Buy vs Rent

The following comparison will illustrate how the low interest rates are reducing payments enough to compete with the rental market. Under more reasonable financing terms mortgage costs are not terribly out of line with the rental market. With more creative financing it is easy to see why sales are currently strong.

First consider this 1716 sqft house in South Edmonton for $374,900

Looking on craigslist for rentals in Edmonton I found the following.

The 1680 sqft house is the closest match. The advertised price is $1500 but after a few months the price increases to $1700.

1680 Square Foot Beautiful house in Edmonton's most popular newly developed community called Ellerslie crossing. The house location is seconds walk from ETS bus stop and kids school buses. Close to all amenities. Its next to South Edmonton Common, Anthony Henday, Calgary Trail and Whitemud. The lake is visible from the bonus room....Starting rent of $1500.00 will increase by $50 on December ($1550), January ($1600), February ($1650) and will get fixed at $1700.00 from March, 2010 onwards.

Comparing full asking price and rent results in a ratio of 220. That is fairly high even though it is from one of the more reasonable priced houses on the MLS (there was only one rental to choose from in the neighboorhood).

Looking at the price vs. rent things are a little closer.

Assuming full asking price, 10% down, 2% CMHC premium, 4% 5-year fixed rate and 25 year am.
$1814/month. $674 of which is principal.

There is a premium here, especially when taxes and maintenance are included. However, after 5 years the balance will be $300,255.

A buyer under these terms will end up paying a moderate premium and pay down some of the principal over 5 years. Meh. Not terribly exciting.

However if a buyer chooses a more risky mortgage a more interesting comparison appears.

Full asking price, 10% down, 2.4% CMHC premium, 2.25% variable and 35-year amortization.
$1192/month. $543 is principal (the first month, at least)

So for $1192/month + taxes + maintenance a buyer can move out of an apartment into a house and become a homeowner. The problem of course is not considering the interest costs for the entire duration of the loan and the effect of this stimulus on the asset price itself. Is this a bubble? Are current buyers the greater fools by recklessly overpaying for houses due to blind faith in future appreciation? Not entirely. Buyers may be incorrectly assessing the risk of future financing costs and not accounting for the asset inflation caused by low rates. This is a more subtle mispricing as opposed to a bubble and due to this I expect a less dramatic unwinding.

The type of financing above is an artificial boost to the housing market. What about the rental market? Low interest rates and creative loans reduce demand for rentals as the monthly payments attract people towards becoming homeowners. While rents have been falling partially due to the weak economy, I think another reason is from these financing terms. If/when these financing terms become less attractive the rental market may gain strength.

But its Halloween so we have to consider we may be in a deflationary depression where everything is toast.

Policy advice for Mr. Carney

Dear Mr. Carney,

Today you made the following statements regarding the Canadian housing market:

"We expect prudence from lenders," he said. "We expect, and we have confidence in, prudence from Canadians. We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan."

That is a concise statement and echoes what many people have been saying for some time. However this appears to be a case of CYA so in 2011 you can say "hey, look! I told people to be prudent", while still allowing the heightened demand for housing contribute to precious green shoots.

You don't need to remind borrowers of anything. All that needs to be done is for CMHC to require qualifying income to be set for more normal interest rates. If CMHC ensured that borrowers could handle more normal rates that would limit the downside if/when rates increase. For example it would be more reasonable if CMHC required a qualifying rate of 6% to insure these mortgages.

Obviously people are qualifying and depending on super low interest rates. This has been going on for awhile. Consider the quote from the July 2nd article First time buyer like low rates:

What really helped? The 2.75-percent interest rate they were offered. It ultimately allowed them to move from a $1,800-a-month apartment into their own home.

“But we don’t have a lot of [wiggle] room,” Morettie said. “We can go up to four percent, but then we’re done.”

Ouch.

craigslist rental sample

The price to rent ratio remains elevated in Calgary and Edmonton. I suspect this is due to an irrational negative attitude toward renting in Alberta and very low interest rates. However, I do think that some part of the price difference between Alberta and the US is a real difference between the cost to rent (and build). Its simply more expensive to rent in Calgary and Edmonton than Phoenix and because of this prices should be comparatively higher.

