Central Okanagan Housing Bubble – A Data Dive

And it happens again, yet another real-estate driven discussion in the lunchroom. It is February 2017, and despite red hot warnings from the CMHC, economists, and financial bloggers around the globe, my Canadian coworkers show no sign of stopping their usual castle-hunting ways.

After all, renting is just throwing your money away, right? And those warnings are really only for Vancouver and Toronto, right?!

WRONG.

I decided to take a trip into the Central Okanagan Mainline Real Estate Board‘s data archives. They produce very lovely monthly reports dating back to 2002, which show median and average prices of various types of real estate, including houses (residential), condos, and townhouses. Even better, they also have a handy report that shows average prices for all of these types of property dating back to 1987. While the old reports don’t show median prices, I extrapolated these from the average prices because the following correlations exist between average and median prices:

Houses: 99.89% | Condos: 98.71% | Townhouses: 99.73%

If you feel like critiquing my math, you can find it over in this post.

But here’s the short version – I wanted to know what the real trends in real estate prices were in my region – the Central Okanagan. And here’s the data.

For Detached Homes:

CO Home Prices.jpg

You see that little uptick in 2016? You’re not imagining things, an average priced home was actually $600k. This is higher than even 2008. Just looking at the steep slope in the past three years, does that really look like a nice, stable trend? In fact, does anything since 2002 look anything like a nice stable trend?

For Condos:

CO Condo Prices _ Better Format.jpg

And if you’d like some even crazier volatility, check out those spikes. And again, ooh, look, a very steep upswing in the last three years.

For Townhouses:

CO Townhouse Prices.jpg

Slightly less volatility in the townhouse market, but even then, check out the upswing, and the crazy 45+ degree slope from 2001 to 2008, compared to the even movement between 1987 and 2001.

MY POINT IS:

IN WHAT WAY DOES THIS LOOK LIKE A GOOD MARKET TO BUY IN?!?!?!?!

Each and every one of these graphs shows increasing prices, with housing prices even higher than the peaks of 2008. The high step-up, year-over-year, is completely insane, and can only be followed by back-breaking, stomach-lurching falls. A property you buy now is not going to increase in value, at least not for more than a few months, maybe a year. And I’m not the only one saying this.

And yet again, and again, lunch after lunch, casual conversation after conversation, all I hear is talk of mortgage specialist appointments and “Oh, we’re looking for a house!”, or, even more upsetting: “I just bought a house!”.

And always with a smile. Always a smile. I die a little inside every time.

I work with accountants, people who excel at math and detail-oriented thinking, many of whom have years of experience in financial advisory roles. These are the people giving advice on how to succeed in the market – maybe not the housing market, but markets all the same.

If seasoned business advisors are buying houses when it took me less than two hours to pull up terrifying, not-good graphs of this very region, what exactly does that say about the general population?

Let me give you a breakdown. Before 2002, which you can see in the above graphs, is when everything went haywire, these were the average inflation-adjusted median prices:

  • For a house: $224,474
  • For a condo: $133,499
  • For a townhouse: $188,063

The inflation-adjusted medians prior to 2002 are reasonable – they fall in line with median incomes. The median family income in 2015 (no need to go back further as that’s the point of inflation-adjusting) for the Okanagan Valley was $56,851 (per this report). A house price falls nicely at 3.95 this income, which is in line with the much-said 3-4 times rule, if a little on the high side. Maybe that’s the sunshine tax, who knows.

But after 2002? Check this out, inflation-adjusted median prices average out to:

  • For a house: $434,003
  • For a condo: $234,546
  • For a townhouse: $329,229

Suddenly, a house costs 7.63 times an average household’s income. Some of this might be from low low low interest rates, but can I say one thing:

UNSUSTAINABLE

I’m calling it: Fill the moat. Draw the drawbridge. Heed me and do not enter here.

I don’t care if you think renting is throwing money away. You know what else is throwing money away? An underwater mortgage and bankruptcy.

I wouldn’t buy an Okanagan Valley castle for those prices even if it had the prettiest moat in the entire universe and a legitimate tower library.

And it took me. Two. Hours.

Math Behind February 2017 Data Dive

The following post contains calculation data for this post over here. In other words, unless you’re a data nerd (like me…), you’ll prefer the text version.


Data for Houses:

