# Buying a house or condo



## leeder (Jan 28, 2012)

A cousin of mine is looking to buy either a house or a condo in the near future. He has a steady job that gets him about $70-75k per year pre-tax (I would guess about $45k take home). He's fairly conservative financially, paid off his student loans a number of years ago, and has invested and saved religiously over the years. He says he can put in a $60-80k down payment, if need be. He asked me if I think there is a good $ range in terms of property value that he should target based on his income. I have no idea, as I haven't been involved with the real estate market in years. Anyone have any thoughts? Are there good rule of thumbs in terms of max home affordability?


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## Just a Guy (Mar 27, 2012)

Historically, it should be about 2.5-3x your annual income with 5-10% down. With the lower interest rates, that number has gone up significantly since houses are "more affordable" (meaning you can afford to pay more as interest is less)...however interest rates are now rising.

I'd say your cousins should stick to a place under 300k.


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## lightcycle (Mar 24, 2012)

Just a Guy said:


> Historically, it should be about 2.5-3x your annual income with 5-10% down. With the lower interest rates, that number has gone up significantly since houses are "more affordable" (meaning you can afford to pay more as interest is less)...however interest rates are now rising.


2.5-3x is so laughably quaint these days. Buyers in the Lower Mainland would have to be raking in 450K-500K a year to afford the *average* house.


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## james4beach (Nov 15, 2012)

I've seen friends and family buy various houses and condos over the years. I don't think I would ever buy a condo ... you end up with an "apartment living" experience for the cost of a house. My family members who bought condos have ended up with horrendous monthly management fees combined with occasional enormous repair expenses. For example a few years ago their condo board decided to install glass all over the balconies, kind of like that Toronto glass condo craze, and they ended up with a bill of something like 30K to 40K for "their share" of the upgrades. As seniors, they don't have 40K cash sitting around so this was very unpleasant. In addition to that, some of the condo buildings will make you feel like tenants even though you own the place, depending on how the management company is.

I would only buy a house. If I want the apartment experience, I'll just rent one.



Just a Guy said:


> Historically, it should be about 2.5-3x your annual income


Ancient history


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## leeder (Jan 28, 2012)

james4beach said:


> I've seen friends and family buy various houses and condos over the years. I don't think I would ever buy a condo ... you end up with an "apartment living" experience for the cost of a house. My family members who bought condos have ended up with horrendous monthly management fees combined with occasional enormous repair expenses. For example a few years ago their condo board decided to install glass all over the balconies, kind of like that Toronto glass condo craze, and they ended up with a bill of something like 30K to 40K for "their share" of the upgrades. As seniors, they don't have 40K cash sitting around so this was very unpleasant. In addition to that, some of the condo buildings will make you feel like tenants even though you own the place, depending on how the management company is.
> 
> I would only buy a house. If I want the apartment experience, I'll just rent one.



You raise good point, and I would tend to agree with you in getting a house over a condo. In his case, I think he is looking for something that's close to his work in downtown. On the bright side, he can forgo shovelling the driveway & sidewalks and mowing lawn & pulling weeds. In terms of rent vs. buy, it's up to him, though he'd be losing money by renting. At least buying he'd have a property to sell if the day comes where he expands his family.

James, what would you suggest in terms of home affordability? With the house prices so high, I agree the 2.5-3x annual income may be a historical figure.


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## Numbersman61 (Jan 26, 2015)

james4beach said:


> I've seen friends and family buy various houses and condos over the years. I don't think I would ever buy a condo ... you end up with an "apartment living" experience for the cost of a house. My family members who bought condos have ended up with horrendous monthly management fees combined with occasional enormous repair expenses. For example a few years ago their condo board decided to install glass all over the balconies, kind of like that Toronto glass condo craze, and they ended up with a bill of something like 30K to 40K for "their share" of the upgrades. As seniors, they don't have 40K cash sitting around so this was very unpleasant. In addition to that, some of the condo buildings will make you feel like tenants even though you own the place, depending on how the management company is.
> 
> I would only buy a house. If I want the apartment experience, I'll just rent one.
> 
> ...