Consider this selection of craigslist rental ads for $1250.

Edmonton

$1250 / 2br - Apartment For Rent at RentersOnline.com

Two -2- Bedroom, apartment condo , approx 900 sq ft with a nice sized west facing balcony in a 3 yr old west end elevatored building is available immediately. The suite comes complete with fridge, stove, dishwasher, washer and dryer.

The suite also features underground parking.

The unit is on the top floor so there will be no noise from above.

Heat and Water are included in the rent.

The master suite has a walk in closet and full 4 pce bathroom. The second bedroom has a large closet with sliding mirror doors. The second bathroom is next to the second bedroom and is a full 4 pce bathroom and also houses the upright washer and dryer.

The suite also has a full storage room and linen/storage closet.

The kitchen, with ample counter and cupboard space, is open onto the living/dining room and comes with an island.

The suite is located in an area that is close to schools, YMCA, parks, shopping, dining,transit , just south of the Whitemud and just west of 170 st.

Lease duration is negotiable but preference is given to a 1 yr lease.

Calgary

$1250 / 2br - Stylish 2 Bedroom Upper Suite in Killarney (Killarney / Inner City)

Beautiful and bright 2 bedroom upper suite in the desirable inner-city community of Killarney. Minutes from Downtown, Marda Loop and Mount Royal College. Located on a quiet tree lined street conveniently nestled just several blocks from 26th Avenue and 17th Avenue transit corridors. Close to Westbrook and Westhills shopping centres; Killarney pool; parks, and University of Calgary with easy access to Crowchild Trail and Glenmore Trail.

Crisp, clean, open concept suite with laminate and tile flooring and a brand new renovated bathroom. Features a private balcony, high ceilings and in-suite laundry. Street parking (a two car insulated garage is also available).

No smoking or pets. Please call for more information and to schedule a showing of this beautiful suite!

Phoenix (Mesa)

$1250 / 3br - 2Ba-Single Story-2160 SqFt-3 Car Garage-Inc Gardener (Mesa)

This is a Spacious near new 2160 SqFt 3br 2ba single story home. 3 car garage with electric garage door opener. Beautiful earthtone carpet, and tile through out. Large master bedroom with sitting area and a hugh walk-in closet, garden tub, and separate shower. Raised vanities, ceiling fans, separate laundry room and Faux wood binds throughout. Upgraded kitchen cabinets, gas range and microwave. Grass landscape in rear with rock landscape in front all irrigated by electric timer. 1 mile South of 60 Freeway close to schools and shopping. More pics and floor plan on request.

• cats are OK - purrr
• dogs are OK - wooof

Right question. Wrong answer.

I'm back, and it only makes sense to start with a post about a mortgage calculator after a six month break. Remember the buy vs rent calculator? Well this is similar except the scary thing is I don't think it's broken.

Mike from the Albert Bubble blog commented on this mortgage calculator from President's Choice Financial.

How much can I afford?

I was shocked at the vast sums of money one could qualify for based on a 35 year amortization and a 2.25% VRM. Consider 3 cases:

Case 1

Individual
Income: $66,000
Down: $20,000
Debt payments: $0
Taxes: $2200
Heating: $75

Pre-qualified for a $391,970 mortgage! It was limited *not* by the income, but by requiring a 5% down payment.

Case 2

Couple
Income: $120,000
Down: $80,000
Debt payments: $100/month credit card
Taxes: $4000
Heating: $180

Pre-qualified for a $711,371 mortgage! The reason one can get qualified for so much money is it uses a rate of 3.64%.

Case 3

Professional Couple
Income: $170,000
Down: $80,000
Debt payments: $100/month credit card +
Debt payments: $300/month auto loan
Taxes: $4000
Heating: $180


Pre-qualified for a $ 1,058,721.73 mortgage!




Right question. Wrong answer.
3x income is probably a more reasonable measure and allows for more normal interest rates and some discretionary income.

Notice a Pattern?

The REALTORS Association reports on several statistics in their report and draw comparisons from either the previous month or the previous year. Below I made the opposite comparison they chose to make in the report [in red].

