# Real estate prices about to take a tumble next year



## carverman (Nov 8, 2010)

Just heard on the CBC TV news that that " economic experts" are predicting an "adjustment" to the real estate market in 2016. 

http://www.theglobeandmail.com/repo...016-as-rates-rise/article20142425/?cmpid=rss1



> Rising interest rates will erode housing affordability, which Mr. Hogue notes is already stretched in some markets. “We expect the current upward momentum in home prices to wane gradually, as demand cools and more home sellers emerge,” he wrote. “We expect that the current condo construction boom in large urban centres will bring more properties on the resale market as units are completed. While the majority of condo units under construction are already sold, rapid increase in the stock of existing condos is likely to create a displacement effect whereby older units are vacated in favour of newer ones.”





> The affordability index measures the percentage of pre-tax household income that is needed to service the cost of owning a home at current market prices, including payments for a mortgage, utilities and property taxes. A reading of 50% means service costs swallow up half of a household’s pre-tax income.


http://business.financialpost.com/2014/05/27/canada-housing-market-affordability-rbc/



I can see inflated housing prices since 2005, based on demand and low mortgage rates in Toronto and Calgary. (if you look at the afflordibility index in the Globe and Mail link .but Winnipeg at 194.21..it has nearly doubled since 2005. so what is going on there?


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## Just a Guy (Mar 27, 2012)

I think it's pretty simple...cheap money allows people to pay more for the same product. A $150k house at 8%, amortized 25 years costs you $1144/month. A $250k house at 3%, amortized 25 years costs you $1183/month.

People have been slowly switching from buying based on price, to buying based on what they can afford to pay monthly (take a look at car ads, they used to say the price of the car, now they have weekly payments).

So, because of supply and demand, people bid up the prices of houses. 

What everyone seems to forget though, the difference between a car loan and a mortgage is that a car loan is fixed interest for the life of a loan whereas a mortgage is only fixed for the term of the mortgage (usually 5 years). After that time period, the interest rate, and thus the payment, could and will most likely, change. That $250k place (now $214k after pay down), at 5% amortized at 20 years (since you've already paid down 5 years, you should drop the amortization term or you never pay the place off) will now cost you $1400/month, an extra $2640/year after tax increase...

Remember, these calculations are for houses selling significantly below the average selling price, the hits will be much larger for most people...

The housing correction has been predicted for the past decade, and many now believe that people are crying wolf, but the government continued to do the previously unthinkable and kept dropping interest rates...it kept the insanity going. People don't think about the consequences, and they don't understand basic math...how many school kids said "we don't need math in real life..."?

When interest rates increase, and they can't really go much lower, people will be stunned upon renewal as their once affordable house, suddenly becomes unaffordable. They, of course, will try to sell...hoping for a profit, but the market will be slowly flooded with others trying to do the same thing, and buyers won't be able to afford the payments at the higher rates any more than the sellers...people will try refinancing at a longer term, which may buy them a few more years...but prices will drop, many will lose their homes to foreclosure, it's inevitable.


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## sags (May 15, 2010)

I think the best thing the government could do..........to be proactive and get ahead of the situation, is to legislate that mortgage lenders cannot demand the "difference" between their appraised home value and the mortgage balance......when the mortgage is renewed.

As long as people are making the payments, they shouldn't be forced out of their homes. It would be doubly difficult to service a significant payment plus higher monthly payments in the future, and a lot of homeowners could be forced out of their homes, if faced with a big payment on renewal.

In the US.........the banks ended up with a lot more homes through foreclosures, than there needed to be. The glut of inventory drove home prices down further, and made a difficult situation much worse. The US banks refusal to re-negotiate terms of the mortgages created a self inflicted injury, and they ended up with millions of homes they had to maintain, or abandon to fall apart. The banks are not set up to be landlords, managing millions of properties.

If Canadian home prices fall................HELOCs will also be on the bank's radar. They will limit their risk by reducing HELOC limits or eliminating the HELOC altogether, which may not be in the interest of their customer or the economy.

Some of the big US banks adopted the practice of automatically lowering HELOC limits with each payment, in geographical areas where home prices declined steeply. The practice effectively cut off credit to people without notice.

Essentially, we don't want bank practices to create more pain than it solves, and in hindsight we can use the mistakes made in the US during their housing price meltdown, to mitigate problems should they arise.

The government acting now...........could prevent a lot of confusion and pain later.