There are pros and cons for each situation. For some 45 years, I owned a single family home. I looked after everything - Landscaping and home maintenance. Six years ago we moved to a single family home in a bare land condo located on a golf course. Now the condo association looks after the lawn and the snow removal. Certainly works well for me since I am now in my late 70’s. Another advantage is that there are rules which all owners must follow.
In the US we own a unit in a complex which we use in the winter. No problems - I am an active participant in the condo operation.


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## james4beach (Nov 15, 2012)

leeder said:


> You raise good point, and I would tend to agree with you in getting a house over a condo. In his case, I think he is looking for something that's close to his work in downtown. On the bright side, he can forgo shovelling the driveway & sidewalks and mowing lawn & pulling weeds.


Depends on the city (you want a vibrant downtown) but for many years now I've been renting a downtown apartment within walking distance to work, and it's incredibly nice. I highly recommend it. I think Mr Money Mustache also did this when he lived & worked in Toronto.



leeder said:


> In terms of rent vs. buy, it's up to him, though he'd be losing money by renting. At least buying he'd have a property to sell if the day comes where he expands his family.


There is no loss of money due to renting. Any renter who is responsible with money and investments can amass significant savings while renting. In my approx 13 years renting, I have saved more than enough money to buy a house. Today, I could buy a house outright without a mortgage. And I didn't even invest aggressively.

Ben Felix of PWL has a couple nice videos describing this debate between rent vs own and describes how renting can indeed make you rich. I share his conclusion, which is that it can work out nicely either way. Buying a home is not intrinsically better, nor does it necessarily make you wealthier:
https://www.youtube.com/watch?v=UuAZ4M9f_sM
https://www.youtube.com/watch?v=xprFz1CJu6E

However I'll add, some people are not disciplined about savings and investments can benefit tremendously from having a house and mortgage, because the mortgage forces them to save (paying down principal). When you're renting, more of the money management is up to you. Do it right, and you'll build up nice savings. I can attest to the fact that this works.



> James, what would you suggest in terms of home affordability? With the house prices so high, I agree the 2.5-3x annual income may be a historical figure.


Sorry, I have no idea.


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## Just a Guy (Mar 27, 2012)

Funny, the question was “what is affordable” to which others seem to think that the “historical” numbers are now “out of date”. 

So, you all think you should overpay for houses, that you won’t be able to afford if interest rates return to their “historical” levels because interest rates have been extremely low for decades allowing people to buy at a different ratio. 

This is exactly the reason why so many Americans lost their houses and why I see a mess in Canadian real estate coming.

Remember mortgages are usually 20-25 year commitments, a lot can happen over that time period. For every $100k you borrow, your payment will increase about $50/month for each 1% the interest rate goes up. You may be in for some payment shock at renewal time.


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## fatcat (Nov 11, 2009)

here in victoria single family homes are out of reach of so many people, condos are the only option ... most condos are fine and good investments and some small number can create problems like here in bc we had the leaky condo situation which stung a lot of people

renting has lots of advantages too

i tend to be in the camp that says that your home is a long term bulwark against inflation and for many can basically be their retirement and even nursing home habitation fund


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## new dog (Jun 21, 2016)

I think one should not be in a rush to buy anything in greater Vancouver at least at this time. Detached houses are not selling very quickly and condo's and townhouses I believe are at the top of their price range. They are currently building tons of condo's and townhouses so I would sit on my hands at this point in time.


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## rl1983 (Jun 17, 2015)

I agree New Dog.

Condos, while " affordable " are only so on the initial approach. They are cheaper in appearance as the purchase price is lower. Nobody thinks about stratas fees ( which in downtown Vancouver are ridiculous ) even condo insurance which seems to rise every year because you are living next door to potentially the person who sets the building on fire.


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## Mortgage u/w (Feb 6, 2014)

In terms of affordability, you cannot use a formula based in income alone. You need to factor in other factors such as debts; car loans/leases, credit card and LOC payments, if any. The higher the debt-load, the greater the repayment capacity is reduced. 

I suggest having him crunch some numbers using an on-line mortgage calculator - or better yet, meet with a mortgage broker.

As for condo or house, my preference is house, but that is an individual choice. They both have their pros and cons and is unique for each person.


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## nobleea (Oct 11, 2013)

What city is your cousin in?


