value analysis - rent vs purchase

Leveraging, renting vs owning, making an investment or buying a home?
hamor
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value analysis - rent vs purchase

Post by hamor »

I always considered sort of historical average for purchase price/annual rent to be around 20, don't ask me how I got it into my head, long story.
I've been reading Bernstein's Investor Manifesto (very basic info, but entertaining and good refresher nonetheless) and he considers the 'normal' ratio to be 15. He mentions when he shops for RE, he multiplies monthly rent by 150 (12.5 years) to get an idea where the purchase price sits.

I am sitting here scratching my head (not quite pulling the last hair out yet), thinking
in my GTA neighborhood the smallest house goes for $800K now, bigger ones at $1.2M. I can't see anyone paying more than $2.5K monthly rent, so 2.5*12=300 x 15 = $450K that should be the price of the house here..?
even using my own 20x it comes to $600K :?:

What do you think?
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Re: value analysis - rent vs purchase

Post by kcowan »

You need to understand what it means to become an Asian City. That changes all the ratios forever.

I am in Vancouver and I rent because I caught on early that it was driving the market. I am not a speculator.
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Re: value analysis - rent vs purchase

Post by sunkenradish »

You aren't crazy. Housing valuation is.

An anecdote you can do with what you please: Families in Ottawa's now "hip" Glebe have passed houses down from generation to generation for a hundred years. Many people have sold because the taxes on their 100+ year old properties were beyond their middle-class means to afford.
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Re: value analysis - rent vs purchase

Post by hamor »

kcowan wrote:You need to understand what it means to become an Asian City. That changes all the ratios forever.
Do you have an explanation for this?
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Re: value analysis - rent vs purchase

Post by AltaRed »

hamor wrote:
kcowan wrote:You need to understand what it means to become an Asian City. That changes all the ratios forever.
Do you have an explanation for this?
The Asians are not buying into Vancouver (and perhaps elsewhere) because of economics. It is for a safety net where they can land when 'the heat is on'. There are enough of them doing it that prices become inflated. As I understand it, the same is not the case for Montreal, for example, where the Lebanese, amongst others, are not a big enough force to move the market.
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Re: value analysis - rent vs purchase

Post by kcowan »

Thanks AR for your response. The other factor in becoming an Asian City is that they can live anywhere and not just in the urban ghetto of Richmond. This transition took place about 8-10 years ago for Vancouver. It distinguishes Vancouver from Seattle, San Francisco and LA.

I don't know about Toronto. When we lived there (up until 95), it was confined to "AsianCourt", a band east of Woodbine from south of 401 to Major Mackenzie.
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Re: value analysis - rent vs purchase

Post by hamor »

kcowan wrote:Thanks AR for your response. The other factor in becoming an Asian City is that they can live anywhere and not just in the urban ghetto of Richmond. This transition took place about 8-10 years ago for Vancouver. It distinguishes Vancouver from Seattle, San Francisco and LA.

I don't know about Toronto. When we lived there (up until 95), it was confined to "AsianCourt", a band east of Woodbine from south of 401 to Major Mackenzie.

Asians are all over GTA now. Markham was the first Canadian city to go over 50% for visual minorities in the population. Some areas of it look like suburban Chinatown - signs in Chinese and if you're not Asian you feel out of place. Where I live is considered good mix neighborhood, still we have plenty of Asians here, Chinese and Koreans are within 2 house distance from me in all 4 directions.
(I hope no one takes these simple observations as racist remarks :roll: )
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Re: value analysis - rent vs purchase

Post by parvus »

hamor wrote:I always considered sort of historical average for purchase price/annual rent to be around 20, don't ask me how I got it into my head, long story.
I've been reading Bernstein's Investor Manifesto (very basic info, but entertaining and good refresher nonetheless) and he considers the 'normal' ratio to be 15. He mentions when he shops for RE, he multiplies monthly rent by 150 (12.5 years) to get an idea where the purchase price sits.

I am sitting here scratching my head (not quite pulling the last hair out yet), thinking
in my GTA neighborhood the smallest house goes for $800K now, bigger ones at $1.2M. I can't see anyone paying more than $2.5K monthly rent, so 2.5*12=300 x 15 = $450K that should be the price of the house here..?
even using my own 20x it comes to $600K :?:

What do you think?
Rent to price is one thing. Another measure would be income to house price. Historically it was about 3X. Now it's roughly 6X.
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Re: value analysis - rent vs purchase

Post by Beezy »

I like that rent to price calculation.