Edmonton, April 2, 2009: The average* price of single family homes in the Edmonton area has hovered around the $350,000 mark for the first quarter of this year [Average price of a single family home in 2008 increased from 379,567 to 387,632 January to March], reported the REALTORS® Association of Edmonton. At the beginning of January the average price for a SFD was $351,870. The price varied slightly and at the end of March the average SFD price was $349,716, up 0.7% from the previous month [decrease of 9.8% YOY]. Condo prices were a little more volatile but popped up 1.6% in March to $230,469, after a 5% drop in February. The average price of a duplex/rowhouse was $276,776.

“With price stability, low interest rates, spring weather and pent-up demand; it appears that REALTORS® are starting to get busy again,” said Charlie Ponde, president of the REALTORS® Association of Edmonton. “Our offices are reporting an increase in buyer interest. Sales in March were up 28% from the previous month.” [down 11.4% YOY]

Residential sales through the Multiple Listing Service® in March totalled 1,380 units. Total MLS® sales (including commercial and rural sales) were 1,513 units. This is a 30% increase over the previous month. [down 11.5% YOY] Total residential sales for the first quarter were 3,185 units and total MLS® sales were 3,471 with a YTD value of $1.1 billion.

There were 2,891 residential listings in March (down 31.7% from last March) [up 9.0% from February] resulting in a month end inventory of 7,476 residential properties (down from 9,464 in March 2008) [up from 7076 in February]. The sales-to-listing ratio was 48% and average days-on-market was 56 days (down five from February) [up 5 over last March].

“The market is once again operating in a normal fashion with typical seasonal fluctuations,” said Ponde. “REALTORS® are prepared with daily statistics and market knowledge to help clients understand the market fluctuations and advise them on pricing and marketing strategies that help buy and sell homes and commercial properties.”

REALTORS® (who are all members of the REALTORS® Association of Edmonton) have just completed their annual membership renewal. Some members choose renewal time to withdraw or retire from the industry so membership numbers dip slightly at the end of March. So far the renewals are typical and the Association expects that the more stable market will encourage most REALTORS® to remain in the industry.

Dare to Compare

A few things happened since I last compared to US home prices.

1. Canadian dollar went down considerably making Canadian real estate less expensive (to Americans). Last time I did this there was no need to convert currencies.
   
2. Many US cities experienced brutal declines. Note that American cities are from Q4 2008, Calgary and Edmonton are from February 2009.
   
3. Alberta prices fell but less than many U.S. cities when looking at local currency.
4. Some US cities literally fell off the charts. For instance Detroit, where average price $13,638. I am sure sales mix has an impact on this number, possibly why it was not included on CNN.
   

US prices from CNN
Edmonton prices from EREB
Calgary Prices from Mike Fotiou
Fort McMurray Prices
Currency converter