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## Just a Guy (Mar 27, 2012)

Probably would not solve the problem...people would complain about being trapped in homes they can't sell because they are underwater... Should we also legislate that people should be able to sell their homes at a profit? No one forces people to be stupid, they do that all on their own, why should we legislate a solution to try and solve their stupidity? It's never worked in the past.


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## steve41 (Apr 18, 2009)

I am in a 13 property cluster (each around 1/2 acre) which is a ltd company. We each have 140+/- feet of low bank waterfront. I estimated my property would sell for twice its current worth if it were fee-simple, because the banks won't mortgage it. You have to come up with the cash.


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## carverman (Nov 8, 2010)

Just a Guy said:


> Probably would not solve the problem...people would complain about being trapped in homes they can't sell because they are underwater... Should we also legislate that people should be able to sell their homes at a profit? *No one forces people to be stupid, they do that all on their own, why should we legislate a solution to try and solve their stupidity? It's never worked in the past*.


Not sure if it's because people are stupid or just getting caught in the squeeze during mortgage rate upward changes upon term renewal.
Young families need homes close to where they work. Renting for the rest of your life doesn't get you any equity either and in Canada, at least your principle residence is tax free when you go to sell...so..most people see the family home as both shelter and an investment for the future.

What seems to upset this way of thinking is the economy, and the demand for housing and interest rates. 
And these days there is the ever increasing assessments of properties for tax reasons and the yearly increase in property tax, which can be significant on a market inflated house in high demand areas. 

As soon as the interest rates at term renewal go up, and real estate prices start to go down due to economic reasons, families that thought they had affordable housing, no longer have. 

This happened in Toronto due to an overheated housing market in the 80s recession. Interest rates went up drastically, the market went down, and people were forced to pay higher mortgage payments on housing that was worth less than before.

Caught in a squeeze, home owners tried to sell in a depressed market. Most homes were worth less on re-apprasal than the amount of the mortgage still owing. People that lost their jobs due to the down turned economy eventually just faced foreclosure, if they had no income to renegotiate for a longer term to lower the monthly payments.


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## KaeJS (Sep 28, 2010)

I really don't see how housing is not affordable.

Can someone explain this to me?

It seems pretty damn affordable to me and I commute to work which costs me $600/month in gasoline. With tenants and Salary, I only make the equivalent of someone on a $60k salary a year.

If you've got two people working at $40k/year, that's more than I make. So how is this not affordable?

There will be no crash. Interest rates will not cause the crash. The rates are not suddenly going to jump to 7%, or even 5%. It will be a slow and gradual process whereby homeowners will be able to make changes in their lifestyle to afford their home.

Maybe they will stop buying tim hortons everyday. Maybe no beer on weekends, or $300 hair cuts for the ladies.


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## Just a Guy (Mar 27, 2012)

Kaejs, it won't be a sudden increase, but it could easily happen over 5 years (which is the time between renewals). Most people don't realize their payments can go up...they think, by paying down, their payments should get lower, or at least stay the same.

The advice of buy the most house you can afford, will come back to bite people.

Notice, I didn't even mention a cash call at renewal time just to keep the value above water, I was only talking the payment increase.

Carverman, don't confuse assessed value with property taxes. Cities set a budget which has a number in it stating the amount they need to collect total. The assessed value is only used to determine your portion of that total number compared to your neighbour, it has nothing to do with the total number. If your house is assessed as being worth more than mine, you'll pay more taxes than me, but the city doesn't increase taxes because property values increase...


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## birdman (Feb 12, 2013)

Sags, I don't think making the banks renew mortgages regardless of the current loan to value ratio will work. When a F/I makes a loan, including a mortgage, it is due in its entirety on its due date. This could be "on demand" or at the end of the "term". I cannot see legislation being implemented saying that a F/I must renew the loan. From a F/I's perspective they must have the funds to fund the mortgage and from both a liquidity and interest rate risk perspective F/I's fund a 5 yr mtge with a 5 yr GIC. (Its not quite that simple) For example, if the GIC purchaser(s) do not renew and withdraw their GIC'(s) how can the F/I renew the mortgage? In the case of a run on bank deposits they have the option of demanding repayment of "demand" loans and not renewing term loans. Fortunately, there are safeguards in place which hopefully will prevent a "run" from happening. However, about 45 years ago when I was a young man working for a F/I there was "Tight Money" and F/I's were reducing credit lines for corporations and turning away very good business as there were limited funds to lend. I never saw it again but it could happen.