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## leeder (Jan 28, 2012)

He's in Calgary.


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## Numbersman61 (Jan 26, 2015)

The OP indicated that his relative, who has funds for a significant down payment, is considering purchasing a condo near where he works in Calgary. My advice - Go for it! Just don’t pay too much. My children initially purchased condos and then graduated to single family homes. I’m now encouraging my grandchildren to do the same thing. In my view, it is very important to own the place you live in. It not only fosters forced savings but also helps develop responsibility in a gradual basis. Potential difficulties with the condo boards are overblown.


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## Just a Guy (Mar 27, 2012)

The best way to deal with issues on a condo board is to join the condo board. Most of the time they need people and they are always looking for guidance, since most people don't know how to operate a business. If you get on the board, you have a say in how things are run, not a bad sacrifice in time for controlling the outcome of what, for many, is their largest "investment".


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## Numbersman61 (Jan 26, 2015)

Just a Guy said:


> The best way to deal with issues on a condo board is to join the condo board. Most of the time they need people and they are always looking for guidance, since most people don't know how to operate a business. If you get on the board, you have a say in how things are run, not a bad sacrifice in time for controlling the outcome of what, for many, is their largest "investment".


I agree - if you are a condo owner, be an active participant.


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## Just a Guy (Mar 27, 2012)

And don't try to cheap out on maintenance because you don't want to spend money.


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## Longtimeago (Aug 8, 2018)

Numbersman61 said:


> The OP indicated that his relative, who has funds for a significant down payment, is considering purchasing a condo near where he works in Calgary. My advice - Go for it! Just don’t pay too much. My children initially purchased condos and then graduated to single family homes. I’m now encouraging my grandchildren to do the same thing. In my view, it is very important to own the place you live in. It not only fosters forced savings but also helps develop responsibility in a gradual basis. Potential difficulties with the condo boards are overblown.


The most sensible reply without having a lot more information on the individual in question.


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## peterk (May 16, 2010)

Just a Guy said:


> For every $100k you borrow, your payment will increase about $50/month for each 1% the interest rate goes up. You may be in for some payment shock at renewal time.


I really don't see why that is all that scary of a prospect. Even if all of a sudden rates spike and you have to pay an extra $1000/month, homeowners will just suck it up and cut back on other life expenses - Get rid of a car, no more vacations, cheaper groceries and clothes, an LG instead of an iphone, reduced luxury kids sports, etc.

I wonder if there's stats out there about reasons people default on their mortgages and give the keys back. Out of: job loss, housing price decline, huge investment losses, divorce, and interest rate increases, I'm sure interest rate increases comes dead last.


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## Just a Guy (Mar 27, 2012)

That’s because people don’t understand how compound interest works. The number one reason people lose their homes is they can’t afford it. Interest rates plays a large role in affordability. 

People lock in for 5 years at probably very close to what they can afford...they pay their mortgages for 5 years, then go in for a renewal. Of course interest rates have gone up in 5 years, but people think the bank has just raised their payments by $1000/month, which they can’t afford, to make bigger profits. Then people scream and shout that the banks are crooks...they don’t understand that interest rates are what caused them to lose their house. They complain about how they made payments for 5 years and now the bank unfairly raised their payments “out of the blue”. 

Of course, they try to sell and cash out their equity only to find anyone interested in that house (surprisingly millionaires don’t want to live in 1200 sq.ft. Bungalows or whatever) is in the same boat, they can’t afford it either, so eventually they sell at a loss and the housing market corrects. The price drops down to a point where people can afford to pay the mortgage at the new, higher, interest rates. 

Btw, there are only a couple of provinces where you can walk away from your mortgage. All the other provinces can come after you for the difference. Oh and so will CMHC if they sell your house at a loss if your not in one of those few provinces (I think it’s just Alberta and Saskatchewan that have non-recourse mortgages).


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## AltaRed (Jun 8, 2009)

I think Peter is correct. Job loss and divorce are the major reasons. Think about the uptick in arrears in AB and SK since the commodity crisis. See stats here https://www.cba.ca/Assets/CBA/Documents/Files/Article Category/PDF/stat_mortgage_db050_en.pdf Look at SK in particular in the detailed tables.


