Once again Garth has attacked an innocent person who has come to ask him a reasonable question. Check out the post here
In this comment “Third, what the hell is wrong with having no property, no debt, and $800,000 in cash?” he once again is discouraging people from buying a home, yet he has bought I think four homes in the recent past?
Anyway, how about this as an alternative strategy?
Buy the home for $900,00 and put $400,000 down. There are two ways to analyze this.
1) Value of buying this home today versus a year ago
I’m assuming this home is down 15% versus one year ago. (If people know the real data on this please comment and I will fix.)
2009 Price = $900,000 2008 Price = $1,035,000 -15%
2009 Mortgage rate (5 year fixed) = 4.39% 2008 Mortgage Rate = 5.65% -29%
2009 Down Payment = 44% or $400,000 2008 Down Payment = 44% or $460,000 -15%
Amortization 25 Years in both cases
2009 Mortgage Payment = $2,736.87 2008 Mortgage Payment = $3,560.12 -30%
Mortgage balance at end of term:
2009 case = $438,178.33 2008 case = $513,966.53 -17%
she will be ahead by $513,966.53 – $438, 178.33 = $75,787.50 then she would have been by buying a year ago. There is the $50,000 she was lamenting about losing by selling too early and then some.
2) Velocity of Money Strategy
With the balance she has remaining ($400,000) after her down payment she could invest in Garth’s bank preferred shares option at 7% annual rate of return.
At the end of five years her investment account will have: $564,239.50 for a profit of $164,239.50. After tax at say 35% she has $105,113 to protect her net worth against any drops in her home value.
This is where the opinions will run wild, here is mine:
If Garth and his army of doomsayers are correct and over the next five years her real estate will drop in value, then the first 19% drop is protected by her gains in her investment account $105,113 and the equity she has built up by her principal reduction 0f approx. $62,000. ($105,113 + $62,000)/$900,000
I for one believe that over the course of five years she will see a moderate increase or at worst flat. Why? Housing has always grown with incomes (except when they temporarily overshoot income, causing the market corrections that we have seen). Incomes in BC, in my opinion, will likely rise moderately as the west coast is set up well in the recovery therefore her home value net should rise moderately in my OPINION.
Therefore if at worst her property increase is flat her net worth will have risen by the equity she built (principal repayment on her loan of approx. $62,000 and her investment account balance of $105,113 = $167,113).
Compare this to Garth Turner’s advice.
Rent and invest her money.
Investment ($800,000 at 7% annual rate of return) = $1,128,479.01. Profit = $328,479.01 after tax (35%) = $213,511.36
Lost rent money= This is tough as I don’t know what her rent is right now? What is reasonable in Vancouver to compare living in her $900,000 home? I don’t know let’s say this one.
Therefore her rent at $3,600 per month X 60 = $43,200 GONE.
Therefore her net worth with Garth’s advice = $213,511.36 – $43,200 = $170,311.36
Conclusion:
There is a million ways to likely analyze this but you may say
“Yes, but garth’s advice has less risk against the catastrophic drop in property values we believe will happen”
I can’t combat this one, we will have to agree to disagree on this point. Keep in mind I never put in ANY property appreciation over the next five years in my example, what if we see a moderate increase of 2% per year? There would be an additional $94,000 added to her net worth.
My final point is that Garth Turner ALWAYS discounts the intangible value of living in your own home, even though he is in his own home.
In my OPINION MOST rental homes are not located in the best areas, and are often not the best kept homes. Those that are, typically cost MORE per month in rent then what you could pay in a mortgage payment for a comparable home in the area because they can get a premuium rent for obvious reasons.
So why not encourage people to live in their own nice comfortable home in a good area for a committed period of at least five years or more (property flippers deserve the pain they get when caught in a correction, because they take risk and can profit in a boom) as long as they think it through:
1) don’t get caught up in the hype of competitive offers and overpay
2) work with a mortgage professional who will design a personalized mortgage strategy to protect you and that will complement your overall financial wellness.
….Taking a deep breath and ready for the Garth followers…sigh
Comments
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By rory, June 27, 2009 @ 8:10 pm
Greg, hi …first assumption is can she can afford the mortgage …income needs to be $120k when the average family income is only about $80K or less …+ she has to pay $16K in land transfer tax …so even if RE never goes down from where it is it is way too overpriced …and this is a “an innocent” women that has 400K to put as a down payment.