INFLATION ADJUSTED
House House Median CPI House House
Year Average Price Median Price % of Avg Index Average Price Median Price
1987                81,672              75,109 91.96%         113.6 1987        172,461.77      158,603.31
1988                86,558              79,602 91.96%         118.3 1988        175,517.51      161,413.50
1989                99,696              91,685 91.96%         124.0 1989        192,865.27      177,367.25
1990              121,963           112,162 91.96%         130.7 1990        223,846.60      205,859.02
1991              132,276           121,647 91.96%         136.2 1991        232,971.04      214,250.25
1992              155,163           142,695 91.96%         140.3 1992        265,294.65      243,976.43
1993              171,318           157,551 91.96%         144.5 1993        284,402.32      261,548.68
1994              174,439           160,422 91.96%         148.2 1994        282,353.63      259,664.61
1995              170,523           156,820 91.96%         152.4 1995        268,408.33      246,839.91
1996              167,982           154,484 91.96%         156.9 1996        256,825.29      236,187.65
1997              178,525           164,179 91.96%         160.5 1997        266,822.22      245,381.26
1998              176,055           161,908 91.96%         163.0 1998        259,094.83      238,274.82
1999              181,604           167,011 91.96%         166.6 1999        261,485.98      240,473.82
2000              187,265           172,217 91.96%         172.2 2000        260,868.39      239,905.86
2001              190,552           175,240 91.96%         177.1 2001        258,102.93      237,362.62
2002              204,838            186,000 90.80%         179.9 2002        273,165.37      248,043.62
2003              238,873            217,750 91.16%         184.0 2003        311,488.24      283,944.04
2004              282,616            264,700 93.66%         188.9 2004        358,891.17      336,139.83
2005              330,323            307,500 93.09%         195.3 2005        405,727.61      377,694.68
2006              402,535            370,000 91.92%         201.6 2006        478,973.09      440,259.96
2007              476,507            439,000 92.13%         207.3 2007        551,289.84      507,896.51
2008              505,320            473,000 93.60%         215.3 2008        563,007.78      526,998.10
2009              460,077            425,000 92.38%         214.5 2009        514,430.03      475,209.07
2010              481,405            439,950 91.39%         218.1 2010        529,590.94      483,986.53
2011              472,888            429,250 90.77%         224.9 2011        504,302.97      457,766.00
2012              467,809            425,000 90.85%         229.6 2012        488,771.67      444,044.39
2013              462,921            422,750 91.32%         233.0 2013        476,682.39      435,317.21
2014              498,563            451,950 90.65%         236.7 2014        505,188.82      457,956.34
2015              511,073            479,000 93.72%         237.0 2015        517,251.11      484,790.40
2016              597,698            550,000 92.02%         239.9 2016        597,698.00      550,000.00
91.96%        357,925.99      329,238.52
Correl. of Median/Avg 99.89% Average Median Price Prior to 2002      224,473.93
Average Median Price 2002 On      434,003.11

Data for Condos:

INFLATION ADJUSTED
Condo Condo Median CPI Condo Condo
Year Average Price Median Price % of Avg Index Average Price Median Price
1987                53,442              47,517 88.91%         113.6 1987        112,850.21      100,338.48
1988                58,169              51,720 88.91%         118.3 1988        117,951.87      104,874.52
1989                65,082              57,866 88.91%         124.0 1989        125,903.32      111,944.39
1990                74,209              65,981 88.91%         130.7 1990        136,200.59      121,100.00
1991                82,728              73,556 88.91%         136.2 1991        145,704.65      129,550.34
1992              102,191              90,861 88.91%         140.3 1992        174,724.16      155,352.46
1993              105,382              93,698 88.91%         144.5 1993        174,943.00      155,547.03
1994              111,446              99,090 88.91%         148.2 1994        180,390.75      160,390.79
1995              106,511              94,702 88.91%         152.4 1995        167,651.52      149,063.96
1996              104,551              92,959 88.91%         156.9 1996        159,846.54      142,124.32
1997              102,485              91,122 88.91%         160.5 1997        153,173.37      136,191.00
1998              104,010              92,478 88.91%         163.0 1998        153,068.38      136,097.65
1999              106,312              94,525 88.91%         166.6 1999        153,075.36      136,103.86
2000              110,193              97,976 88.91%         172.2 2000        153,503.70      136,484.71
2001              107,343              94,000 87.57%         177.1 2001        145,396.23      127,323.12
2002              120,034            109,000 90.81%         179.9 2002        160,073.48      145,358.89
2003              144,957            124,450 85.85%         184.0 2003        189,022.62      162,281.68
2004              200,463            160,500 80.06%         188.9 2004        254,565.92      203,817.31
2005              253,971            204,500 80.52%         195.3 2005        311,946.33      251,182.32
2006              236,821            215,000 90.79%         201.6 2006        281,791.36      255,826.73
2007              269,513            245,000 90.90%         207.3 2007        311,810.28      283,450.22
2008              287,743            260,000 90.36%         215.3 2008        320,592.00      289,681.83
2009              255,229            238,000 93.25%         214.5 2009        285,381.49      266,117.08
2010              253,849            235,000 92.57%         218.1 2010        279,257.86      258,522.18
2011              250,459            223,000 89.04%         224.9 2011        267,097.53      237,814.37
2012              239,799            215,000 89.66%         229.6 2012        250,544.47      224,634.22
2013              233,325            210,000 90.00%         233.0 2013        240,261.12      216,242.73
2014              243,443            221,000 90.78%         236.7 2014        246,678.32      223,937.05
2015              258,546            234,000 90.51%         237.0 2015        261,671.44      236,828.71
2016              291,884            262,500 89.93%         239.9 2016        291,884.00      262,500.00
88.91%        206,898.73      184,022.73
Correl. of Median/Avg 98.71% Average Median Price Prior to 2002      133,499.11
Average Median Price 2002 On      234,546.35

Data for Townhouses:

INFLATION ADJUSTED
Townhouse Townhouse Median CPI Town Home Tome Home
Year Average Price Median Price % of Avg Index Average Price Median Price
1987                72,530              67,489 93.05%         113.6 1987        153,157.17      142,512.70
1988                77,170              71,807 93.05%         118.3 1988        156,481.05      145,605.56
1989                87,009              80,962 93.05%         124.0 1989        168,321.84      156,623.42
1990              104,451              97,192 93.05%         130.7 1990        191,705.69      178,382.08
1991              116,269           108,188 93.05%         136.2 1991        204,778.72      190,546.53
1992              131,716           122,562 93.05%         140.3 1992        225,205.43      209,553.57
1993              144,399           134,363 93.05%         144.5 1993        239,714.51      223,054.27
1994              138,749           129,106 93.05%         148.2 1994        224,584.43      208,975.74
1995              136,684           127,184 93.05%         152.4 1995        215,144.73      200,192.09
1996              137,698           128,128 93.05%         156.9 1996        210,524.52      195,892.99
1997              141,549           131,711 93.05%         160.5 1997        211,558.15      196,854.79
1998              151,718           141,174 93.05%         163.0 1998        223,278.80      207,760.85
1999              147,832           137,558 93.05%         166.6 1999        212,858.72      198,064.97
2000              147,888           137,610 93.05%         172.2 2000        206,014.50      191,696.42
2001              139,027           129,365 93.05%         177.1 2001        188,312.25      175,224.49
2002              164,987            148,950 90.28%         179.9 2002        220,021.36      198,634.93
2003              187,423            170,000 90.70%         184.0 2003        244,397.90      221,678.47
2004              227,520            202,500 89.00%         188.9 2004        288,925.33      257,152.68
2005              266,287            240,000 90.13%         195.3 2005        327,073.77      294,786.09
2006              305,773            275,000 89.94%         201.6 2006        363,836.78      327,220.24
2007              348,805            327,500 93.89%         207.3 2007        403,546.34      378,897.74
2008              384,131            357,500 93.07%         215.3 2008        427,983.74      398,312.52
2009              350,707            330,000 94.10%         214.5 2009        392,139.17      368,985.86
2010              349,079            328,000 93.96%         218.1 2010        384,019.85      360,830.96
2011              345,534            328,000 94.93%         224.9 2011        368,488.57      349,789.75
2012              344,747            334,900 97.14%         229.6 2012        360,195.23      349,906.98
2013              352,626            329,000 93.30%         233.0 2013        363,108.62      338,780.28
2014              361,435            345,000 95.45%         236.7 2014        366,238.41      349,584.99
2015              371,367            354,690 95.51%         237.0 2015        375,856.27      358,977.67
2016              407,947            384,900 94.35%         239.9 2016        407,947.00      384,900.00
93.05%        277,513.96      258,645.99
Correl. of Median/Avg 99.73% Average Median Price Prior to 2002      188,062.70
Average Median Price 2002 On      329,229.28

All average and median data pulled from the Okanagan Mainline Real Estate Board (median prices prior to 2002 have been extrapolated using averages), with inflation numbers pulled from inflationdata.com.

Rent or Buy – The Immortal Q&A of every F.I.R.E. Blog

Ah, Christmas… That wonderful time where the earth turns white, turkeys pop into existence over red tablecloths, and houses get invaded by hoards of relatives. And, of course, well, this:

“Are you thinking about buying?”

Shards, this is up there with “do you have a S.O. yet?” and “don’t you want hatchlings?” as my least favourite questions of all time. This is because, inevitably, if I say “No”, I end up in the following scenario:

Them:                   “But you should be building equity!

Me:                        “I am building equity. In the stock market.”

Them:                   “You can’t live in the stock market!”

Me:                        “The dividends pay for my rent, so it’s the same thing.”

Them:                   “No, it isn’t!”

Not a very productive discussion, let me tell you. Also, let me get this straight before we start – I am not inherently against the idea of owning property. I lived in mortgaged houses for all of my hatchling years, and had a nestroom painted my favourite colour, the works. What I am against is this: Making bad financial decisions.

And, regardless of what every dragon elder says about residential property and how it’s “the best investment you’ll ever have!”, houses/condos/castles are not always a good investment. In fact, I sometimes wonder whether they should even be called an investment at all, for a few key reasons:

  • The average person only stays in one place for 4.86 to 5 years. That is super short-term from an investment standpoint.
  • Buildings aren’t built to last, with most components needing replacement within 10 years. This makes upkeep a lot of work for the owner, especially with an older building. On top of this,
  • The only way to build equity in a house (or a condo or castle) is through the inherent enforced savings plan (other name – a mortgage) or through an appreciation in value, which is not guaranteed
  • And on top of that, any equity you do get is eaten into by all the costs of owning property: maintenance, transfer costs, property taxes, strata fees, mortgage insurance, interest…

If I was choosing an investment, the above four points would not be favourable. When I buy ETF stocks, for instance, I’m looking for long-term gains, which the stock market is very good at. I’m not expecting to have to do any work – I buy it, I hold it, when I retire, I sell it. Easy as breathing. And equity building is much more straightforward – I only buy ETFs that have a minimum 4% dividend payout ratio, that’s solid cash, every couple months, that doesn’t have the ability to vanish like house appreciation. And as for costs of ownership, the most we’re looking at is the fee from whatever broker you’re with and the commission on buying/selling, which are generally pretty reasonable if you’re a long-term, hold em’ investor.

Makes house ownership look less pretty, doesn’t it? And, unlike with purchasing a stock, to buy a house, you usually have to give up all of your hard-saved hoard as a down payment, resulting in zero diversification. In short, when you buy a property, you are betting everything on one horse. Which I think is a bad thing – I’ve never bet on horse racing, but that’s archaic English sayings for you.

In short – I do not really think of residential property as an investment. If it’s a rental property, okay, sure, that’s a business venture, I’ll give that one to you (go check out Afford Anythingbecause Paula Pant knows way more about that than me). But if you’re an average Jane/Joe buying a house to live in it, stop kidding yourself. You’re buying the house because you want a house, not because it’s an investment. If it happens to make you money, well, hey, lucky you, don’t go mentioning that to any of the three million Americans who foreclosed their homes during the 2008 crash.