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## KaeJS (Sep 28, 2010)

Just a Guy,

I appreciate your post (as I usually do with most of your posts), but I still disagree. Yes, rates can increase over a 5 year span, but the increase will be incremental. Even if there are a few houses that end up for sale, there is still a lot of foreign investment coming in to Canada and buying up houses.

Toronto is not as hot as Vancouver, Calgary is booming...

I just don't see prices in a declining state due to interest rates.

I'm going to be stereotypical, but I would think that most people who rent (yes, not everybody) are usually the people who owe money and make bad choices. Usually homeowners are decent at finances and are at least going to try their best to keep their house. If it means cutting expenses or getting another job, or taking overtime at work, I think people will try to make it work. Selling a house has it's own set of costs that are unfavourable.


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## peterk (May 16, 2010)

KaeJS said:


> I really don't see how housing is not affordable.


But don't you live in a ~250k townhouse in Cambridge? The same townhouse in the hot cities with all the jobs costs 400-500k...

And most families don't want to live in townhomes or apartments. They want detached homes.


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## KaeJS (Sep 28, 2010)

peterk said:


> But don't you live in a ~250k townhouse in Cambridge? The same townhouse in the hot cities with all the jobs costs 400-500k...
> 
> And most families don't want to live in townhomes or apartments. They want detached homes.


Yes, I do live in a $250k townhouse.

But my total income is $60k gross/year. If you are spending $400k+ for a townhouse in the city, you better be making more than $60k/year. There's no way a bank would give you a mortgage for $400k if you are not.

I would hope the people in the city are being paid better than someone like myself living in the outskirts.


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## sags (May 15, 2010)

My concern would not be to protect the individual homeowners........as much as to protect the overall Canadian economy.

The US started with sub-prime home owners, but quickly extended to prime borrowers, and to people who didn't even own a home.

Given the impact real estate has on our economy.........maybe nothing would work. 

In that case.........we would all feel the negative effects.......falling home prices, layoffs, stock market declines............


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## KaeJS (Sep 28, 2010)

sags said:


> My concern would not be to protect the individual homeowners........as much as to protect the overall Canadian economy.....


This.

I don't think the government or the banks will "let" this happen. They will make sure that they keep rates low and slow to ensure there isn't a tumble.
I think we are just looking at years and years of flat home prices.


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## Eclectic12 (Oct 20, 2010)

carverman said:


> Not sure if it's because people are stupid or just getting caught in the squeeze during mortgage rate upward changes upon term renewal.
> 
> Young families need homes close to where they work. Renting for the rest of your life doesn't get you any equity either ...


My co-worker disagrees as when he periodically checks, renting allows him to save a ton of money versus buying.
What seems to make him stand out is that he's proactively saving/investing versus the others who seem to rent & spend.


Cheers


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## KaeJS (Sep 28, 2010)

In my experience, renting is equally as expensive as owning a home. It usually doesn't allow one to save more or less, but an equal amount.

The difference is all in appreciation. In my situation, I would be able to save the same amount if I rented.


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## marina628 (Dec 14, 2010)

Something very drastic will have to happen for prices to drop because we sold 3 properties in last 90 days in Whitby/Oshawa ,your basic 3 bedroom 1350 sq detached home with 1.5 baths and finished basement with family room laundry and another bathroom.One sold in 4 days $900 over our asking and other 2 sold 7-9 days full price in low to mid 340k.Even with deals on the table our agent had dozens of calls asking to show them.I realize this is on the low end and in the starter market but I see this happening at all price levels.BTW the reason we sold was the tenants were moving and we decided to sell because of changes in our life going on and better investment opportunities in other markets.


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## Eclectic12 (Oct 20, 2010)

sags said:


> My concern would not be to protect the individual homeowners........as much as to protect the overall Canadian economy.
> 
> The US started with sub-prime home owners, but quickly extended to prime borrowers, and to people who didn't even own a home...


Isn't there a significant difference between the US where there little incentive to pay off one's mortgage as it's tax deductible and Canada where it's not?

Then too, the NY Times reported in 1999:


> Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
> 
> In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers... In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times.
> 
> But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s


http://en.wikipedia.org/wiki/Financial_crisis_of_2007–08


I'm not sure there's the same gov't pressures or relaxed underwriting or rush to automated underwriting that the US had.


Cheers


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## sags (May 15, 2010)

KaeJS said:


> This.
> 
> I don't think the government or the banks will "let" this happen. They will make sure that they keep rates low and slow to ensure there isn't a tumble.
> I think we are just looking at years and years of flat home prices.