What your not getting is RE at these prices is a lifetime of servitude …there is none to minimal upside.
Whatever happened to 3.5 times your salary and no more that 40% of your net worth in RE …you know all these things but you do not talk about …why …because you would never earn a living doing it…you sell bank mortgages (your a middle man) …what the hell do you think you are going to say …jeez …plus GT comments just put your site on the map …for now anyway.
I also would like to hear from you how Canada is so different then the US and why Vancouver RE would be like almost 2X San Francisco’s …do your own comparisons to an oil town in the US …you know there are no innocents …
As to you making an error in your calculation by 50% …never, never, should have happened …this is your business …just by looking at the numbers all the bad ass bloggers on GT’s site knew your numbers were wrong ..all except you …that is a bad on you…credibility now zero…sorry man.
of course I assumed she could qualify for the mortgage. She is considering a home probably close to double the Vancouver average. If not, she puts more down. Not fair I think to compare to San Francisco. California was one of the worst to decline in the sub-prime meltdown. The US meltdown was caused by Real Estate prices overshooting income by a large margin. We overshot in Canada as well but no where near what they did in the US, this started the house of cards to fall. Prices drop (to naturally correct the overshooting), equity erodes, sub-prime mortgage interest rates re-set, no equity to bail those people out, foreclosure. None of those fundamentals happened here with the exception of prices slightly overshooting income. They are not happening here right now either. In fact the correction of 2008 brought prices BELOW incomes as they naturally would.
Honestly, I never heard the 3.5 times salary, 40% of net worth example before. You probably don’t want to hear this, but I think close to 100% of young buyers today would be violating your rule. In fact i would say that the lions share of the Canadian homeowner population would have more then 40% of their net worth in their home. Not sure where we could get that stat, seems intuitive to me.
This current boom in the major centres, for certain in Calgary, is fueled by pent-up demand for first time home buyers taking advantage of considerably higher affordability. The price spike is caused simply by supply not catching up. Calgary absorption rates went from 9 months at its high in Q4 2008 to almost 2 months right now. This boom will thankfully cool off, and probably soon, which will likely keep us in a balanced market for some time. Once rates edge up a bit higher, and supply naturally catches up to demand.
I have said numerous times in the recent past that we are likely not seeing much increase in Canadian Real Estate for some time, or if any it will be moderate. The only caveat is there will be some pockets in Canada that will likely outpace inflation in moderate price appreciation. I believe inflation will come back, and with it means higher incomes, and with that means higher real estate prices.
For the record everyone of Garth’s bloggers also didn’t calculate the numbers right go back and look at their attempts to calculate it, except for one, and I thanked him for showing me, and quickly stood up and made the changes. When Garth makes a mistake he NEVER admits it, he deletes the comment, I know because it has happened to friends of mine, when you make a mistake do you?
Thanks for your comments
- Greg
By Frank, June 27, 2009 @ 8:15 pm
Greg,
You truly disgust me.
Tell the truth now, would you EVER discourage anyone from buying real estate?
You know, since you make a profit from selling real estate?
Would you ever tell someone it’s just not the right decision (ie. they would be mortgage poor paying 60% of their income on housing, their job may not be secure (they’re in construction), interest rate increases could bust them and cause them to lose their home, real estate prices are EXTREMELY likely to decline (don’t tell me you believe otherwise or I really will get angry with your pimping & whoring), etc, etc……
So Greg, you depend on buyers for your living – do you just tell each and every one of them to go for it?
If people can’t qualify, and the lenders/insurers are incredibly tight on both credit and asset right now, then yes we would tell them don’t buy. For instance if someone was about to spend 60% of their income on a mortgage they would not qualify, and thus they would not get a mortgage. The rules allow only for 32% of their income.
In my example if you had bothered to comment on it, you would have seen that Real Estate could have fallen 20% from now which would arguably means 35%-40% from the peak and this girl would be at worst even. I know you would say that if she rented she would be ahead, but once again you completely write off the intangible value of owning her home.
- Greg
By Mike, June 27, 2009 @ 10:35 pm
Calgary real estate still very overpriced. How many houses
was sold for 500K and up????!!!!!! How fast acreages and land selling around Calgary? Not sell at all.I beleive in 2009- 2010 price will drop another 10-15%.
