When rent money isn’t dead money
Carolyn Ireland – Globe and Mail
Bay Street money manager Ming Lam isn’t against home ownership – he’s just against ownership at prices that he thinks are higher than they should be.
Comment: What he THINKS they should be? So this is all based on what he THINKS? Not reason or logic, data or statistics? That is one way to get in trouble… No human opinion is higher than the truth.
He admits that this view often leaves him standing alone at cocktail parties.
“You just bought a house? Are you nuts?” is a sure conversation stopper, he agrees, laughing.
Mr. Lam has been bearish about Toronto’s real estate market for years and he cautions that people who think buying a house is always a good investment may not fully understand the costs.
Comment: And yet, those who bought 5 years have seen their home’s value double. Bad idea… I know…
A principal at Silver Heights Capital Management in Toronto, Mr. Lam is an avowed renter. He knows there’s an emotional element to owning a house but he has an emotional attachment to making money.
He believes people are too quick to plug some numbers into a mortgage calculator to see what house they can afford compared with how much they might shell out in rent. Often they go into denial about the taxes, depreciation and maintenance.
Comment: But houses in Toronto do not depreciate. Anyone who has bought a house in the past 20 years has seen the value go up. In fact, but for a brief blip in the early 1990s, prices have always risen. In 1966 the average sale price was $21,360 and last year it was $465,412 – ’nuff said. Taxes are LOW in Toronto. The average house pays about $225/month (using the average of $500,000 for both condos and houses, sampling 41 properties for sale in the downtown core). Maintenance is maybe 1% of your home’s value per year – a fair trade for the 8-10% in value you get annually. The average house, at $500,000 with a 5-year rate of 3.29% and 30-year amortization costs $2,333/month for mortgage and taxes – with 5% down. It takes $90,000 income to qualify. Really not a big deal!
A property tax rate of 0.8% on an $800,000 property is $533 a month, he points out. In addition, owners have no choice but to make major repairs such as replacing the roof or installing a new furnace. He thinks a realistic estimate is about three% of the value of the house per year.
Comment: Huh? The taxes on most houses is certainly not $6,400/month. What the price is is NOT what the appraisal is. And is thus not what you pay taxes on. I love people who are wrong, they use the fuzziest math in a attempt to prove a point that is wrong to begin with. There are 27 homes for sale right now in Toronto’s central districts (C01-C15) in the $790,000-810,000 range. The average taxes are $4,300 per year. Do the research before you speak, that is what I do!
Once those sums are paid out, the amount available to put towards the mortgage is drastically reduced, he argues, and makes renting the more attractive option.
Comment: But renting gets you nothing, that money is essentially thrown away. If I pay $2,000 a month on my mortgage, plus $500/month in taxes and $5,000 per year in maintenance (which is WAY too much) – I don’t care because I am making $50,000 per year on my $600,000 house. After 10 years I can sell it and put $200,000 in my pocket. If Mr. Lam moves, he gets… nothing.
Mr. Lam recognizes that he possesses something many homeowners don’t: The acumen to invest in assets other than real estate. In other words, he can take the money that he saves by renting and funnel it into stocks and other investments.
Comment: And I can also invest in the same things. He also has housing costs, as do I. We both have discretionary income after that that we can do what we want with. Just my housing money is not being wasted, like his.
Many people would plow the money saved into Caribbean vacations if they didn’t have the forced savings plan that a house provides.
“If you don’t have the discipline to save and invest the money from the cost savings of renting then buying a home might make sense for you even if house price levels are higher than average,” he says.
Comment: High than average? What average? That doesn’t even make sense. More of the fuzzy math to justify a point that is wrong.
He says there are lots of barometers people can look at to determine whether real estate in Toronto is expensive or cheap right now, but in his opinion house prices and income levels should have some correlation over long periods of time.
Comment: They do, in monthly costs. The average rent on a 2-bedroom unit is around $2,200 a month. Not a ton more than the mortgage and taxes cost on a $500,000 house. That is the correlation. Trying to tie rents to purchase prices makes no sense, it is all about what people pay every month.
“Generally speaking, I think that the average family should be able to afford the average home,” he says. “It’s a simple litmus test and one that I think most people would agree with.”
Comment: The median income in Toronto in 2009 was $66,790 and the average house price was $395,460 in the same year. With 20% down, they could afford it at the rate of 4.19% available then. And those are just averages I pulled from TREB and StatsCan (and this simple example does not take into account that the bottom chunk of income earners tend to rent, not buy, so they skew the income figure down – for actual buyers, it would be higher). But, if we take the numbers from a large mortgage broker – CanEquity – we see that in Toronto the average household income on mortgage applications is $125,000 and the average home loan is $262,000. That shows that the average family can EASILY afford the average loan they are getting. With a 5-year rate of 3.29% and 25-year amortization, the monthly payments on that are $1,279. Add in another $1,000 for taxes and maintenance and you are pretty much bang-on the $2,200 the average 2-bedroom rents for. But the rent money is gone, the house is worth something. Like leasing a car vs. financing – one you own at the end, the other belongs to someone else.
He’s not sure that Toronto house prices pass the test right now with a ratio of something like seven to one. Low interest rates are driving the “affordability” of real estate, he adds.
Comment: Ratio of 7 to 1? What ration? Seven of what? One of what?
He doesn’t know what interest rates will do in the future, but he thinks potential buyers should be stress testing their notions of what they can afford. What if interest rates were 4% or 5% higher?
Comment: Rates will rise, we all know that. But to suggest that they will rise 4% or 5% is just stupid. Anyone with any sense – and Mr. Lam claims to know a LOT about money – knows that that will not happen. That would put posted bank rates over 10% – a rate we have not seen for 20 years. More fuzzy math… Real math is that if rates rise 2% then monthly costs on a $500,000 mortgage would rise by $500. Not chump change, but not enough to bankrupt the average homeowner.
“I’d certainly want to know how it would affect my finances – just in case.”
Comment: Why? You rent, it does not matter. But to quote a BMO survey from March: 57% of Canadian homeowners say that they could still afford their home if interest rates were to climb by 2%. However, 20% indicated that a 2% rise in rates would hamper their ability to afford their home; 23% indicated they were unsure if a rise in rates would affect them. There you go, many Canadians know how it would affect their finances. And most are not concerned.
Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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