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Buy/Rent Calculator in the New York Times

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Here’s an excellent Buy/Rent comparison calculator on the New York Times site. It lets you enter rent value / purchase value, interest rate, property taxes and then adjust sliders for house appreciation and rent increases.

What with recent complaints about ‘affordability’ in the lower mainland I was curious about how some local real estate would compare, so I entered some number for this house I found on craigslist since it listed a selling price and current leased rental income.

With rental income of $1170 and an asking price of $419,800 you get some interesting results by playing with sliders on that calculator. for instance: 25% down payment at 6.25% interest rate – if the house appreciates by 10% a year over 30 years you’re better off buying after just one year, but if the house appreciates an average of 5% a year over 30 years you’re better off renting.

There are a lot of variable there – if you have some numbers from the local market its worth plugging them in and checking out the results.

Note: Since this is a US site I assume they are taking into account the mortgage tax write off, which we don’t have here in Canada.

UPDATE: dingus points out this Canadian buy/rent calculator.

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grant

"What do you do about a landlord who won't mow the lawn?"I have not idea what that means but it sure made me laugh!

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Freako

"Freako: I wouldn't call the long-term US bond rate efficient, as a substantial portion is owned by foreigners. "Hard to say for sure. Who says foreigners have to be stupid. And while Asian buying of the Greenback can affect yields at the margin, can it really turn the yield curve? What are domestic investors doing? It could also be that the bond market is smarter than we think. Maybe they priced in a housing related recession, or even deflation. Would be odd since the stockmarket seems oblivious.In either case, I'd expect the bond market to be less inefficient than the RE market by a wide margin.And should the bond market turn out to be mispriced, long yields could shoot up fast furious, hardly ideal conditions for RE appreciation.

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Freako

On the topic of appreciation, let's have some fun with the numbers.Let's give it 10% annually for the next 5 years, and assume that rates stay flat.At that time:1. The GV SFH benchmark will be $1,098,646.2. The down payment will be a cool $275K. Contrast with todays (still high) downpayment of $170K. A prospective buyer would need to put aside roughly 20K a year extra just to keep up with the increase in downpayment.3. Monthly payments before taxes, maintence and utilities: $5,316.075 years is a bit short, let's go to 10 years:1. GV benchmark $1,769,3812. Downpayment (25%) $442K (gulp)3. Payments: $7,786.24Yes, your income will be higher by then, but not by an annualized 10%. Real wages have been flat for some time, so even if we allow 3% nominal wage growth, these payments will bury all but Jim Pattison and… Read more »

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bcubbins

Some impeccable logic in today's Province…Beata Caranci, a senior economist for TD Bank, is quoted as saying "Here in Canada, you know it's not a bubble because it's not burst."http://www.canada.com/theprovince/news/money/story.html?id=bf928463-7a6a-4349-9137-9e4322c37fc3

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markx

"As the housing price drop to a level where it makes more sense to own than to rent, it creates ownership demands as renters then chooses to buy than to rent. "That works in theory. In reality, as housing prices drop, people start demanding higher and higher ownership discount to compensate for "losing money". As prices rise, people price in higher and higher "ownership premium" to allow for "A house that make more money than I do". Ahh, the wonders of extrapolation, a perfect example of short term inefficiencies of free market.

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Akhen

At the top of each real estate cycle, it is better to rent than to own. As the housing price drop to a level where it makes more sense to own than to rent, it creates ownership demands as renters then chooses to buy than to rent. This is one of the indications of a possible market bottom.Ahkenaten

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Akhen

The yield curve, closely watched by market pundits and investors, is the overall market participants’ current view of what the cost of borrowing is relative to the term to maturity. It does operate in an efficient market environment. The “…long-term US bond rate…” is different from the HOLDERS of bonds. Foreign holders are some of the participants of the debt market which is sometimes called money printing.That said, though the current yield curve projects a high possibility of a recession, it does point to a benign rate of inflation which means that further liquidity is expected to be pumped in.I think the calculator is useless as it does not factor in the business cycle and assumes a linear pattern of value growth. Useless in practical terms!Ahkenaten

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markx

Freako: I wouldn't call the long-term US bond rate efficient, as a substantial portion is owned by foreigners. Of the 8 trillion debt, I think 1 trillion is owned by Chinese, 1 trillion by Japanese, and 0.2 trillion by Russians. Political motive, and desire of currency stability may overrun the desire of return. Plus a large amount of pensions funds and insurance funds are stuck in bonds, due to their mandate of safety.

