Monday, March 12, 2007

How out-to-lunch are our prices?

First, kudos to House Hunt Victoria on his blog. I've really enjoyed reading it thus far, and there's been some great commentary on his topics. Nice work! My entry today may be of interest to him and others who are debating between renting and buying.

I've been doing some thinking and some number crunching. My young family will need a larger living dwelling in the next year or two. The question is, and will be, should we buy or continue to rent? We've been, and will continue, to save all our extra pennies in an attempt to maximize our down payment, should that be our decision. Part of the reasoning behind my starting this blog was to educate myself as much as possible about today's housing market, and thus make a wise decision.

Using Craigslist and, I pulled together a spreadsheet of rental asking prices for 3+ bedroom homes, and then calculated the average monthly asking price. I know that the number I came up with is not 100% accurate, as there will be duplicate ads between the web sites. Also, in going through the ads quickly, I'm sure I pulled in the occasional number from Parksville or Nanaimo or wherever other than Victoria. But I do think that the average I got should be pretty close.

Average rental asking price for 3, 4, or 5 bedroom home = $1693 / month.

What is the average rental price for a 2 bedroom suite? We pay over $1100 / month. Our friends are paying between $800 - $1050. However, they've all been in their current locations for 2+ years. I think it is fair to say that conservatively, the average rent for a nice 2 bedroom suite is around $1000 / month.

Consider this - a large home, 3+ bedrooms upstairs, 2 bedroom suite down. If both were rented at the average asking price, total monthly rent income = $1693 + $1000 = $2693.

Homes that meet the 3+ beds up, 2 bed suite down, criteria can be bought today for $500000 or less. This home is not in Oak Bay, probably not in Victoria proper, but it is in Langford or Colwood, maybe even Saanich (MLS does have a 3 bed up / 2 bed down home in Maplewood for $409900). Put 10% down as the down payment. Including CMHC fees, mortgage comes in at approximately $459000. At today's interest rate, say 5%, 25 year amortization, monthly mortgage payment is $2683.

Hey, if you live upstairs, rent the downstairs suite, your mortgage payment is then $1683. Less than the average rent for a 3+ bed home!

Ok, there's property taxes, maybe $300/month, utilities $200 / month, misc repairs, I don't know. Yes, it is more expensive to buy. But, if you take into consideration the fact that equity is being built, is it really any more expensive? The first month's payment knocks the principal down by $771. That's $771 in equity, so long as the value of the house does not decrease.

Try this. $2683 (mortgage payment) + $500 (taxes and utilities) = $3183.

$3183 (monthly cost of purchased home) - $771 (equity) - $1000 (2 bed suite) = $1412.

In buying a home, $1412 / month (initially) is down the drain. Renting the 3+ bed home, it's $1693 / month.

I know that this comparison is not perfect, and I do believe that house prices are too high for current rents (especially small homes, townhomes, and condos). What I'm asking is whether the cost of renting is really that much less than buying a comparable home with suite? Is it me or just our home prices that are totally out-to-lunch?