I was thinking about the advice I should give to the people I know who are considering the purchase of a place to live and I came up with a way of simply expressing the math that is in my head. I wanted to keep the advice quite simple since I recognize that most people get lost after 1 + 1 = 2 and 10 x 10 = 100.
So here we go, a simple model for evaluating how much a dwelling is worth. It factors in comparable market rent, opportunity cost of down payment, maintenance/fees/taxes (expressed as a % of market rent), and, very importantly, mortgage costs. The "low price" is what I consider the highest price that the property in question would be a "Value" buying opportunity from an investment perspective. The "high price" is top price for what I believe a 'rational buyer' would be willing to pay for the property given the choice of renting or buying the same property.
The formula is fairly simple. It is a Present Value calculation of the mortgage payment over a 25 Year period plus a factor for maintenance, taxes, and other fees. I assume the "Value" buyer wants at least a modest positive cash flow from day 1 and factors a decent amount for costs with no ownership premium. A 'rational buyer' is willing to pay a premium for the so-called 'privilege of ownership' and does not factor in as much for maintenance as the resident owner can do the work him or herself.
For kicks, I added the estimated current market price in Greater Vancouver and the necessary price correction to bring it in line with the "rational buyer's" highest possible price. Feel free to poke holes in my methodology.
An alternative valuation method reflecting the total lifecycle usage of a property. These formulas determine the price, above which, it is better to rent than buy. This number is represented in the column "PV of Property" and it takes into account the age (lifecycle stage) of the buyer. I also added some various interest rate and inflation scenarios for interest sake (pun intended). If the price of the property is above the PV of Property amount then it is cheaper to rent - for life. Click on the picture to enlarge.