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Freako

"10% a year appreciation isn't out of line – we've seen appreciation far beyond that here for at least a few years."Appreciation is not independent. It comes down to market efficiency. Forward rates have priced in assumptions about inflation, which of course is based on further assumptions about productivity, economic growth etc.I can tell you with absolute certainty that forward rates have not priced 10% appreciation going forward. Which market is more efficient (better able to accurately predict future economic conditions)? The long term bond market or the RE market?Again, on the topic of market efficiency all else the same, I'd expect an owner to be far of a renter over the long haul simply as a result of compensation for risk. However, all else is not the same at this very moment. I still have no doubt that over… Read more »

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markx

Patiently waiting: option 4, moving. I thought one major advantage of being a renter is the mobility. Find a place closer to work, or have a better landlord.

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Patiently Waiting

What do you do about a landlord who won't mow the lawn?a) Mow it yourselfb) Bug him about itc) Start a snake farmHow tall can regular lawn grass grow? I think we are going to find out.

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domus aurea

Brief OT:Talking about what it takes for a major crash, look at what's happening in the Bay Area (extract from a local paper):"Investors are placing properties on the market, trying to sell them before the busy summer selling season. And more homeowners, desperate to avoid foreclosure are placing their homes up for short-sale meaning they are being sold for less than the mortgage.According to ZipRealty, short sales account for slightly less than two percent of homes for sale in the Bay Area."As soon as prices stop growing (notice: no drop necessary!) you have a sudden flood of properties to the market: investors, people mortgaged to the brim, fearful mover-uppers!Only a permanent increase in prices could support the house market but that's not clearly possible. As you hit the affordability (or 'borrowability') wall, things unwind.One more time: we are in for… Read more »

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Drachen

Interesting, the calculator doesn't allow negative appreciation :)But, if you assume that over the next 25 years there will be 0 appreciation (which is fairly safe if you look at how long it took prices to recover from the '80s) and rent at 0 (which came up in a graph recently as very close to the inflation of rents) it takes a pretty cheap house to make things worthwhile.Neither of those assumptions is beyond the realm of reasonable possibility (in spite of dosh and his 10% insanity I think that both numbers will likely be 0 or in the negatives after 25 years).Anyhow, as Dingus says that's the wild card, but if things are destined to return to fundamentals then buying now is financial suicide unless you can find a house at 1/4 the going cost.

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markx

I think rent increases would be a better parameter, as rent generally flucuate around inflation, and largely driven by wages. Equating house appreciation at the rate of rent increase, and you get a pretty good model. The problem in the short term is, if you apply rent increases of the past year into the next 25 years, buying probably still make sense. I don't believe that the trend of increasing rent will continue, but I'm also not going to contribute to the upward pressure in rent. I'm simply moving out of GVRD for a while to let this mess settle down. Hopefully I will be back around 2009. http://ex-vancouverite.blogspot.com/

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domus aurea

Dosh:when you put down 10% per year in the calculator, it automatically assumes that will be the average appreciation for the next 25 years. We have not had that in the past 25 years 9far from it) and I suspect that we won't have that for the next 25 years.

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dingus

"10% a year appreciation isn't out of line – we've seen appreciation far beyond that here for at least a few years. "…to me implies several years of far less than 10% appreciation. Anyway, that's the wild card. Play with the calculator and you'll find that assumption basically drives the whole model.

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dingus

Canadian Rent v. Buy calculator is available here:http://tinyurl.com/yp7sqtTry it out! It's pretty skookum.

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dosh

10% a year appreciation isn't out of line – we've seen appreciation far beyond that here for at least a few years.

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