Sorry to come in late on this and ask a question that will probably have a million answers based on what I read in this thread. I live in Calgary where the rental vacancy rate, according to today's paper, is around 1.6 and expected to go to 0.5 by early 2007. The link to the article is below. To make matters worse, housing prices have increased almost 40% in one year and continue to climb by almost $15,000 per month. I currently own but because of a change in my situation, will have to move in the next couple of months. I am trying to decide between rent and buy and get a different answer depending on who I'm talking to. A few things complicating my decision: 1. A suitable rental place will cost me at a minimum $1000/month but probably $1200-1500. This would be very close to and possibly even slightly more than the mortgage payment for what I am looking for. 2. I am not sure how much longer I will stay in Calgary, potentially only one year and possibly even less. Note however that I can port my mortgage from my currently place without any penalties. 3. I am concerned that I will buy into an inflated market that will deflate and I could lose significant money. That said, some sources say Calgary, as a large center, has been under-priced for a long time and these new prices are an adjustment for that and therefore shouldn't go down. Any advice? http://www.canada.com/calgaryherald/news/story.html?id=7b42bdad-a941-42b4-b9fb-90c69ae1e3b4&k=16427
When in doubt go to the basics: 1. Your mtg on a 15 year term should be less than 30% (MAX) of your after tax income. 2. You really should not buy anything unless you plan to stick around for at least 5 years. Transaction costs are just too high. There will be a downturn at some point, so think how you will get out from a worse case scenario. 3. There may be a plateau in Calgary towards the end of the year as more people put their old house on the market when the builder finishes their new house. But again there may not be, and seriously, nobody knows for sure. 4. If you decide to buy anyway, check the For Sale By Owners and compare with the MLS comp list (ask an agent). Sometimes you find great deals as FSBOs will let their home go for way less than market price. Also check house auctions, they usually go less than market. 5. Try to find an ugly house that you can invest some elbow grease in. At least you will build some sweat equity and be able to sell it for a little more than you bought it, if the market should flatten. 6. There is a lot of money in Calgary and the whole province is fundamentally sound, as long as oil sits above 35$/barrel, taxes are much lower than anywhere else in Canada, and we have a government that welcomes businesses.
Good points all. Is Calgary where the oil tars are? That could be a good place to own property. One other thing he needs to consider is hanging on to the old house and renting it out. Here in the U.S., you can hang on to it for almost 3 years after vacating, and still sell it without paying much or any taxes. Not sure about Canada's tax issues though. Anyhoo, instead of "porting" the mortgage, he should at least consider leaving it where it is, and renting out the old place. With respect to buying a new place, even this real estate bull thinks that renting is the best idea until he has concrete plans about where he'll be in the future. SM
Here's a quick, back of the envelope calculation. You can put together a big spreadsheet with 30 years of cash flows and discount rates, but you'll get a very similar answer. I know, I've done it. Either you are renting a house, or you are renting the money to buy the house. Thanks to the Uncle Sam, the latter is tax deductible, but the former is not. Mortgage rates, the cost of money collateralized by a house, are running 6.45% (30 year fixed jumbo at bankrate.com). So you pay $38,700 a year in pretax dollars to rent $600,000. (I am correctly ignoring any form of savings - such as down payment or principal payments. Savings have an opportunity cost. Any money you save can be considered to be borrowed from your brokerage account using the mortgage rate as a proxy for the opportunity cost. That's what an interest rate is, after all.) Compare $37,500 in pretax dollars with $18,000 in after-tax dollars at your tax bracket and you have your answer. Martin
Thank you very much for your answers. I'm getting a very good deal on a 600k house, renting at $1500 and all my friends tell me to just buy one but I think it's just a fantastic deal -- esp since real estate prices where I live are what I consider to be at least to be near bubble zone.
sounds like you are. take the extra 1500 or 2k you're saving a month by not buying now and save that away until short term fed rates hit 1% again (probably about 4-8 years out) and no one believes in houses, but the numbers pencil do out. Then you'll do well. Until then, save away and get yield on your cash.
I'm in a similar situation and I can afford to buy. I just choose to take advantage of the large spread between the cost of renting and buying. Additionally, as a professional trader trading from home, I write off $1,300 per month in office rent. This is almost equivalent to the interest rate credit. A great accountant is key in this area. Additionally, the downpayment money that I would have tied up in the house is bringing in a better return than the rising equity on the house. Naturally, a mortgage provides leverage on the appreciation which my investment funds don't use (no margin on investments).
Most people also don't spend too much time figuring out the opportunity cost on funds used to make the deposit if you buy. It might be important if you are trader. A lot hinges on two assumptions : the expected horizon return on real estate and the expected opportunity cost on funds.