You are correct that sales for homes above $500,000 are slower. Approximately 70% of activity right now is under $500,000. I am not sure it is because prices are overpriced or not. As for another drop of 10-15% you may be right but for that to happen, one of two things must happen.
1) Demand for all real estate would have to plummet, as it did in 2008. I see demand somewhat leveling off, but in a recovery, and we are eyeing a recovery in 2010, it is hard to believe that people will not be out buying many things including houses. As well in 2009 prices are already up 4% for the year. January Median sales price Calgary metro single family homes ($374,700), May 2009 = $390,000 and we will likely see these same number up for June as well. In fact I think Calgary Real Estate will have risen 5% in 2009 when it is all over.
2) Supply comes back in droves. It is hard to imagine why supply has not come back given this mini-boom we are experiencing right now? Particularly when you think of all the supply that came out of the market in the second half of 2008. Supply rarely comes into the market during the summer for obvious reasons. Maybe, and somewhat hopefully we will see some supply come in the fall to help to balance the market. We went from almost 9 months of supply in late 2008 to almost 2 months right now.
In the recovery look for Calgary Real Estate prices to do close to another 5% in 2010 as inflation rises so to will income, and the job prospects for the oil industry with near $100 oil should keep people buying all things including houses. Calgary and Alberta will likely lead the country in inflation in the recovery as it has before, which will also have an effect on pushing house prices up.
If the recovery is slower then expected for the US then Canada as a whole will still suffer, but again at near $100 oil Alberta may be an island of higher prosperity.
Consider this, if in the worst financial crisis we have seen since the depression the new equilibrium for oil was around $50 what do you think it will be when demand from China, and India comes roaring back in their recovery?
Thanks for the comment
- Greg
By Mike, June 28, 2009 @ 11:49 am
Hi Greg,
I am working on Alberta Oilsands and I can tell you NO any active projects in the near future. More laid off yes. When
companies freeze up projects considering economic situation
VERY VERY hard to start it again because need again reschedule everething. It a money,lot of money.For you consideration my company will send to laid off 300 engeeners and 950 construction workers by October. If seriosly no any signs of recovery beleive me.With my collegs
we are thinking glimmer of hope not early as 2012.
Mike.
Mike
These future projects getting cancelled actually is very worrisome as it will reduce future supply, which could bring a very unwelcome spike in prices when demand surges back. I just can’t help but think that when demand surges, projects will be fast tracked and jobs will come back. When is a good question. Nonetheless with $100+ oil things will be better in Calgary and Alberta quicker then the overall Canadian Economy I think.
- Greg
By Mike, June 28, 2009 @ 6:48 pm
100 % agree with you Greg.
By Mike, June 28, 2009 @ 7:04 pm
Hi Greg,
Read last post on Bob Truman blog. 3500 SFH on the market
and 90% of them not selling at the current prices,that’s what I say before house market in Calgary – very overpriced.
Bob Truman said on his blog “High-priced homes are selling better than in 2008. It’s not just the first-time buyers who are purchasing homes this month. So far in June, sales of homes over $600,000 are up 20% over last year. In May, sales in this price range were 8% lower than in May 2008. For the period Jan 1 – May 31, sales were down 39%.” http://www.bobtruman.com/blogs/bob_truman/archive/2009/06/15/peak-price-for-this-year-has-it-already-happened.aspx
I think he meant when commenting on 90% of homes unsaleable at the current price that these homes are dogs. The inventory level is just soooo low that when good homes come on, they go fast. Anyway his comments are good advice, summer is here and we have to see what will happen, it is weird times for sure.
- Greg
By Al, June 28, 2009 @ 10:50 pm
With all the negativity shown by bloggers on here and most realty websites, its an almost perfect contrarian signal that we’re at the near term bottom of this Housing Downturn in Canada. Prices dropped 12 to 15% in Vancouver the psat year and something similar in Calgary I believe. But interest is definitely improving despite the negative talk by so many. My co-worker had TWELVE showings in 2 days last week to sell his house and closed the deal the following day. Certainly the Buyers are enjoying these low interest rates and the current global recession looks to be flattening out, perhaps even turning the corner, but gee, its almost sacriligious to suggest things might improve in the economy! People would have my head for being even slightly positive!
Sometimes one wonders if there is another agenda altogether by all these Real Estate ‘Bears’ and naysayers. Perhaps, just perhaps, they are actually Buyers trying to keep prices low enough for them to stock up on property themselves….