Ask Dr. Housing Analysis

With mortgage rates very low these days -- I'm hearing people pulling 3.5% on a 5-year closed -- the buy-vs-rent bugbear rears its ugly head once again but now, on the face of it, ownership costs have dropped significantly from last year through a combination of price drops and interest rate cuts.

I keep hearing comments on blogs and amongst friends and family about how the buy-vs-rent equation has decidedly shifted to the buy side, given one's propensity to own instead of rent, so if the math works why not buy now? In some jurisdictions the tax laws favour owning biasing the calculation further, from a buyer's point of view.

So instead of lecturing on my views, I thought I'd present a real-life case from someone I know, inspired by Fish10 and, for wily veterans of the Vancouver housing blog scene, the old "Ask VHB" posts of yore.

For a change this person is not in the Vancouver area. Please feel free to analyse the situation in the comments. I'll post the "correct" answer in a few days. You will be marked on your analytical ability; this is, after all an "analysis" blog so don't suck.

Yo,

Right. There is a tax scheme in Holland such that it is actually cheaper to buy a house on an interest-only scheme than to pay rent. Long story short:

I’ve got the 30% tax relief, so the first 30% of my salary is non-taxable (a benefit for being an expat.) Mortgage interest payments are deductible in full – so would save big time on that if I were paying interest only.

All in all it makes sense IFF [if and only if] the value of the house rises by more than 10% by the time I sell it (because in the purchase fee is approx 10% fees, all borne by the buyer). So I’ve been looking into prices and here in Holland they’ve just started to drop – last month prices dropped across the board.

Here’s the official government statistics site (in English!) with some fun stats.

By looking at this, to me it seems like it might be a good time to start looking, but would appreciate your nerdly view on things too!

Nerdlings, what say you...?

What to do?

It is clear that home prices in the Vancouver area have only just begun their downward descent with the Fraser Valley leading the way. It seems that developers are catching on quckly to the notion that they must provide steep discounts to move their product now and private sellers are slowly catching on to the same fact.

Now here is the background for my question:

I have found a home for sale that would likely meet my criteria. My criteria is this:

1) Walking distance to grocery store and other shopping (10 minutes or less). Preferably a rec centre as well.
2) Within 5-10 minutes drive to work. Preferably walking distance.
3) Does not need any major repairs or updates.
4) Price must meet pricing standard as follows:
Fair Price = {[1/(5 Year mortgage rate)*100] * [Annual Rent (estimate) - Annual Strata Fees/Maintenance - Annual Property Taxes]}

This is how my formala works out in this specific case:
Fair Price = (1/5.7%*100)*(19,200 - 2,000 - 1,500)
Fair Price = 17.5 * 15,700
Fair Price = $275,378

The asking price is higher than the current fair price but I'm fairly certain that I could get my fair price in the next couple months if conditions stay as they are. The price was just reduced 10% so it popped onto my radar.

But here is the question: Should a person purchase with the full knowledge that the property they are purchasing will likely fall in value even further? Why or why not?

I am personally comfortable with the risk of further price declines as long as the fair price criteria is met but I may not be the norm. I will also be purchasing with a 30-40% downpayment and well below my affordability level as the lenders see it so even temporary job loss wouldn't be a major issue.

Reader Submitted Question?

Here is a question from an email I received. What do you think this person should do?

We're selling a house in the states and will do very well (the downturn has not hit our neighborhood at all--doubled our investment in 5 years, not bad) and have a substantial downpayment but even hundreds of thousands of dollars here is really very little. But we also have investments that we could liquidate (not our retirement accounts) to pay the down payment--"total" liquidation would add about 80-85 percent to a downpayment. This would leave us with little reserve. But with a relatively low mortgage, we can save money prettyfast--right now we save pretty well--about 15 percent of after tax income--and that wouldn't change too much with the kinds of mortgage we're considering. Is that stupid?

Pros: more downpayment, nicer house, better neighborhood and/or less mortgage.

Cons: Little reserve. Investments seem to do well now. My wife feels it's insane to get rid of investments and it makes her nervous. She may be right.And related: given your feeling about the market, if you had the cash to buy a house now (we're looking east van) would you? Or does it make sense to keep money in the market until things turn...if they turn (about which I am somewhat doubtful, given what it looks like in our current neighborhood, Kits.)

What should this person do?