Fixed mortgage rates are determined by bond prices, so the government would have to subsidize individual homeowner rates to have a positive impact.

I doubt that would be politically feasible.


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## sags (May 15, 2010)

Right now, I think our economy is too anemic to suffer a large economic decline from 3 of it's leading industries.......real estate, banking, and construction.

If there is going to be a major correction...........now would not be a good time for it.


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## My Own Advisor (Sep 24, 2012)

"When interest rates increase, and they can't really go much lower, people will be stunned upon renewal as their once affordable house, suddenly becomes unaffordable."

Ideally, this will happen, rates rise. Unfortunately I don't see this happening for many years, personally.

I've said for years, I don't see how this low (and prolonged) interest rate environment is helping anyone but the banks. At least I own a few of them 

I can't wait to have my house paid off in <8 years. Then, I really don't care what happens with interest rates. That's one factor out of the retirement planning puzzle I don't have to worry about.


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## Eclectic12 (Oct 20, 2010)

KaeJS said:


> In my experience, renting is equally as expensive as owning a home.
> It usually doesn't allow one to save more or less, but an equal amount.


YMMV ... when I was renting a house to check out where I wanted to live, it was $1200 a month.
When I bought, there was more land, the house was about the same and just the mortgage on it's worked out of $1100.

Renting didn't have the additional expenses that home ownership does (ex. property tax was already rolled into the rent instead of added on, no expense when the roof was replaced, no appliance replacement/repairs etc.).


If I sold all the stuff I had (1936 dining room set, canoe, etc), I could easily have been in an apartment where my saving/investing income would be increased by $10K a year, just between property taxes and the mortgage differential.





KaeJS said:


> In my situation, I would be able to save the same amount if I rented.


Fair enough ... though a lot of people overlook many costs that come with home ownership.


Cheers


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## KaeJS (Sep 28, 2010)

My Own Advisor said:


> I've said for years, I don't see how this low (and prolonged) interest rate environment is helping anyone but the banks. At least I own a few of them


It's benefitting me (and you)!
I want the rates to stay as low as possible for as long as possible. When the rates are low, it's as if all of Canada is on "pause" and I am able to catch up and blow even further past those people who are spending. The longer the rates stay low, the more of my money goes straight to principal.

I am ferociously trying to pay down as much as I can on the mortgage. By the time rates are 5%, I should owe less than $100k, and payments will be a breeze.


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## Just a Guy (Mar 27, 2012)

If you're a renter, you rarely invest the saving you have over home ownership, so that's usually a pretty weak argument...as they just spend the money on junk.

As for the rate increase not happening, the government has been hinting that they want to raise the rate for more than a year. Remember when the government called the bank for offering mortgages below 2.99%?

I'm pretty sure the government realizes it can't raise the rates in the current conditions, but lending has also gotten a whole lot tougher in the past year. With less loans being approved, the government has less people exposed and can raise the rates. I think it's coming, I'll be glad if I'm wrong...of course if I'm right, I get to go on a buying spree so it's win win I guess.


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## KaeJS (Sep 28, 2010)

Eclectic12 said:


> YMMV ...


Absolutely.

In my case, the only reason it is feasible and more favourable for ownership is due to my downpayment + tenants. I understand that not all people have the same financial situation or want the responsibility of being a landlord.

If I rented, I would save $1050/month.

By owning the house, I am saving $1150/month. This is inclusive of having the mortgage paid, property taxes, condo fees, everything. 

It's just slightly more savings on the home, but I am only 2 years into my mortgage. As time goes on, the savings will increase as the mortgage amount drops, where as with renting, the rent can only go higher.


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## martinv (Apr 30, 2009)

Steve, have you thought about trying to obtain "bare land strata" title for your properties?
It may take time, possibly several years and money but may be worth it in the end.
It would probably require a zoning change plus they would likely want "cash in lieu" for parks.
You have probably thought of this already.


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## gt_23 (Jan 18, 2014)

KaeJS said:


> It's benefitting me (and you)!
> I want the rates to stay as low as possible for as long as possible. When the rates are low, it's as if all of Canada is on "pause" and I am able to catch up and blow even further past those people who are spending. The longer the rates stay low, the more of my money goes straight to principal.
> 
> I am ferociously trying to pay down as much as I can on the mortgage. By the time rates are 5%, I should owe less than $100k, and payments will be a breeze.