So why am I writing this post if I don’t think houses are an investment? Well, what it comes down to is that I need to live somewhere, and my options for potential castles are pretty limited:

  • Renting – What I do now
  • Buying – What all my relatives keep asking me about over Christmas dinner
  • Roommates – What my dwelling-sharing friends complain about endlessly
  • Escaping to the Wilderness – What my dad desperately wants to do

Well, I’d survive approximately two days in the wild (some dragon I am), and as choosing a roommate is akin to playing Russian Roulette with a fully loaded gun, that really only leaves two options.

To buy or not to buy, that is the question.

There are plenty of blogs and people who have dragged out this discussion before, and the ultimate answer is pretty unfulfilling: It depends. Thus, I am not writing this as a definitive guide. My situation is not the same as your situation, and therefore cannot be compared. However, I can give you the tools and analysis needed to make an informed financial decision, and that’s what this post is about.


INGREDIENTS FOR AN INFORMED FINANCIAL DECISION 

Yeah, we’re going at this recipe style, because who doesn’t like recipes. Lots of structure, delicious outcomes… So, for this epic financial dessert, you’ll need:

  1. Two COMPARABLE properties, one for rent, and one for sale: this is where Millennial Revolution went wrong (well, the analysis worked for them, but couldn’t really be applied to anyone else). They compared their rental apartment against a $500k house. If you’re living in a small apartment and are thinking of buying a house/bigger condo, the property you are considering buying should be compared to a rental property as similar to it as possible, not the rental property you’re currently living in. After all, there’s nothing wrong with upgrading into a larger rental if it’s truly better than buying a comparable property.
  2. Information on the rental property:
    • The monthly rent
    • The annual rent increase percentage allowed in your province/state
    • Cost of parking/laundry if any
    • Cost of tenant insurance
  3. Information on the property for sale:
    • The list price
    • The annual property tax (I’ll show some calculators for this later if the number is not available in the listing)
    • Strata fees
    • Cost of parking/laundry if any
    • Cost of home insurance
  4. Financial information:
    • The dollar amount you have available for a down payment
    • The mortgage calculator of the bank of your choice

DIRECTIONS FOR AN INFORMED FINANCIAL DECISION

  1. Calculate the average cost per month of renting over the next five years (since, like I said above, most people move every 5, though feel free to change it up if you’re positive you’re staying wherever you are shorter/longer)
  2. Calculate the average cost per month of owning over the next five years
  3. Compare financial factors
  4. Consider qualitative factors
  5. Decide

Yeah, that was pretty skimpy on the details. This is because it is much easier to show you than it is to tell you.


A (HOPEFULLY) HELPFUL EXAMPLE

I currently live in a 480 square foot apartment. It’s awesome, less than a block from work, and I’m not too interested in anything larger (cleaning takes time, which I tend to have absolutely none of during tax season). So, for me, I’m going to compare my current rental situation to a similar apartment. In your case, you may need to find a different rental property that compares to the house/big condo you want to buy.

Luckily, there happens to be an apartment for sale of about the same size, built by the exact same developer, just across and down the street from where I currently live, which makes for a nice easy comparison:

  My Rental Apartment (Furnished) Apartment for Sale
Size 480 square feet 442 square feet
Age Built 2016 Built 2009
Location Half a block to my work Next door to my work
Type Low-rise apartment building Low-rise apartment building
Pets No pets permitted Two cats or one cat and one small dog
Appliances Fridge, Stove, Dishwasher, Laundry Hookups Fridge, Stove, Dishwasher, Laundry Machines Already in Suite
Heat/Cool Two Gree In-Wall Units One Gree In-Wall Unit
Parking Heated Underground Parking Covered Parking
Storage Bike Storage, one 3-foot closet, one 5-foot closet Bike Storage, one 3-foot closet, one 10-foot closet
Layout

 

Excellent, while a studio, has definitive living, dining, and bedroom spaces with a built-in divider, no balcony Adequate, also a studio, less definitive spaces, no real “living room” as space is taken up by a balcony/40 less square feet
Other Rentable garden boxes available Rentals/investment properties allowed
Financials Monthly Rent:        $900.00

Parking Fee:            $  40.00

(Rent includes hot water)

List Price:      $223,700.00

Strata Fee:    $        117.00

(Strata fee includes hot water and parking)

Yes, I really did say $223,700, and before anyone tries to tell me that’s ridiculous (AKA – what all my relatives/coworkers said), and that I should look for something reasonable, I’ll have you know that the median (not average!) condo selling price in the Okanagan Valley was $262,500 in 2016.

So let’s get started.


STEP ONE: CALCULATE AVERAGE MONTHLY RENTAL COST

I’m going to go with the five years I mentioned above. In BC, landlords are allowed to raise rent by 3.7% in 2017. However, we have to remember that some of this is just inflation, and since I want comparable numbers, we will be removing inflation entirely. In Canada, the inflation rate in December 2016 was 1.5%, so:

Real Annual Rent Increase = 3.7% – 1.5% = 2.2%

If we assume that my landlord (which is a corporation) will increase rent at the absolute max every year (they probably will), then my rent is as follows:

2017: $900.00 | 2018: $919.80 | 2019: $940.04 | 2020: $960.72 | 2021: $981.85

Or, on average: $940.48

Now, I’m not going to bother increasing the $40 parking fee, or the $28.49 I pay for tenant insurance , as there are no real strict rules with which to calculate and it would likely be at most an inflation increase, so what this means is that over the next five years, my rent apartment would cost:

Rent

Parking

Tenant Insurance

Total Cost

$                            940.48

$                              40.00

$                              28.49

$                        1,008.97

P.S. Before anyone asks me why I’m not including utilities: remember, we’re comparing two comparable properties. If they’re truly comparable, the utilities cost should be the same.