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## Just a Guy (Mar 27, 2012)

And how much have interest rates risen in say the last 20 years...they haven't until this last year. Let's see what happens when the interest rates rise every year instead of fall. Some of us still remember when interest rates were higher than 3%.


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## AltaRed (Jun 8, 2009)

Mortgage rates have mostly been saw-toothing down for decades, with the occasional blip. https://www.ratehub.ca/5-year-fixed-mortgage-rate-history I'd be surprised to see them above 7% ever again with discounted rates below 5%. For most people, lifestyle changes will be enough to keep them solvent. The bigger issue is continued decline in affordability for new entrants to the market, and thus prices will come down to match.


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## My Own Advisor (Sep 24, 2012)

I don't think we'll ever see rates about 5%. That would break the bank of most people but then again, with rates so low, the greatest banking invention over the last 20-30 years has been the HELOC. "Just pay the minimum and you'll be fine." I heard that from someone at work today.


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## peterk (May 16, 2010)

So the worst case scenario is something like:

Family with two moderate, 50-70k incomes, and has huge 500k mortgage. At 4% on the current mortgage they are making payments of $2600/month.

5 years later - incomes haven't increased, wife is on mat leave now, so <1.5 incomes. Rates are now way up to 9%, potentially causing mortgage payments of $4100/month, but the bank lets them re-amortize to 25 years again so payments drop to $3600/month.

So whatever other life expenses they have, they must come up with an extra $1000/month, during a time when they are on lower income with new family expenses. Sure that sucks, but without a job loss, a divorce, or major market correction that forces the bank to demand cash, I don't see how the family is not going to be able to come up with the payments. The idea that there is not $1000+ per month of fat/luxury spending in nearly every middle class Canadians' budgets is overly worrisome.


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## Just a Guy (Mar 27, 2012)

Yeah, as long as they don't pay their income taxes, don't eat, get hand me down clothes, don't have a need for a car, gas, utilities, etc. I'm sure they'll be fine. 

Btw, you may want to recheck your math...500k @ 9% is $4140/month with 25 years amortization. If you go for 30 years it only drops to 3964/month.


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## AltaRed (Jun 8, 2009)

That is why the regulator recently bumped up the stress test, i.e. qualifying interest rate, to provide more cushion. Granted those that qualified 3 years ago without the higher stress test AND lower interest rates are more likely to be hard pressed to make ends meet if they had to renew today, but there are ways to mitigate the damage as Peterk suggests. I simply don't see the degree of risk here that existed in the USA in the days of NINJA loans.... unless we are really wrong with interest rate increases (which I strongly doubt). With the amount of both government and corporate debt out there, central banks are not in the position of 'doubling' short term rates and even if they did, the bond market would not now follow...recognizing what I just said. We would get an inverted yield curve and a recession, and potentially stagflation, but not cataclysmic debt defaults.


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## Just a Guy (Mar 27, 2012)

I'd say history would prove that what you want to "believe" will or won't happen tends to have nothing to do with what usually happens. 20 years ago no one, including myself, ever thought we'd see 0% or even negative interest rates. We were happy with a historical average mortgage rate of 8% (which was a lot better than he 21% we saw a decade earlier). 

These runs have gone on so long that no one remembers what things were like...that's why you can't see the corrections coming and don't believe they can happen. Something that has occurred many times in history...yet we're always shocked.

How many people were shocked right out of their houses in 2007/8 America. No one saw it coming...unless you looked objectively at how stupid the lending and borrowing practices were. No one ever paid anything down, they were underwater from the beginning, but everyone believed housing prices always go up, they had for 20+ years at unprecedented rates. The party was never going to end...


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## Longtimeago (Aug 8, 2018)

Just a Guy said:


> I'd say history would prove that what you want to "believe" will or won't happen tends to have nothing to do with what usually happens. 20 years ago no one, including myself, ever thought we'd see 0% or even negative interest rates. We were happy with a historical average mortgage rate of 8% (which was a lot better than he 21% we saw a decade earlier).
> 
> These runs have gone on so long that no one remembers what things were like...that's why you can't see the corrections coming and don't believe they can happen. Something that has occurred many times in history...yet we're always shocked.
> 
> How many people were shocked right out of their houses in 2007/8 America. No one saw it coming...unless you looked objectively at how stupid the lending and borrowing practices were. No one ever paid anything down, they were underwater from the beginning, but everyone believed housing prices always go up, they had for 20+ years at unprecedented rates. The party was never going to end...