That sounds like fun. While your strategy might give you peace of mind, hopefully you realize that the guy who invested his surplus cash instead of paying down his 2.5% mortgage earned probably 30+% more on that cash in the last couple years.


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## KaeJS (Sep 28, 2010)

gt_23 said:


> That sounds like fun. While your strategy might give you peace of mind, hopefully you realize that the guy who invested his surplus cash instead of paying down his 2.5% mortgage earned probably 30+% more on that cash in the last couple years.


Yes, but hindsight is always 20-20. 

Some things are not worth the money, though. Living in a single room inside a house with 4 other strangers paying $500/month is one of those things.


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## Butters (Apr 20, 2012)

now that we can't get 30 year mortgages anymore
only the 30 year mortgage owners would have a small problem... they however would be 2 years in already

if someone right now bought at 3% for 4-5 year contract at 25years
in 4-5 years they can just get the same payment rates at a higher percent but still the 25 year mortgage and thus not increasing their monthly payments much

both 25 year mortgages
250k at 3% in 5 years = 213,686.11
$1,183.12 monthly

213k at 5% = $1,242.81 monthly

60 bucks more a month in 5 years, hopefully they get a raise!
it will just take forever for people to pay them off
everything will be stagnate


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## sags (May 15, 2010)

If home prices remained stable...........home owners would have some options at renewing at higher interest rates.

I would think they would have to apply for a new mortgage to extend the terms, and would probably have to pay appraisal and lawyer fees..............and possibly CMHC fees again.

It might be a problem if the home value has fallen below the mortgage though.

The bank may not want to issue a mortgage, without a down payment for the difference.


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## carverman (Nov 8, 2010)

Just a Guy said:


> Cities set a budget which has a number in it stating the amount they need to collect total. *The assessed value is only used to determine your portion of that total number compared to your neighbour, it has nothing to do with the total number*. If your house is assessed as being worth more than mine, you'll pay more taxes than me, but the city doesn't increase taxes because property values increase...


Slight confusion here my CMF friend; 

*Property taxes are proportional to the assessed value of your property and the mil rate that the city or municipality sets every year before their municipal tax year begins. 
*
The mil rate increase is based on a number of city needs, the 'official inflation rate", and any other local improvements
in ones residential area. The assessed value x the mil rate in most cases, *does cause the municipal tax to increase*. Mine certainly has in the last 5 years based on the Municipal assessment on my property, and what the city of Ottawa requires to collect from their budget the set.

So if you are paying a mortgage to a institution, and they are also collecting the taxes for you, the mortgage payment (although fixed for the 5 year term), will increase each year due to the increase in municipal tax collected. 



> *Mil Rate Calculation*
> 
> Each year, Council, during its budgetary process, approves the amount of revenue required to operate the municipality. From this amount they subtract the known revenues, such as grants, licences, permits and so on. The remainder represents the amount of money to be raised by property taxes. The amount to be raised is divided by the total value of all the property in the municipality and multiplied by 1000 to decide the tax rate also known as the "mil rate". The calculation expressed as an equation is as follows:
> 
> ...





> *Property Tax Calculation*
> 
> The amount of municipal tax payable by a property owner is calculated by multiplying the mil rate by the assessed value of a property and dividing by 1000.
> 
> ...


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## jcgd (Oct 30, 2011)

KaeJS said:


> In my experience, renting is equally as expensive as owning a home. It usually doesn't allow one to save more or less, but an equal amount.
> 
> The difference is all in appreciation. In my situation, I would be able to save the same amount if I rented.


I think most people rent less than they would buy so they end up able to save a bit more. Most people don't rent a five bedroom, three bath house. They will stay in a condo or townhouse with cheaper rent, but when people buy they rarely get the bare minimum.


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## Addy (Mar 12, 2010)

KaeJS said:


> Maybe they will stop buying tim hortons everyday. Maybe no beer on weekends, or $300 hair cuts for the ladies.


I was shaking my head yes until I read the part about giving up my haircuts. To hell with you!


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## brad (May 22, 2009)

jcgd said:


> I think most people rent less than they would buy so they end up able to save a bit more. Most people don't rent a five bedroom, three bath house. They will stay in a condo or townhouse with cheaper rent, but when people buy they rarely get the bare minimum.