STEP TWO: CALCULATE AVERAGE MONTHLY OWNERSHIP COST

Information collection:

  • Probable Closing Costs: The Pihl Law Corporation Okanagan Home Purchase Cost Estimator tells me that I should expect about $1,200 in legal fees and $757.50 in third-party transaction costs, but nothing for property transfer tax, because the First Time Home Buyer’s Program eliminates property tax for me.
  • My Down Payment: Before closing costs, I have about $18k available, so after them, I could afford a down payment of about $16,000. But the BC Home Owner & Equity Program will match my down payment up to 5% of the purchase price, with no interest or principal payments for 5 years. Which is basically free money, since we’re only looking at a 5-year timeline.
  • Interest Rate: Scotiabank offers the lowest 5-year rate I can find @ 2.90%.

Now that we have the raw data out of the way, let’s talk about the logistics. First of all, the list price doesn’t necessarily mean that the price in the listing is the price you’re going to pay. Realtors generally recommend making an initial offer 10% below asking price (if the property has been at the same price for a while) and being willing to take a counter-offer of 5% less. For arguments sake, we’ll assume that I could buy the apartment across the street for $212k, which is about 5% below the list price.

So what’s the damage?! Mortgage-wise, that is.

Well, first, we have to consider mortgage insurance. At $16k down, plus another $10,600 (5% of purchase price) from the BC HOE Program (hehehe, good job, naming people), I’ve got a 13% down payment, which means 87% leverage. According to the Canadian Mortgage & Housing Corporation, that means a 2.40% insurance premium.

($212k – $16k – $10.6k)*(1+2.40%) = $189,850 (rounded)

Ah, the sweet sound of a mortgage nearly five times my salary. Lovely, isn’t it?

Now, with Scotiabank’s low low low interest rate, and their handy online calculator, this gives me…. drum roll please!

Monthly Mortgage Payment = $888.74

Well! That sure looks nicer than the $1,000 my apartment will cost me. But hold your horses (wow, English has a lot of horse-related sayings, I never realized), the mortgage is not the only cost of owning property. We also have to consider:

  1. Property Tax,
  2. Strata Fees (if applicable),
  3. Home Insurance, and
  4. Maintenance.

Now, same as I did with the tenant insurance and parking fees for my rental apartment, I’m not going to increase these costs year over year. The assumption is that they will rise at the rate of inflation, and therefore will be the same cost next year as this year, in today’s dollars.

Calculating property tax can be tricky, since not all property listings will include them. However, if you’re lucky, your province/state will have an online assessment database, like E-Value BC, where I was able to find out that the apartment I’m looking at was assessed at a $168,600 value in July 2016. Punching this value into the City of Kelowna Property Tax Estimator leads to a $1,082.44 property tax levy for 2017, or $90.20 a month.

Home insurance was easier, as finding an online calculator is pretty straightforward. This particular calculator tells me I’ll spend $36 a month on insurance.

Maintenance tends to be a subjective topic when it comes to home ownership. The cost can vary depending on the age of the building, how well it was built, how good its previous owner treated it, how big it is, etcetera, etcetera. However, most experts (AKA people like Paula Pant – I have a crush, you can tell) suggest budgeting 1% of purchase price for maintenance, or budgeting $1 per square foot. This creates interesting results for the apartment I’m looking at:

  • 1% of purchase price = $2,120 per year
  • $1 per square foot = $442 per year

That’s a bit of a range, so we’ll compromise and average it to $1,281, or $106.75 per month. If you’ve got more knowledge about maintenance costs, go with your expertise and not a random rule, because, as you can see, math really only goes so far (And here I thought math was the ruler of universe… So much for Mr. P’s 9th grade arithmetic mantra).

And we put it all together and what have we got? (That’s a song, isn’t it… I can hear it, the music, tickling at my brain. Disney, you brain washer). Bibbidi bobbidi boo!

Mortgage

Property Tax

Strata Fee (see the big table above)

Home Insurance

Maintenance

Total Cost

$                            888.74

$                              90.20

$                             117.00

$                              36.00

$                            106.75

$                        1,238.69

Okay, that’s a little bit less magical than Cinderella’s glass slippers. And that brings us to the next step in this fancy little recipe…


STEP THREE: COMPARE FINANCIAL FACTORS

The first part of this step is pretty straightforward:

BUYING WOULD COST ME $229.72 MORE A MONTH THAN RENTING.

Notice the “me” in there. Because before anyone gets riled up, this is entirely specific to my situation and you need to go do the math yourself. If anyone sends me some kind of “But I’m special! My situation is ________.”, I swear to high dragon heaven I will screenshot it, print it, and set it on fire.

Ahem.

Now, the interesting part (at least to me), is that I could actually afford this. I have a $300 surplus (yeah, it’s low, yay entry-level salaries in accounting) in my monthly budget that I deposit directly into my marketable securities account. It would be difficult, and I would have barely any wiggle room for emergency savings, but I could technically afford that apartment across the street.

But why would I willingly spend $230 a month more on the exact same living space?!

And that’s where the usual rebuttal comes in: “Because you’ll be building equity!”