Makes it nice and simple to calculate a rough value, if it has the stats to back it up.
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Re: value analysis - rent vs purchase

Post by Koogie »

I'm not clever enough to have known and appreciated the ratio a few years ago but the underlying message was clear to me and that is why we sold our little slice of {hell} McMansion in the GTA greenbelt and moved into a nice little rented city bungalow down by the lake. Prices in that suburb appreciated only about another 5-10% after our move as I understand it (so we missed market top but oh well ) but I was expecting (and still am) a crash of sorts (in that area).

Meanwhile, rent has been stable, bucket loads of money have been saved by avoiding the endless "upgrades" and consumer spending associated with house ownership (which most mortgage slaves poo-poo but is a giant money sucker) and frankly quality of life improved substantially by being able to walk to everything. Including work, once I moved the office down to the same area.
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Re: value analysis - rent vs purchase

Post by parvus »

Would you be better off financially renting or buying a home?
Every year, Frank Tristani assigns his McMaster University finance students the task of showing whether renting or buying a home makes you wealthier.

As Mr. Tristani scores the results, owning never wins. “Over six years, no one has been able to substantiate buying as creating more wealth over the long term,” he told me in an e-mail.
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Re: value analysis - rent vs purchase

Post by newguy »

parvus wrote:
Every year, Frank Tristani assigns his McMaster University finance students the task of showing whether renting or buying a home makes you wealthier.
Does it really take uni level finance students to do this analysis or would grade 9 math and common sense work as well?

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Re: value analysis - rent vs purchase

Post by parvus »

Depends. How many teachers know how their pensions are financed?
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Re: value analysis - rent vs purchase

Post by uuuu »

parvus wrote:Would you be better off financially renting or buying a home?
Every year, Frank Tristani assigns his McMaster University finance students the task of showing whether renting or buying a home makes you wealthier.

As Mr. Tristani scores the results, owning never wins. “Over six years, no one has been able to substantiate buying as creating more wealth over the long term,” he told me in an e-mail.
Well Mr.Tristani doesn't count the tax benefit of owning a property compared to other investments. An investiment with 9 percent of annual return will end up much less when considering tax on the returns.
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Re: value analysis - rent vs purchase

Post by parvus »

Do you mean the tax benefit of owning the residential property (and there are some, thanks to antiquated property tax assessment systems that favour home owners over renters and business tenants)? Or do you mean the exemption from capital gains upon disposition?

At best, the literature suggests, residential property values match inflation. They might do a little bit better than bonds over the long term -- but not much. Equities, for those brave enough to buy them, pay a premium -- not a very reliable one, of course.

Hence the tax discounts on capital gains -- should they happen. They may never come.

Residential real estate involves little risk -- and little gain. (Or so our tax authorities hope -- but then again, there are land transfer taxes.) A bit like eating bread, one might say: bake it yourself, or buy it at a bakery. Which is cheaper?

In the end, residential real estate satisfies a personal preference; but it is not an investment.
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Re: value analysis - rent vs purchase

Post by j831robert »

Guess I'm holding the other end of the stick - about to sell our home and move into a two bedroom apartment. Wife is now established in a Long Term Residence from which she will probably only exit in a box and I'm not about to remain alone in what has been our happy home for the past 26 years. Two bedroom apartment ? One for me and one for my computer, Yamaha organ, and two folding cots for visitors (nice to have you but don't plan to stay long). Since I am now supporting two 'homes' my math predicates an a rental apartment in my favour financially.
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Re: value analysis - rent vs purchase

Post by kcowan »

Are you getting what you hoped for out of your home?
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Re: value analysis - rent vs purchase

Post by j831robert »

Probably not since we customized to suit our specifics and I've some patching and repairing to make the place showable. BinL who's in the business advises me of a probable figure which is acceptable (Chatham being hard hit like Windsor with the near demise of autoparts production etc). In any event the proceeds will be immediately divided amongst der kinder (better now than wait and no tax to pay).
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Re: value analysis - rent vs purchase

Post by Jack's Girl »

We are close to taking the plunge next summer. Have a buyer for our rural home lined up. Will probably do a vendor take back mortgage to get a better return on our money. If the house ends up back in our hands we wouldn't complain (I still love this place.)