Metro Area	State	Median home price ▲	% change YOY
Tulsa	OK	N/A	N/A
Nashville-Davidson-...	TN	N/A	N/A
Kalamazoo-Portage	MI	N/A	N/A
Detroit-Warren-Livonia	MI	N/A	N/A
Danville	IL	N/A	N/A
Saginaw	MI	$43,900	-41.4%
Youngstown-Warren-B...	OH-PA	$61,700	-0.2%
Toledo	OH	$75,600	-27.3%
Decatur	IL	$79,300	5.9%
Lansing-E.Lansing	MI	$80,000	-27.0%
Canton-Massillon	OH	$80,400	-18.0%
Grand Rapids	MI	$80,500	-35.2%
South Bend-Mishawaka	IN	$80,800	-6.4%
Elmira	NY	$80,900	-0.4%
Akron	OH	$86,100	-21.1%
Dayton	OH	$87,800	-17.6%
Cleveland-Elyria-Mentor	OH	$88,300	-25.5%
Ft. Wayne	IN	$88,600	-2.5%
Erie	PA	$95,200	-3.4%
Springfield	IL	$96,700	-11.0%
Cumberland	MD-WV	$96,900	-16.9%
Davenport-Moline-R...	IA-IL	$98,400	-3.6%
Memphis	TN-MS-AR	$100,200	-19.4%
Indianapolis	IN	$100,200	-12.1%
Topeka	KS	$104,800	-6.7%
Waterloo/Cedar Falls	IA	$105,200	-8.8%
Binghamton	NY	$105,800	-3.7%
Buffalo-Niagara Falls	NY	$106,200	0.8%
Pittsburgh	PA	$109,100	-6.7%
Cape Coral-Fort Myers	FL	$110,900	-50.8%
Rockford	IL	$111,500	-1.5%
Rochester	NY	$112,500	-6.9%
Saint Louis	MO-IL	$113,700	-14.8%
Syracuse	NY	$114,100	-9.7%
Gary-Hammond	IN	$115,100	-7.6%
Cincinnati-Middletown	OH-KY-IN	$116,000	-12.4%
Springfield	MO	$117,100	-3.0%
Peoria	IL	$117,200	-1.1%
Wichita	KS	$118,200	3.9%
Florence	SC	$119,100	1.9%
Spartanburg	SC	$120,800	-0.8%
Ocala	FL	$121,700	-21.5%
Amarillo	TX	$122,600	2.0%
Palm Bay-Melbourne-Titusville	FL	$123,600	-18.3%
Chattanooga	TN-GA	$123,800	1.8%
Louisville	KY-IN	$124,000	-6.8%
Oklahoma City	OK	$124,200	-7.9%
Charleston	WV	$124,800	1.5%
Mobile	AL	$125,000	-9.0%
Little Rock-N. Little Rock	AR	$125,200	-1.8%
Kankakee-Bradley	IL	$125,600	1.0%
Montgomery	AL	$126,300	-11.9%
Columbus	OH	$126,500	-7.8%
Jackson	MS	$126,600	4.7%
Appleton	WI	$127,600	-2.5%
Atlanta-Sandy Springs...	GA	$129,200	-21.4%
Gulfport-Biloxi	MS	$129,500	-13.9%
Omaha	NE-IA	$129,700	-4.4%
Kansas City	MO-KS	$131,000	-11.6%
Champaign-Urbana	IL	$132,000	-8.1%
Beaumont-Port Arthur	TX	$132,600	16.7%
Lincoln	NE	$133,100	-3.6%
Corpus Christi	TX	$134,000	-2.8%
Greensboro-High Point	NC	$135,400	-10.2%
Birmingham-Hoover	AL	$135,400	-13.3%
Cedar Rapids	IA	$136,900	1.5%
Dallas-Fort Worth-Arlington	TX	$138,000	-4.8%
Columbia	MO	$138,100	-4.2%
Lexington-Fayette	KY	$138,200	-3.3%
Shreveport-Bossier City	LA	$139,200	2.8%
Columbia	SC	$139,200	-3.9%
Fargo	ND-MN	$140,100	-1.1%
El Paso	TX	$140,700	5.3%
Knoxville	TN	$141,700	-8.6%
Houston-Baytown-Sug...	TX	$142,100	-5.5%
Sioux Falls	SD	$142,400	Unch
San Antonio	TX	$143,400	-5.5%
Deltona-Daytona Beach-Or...	FL	$143,600	-20.7%
Yakima	WA	$145,900	-14.4%
Green Bay	WI	$146,600	-1.5%
Greenville	SC	$146,900	-5.5%
Glens Falls	NY	$147,600	-9.9%
Des Moines	IA	$149,700	-1.9%
Tallahassee	FL	$150,100	-17.0%
Tampa-St.Petersburg-Clearwater	FL	$151,500	-24.9%
Pensacola-Ferry Pass-Brent	FL	$151,700	-3.0%
New Orleans-Metairie-Kenner	LA	$154,900	-2.1%