Right on the money. I can remember people losing their houses because when they went to renew their 8-10% mortgage and the rate had gone up to 21%. While interest rates are not likely to go up to anywhere near those levels in the short or even medium term future, they only have to go up a couple of % to get many people in serious trouble.
https://www.theglobeandmail.com/rea...rned-from-80s-interest-rates/article24398735/

I always remember my Mother talking about people who were living what she referred to as a 'margarine existence'. In those days, only poor people used margarine instead of butter and what she was referring to in her not so subtle way was that paying for their house meant they didn't have enough money left over for food. I think there are even more people today than back then, who are living at the edge of their income and any increase in their mortgage would see them in trouble.

Oh and by the way peterk, just how do you define 'middle class' because as far as I am concerned, there is a very small middle class these days. What there is are a lot of lower income working class people who like to think they are 'middle class'. But in fact they are not. A median income does not make you middle class, it just means you have a median income for whatever area is being measured. That number will differ in a small town vs. a big city etc. but really what matters more than your income is your actual net worth. Someone with a big income and big debt may have next to no real net worth. Someone retired with a modest income may have a considerable net worth as they are likely to 'own' their house, no 'co-own' it with the bank.

The richest 20% of households in New Brunswick would be considered middle class in Vancouver based on their net worth. Middle class in Montreal would be considered poor in Toronto. But do you think those in Montreal don't consider themselves 'middle class'? The fact is that 'middle class' is simply a term politicians like to use to have the majority of people (who think they are all middle class) believe they are working for you. 

There may be some 'middle class' households who have $1000 of slack in their budget as you believe peterk. But I am quite sure there are also a lot of households who are sitting there thinking 'we are middle class', who have nowhere near $1000 in slack in their monthly budget.


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## OnlyMyOpinion (Sep 1, 2013)

> how do you define middle class


Discussions of "middle class" are usually within the context of income. Local purchasing power is an issue to be considered as well, as LTA notes. So does family unit size. 
This article provides some useful context: _Are you earning a middle-class income? Here’s what it takes in Canada, based on where you live_
Middle class is $33-$130k overall, $25k-$87k if you live in Thedford Mines, $91k-$297K if you live in Ft McMurray (2016 StatsCan data).


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## Longtimeago (Aug 8, 2018)

OnlyMyOpinion said:


> Discussions of "middle class" are usually within the context of income. Local purchasing power is an issue to be considered as well, as LTA notes. So does family unit size.
> This article provides some useful context: _Are you earning a middle-class income? Here’s what it takes in Canada, based on where you live_
> Middle class is $33-$130k overall, $25k-$87k if you live in Thedford Mines, $91k-$297K if you live in Ft McMurray (2016 StatsCan data).


According to this article, a better definition revolves around 'discretionary income'.
https://www.macleans.ca/opinion/tru...t-policy-thats-duplicitous-and-irresponsible/

But whatever way you look at it, it's a smaller segment than the segment that *thinks* they are middle class.


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## OnlyMyOpinion (Sep 1, 2013)

Agreed.
This link though I think: https://www.macleans.ca/economy/who-belongs-to-canadas-middle-class/


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## Longtimeago (Aug 8, 2018)

OnlyMyOpinion said:


> Agreed.
> This link though I think: https://www.macleans.ca/economy/who-belongs-to-canadas-middle-class/


Yes, the 'discretionary' income most of those who think they are middle class these days are spending, is actually borrowed money, not money actually left over from income. Having a mortgage, car payment, boat payment and credit card minimum payments every month doesn't make someone middle class. Having a home(with no mortgage), a car (bought for cash),a boat (bought for cash) and credit cards paid in full each month does.


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## Henriette (Sep 14, 2018)

I have seen my friends, family members, buying houses and condo but whom ever buyed condo they are not happy with it so that's why, I will recommend house.


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