Real Estate Talks

Every year or so, I find it interesting to compare the buy versus rent scenarios for different areas in Greater Vancouver.
I looked up mortgage rates at TD and found a 2.94% fixed rate for a 5-year term. Sounds like a pretty solid deal, so I used their calculator for $1m, $2m, $3m, and $4m homes putting 25% down for each. Monthly mortgage payments worked out to be:
 
$750k loan, $3,536 / month
$1.5 m loan, $7,052 / month
$2.25m loan, $10,579 / month
$3m loan, $14,105 / month
 
After 5 years of making payments, a little more than half of the payments would have gone to principle deduction. So, for the $14,105 payment, about $7,500 per month would go to reducing the overall loan amount.

For the opportunity cost, I used a conservative 2% return (compounding) for the 5 years. The lost return of 2% equals about $430 / month for every $250k of downpayment.

To keep things simply, I ignored property taxes, maintenance / repairs, depreciation, etc. associated with owning your own property. Overreaching justification: These costs are offset by “pride of ownership”, although these costs can be quite significant.

So, taking the interest portion of the mortgage payment and the opportunity cost of the downpayment, approximately monthly figures are:

$1m home: $2,100 / month
$2m home: $3,800 / month
$3m home: $5,400 / month
$4m home: 7,400 / month

Of course, the homebuyer would still have to afford / need to make the entire mortgage payment, just that the principal reduction would be forced savings.
If we consider the home an investment (leveraged for these examples), the obvious deciding fact is how much will the home appreciate (or depreciate) over the 5-year period. If it only appreciates 2% a year, the that would average over $1,700 / month per $1m worth of home. When I compare to homes in the same price range offered for rent I keep this in mind, but without a crystal ball, I just revert back to the interest and lost opportunity costs of the downpayment. I should fact in the other costs of ownership.

After looking on Craiglist on various areas throughout GV, it seems rents for the various homes are approximately:
 
$1m: Mid to high $2000’s / month
$2m: Mid to high $3000’s
$3m: High $3,000’s to low $4,000
$4m: Mid $4000’s
 
Of course, there are lots of exceptions throughout the area: $4m + homes on the West side with rents in the lower $3000’s and $700k homes in Maple Ridge with rents over $3k.
What I take away from the simple exercise is just confirmation of what is already suspected. The more expensive the home, the bigger the gap between renting vs buying.

Its always fun reminding people that investing in an RRSP means you pay taxes when you retire and use the money and with a house you can sell it without paying tax and use the proceeds together with CPP/OAS to live the rest of your life.

So are you renting or did you buy?  If you did the same exercise the last few years, your 2% will need to be ten times more.  

I continue to rent a house in Vancouver. But I have money to either buy or invest, either in Vancouver or elsewhere.

I rent because it just makes sense: The house I live in would probably sell for $4m + (mostly land value), yet I pay around $3k / month. Rent has not been raised since we moved in 4 years ago.

I also have both residential and commercial real estate investments so I am "in the market" so to speak. If I can find a relatively safe investment with a 8% or 9% return in Greater Vancouver real estate, I am both ready and willing to do it.

It makes no sense to rent when you live in the place with one of the lowest property taxes among any English speaking country.

I think very few people would argue that one shouldn't buy their PR.

The waters muddy when looking for an investment property- especially today in Vancouver.

I think very few people would argue that one shouldn't buy their PR.

The waters muddy when looking for an investment property- especially today in Vancouver.

Depends on your situation and viewpoint; Are you going to live in that PR for a long term or short term period? Do you expect the home to appreciate or depreciate? What are the costs of ownership versus renting? What other investments opportunities are available to you? What is your income and tax situation? How stable is your job or industry you work in? What are your needs versus your desires?
I could buy a house without a mortgage in Langley, Abbotsford, Mission, etc. but I would only do that for investment purposes because I have zero desire to live there. While buying a PR out there is an option for my family, it is not desirable and would adversely impact our standard of living. Fortunately, we don't have to make that sacrifice. Instead, we are able to live in highly desirable area that is significantly subsided by our landlord. Meanwhile, saving well over 50% of our take home income.
Or we could buy a $4 million home in Vancouver and have a $15k / month mortgage. I just don't have the risk tolerance for that investment in Vancouver, and it just doesn't make sense to me. Income to price ratios tend to eventually balance out. 

That's why I said "very few".

You might be part of that "very few" but the majority of people would be wise to purchase real estate when they are financially able to do so.  And like you said, you do own real estate already.

if you can afford the $15,000 a month for that 4m home you might as well do it as putting that $15,000 in just about anything else would result in paying a lot more taxes

Is this blog run by TDMA? why do you have the last comment on every thread? Are you the kind of guy who has to get in the last word?

I await your response...

if you can afford the $15,000 a month for that 4m home you might as well do it as putting that $15,000 in just about anything else would result in paying a lot more taxes

 Can you explain how that works, it doesn't make sense to me

if you can afford the $15,000 a month for that 4m home you might as well do it as putting that $15,000 in just about anything else would result in paying a lot more taxes

 Can you explain how that works, it doesn't make sense to me

I think what google translate is trying to tell us is that you would have to pay taxes if you sell a different asset other than a PR - of course forgetting that a husband and wife have a combined $104,000 of TFSA contribution room which results in no taxes unliked RE where one pays property taxes annually and transfer taxes when purchased.

Experienced people know that tax free accounts have a very limited amount of deposits whereas you can put as much as you like into an open mortgage and Vancouver has one of the lowest property tax rates in the world.  Dont need to gamble on the stock market.

A coherent response from TDMA would be too much to expect. I have ran some figures that I can share. Assuming the same interest rates, $1 million downpayment, $4 million home and over a 5 year period:
 
Mortgage payments of $15K / month. After 5 years, approximately $480k would have gone toward the principal. For just the sake of running number, I used 3%, 5%, and 10%.
 
If the house appreciated 3% each year, the total equity in the home would be $2.256 million (including the $1 million dowpayment). At 5% compounded yearly that figure would jump to $2.84 million. At 10% compounded it skyrockets to $4.566 million.
 
If the house appreciated by a total of 3% over the 5 year period, the equity would be $1.6 million. At 5%, $1.68 million. At 10%, $1.8 million.
 
Alternatively, if the house was worth 3%, 5%, or 10% less after 5 years, the equity would be $1.36 million, $1.28 million, and $1.08 million respectively.
 
The alternative would be to rent the same home for $4k month and put the additional $11k / month (plus the $ 1 million downpayment) into an different investment vehicle. Assuming paying tax on the return and making monthly tax installments of 50% of the proceeds, the value of the investment at the end of the 5 year period would be:
 
Compounded monthly at 3%, 5%, and 10%: $1.764 million, $1.837 million, and $2.034 million respectively. If you didn’t get any returns (and no losses), The value would be $1.66 million (initial $1m + 60 months of $11k savings).
 
Overly simplified example as property taxes, maintenance costs, commissions (if selling after 5 years), etc. are not accounted for. As usual, boils down to the same questions:
 
Where will the market be in 5 years (and in the meatime) and what will mortgage rates be when it’s time to renew? If you believe that the Vancouver housing market will continue to appreciate by 10% each year, the decision is easy. If you think that it will be 10% higher 5 years from now that it is right now, then the figures show that investing in something else (even after paying taxes) is about the same.

Besides the part about that rent is throwing money away, thats a lot of tax to pay on whatever you put that million dollar down payment into.