I agree, and I've never felt that "apples to apples" comparisons of renting v. buying made sense because that's generally not how it works in the real world. In seven years of "owning" our own home, I've paid more in interest on my mortgage than I would have paid in 12 years of renting the apartment we lived in before we bought our house. Both places were 3-bedroom, but we were willing to compromise a lot more on location and appearance/condition when we were renting. On the other hand, our home has appreciated in value by more than what I've paid in interest. It could have just as easily been the other way, though, and in fact if I add in all the money we've spent on repairs and maintenance, taxes, etc., we probably just about break even at this point. We plan to live in this house for at least a couple more decades, so ultimately it should be a sound decision finance-wise, but if we were moving tomorrow it would be a wash and we probably would have been better off renting.


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## Just a Guy (Mar 27, 2012)

SheaButters said:


> both 25 year mortgages
> 250k at 3% in 5 years = 213,686.11
> $1,183.12 monthly
> 
> ...


One problem with your math shae, and that is you never reduced the amortization period...after 5 years your principle did reduce to 215, and you have only 20 years left on your pay down theoretically...

The way you did your renewal however, once you are done your next 5 years, you'll still be on track to pay down the property in...20 years (assuming your interest rate hasn't gone up again). 

This is why your numbers only went up by $60/month instead of over $200/month like my original numbers did.

If you never reduce your amortization period, you'll never pay off your house, you're basically renting from the bank. So, your rent is stable for 5 years, but you are not really getting any closer to home ownership...


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## Just a Guy (Mar 27, 2012)

Carver, 

I think you are proving my point. The mil rate is what increases your taxes, not the assessed values.

If we have two houses $100 and $200 (assessed values) and I want to collect $300 in taxes (mil rate), one house would pay $100 and the other would pay $200.

If the houses, the next year were assessed at $100,000 and $200,000 and I wanted to still collect $300 in taxes, there would be no change in tax bills. If I decided I needed the mil rate to increase to $600, one house would pay $200 and the other would pay $400...the increase has nothing to do with the appraised value as long as they stay the same relatively.

That's what I was saying at least.

If cities were smart, they'd appraise everyone with a low value (say 25% below market rates) so no one could ever appeal their taxes. As long as the appraised value remains relative, it would remain fair. If someone was ever stupid enough to appeal, the city could look at "market rates" and that guys portion of the tax bill would increase...

The savings from eliminating the tax appeal board and all the people involved in tax appeals could be significant.


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## Eclectic12 (Oct 20, 2010)

KaeJS said:


> ... If I rented, I would save $1050/month.


If you would be saving by renting ... then clearly renting *can't be* as expensive as owning, for you.




KaeJS said:


> ... By owning the house, I am saving $1150/month.


If you take out what the tenants are paying ... are you still saving "about the same"?

I also had tenants for my first house which changed the net situation but on a strictly "rent versus own", without something to change the situation, renting was usually cheaper.




KaeJS said:


> ... where as with renting, the rent can only go higher.


Again ... YMMV ... I was able to save a bigger down payment for my first house because my co-worker was told me about his building, where the rents weren't going up. I don't remember how long he was there but for the six years I was there, the rent stayed constant.

My current coworker has had his rent go up ... but for the location/space, it was around $400 cheaper than similar ones and his rent has gone up about $60 in eight years.


Cheers


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## KaeJS (Sep 28, 2010)

Just a Guy said:


> One problem with your math shae, and that is you never reduced the amortization period...after 5 years your principle did reduce to 215, and you have only 20 years left on your pay down theoretically...


I think this was the whole point of his post. He purposely did not reduce the amortization period.


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## KaeJS (Sep 28, 2010)

Eclectic12 said:


> If you take out what the tenants are paying ... are you still saving "about the same"?


No. If I took out what the tenants were paying, I would not be able to save as much.

In my calculations, though, I used $500/month for rent. This is quite low. This is assuming I could get a room in the GTA for $500/month including all utilities. This is generally hard to do unless you are willing to seriously downgrade your quality of life.

Without my tenants, I would only be able to save ~$200/month if I were to carry the house on my own.


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## Just a Guy (Mar 27, 2012)

KaeJS said:


> I think this was the whole point of his post. He purposely did not reduce the amortization period.


Yes, my point was he's just a renter with the bank as a landlord and he has all the maintenance to boot.


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## KaeJS (Sep 28, 2010)

Just a Guy said:


> Yes, my point was he's just a renter with the bank as a landlord and he has all the maintenance to boot.


This is true.

I think that a lot of people could end up doing this, though. People have a psychological and emotional attachment to their house. Even if they are just standing still in time and paying interest into infinity, I think this is going to be a viable option for a lot of people. Especially those people with families.


