Wednesday, June 10, 2009

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.

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...?


Davieharely said...
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Unknown said...

The obvious kicker is that prices have just started to drop. It says on that site march was the first YOY drop in a decade. Obviously homes cant keep appreciating faster than inflation forever, because eventually people wont be able to pay for them as their wages havent risen as fast. Expecting a 10% price appreciation by the time of selling is completly possible as long as our would be buyer has a while to wait. The buyer also has to take into consideration maintance costs and property taxes if they arent already in there somewhere. Its also dangerous to count on appreciation. If it drops in value and the buyer loses his/her job then he/she will be forced to sell at a loss, where if renting he/she could just move to a cheaper place for a while.

Basically i think the answer is a big fat NO mainly due to the risk involved.

Warren said...

Prices could drop say 20% in the next year, but if rates go up such that payments are the same (but each payment is more interest and less principle) are you really better off waiting?

Tough call for sure.

first_time_buyer said...

I would rather pay high interest on low principal than low interest on high principal if they come to same amount. it is due to the fact that if I decide to pay a single extra dollar than what is agreed to in my mortgage, my payment drops heavily due to that extra interest I dont pay on that extra dollar.

the reversal to the mean logic also would work in my favour. low interest rates would eventually rise and high interest rates would eventually drop.

mohican said...

I agree FTB ++

patriotz said...

Prices could drop say 20% in the next year, but if rates go up such that payments are the same (but each payment is more interest and less principle) are you really better off waiting?

Of course you are.

If you buy the same house later for less than you would have paid today you are ahead. Period. Just as if you buy the same stock later for less then you would have paid today you are ahead. Period.

Among other things, you seem to have forgotten (or ignored) that the person buying earlier at the higher price will be paying the same interest rates as the person buying later at the lower price, at the end of his first mortgage term, for the rest of his amortization. In other words, he will be making higher payments right until the mortgage is paid off.

Warren said...

Patriotz as usual you are assuming the worst. I could lock in today for 5 years at 3%, you lock in 2 years later at 7%. By the time my renewal comes up, rates are back down to 4%. There are many scenarios. You can't assume the worst one and base all of your decisions on that. Then you'll never buy. Oh, wait...

Unknown said...


Patriotz isnt assuming the worst but you seem to be assuming the best. It is possible that rates go up in 2 years and down again in 5, but it is also possible rates go up in 2 years and further up in 5 years. Since future interest rates are unknown you cant say there is any benifit of waiting or buying now in terms of the interest rate you will pay 5 years from now. None of this matters for this scenario anyway since it seems like the would be buyer is planning on selling within 5 years anyway since he/she is just paying interest on the place and is making no real effort to actually own it. Essentially this person is just renting from the bank instead of renting from a landlord, but with the added risk of price changes. (this could be good or bad depending on how it works out.)

Anonymous said...

I'm thinking of buying and being that I'm young and can still have roomates then would it make sense to have a large mortgage and have quite a bit of the low interest mortgage paid by my roomates? I don't see a reason to not buy now with the interest rates so low assuming you can have others helping in a big way with the mortgage and paying down enough per year that by the end of your term your free and clear which I believe I can do.

Is there anything flawed in my potential strategy?


jesse said...

Here's what I said. I don't know the Dutch market well enough to make specific comments. (Thanks for all who commented.)

The mortgage tax deduction and other perks should not affect the long-term value of property, especially for properties commonly to rented out. The reason is because a potential owner like yourself is competing head-on with a landlord who needs to make a decent after-tax return on investment.

Assuming landlords don't get other types of tax breaks like owner-occupiers, the price the landlord is willing to pay is dependent upon his after tax rate of return. Whether or not your particular situation warrants the price you are willing and able to pay being higher, it will not in and of itself determine the asset price when landlords eventually act as marginal buyers and sellers.

If you believe owning produces a certain return based on imputed rent and you are willing to hold the property well into the future, you can justify paying current prices. However all the tax breaks will not compensate for overpaying for an asset -- you will get the same tax breaks if prices fall so from a strict financial standpoint you should be comparing paying now at high prices versus paying later at what likely will be lower prices, assuming Holland's buy-to-let investment climate is speculative. The best bet you can make is determining what others, and not you, are willing to pay when you sell the property at some point in the future when you sell. So if a landlord cannot make a decent return at today's price for a long time period (I would assume current interest rates are not sustainable), the balance of probabilities says prices will fall until they can.

Unknown said...


Roommates are a great way to pay a mortgage if you can stand them. But if you are willing to live with roommates i would much prefer to move in with a few people rather than try to find some to live with me. It is not that hard to find a nice group of people with a nice place in a nice area for 600-700 a month.

Do you really think you can get your roommates to pay all but 700 of your mortgage, insurance, property taxes and strata fees? Not to mention the added risk of owning over renting which you would have to shoulder as the owner.

When and if I do buy I would like a 2 bedroom so i can rent out the second bedroom if I need a bit more cash or if i simply get bored of living alone, but i wouldnt count on the roommate to pay a significant part of the costs.

Patiently Waiting said...

Chad, try renting a house and sub-renting the extra bedrooms. My brother does this and has learned some interesting lessons. Every different person is a whole new variable. Its like a box of chocolates. You never know what you're gonna get.

I'd recommend this before putting your neck on the line in a more serious way.

jesse said...

I agree with Patiently Waiting. Try your hand at your subletting business strategy through renting first and see how you like it. You aren't exposed to any negative asset price changes. Remember yields are quite low so your landlord is effectively renting to you at a discount. I doubt there's any way for you to do better on balance, unless you put on blinders.

patriotz said...
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patriotz said...

Patriotz as usual you are assuming the worst.

I'm assuming that in the long run everyone pays the same interest rates, which is a fact. I'm also assuming that you will be able to buy for later now than today, which is a virtual certainty in my view.

You may call that the worst case, but I simply view that as the only credible case.

You cannot control the interest rates you pay over the long run by when you buy, but you can control the price you pay. That's all there is to it.