And that’s the kicker, isn’t it. The true decision here isn’t “Should I rent or should I buy – which is cheaper?”, it’s really “Will renting or buying improve my net worth more?” So let’s do the math.

Scenario 1: I continue renting and invest that $229.72 a month in my stock portfolio.

Scenario 2: I buy, and I don’t get to invest that $229.72, but I pay off my mortgage and build equity that way.

We also need to remember that if I continue renting, I don’t have to cash out the beginning balance in my marketable securities portfolio for the closing costs and downpayment, so that’s $18,000 that will continue earning money. We plug that, plus a $2,756.64 ($229.72*12 months) annual contribution into this handy calculator with a 7% return (my average, and also the stock market’s), a 5 year timeline, and 100% reinvestment, and we get:

Net Worth After Renting for 5 Years = $41,099

Note that I will probably be investing more than $230 per month, but anything I’d invest above that is the same I’d be investing if I bought, so there’s no point in including it in the calculation.

But what about net worth when owning property? Well, if we assume that the apartment will retain its value (not going up or down, for the record, I’ll talk about housing appreciation in a bit), then the equity is simply the original downpayment of $16,000 (after closing costs) plus the amount of principal I managed to pay off over five years. For the less math-savvy, this is because if, in five years, I sell the apartment, my “earnings” is simply the difference between the list price and the remaining loan I have to pay back to the bank.

So let’s take a look, and head back to the mortgage calculator I used back in Step 2 to punch in the same data. If we toggle the little “chart” button on the right side of the screen, it tells us how much principal we pay off each year:

Year 1: $5,261.36 | Year 2: $5,415.03 | Year 3: $5,573.20 |

Year 4: $5,736.02 | Year 5: $5,903.56 | Total: $27,889.17

Add all of that to the original $16,000 down payment, and we get:

Net Worth After Owning for 5 Years = $43,889

Wowza! If I buy now and sell in five years, I can make a whole… $2,790 more. No offense, dragon elders, but this is really not the mad equity I was expecting to make with all that talk about how “castles are the best investment you’ll ever have”. And the thing is, that equity isn’t even guaranteed.

See, the reason (Canadian) people believe that housing is an excellent investment is that, in the past 10-15 years, Canadian housing has shown absolutely insane appreciation, and even more so in the last couple years. Instead of just making equity through paying off the mortgage and selling for about the same price, inflation-wise, as they bought it for, people have been able to hold on to a house and sell it, 7 months later, for a price 25% higher in some cases.

If prices go up higher than inflation, suddenly, residential property starts looking like an amazing investment. However, just because the housing market has been skyrocketing like crazy for the last 15 years doesn’t mean it will in the future. This is actually something called a “gambler’s fallacy“. It’s also the reason I sometimes wonder why accounting is a profession, because what we do is create reports based on past data, and just because OpCo made $1 million last year doesn’t mean they’re going to next year (but hey, I like my job, so I try not to shout about it).

Economists all over the world have been eyeing the Canadian housing market with critical suspicion since the appreciation kept going, even when the USA’s bubble burst way back in 2008. Robert Shiller, who predicted the American crash, has been blaring red alerts for years. Garth Turner, one of the financial bloggers who actually got me interested in F.I.R.E., actually thinks the bubble started popping back in October 2016. Even the CMHC itself has called the Canadian housing markets overvalued.

So what does this mean for me, if I went and bought that apartment? Well, if housing is overvalued now, that gives me the distinct impression that in 5 years, I probably won’t be able to sell that suite for the $212k I bought it for, and the thing is, even if the value only drops 1.5% ($3,180) , I’ll actually make less than I would in the stock market, not considering closing costs and so on.

However, a 1.5% drop would be a mere blip on the radar, from an economic perspective. CMHC stress testing in Fall 2016 showed that if interest rates increased, housing prices could actually drop as much as 30%. Given it would only take a 21% drop to bring my net worth below $0 at the end of five years, that’s not exactly a point in favour of home ownership.

My point is – While, yes, you can build equity in the housing market, if you’re lucky enough to live in an area where housing appreciation is at least above inflation, this is not a guarantee,  and believing in the idea that “housing always goes up!” is part of what caused the American housing crash. Does the phrase “we must learn from history” ring a bell? It certainly does for me, because my Grade 8 social studies teacher must’ve repeated it a dozen times, and Grade 8 me didn’t give a damn when she probably should have. Better late than never, eh?

So what’s the conclusion here?

  • Per month, owning would cost me $229.72 more than renting,
  • Over five years, if housing prices stay stable, I have the potential to make about the same money owning as I would renting, net worth-wise.
  • House ownership is a hell of a lot more risky than stock ownership, especially in my region (the Okanagan, which has not escaped the effects seen in Vancouver).

And that brings us to step four.


STEP FOUR: CONSIDER QUALITATIVE FACTORS

So, you’ve done the math, you’ve seen the costs, you know the risks. If you’re lucky, you live somewhere that is not Canada or some super-expensive city, and don’t have to stare at micro-suite listings that exceed $200k. Maybe the cost actually is less than renting, in which case I am massively jealous and also happy for you. But once you’ve done all that, you also need to take a step back, and remember that money isn’t everything.

