Aug 172014
 

Some experts say the North American real estate market is starting to become overvalued again. In today’s post we’ll compare property prices to rents and explore whether or not overheated markets like Vancouver are headed for aĀ hard landing. šŸ™‚

Rent vs Buy

Let’s take two fictitious singles, Alice and Barry, who are both from Vancouver and work for B.C. Hydro, a utility company. They each have $20,000 in savings and they both want to move closer to work. Alice plans to rent while Barry plans to buy.

Alice manages toĀ find a suitable apartment that’s located very close to her job. It only takes her 5 minute to walk to work. šŸ˜€ She decides to investĀ her $20,000 of savings into the stock market.

  • Alice’s Apartment:
  • Location: 7418 Byrnepark Walk, Burnaby B.C.
  • Size: 800 sq ft.
  • 2 beds, 2 baths.
  • Rent: $1,600 a month.

Here is the actual listing on Craigslist I found. The move-in date is not until Sept 1st, 2014. So this is a real life housing situation that could happen to someone in Vancouver right now. Click on image to biggify.

14-08-rental-unit Rent vs Buy

 

Meanwhile, Barry also finds a place to buy, coincidentally in the exact same building as Alice, and also has the same number of bedrooms and bathrooms.

  • Barry’s Apartment:
  • Listed Price: $369,000
  • Location: 7418 Byrnepark Walk, Burnaby B.C.
  • Size: 792Ā sq ft.
  • 2 beds, 2 baths.

Here is the direct link to the actual listing on realtor.ca.I’ve taken a screenshot as well in case the listing is removed in the future.

 

14-08-purchase-unit Rent vs Buy

Barry decides to spend his savings on the down payment and get a mortgage for the remaining $350,000 balance. I’m currently paying 2.6% on my mortgageĀ so let’s keep it simple and give Barry the same rate. Using a mortgage calculator we find that Barry’s mortgage payment amortized over 25 years is $1,585 per month.Ā That’s almost the same as what Alice isĀ paying for rent. šŸ™‚

This is why a typical condo in Greater VancouverĀ costs $369,000. It HAS to cost this much in order to stay competitive with rental rates. Condo pricesĀ aren’t fallingĀ because lower prices would lead to lower mortgage payments, and it’s simply notĀ rationalĀ for peopleĀ to rent a place when it costs a lot less to easily ownĀ another (almost identical) unit in the same building.

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