Friday, July 31, 2009

What's wrong with Vancouver

When I first moved back to Vancouver, I started looking at buying a place to live in. I started looking in spring, 2003. I was looking mostly just at 1 bedroom condos in Kits. The problem I had was that I couldn't wrap my head around paying double (to own) or what I was currently paying (to rent) for just about the same place. I decided to invest my money elsewhere. In hindsight, if I had bought, I would have made a serious chunk of cash on the property. But the cashflow of it didn't make sense to me back then. And now...

As things slowed down in the fall, I started looking again. Actually, this is the second time that it happened. The first time was when things slowed down a bit in...Winter 2007? Each time I told myself that I'd just start looking at some listings and hopefully find something that makes sense. But it's very easy to get caught up in the moment.

This time around, I haven't been out to look at any specific properties. My intention was to keep my eye on the market and as the slowdown continues, pick something up in the fall or winter. But now shit has gone crazy again. Lets look at just how crazy.

Option 1 sees me picking up a 1 bedroom condo. This isn't really an ideal option and is most likely a short term solution. For about $325,000 you can buy a decent 1 bedroom in a nice neighbourhood. You can definitely go cheaper if you head further East, but this is probably a good starting point for determining the bottom of the market. So, if you look at this purchase, assuming a 5% down payment and a 5 year mortgage (4.3%), 25 year amortization:

Out of Pocket:
$16,250 - Down payment
$2,000 - Legal and other closing fees
$5,500 - Property transfer tax (you get around this for a first time purchase)

$23,750 - Total up front, out of pocket expenses.

$1,727.51 - Mortgage payment ($317,000 mortgage which includes CMHC payment)
$180 - Strata fees
$66.67 - Insurance
$125 - Property taxes

$2,099.17 - Total monthly payment

So, all of a sudden, you're paying almost $25,000 out of pocket for the privilige of paying $2100 per month to live in a place that you could rent for $900. This is crazy. This doesn't even take into consideration the potential for some of the things you could end up paying for (new fridge? broken toilet? special assessment?). I know. You won't own anything. I get it. But my point is that when you compare the rents paid to the cost of owning, Vancouver is in a crazy, crazy league of its own.

So I started to think about another way of doing things. What if I extended myself a bit more and bought a house? Of course, I wouldn't be able to afford to buy a house and live in it. But what if I bought a house, lived in the basement and rented it out? Surely this would make sense?

The problem with this is that in order to buy a house that somebody would want to rent, you have to pay a lot of money. There's definitely cheaper houses out there, but it seemed to me it would cost me about $800,000 to get a decent house in a decent neighbourhood. This would most likely get a house with a finished 2 bedroom basement suite and maybe 3 bedrooms on the main floor in a decent neighbourhood quite far to the east. Lets look at this with the same criteria as above:

Out of pocket:
$40,000 - Down payment
$2,000 - Legal and other closing fees
$15,000 - Property transfer tax (at best, you might see $4,000 of this disappear for a first home buyer)

$57,000 - Total out of pocket

$4252.33 - Mortgage payment (including the CMHC charges)
$125 - Insurance
$358.33 - Property taxes

$4735.66 - Total monthly charges

This neglects water, hydro, etc. As well as inevitable repairs and maintenance. Of course, renting out the top floor of the house gets you some money. But have you looked on Craigslist? There aren't too many people asking for more than $2000 for 3 bedrooms in a house. Maybe you push it to $2200. But you're still going to be paying $2500 to live in a 2 bedroom basement suite. It's crazy.

Which brings me to this. I've seen something similar to this chart a few times, but I dug it up again. For the longest time, housing cost remained more-or-less flat, relative to inflation. There were some peaks and valleys, but it didn't stray too far. Then...

(Link to this and other charts and graphs here)

What happened? What's going to happen? We paid a relatively constant amount of our income towards housing for a long period of time. Now, all of a sudden, we're pumping huge percentages of our incomes into our homes. The assumption is that the value will go up and that everything will be okay. The US proved how precarious this assumption is. Vancouver dipped a bit, but it's still stayed strong. But what the hell is going on? Where is all the money coming from? Who can afford this?

Lucky for me, I really have no choice but to sit on the sidelines. I don't want to pump a whole bunch of money into a 1 bedroom that will only work for me for the next few years. I don't want to move to the sticks. I can't afford a house, unless I live in a tent in the backyard and rent the whole thing out. So it's very easy for me to throw stones and call this crazy. But I have a decent job with a decent wage and if I can't afford this stuff, who can?

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