Other things to consider:

  1. Financial risk tolerance – maybe you think housing is still going to go up, and you’re good with buying and taking that risk. Maybe you’d rather take the safer route that is a healthily diversified portfolio. Maybe you found a foreclosed fixer-upper that is half as expensive as everything else and you’re going with it. Your risk tolerance is your own; make sure you listen to it.
  2. Liquidity – one of the problems with housing as an investment is that you have no access to your equity unless you sell or take out a home equity loan (dangerous). A marketable securities portfolio, on the other hand, is easy to sell – I can cash mine out in 3 business days. If you know you’re going to need cash (for school, your new hatchling, tires on your car…), investing in something that is not a house might be a better play.
  3. Your own self-control – are you actually going to put that $229.72 into savings each month, or are you going to spend it on beer? Buying a house can often be an easier way for people to save because you don’t get to tell the bank “No, I ain’t payin’ you this month”, whereas I have to physically go click buttons to make sure money ends up in my Questrade account. However, there are ways around this, like employer savings plans that deduct directly from your paycheck, or setting up a bank-automated system that siphons away your money to savings without you even noticing.
  4. Effort expenditure – owning a house takes work. Repairs and maintenance become your own prerogative; there’s no landlord to call up and inform about a problem. If you like housing maintenance and weekend projects, this might not be a problem for you, and as a hopeless white girl who has accidentally cut herself with a tape measure, I applaud you.
  5. Flexibility – the beauty of being a tenant is that it is really easy to get up and leave. My first year at my new place is a one-year lease (municipal government has rules about new buildings), but after that, it’ll transfer to month to month. If I got offered a better job, wanted to move in with an S.O., or suddenly got tired of my downstairs neighbours, moving would be comparatively painless. In contrast, with home ownership, the property needs to be either sold or rented out, which can take months to go through, a period of time where you may be paying two mortgages, or a mortgage and monthly rent.
  6. Benefits – Home ownership isn’t coveted for nothing. You get to paint your walls whatever colour you’d like, pet ownership becomes acceptable, you can rip out the ugly vertical blinds and replace them, etc. If you really want to own six dogs or a pet pig (my sister loves those things), or have an itch to constantly renovate, then ownership is probably a better option.
  7. Social pressure – Maybe your S.O. is convinced renting is synonymous with being poor. Maybe your co-workers look down on you because they think you’re bad with money because you don’t own a house. Maybe your soon-to-be father-in-law is horrified that you didn’t have a place already bought in which to house his precious daughter. Social pressure is a definite factor in a lot of housing decisions, and shouldn’t be underestimated.

And there we have it – seven things to consider, which brings us, finally, to:


STEP FIVE: DECIDE

In the end, it is ultimately your decision. Like I said, the answer to the question “Should I rent or should I buy?” is: “It depends.” But if you’ve mathed the math, researched the research, and considered the consequences, then I can honestly say that yes, you’ve done your homework. If you choose to then ignore that homework and do whatever the hell you want, then sure, okay, that’s also your decision.

You do you, mate, you do you. But don’t come crying to me in five years if you bought in Vancouver and have lost the scales off your back. I genuinely will not give an egg shard about your problems.

Me, I’m renting. The building managers are great, the commute is under 10 minutes, the dishwasher is my best friend. My stock portfolio continues to show me nice shiny dollar signs. What more could I want?

In conclusion, do the math, make your decisions. But, for the love of Smaug, make sure its a good one.

You’re a dragon, not a brain-dead sheep. Don’t follow the herd. Eat them.

…. metaphorically, of course.

Understanding the Cost of Moving Out

The milestone of juvenile dragonhood – the big move, the big leap, the head-over-heels flight from the parents’ nest directly into the big scary world. Some of us manage it earlier than others, wobbling into our first independent den while still in our teens. Others stay in the nest much, much longer, living in dark basements until their scales gleam only in the light of violent video games (or so Millennial researchers would have me believe).

Others – like me – left the nest at somewhere in between. After completing a four-year Bachelor, and spending four months paying a very discounted rent for room & board to my parents, I got the itch. It wasn’t the first time I’d had it. When I first started college I seriously considered moving out, despite the fact that the campus was only a 10-minute bike ride from my parents’ place, but I eventually stayed with the financially-healthier option of living with my parents rent-free through my undergrad.

But here I was, September 2016. I’d just signed the employment offer for my new job as a baby accountant, ready to begin my CPA articling with a local mid-sized firm that paid reasonable money for an entry-level job. A new all-rental apartment building had just been finished being built, a mere block from my new workplace.

I fell in love with an adorable, brand new 480 square foot suite with an excellent layout going for $900 a month, and signed a year’s lease two days after the first viewing.

Entirely terrifying in about 3 billion different ways, let me tell you.

But I’d been planning for this since the first time I got the itch. I had spreadsheets detailing every possible item I’d need to buy, from couch to flatware to bathroom plunger. I had savings set aside for just this very moment, with some smaller things already accumulated in boxes beneath my bed.

As evidence, here, you can see the (yes, absolutely ridiculous, I know) spreadsheet:

moving-out-listing

You notice how the kitchen listing keeps going? It contains 107 items, no joke. This isn’t a very accurate listing, as everything that I already had or was given as a gift is listed at $0, but the estimated costs/actual costs of stuff I had bought or intended to buy was $5,916.30 per this spreadsheet.

Yep. I was planning to drop $6k on moving out, and that’s not even factoring in damage deposits and moving costs and that first big grocery trip.

And that’s why I’m writing this: Moving out is not cheapWhile yes, everyone experiences the urge to leave the nest, and that’s a good thing, a milestone in adulthood, it is very important that you do so smartly, if you have the choice, and that you understand that if you are going to move out, you need to build savings. If you move out and just end up building up credit card debt because you can’t really afford it, you will be a very unhappy camper, and moving back in with your parents is never a fun decision.

