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.