Reading	PA	$155,100	1.0%
Phoenix-Mesa-Scottsdale	AZ	$155,900	-35.5%
Baton Rouge	LA	$156,400	-7.8%
Bloomington-Normal	IL	$159,300	9.6%
Jacksonville	FL	$160,700	-9.5%
Bismarck	ND	$164,300	6.0%
Durham	NC	$165,600	-7.0%
Kennewick-Richland-Pasco	WA	$165,900	-3.8%
Boise City-Nampa	ID	$168,800	-14.7%
Hagerstown-Martinsburg	MD-WV	$171,400	-10.8%
Gainesville	FL	$174,000	-11.5%
Orlando	FL	$175,200	-27.1%
Sarasota-Bradenton-Venice	FL	$178,100	-35.0%
Las Vegas-Paradise	NV	$181,700	-33.6%
Albuquerque	NM	$183,700	-6.2%
Austin-Round Rock	TX	$184,800	-0.1%
Farmington	NM	$185,000	-0.8%
Tucson	AZ	$185,900	-21.2%
Spokane	WA	$185,900	-4.2%
Charlotte-Gastonia-Concord	NC-SC	$186,300	-9.0%
Springfield	MA	$186,400	-9.7%
Colordo Springs	CO	$187,000	-11.2%
Sacramento--Arden-Arc...	CA	$187,900	-36.9%
Minneapolis-St. Paul-Bl...	MN-WI	$188,600	-13.2%
Albany-Schenectady-Troy	NY	$193,100	-3.6%
Charleston-North Charleston	SC	$193,800	-5.2%
Milwaukee-Wauk...	WI	$194,900	-11.2%
Salem	OR	$198,000	-14.4%
Richmond	VA	$199,400	-11.7%
Denver-Aurora	CO	$200,800	-12.7%
Riverside-San Bernardino-Ontario	CA	$201,300	-40.8%
Pittsfield	MA	$206,000	1.7%
Philadelphia-Camden-Wilmin...	PA-NJ-DE-MD	$212,500	-6.3%
Dover	DE	$212,500	6.5%
Eugene-Springfield	OR	$212,800	-10.4%
Portland-South Portland-Bi...	ME	$214,500	-11.4%
Worcester	MA	$217,000	-16.2%
Chicago-Naperville-Joliet	IL	$217,800	-16.6%
Virginia Beach-Norfolk-Newport News	VA-NC	$222,000	-5.9%
Norwich-New London	CT	$223,100	-11.6%
Kingston	NY	$224,000	-9.0%
Providence-New Bedford-...	RI-MA	$224,500	-17.8%
Salt Lake City	UT	$225,400	-1.6%
Madison	WI	$227,000	-0.3%
Atlantic City	NJ	$229,100	-17.8%
Raleigh-Cary	NC	$230,900	-2.0%
Reno-Sparks	NV	$231,200	-23.3%
Hartford-W/E	CT	$233,700	-9.4%
Miami-Fort Lauderdale	FL	$234,200	-32.3%
Allentown-Bethlehem-Easton	PA-NJ	$238,000	-3.4%
Manchester-Nashua	NH	$238,600	N/A
New Haven-Milford	CT	$240,400	-10.6%
Trenton-Ewing	NJ	$247,800	-19.2%
Baltimore-Towson	MD	$260,100	-5.5%
Portland-Vancouver-Beaverton	OR-WA	$264,500	-9.0%
Edmonton	AB	$270,178 (335KCAD)	-9.4%
Washington-Arlington-Alex...	DC-VA-MD-WV	$295,100	-26.2%
Boulder	CO	$324,400	-12.6%
Calgary	AB	$302,438 (375KCAD)	-12.4%
Barnstable Town	MA	$325,300	-14.9%
Seattle-Tacoma-Bellevue	WA	$325,900	-13.7%
San Diego-Carlsbad-San Marcos	CA	$332,800	-36.4%
Boston-Cambridge-Quincy	MA-NH**	$335,700	-11.8%
NY: Edison	NJ	$343,600	-7.2%
Los Angeles-Long Beach-Santa Ana	CA	$354,300	-31.4%
NY: Newark-Union	NJ-PA	$373,600	-14.3%
Bridgeport-Stamford-Norwalk	CT	$379,700	-17.5%
NY: Nassau-Suffolk	NY	$381,300	-17.4%
NY-Northern NJ-Long Island	NY-NJ-PA	$390,400	-14.6%
NY-Wayne-White Plains	NY-NJ	$458,600	-11.7%
Anaheim-Santa Ana	CA	$464,800	-30.8%
San Francisco-Oakland-Fremont	CA	$487,100	-37.4%
San Jose-Sunnyvale-Santa Clara	CA	$525,000	-37.7%
Fort McMurray (avg)	AB	$553,342 ($656KCAD)	3.6%
Honolulu	HI	$610,000	-2.4%