I have been pretty vocal about my preference to rent vs. owning lately and a lot of people look at me with either a blank stair or think I'm nuts for not wanting to jump on the low interest rate "now's the time to buy ... rates are at an all time low" bandwagon/herd mentality brought on by Government interventionism and credible news agencies feeding the fire. There's a lot of thought and analysis behind my madness and I'm afraid a lot of first time home buyers are going to get hurt.
The numbers just don't make sense right now and with the downturn in the real estate market in Toronto, it's great to have sold the condo during May's Spring frenzy to a Greater Fool that bought it as an "investment" which will most likely provide him with an unhealthy negative cash flow and ultimately a negative return (Trust me ... I calculated his cash flow and return based on average rent for our unit minus expenses with debt service using a considerable down payment and it's not good).
I'm glad to say, we're renting a 1300 square foot 2 BR / 2 Bath + HUGE Solarium, Parking and Rogers VIP Cable for $2000 all-in per month. A big step up from our previous digs of 795 square feet 2 BR / 2 Bath just 1 and a half blocks down from the new place which was quite cramped for 3 people. We definitely needed the extra space. So, just before signing the lease I wanted to do a quick Rent vs. Own Comparison of other units within the same condo building and boy am I happy with our decision.
Here's what's listed on Realtor.ca:
#503 - Asking $347,000 - $680/month condo fees (1200 sq ft) + 2 parking spots
#807 - Asking $365,000 - $723/month condo fees (probably >1300 sq ft with those fees)
#2007 - Asking $375,000 - $681/month condo fees (1300 sq ft?)
Nuts! Say we were to put a nice 20% down payment and get the lowest priced one at a "deal" for 95 cents on the dollar ($329,650) ... That's $65,930 down (plus closing costs) and a $263,720 mortgage. A 5 year at 4.49% (ING's rate of the day) with a 25 year amortization would give us a payment of $1,458.15 ($967.73 Interest + $490.43 Principle - in year 1) per month.
$1,458.15 + $680 condo fees = $1948.58/ month and we haven't even paid taxes yet. We looked it up and it's $208/month and don't forget Insurance at 19.71/month. That's $2176.29/month + $100 cable (for an apples to apples comparison) ... We're at $2276.29/month!
All to force a savings of $490.43/month (which takes a dent considering the extra $276.29/month less cash flow we would have to spend considering the additional cost of ownership above and beyond the rental amount).
Here's the kicker ... We all know that we're in a declining market. Don't be confused by this spring's bear market rally. It's spring, it's cyclical, there's always more sales this time of year. This one however, is abnormally out of whack and we haven't seen this height of activity since ... well what do you know ... "June 2009’s sales-to-inventory figure is the highest we’ve seen in the past twenty years. This means that the imbalance between supply and demand – favouring sellers - was greater in June 2009 than any other month in the past twenty years, including Toronto’s real estate bubble in the late 1980’s." Alarming Imbalance in Toronto's Real Estate Market (Pop! ... If this isn't a leading indicator, I don't know what is!)
So we have to factor in depreciation (not appreciation) of the market. At a 3.94% annualized decline, which is based on the average yearly decline during the last slide from 1989 to 1996 and is a fairly conservative rate as it's distributed across the entire 7 years of the last decline. The first 3 years of the decline experienced a 7.72% annualized decrease (ouch). This isn't that bad ... To put this into perspective on how realistic and conservative this rate of decline is considered, the Toronto Real Estate market is currently down 7.6% year-to-date and 11.3% (in June 2009) since the peak in August 2008 (Teranet - National House Price IndexCommuniqués: June 2009 - Monthly Report).
On a property that's valued at $330k ... At 3.94%, we can reasonably foresee losing $13,002 / year or $1083.50 / month which is more than 2 times the $490.43/month of "forced savings" ... So that "forced savings" quickly disappears as does another $593.07 per month ($7116.84/year) from the $65,930 down payment / equity which represents 10.79% of your hard earned money you put towards the down that just disappeared within the first year should markets start to correct themselves (as they did the first part of this year) and as they should and will by the end of 2009 (I'm being bold and making a prediction here ... Let's check back and see how I do).
Keep in mind that this analysis used the LOWEST priced unit bought at a 5% discount as a comparison with a good 20% down payment. It get's worse buying for asking or getting one of the other higher priced units that have the same square footage. Also imagine what would happen to the numbers considering a first time home buyer scraping together a small down payment (which is the group that has largely fueled this bear market rally), add on CMHC insurance fees and voila ... you easily have yourself less cash flow by owning over renting and ultimately the unfortunate possibility of a mortgage that is worth more than your home.
So please ... If someone tells you it's the greatest time to buy because "the rates are so low" look behind the curtain and run the numbers for yourself before jumping on the bandwagon. I know it's very hard to separate the numbers from a VERY emotional decision to OWN a home. Heck ... You're not alone "88 per cent say they would feel more financially secure owning their own home" Genworth study reveals there's no place like home, the magic words being "feel more financially secure." However, emotion should not play any part in a financial decision and for most people, this unfortunately is not the case with the biggest financial decision they will probably ever make.
For me ... It's great to be liquid right now.
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