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## wert (Jan 26, 2014)

jcgd said:


> I think most people rent less than they would buy so they end up able to save a bit more. Most people don't rent a five bedroom, three bath house. They will stay in a condo or townhouse with cheaper rent, but when people buy they rarely get the bare minimum.


Yes. It is a lot like relationships: the person you are willing 'to date' is not necessarily the same quality as the one you eventually marry


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## sags (May 15, 2010)

True.......but there is a lot of people....spending an awful lot of money....on crappy old single family homes that have been given "cosmetic" overhauls to look pretty.

If everyone was buying a brand new, quality built home............for these prices, that would be one thing.

But many aren't. They are buying old homes with leaking foundations, old style wiring, tree roots growing into their water lines, sagging roofs, and unknown costs to upgrade or maintain the homes.

These homes quickly become "money pits" for the owners.........and the last thing a young couple struggling to pay the mortgage payments needs........is tens of thousands of dollars in additional maintenance costs.

I just read the other day.............of yet another Toronto area home that collapsed during renovations. 

It makes you wonder what the other homes in the area are like.

It raises the question if the quality of the homes are worth the price, or is the valuation solely based on location.


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## Just a Guy (Mar 27, 2012)

I'm not sure about the "quality" of a new home either...the best houses that I've found are those built before 1970 give or take.

Houses built in a boom period are often slapped together and poorly constructed. 

I look at today's "technology", whisper quiet joists made of osb between two pieces of 1x1 and I compare that to my first house with a 2x12 fir joist supported by a 6 inch I beam (the house was a 900 square foot bungalow built in the 50's). After 50 years, the floors never squeaked, but my sister's whisper quiet floors squeaked all the time.

I very much doubt many of today's "quality" constructions would last 50-100 years...they are made to be disposable like everything else.


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## carverman (Nov 8, 2010)

sags said:


> True.......but there is a lot of people....spending an awful lot of money....on crappy old single family homes that have been given "cosmetic" overhauls to look pretty.
> 
> 
> It raises the question if the quality of the homes are worth the price, or is the *valuation solely based on location*.


as the real estate agents tell you...location. location...is everything. 

I used to live in the early 70s in TO, in a side street off Danforth and Woodbine. A very old area with homes built in the 20s/30s with
*LEAD WATER PIPES, KNOB AND TUBE WIRING* and virtually no insulation between the old lath walls and the outside brick.

The sanitary sewer was cast iron pipes,cracked from the years, with tree roots growing in them...and the LEAD WATER PIPES were so corroded leading into the house that the water pressure was down to a trickle...never mind all that lead traces in the drinking water...yumm! Good for the brain!
Old converted coal furnaces..and high maintenance woodwork on the outside requiring painting..lots of painting every x years.

However,it was the ONLY house on this small side street that had a private laneway and a garage..and in these older areas
of TO..that could be considered a luxury as permit street parking is the norm here.

I bought this 2 story small house (600 sq feet on ground floor and maybe 400 on the top floor) for $25k in 1972.
Sold it to my mom for just a couple thousand equity in it (lived in it for less than a year) on it when I moved out of the city for another job.

Over the years. a LOT of maintenance had to be done to this house, new copper water lines throughout, remove the old
knob and tube wiring and new furnace + painting, roofing etc etc. Since 1973, I would be that at least 20K in upgrades
and repairs have been done to this old house and it really needs a lot more done to it in modernization..but my mother
is not going to do it now at her age. 

However, this old house is just one block (short walk) to the Bloor subway line...good location..
and today, I would venture a guess that it would prob ably list/sell for $350K to $450K just the way it is now.


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## sags (May 15, 2010)

Just a Guy said:


> I'm not sure about the "quality" of a new home either...the best houses that I've found are those built before 1970 give or take.
> 
> Houses built in a boom period are often slapped together and poorly constructed.
> 
> ...


You are right......a quality home costs a lot more, but there are builders who specialize in custom, well crafted homes.

Suburban tract homes are usually not of the best quality.........but they cost much less.

But how many people concern themselves with the quality of the framing, flooring or other hidden materials ?

My two sisters go home browsing all the time, and all they talk about is the number of kitchen cupboards, or how nice the bathroom fixtures were.