And let me make this abundantly clear to you – I under-estimated the cost of moving out. Even with the spreadsheets, even with tons of research and talking to half-a-dozen adults about the kind of costs I’d encounter, I was still surprised by the final cost:

Deposit $ 450 Half month’s rent
Moving Costs 136 U-haul rental & pizza for family/friends who helped
First Grocery Trip 640 $111.50 of this is just for spices
Contents
  Living Room 2,326 Couch, coffee table, side table, storage unit, bookshelf, art
  Washer/Dryer 1,905 The convenience is worth every penny
  Queen Bed 1,252 Bed frame, mattress, bedding
  Kitchen Stuff 1,259 Dining set, small appliances, pot set, utensils, dishes, bakeware
  TV 872 Screen, speakers, Apple TV, TV stand
  Random 493 Vacuum, lamps, coasters, hangers, screwdriver, door mat, mop, broom, ironing board, other household
  Bathroom 234 Towels, shower curtain, mat, bin, soap dish, toothbrush cup
Total Contents $ 8,341
TOTAL $ 9,567  

It is remarkable how fast it can all add up, and this doesn’t even include the hidden costs of moving out – utilities setup fees,  apartment insurance, etc. On top of that, I didn’t even buy everything on my list! I didn’t get a gaming system, or a popcorn popper, and I still do all my baking by hand because I couldn’t justify to myself the cost of a mixer.

Yeah, I know, kneading bread by hand is definitely a first world problem.

But here’s my point – MOVING OUT IS EXPENSIVE. And it is not something you should do on a whim, or when you’re not financially stable.

I do understand however, that not everyone gets an actual choice about moving out. My parents were great about it, to the point that I actually had to low-key convince them to let me leave (oldest child, difficult to accept they’re all grown up, from what I understand). But I’ve met people who were kicked out at sixteen, or who left abusive homes, or who had to leave town for post-secondary because their city was too small to offer a good education. And for those people, I have recommendations:

1. Nix the Unimportant Things

If your building has a laundry room, don’t get a washer/dryer. My building charges $25 per month for laundry, so it’ll take 6.35 years for my washer/dryer to break even. I bought them because I valued the convenience, not because it was a good financial decision. Also, you can cut down a lot of other things – do you really need a dining set? Won’t you just eat on the couch? Do you really need a bundt cake pan? Can you make due with camping-quality silverware for a few years?  Can you handle sleeping on a camp cot (super comfy by the way) for a while? My aunt actually slept on a cot for over a year before she decided she was actually staying in the city she’d moved to and bought a proper bed, and now the cot is a very convenient stored-away guest bed.

2. Cut Costs Where You Can

Check out thrift stores! I found my TV stand for a whole 15 bucks at Value Village, and while it needed a little love, it was not difficult to refurbish. Tons of my kitchen supplies – glasses, baking sheets, plates – are from thrift stores as well. Browse your local Craigslist or look on Facebook for local shop & swap pages as well. I was able to find my compact, solid-wood dining set for $60 that way. I hit up a lot of garage sales as well, as was able to find plenty of good-quality kitchen items.

3. Look for Free Stuff

If you’re thinking of moving out, the first thing you should do is tell as many people as possible. You’ll be amazed how many of your friends and family will have random shit stored in their garages or closets that they’d love to give away. I got an iron from my aunt, was offered multiple used couches, and my great-aunt offered me a free pick from anything at her garage sale. Also – if you’re in school, and you have exchange student friends, they are going to have accumulated a lot of stuff that they don’t have space for when they fly back home. The campus rez will often have tables of household objects sitting out for free at semester-end. As another option, take a drive around some of the residential neighbourhoods in your city and pick up free stuff left out on the curb, or browse the free section of your local Craiglist or Kijiji!

4. Get a Roommate

If you move in with someone else, most of the time, all of the common areas will already be furnished and fully-supplied. All you’ll have to do is bring your wardrobe, hygiene products and maybe a bed, if there’s not already one there. If you’re moving in to a new unfurnished place with a roommate, it’ll also be cheaper, since you can split the cost. However, I would caution against going halvsies when buying things like couches and TVs, if only to avoid the inevitable conflict when one of you moves out. It’s easier to have one person buy one thing and the other buy something else of similar cost, so that the “Hey, I paid for half of that!” argument never comes up.

5. Choose Cost over Quality

I was reluctant to recommend this one, because buying low-quality items tends to create long-term financial pain, but I’ll say it anyway. If you’re in a bad situation and you need to move out ASAP, savings or no savings, don’t go shopping for a couch based on its longevity. Choose a cheap one, and GTFO. Part of the reason my moving-out cost is so high is because I chose to buy higher-quality, new items that I believe will still be in good shape in 10-15 years. But I also bought some cheaper things. My $35 coffee table is from IKEA and was described by my dad as “the cheapest thing I’ve ever seen”, but I fully intend to replace it with a collection-storing table for my rock collection someday, so it didn’t make sense to buy a better one.

And that’s it. That’s as prepared as I can feasibly make you for the leap from the nest. Save. Plan. Proceed with caution. I wish you the absolute best of luck, but remember, you’re probably going to forget something, so keep some cash in backup.

There’s nothing quite as awful as staring at a clogged toilet in your new apartment and realizing that you’re broke as hell and forgot to buy a damn plunger.

Yep. Someone’s been there.

Don’t be that person, fellow dragon. Really. Don’t.