusion: for an ordinary family, no investment type can beat owning a primary residence, due to the ease of borrowing and lack of tax. Stock investment makes sense if you have a house already, and have ways to borrow/finance your investment. People like us will use the HLOC to help stock investment. Professional like Warren Buffet will find retail investors to chip in for their plans.

  30. SpudNo Gravatar 09. Feb, 2013 at 3:44 am #

    Guys go back to a story a year ago on thi blog and see what comments were there. Guess what it was renting v buying. Move one

  31. Really?No Gravatar 11. Feb, 2013 at 10:38 pm #

    I have a house in Ukraine ,beautiful one , 40 sm walls , 10 sm isolation , stucco, German hydronic copper heating with splitting heat regulation for every room , tealtopened windows ,arch solid wood oak doors , kitchen and stairs ,concrete flours,240 sq m . 5 years ago I intended to sell it , I was proposed 180 k , but family … We were sitting at the teable with relatives telling us that we sell it way too cheap, my brother in law who is a school teacher ,told me ,he was proposed 500 k for his unfinished hous , guy with 5 k incom per year. When I asked how he can own such an expensive house having such low incom ,he answered it’s simply market.
    So my wife insisted not to accept down payment ,80k, before we got ours visas to Canada, buyer agreed to wait ,but in seven months bubble burst , nobody bought houses anymore. For my hous I can get now may be 80 k if will be lucki . But here it’s all deferent , I understand . My wife does not insist on buying a house after she saw what my friend got for 250 k . I am curious is Canadian type of houses have amortization period ? Such type of wooden houses even in former Sovet Union construction code was presumed as a temporary with am. period not more then 35 yeas.

    • GMNo Gravatar 12. Feb, 2013 at 2:05 am #

      You’re a smart guy. You’re right – the new houses they are building today are indeed “temporary”. They won’t be around in 50 years. They’ll have long since collapsed. They’re all made of fibreboard now.

      Want a good house? Have it built yourself. You pick the builder and then watch them very closely all through the process. NEVER buy a pre-built, finished house. You’re asking for trouble.

  32. wsnNo Gravatar 12. Feb, 2013 at 11:49 am #

    Wood is an excellent building material. It’s light, reasonably rigid and flexible at the same time. Early airplanes were built by wood. Even the modern “composite” airplane material is a synthetic not too distant from wood.

    In year 2008, more than 70,000 people died in an earthquake in SiChuan China. You know, it’s 21st century. And yes, they lived in Soviet style concrete apartments.

    @GM, while there are certainly bad builders and poorly constructed houses right now, what makes you think there weren’t such bad examples 10 years ago, 30 years ago… 50 years ago? Sure you didn’t see them during the construction stage. But they do exist. As a matter of fact, the last oil boom in the 70s was bigger than this one, I could only imagine the labor shortage and all the crappy houses in the era.