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## sags (May 15, 2010)

The Money Pit...........

http://www.youtube.com/watch?v=TLLQquBdU8M


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## Pluto (Sep 12, 2013)

Just a Guy said:


> When interest rates increase, and they can't really go much lower, people will be stunned upon renewal as their once affordable house, suddenly becomes unaffordable. They, of course, will try to sell...hoping for a profit, but the market will be slowly flooded with others trying to do the same thing, and buyers won't be able to afford the payments at the higher rates any more than the sellers...people will try refinancing at a longer term, which may buy them a few more years...but prices will drop, many will lose their homes to foreclosure, it's inevitable.


I think a plan is to rent and save until the above circumstance - rates up, market flooded - exists. Then buy with a variable rate mortgage. I'm shocked by high maintenance stories. Most people I know had averaged 100 to 125 a month in maintenance costs. Of course they didn't buy a fixer upper. Just buy a well maintained home. If its a really old house make sure the plumbing and wiring has been updated, and the roof is OK. 

Home ownership is getting a bad rap due to repair horror stories. Just avoid places that could have serious problems. 

One thing I like about home ownership is the leverage. Say you get a 400000 asset for 25% down. The asset appreciates at least at the rate of inflation over time, not necessarily each year. So if the 400000 home appreciates 3% that's 12000. But you only laid out 100000. So the appreciation amount is 12% of the down payment. That's not bad. Of course one has to consider maintenance, taxes, utilities and mortgage interest. After one subtracts that from the 12000 one should have an idea of what it cost. 

For example, yearly,
maintenance 1500
Taxes 2500
utilities 3000
loan interest 8400

Total: $15,400.00 

But the place appreciated $12000. So 15400 minus 12000 is $3400. What could one rent for $3400? Where am I going wrong here? I suppose the rising interest rate scenario is going to up the interest expense. That's why it may be worth while to wait until rates are up, the market is flooded, and buy with a variable rate mortgage. One might get a better price, and be heading into a rate decline.


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## Just a Guy (Mar 27, 2012)

Pluto said:


> I think a plan is to rent and save until the above circumstance - rates up, market flooded - exists. Then buy with a variable rate mortgage.
> 
> One thing I like about home ownership is the leverage. Say you get a 400000 asset for 25% down. The asset appreciates at least at the rate of inflation over time, not necessarily each year. So if the 400000 home appreciates 3% that's 12000. But you only laid out 100000. So the appreciation amount is 12% of the down payment. That's not bad. Of course one has to consider maintenance, taxes, utilities and mortgage interest. After one subtracts that from the 12000 one should have an idea of what it cost.
> 
> ...


I think you answered your own question...when the market gets flooded, the prices go down...when the prices correct say $40-100k (10-25%, personally I think it could be much higher) then you've got a pretty big hole to climb out of.

I'd also point out that in your example, you only used 3% interest to calculate your interest payment...yet you aren't buying until rates increase...one of the two of these is where you are making your mistake.


Also, variable rates are good when interest rates go down, but can kill you in a rising interest rate environment. If rates start to increase, you'll want to lock in as long as you can at a good rate.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> I think you answered your own question...when the market gets flooded, the prices go down...when the prices correct say $40-100k (10-25%, personally I think it could be much higher) then you've got a pretty big hole to climb out of.
> 
> I'd also point out that in your example, you only used 3% interest to calculate your interest payment...yet you aren't buying until rates increase...one of the two of these is where you are making your mistake.
> 
> ...


Good point: Interest rates would likely be higher than 3 % around the time the market gets flooded due to unfordablility. How high is anyone's guess. So yeah the interest expense would be higher to begin with. Any way, for people who are bent on buying that may be a great time with a variable rate. 
I'm not suggesting buying before a correction, but during it. For instance, in the mid 1990's wouldn't been bad to buy in To and Van. Anyone who did that would have been looking at over 10 years of annual market price increases. In that case the % return on the down payment would be fine. Owners made out way better than renters. Currently I think renters will be the winners until the next correction.


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## sags (May 15, 2010)

Retiring baby boomers may also flood the market with homes, but they own much of the small bungalow types of homes.

Whether young people would be satisfied to live in their "grandparents" type of home.............is questionable.

My parents raised 5 kids and my grandfather lived with us.........in a 900 square foot brick bungalow. It had 3 bedrooms, 1 bathroom, an eat in kitchen, and a small living room. The basement was finished with a rec room and 2 bedrooms. It was finished......but dad was no carpenter and wood paneling and indoor/outdoor carpet was good enough.

I recall being very happy there...........but my young relatives would sniff at such a home today.

They are all living in huge homes, hoping they never lose a month off work, and interest rates stay low for the next 20 years.


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