We will rent. To buy in the condo apartment complex where we want to rent will cost us an extra $50K over the value of our house plus increased taxes (by 25%) and condo fees of $800 per month.

To rent, with the return from the VTB mortgage plus the drop in insurance, no property tax, less to heat, and no repairs/maintenance/yard expenses, our housing cost will remain the same as now. Of course, the new place is less than half the size of the old, but I'm still way ahead renting vs. buying. Plus, I don't pay for extraordinary repairs on the building itself, if the building/unit gets run down I can just move and if I hate living in an apartment, I can leave after a year, paying nothing more than moving costs - no commission, no legal fees, no land transfer tax.

So for the kind of housing we want, renting is far cheaper than buying.
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Re: value analysis - rent vs purchase

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I don't know how anyone can say that renting is similar to buying a home. Renting isn't even an investment, it's like saying leasing a car or buying cable TV is an investment. As a home owner, there hasn't been a single year when the maintenance fees and taxes haven't been doubled or tripled by the rising value of my home. Another aspect of buying a home is getting something brand new. Renters - enjoy your bathroom, it's the same one the previous family coughed and puked in 6 months ago with the flu and left plenty of germs. Step into your shower - the one the tenant 2 years ago battled an infectious foot fungus. Here's your bedroom - where the young couple 5 years ago kept their pet rats, the wall to wall carpeting still has the bugs in it's seams. Enjoy your used fridge and stove along with plenty of other peoples germs and muck. Nobody, except the landlord, ever made money renting an apartment.
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Re: value analysis - rent vs purchase

Post by kcowan »

dusty2
Have you considered counselling?

It would seem that your experience renting has left you severely traumatized. :cry:
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Re: value analysis - rent vs purchase

Post by adrian2 »

kcowan wrote:dusty2
Have you considered counselling?
I'll have to mark the calendar if dusty ever responds to a question.
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Re: value analysis - rent vs purchase

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dusty2 wrote:I don't know how anyone can say that renting is similar to buying a home. Renting isn't even an investment, it's like saying leasing a car or buying cable TV is an investment. As a home owner, there hasn't been a single year when the maintenance fees and taxes haven't been doubled or tripled by the rising value of my home. Another aspect of buying a home is getting something brand new. Renters - enjoy your bathroom, it's the same one the previous family coughed and puked in 6 months ago with the flu and left plenty of germs. Step into your shower - the one the tenant 2 years ago battled an infectious foot fungus. Here's your bedroom - where the young couple 5 years ago kept their pet rats, the wall to wall carpeting still has the bugs in it's seams. Enjoy your used fridge and stove along with plenty of other peoples germs and muck. Nobody, except the landlord, ever made money renting an apartment.
I live in a newer high end building, going rate is $350-400/sqft. The first thing I noticed when I moved in were cracks in various spots. As time passed I noticed more and more 'defects' to put it mildly. I remember thinking to myself, I really like this place but super glad I'm renting because at the end of the day, it's a sweet place and I couldn't care less about the underlying quality or future issues.

Two sides to every trade, I'm on the renting side by choice. I could easily afford to purchase any of the units in the building currently for sale. Why on earth would I ever do that? Solution to Bad Idea 101 - don't go there!
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Re: value analysis - rent vs purchase

Post by MALDI_ToF »

My parents sold their rental property/house (lived in the main unit) and are renting it back from the new owner. Now they are making I would say about 10 times the amount of net income from investing the proceeds of the sale into ETFs, GICs, etc. as they did from the rent thanks to having eliminated almost all the expenses associated with being home owners (not to mention eliminating the stress of being landlords). Never seen my mom more happy. :D

Renting isn't all that bad, particularly if owning a house is expensive. Here in Vancouver it certainly is.
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Re: value analysis - rent vs purchase

Post by parvus »

kcowan wrote:dusty2
Have you considered counselling?

It would seem that your experience renting has left you severely traumatized. :cry:
Sincerely
Keith
Well, at least he's not allergic to dust. :mrgreen:
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