So I can rent for say 1800/month?
OR
I can spend $1954/month

* You can’t count appreciation of the condo since its part of the principle and is excluded from the calculation. If you did, you would also have to give the renter the same option to “invest” and a index spyder would just destroy any home in an equity race.

In some cases, the interest someone is paying is more than they’d be paying in rent…you don’t get interest back…so its like throwing your money away to the bank (which is like renting). How long would it take to actually start paying down more of your principal, vs. renting and watching the prices drop 50-100K more over a year?

In the end, it just makes sense that with a falling market you want to RENT, lose your $18,000, and buy 50-100K cheaper. Because during that year of renting you’d be saving more, and spending less on purchasing a home. It’s like a double gain.

This means the ‘cost’ of renting is likely into the tens of thousands in FAVOUR of the renter, not the buyer. At least for properties I see on the market?

(With the final cost/benefit of that shorting being determined by some equation that measures the relative movement of home price growth for each buyer realtive to carrying costs plus/minus the cost of shorting the market?)

Further and perhaps more importantly, using all time highs for job growth, employment, wage growth and the sale price of local commodities (etc) might not be the best benchmark point to use for further home price growth and to jusify current prices. All it does is confirm that prices are indeed inflated, to the same degree all those other benchmarks are.

Before you bought you would easily see this as the case but it seems now you are blinded to this fact and think all of those high benchmark points will lend support to home price growth beating inflation well into the future? Yikes! Equilibrium is always always always restored.

The cost of shorting the market by renting is rent*(12 months). If you are living downtown that equates to a price tag of ~ $18,000/year or more. This is money that one will never see any sort of return on investment. It’s expensive, and there are no guarantees that in one year house prices will be lower. If it takes 9 years before it becomes undervalued, the rent paid during that period would be $175,000 and house prices could be exactly the same. Also, one will be paying rent at 9 year inflated rates, whereas the person that purchased would have built up some equity and monthly costs will not be affected by inflation to the same extent.

If one takes a long term view, then they can make a budget accordingly and if they have better investment options where they can get an aftertax rate of return of 7%-8% over long periods of time then they would come out in 25 years with roughly the same amount of money as the person that purchased the house if they invest the difference between renting and buying. If, for example, they own a business and can get better rates of return than that then I think renting is a better option.

I don’t think that by buying a house is going to make me rich or anything; I see it as a forced “savings” account that is pretty much guaranteed to beat what I could reasonably hope to achieve by investing the difference in the stock market during the same period.

I believe that housing was undervalued in 2004 as the report says, it adequately explains the shortage in housing as the vacancy rates dropped to 0.5% as people arbitraged geographic economic differences and the boom in Alberta population. This is something a contrarian should understand… as the adage goes: buy low, sell high.

I agree there are downside risks to buying, but until those risks such as a commodity crash \ foreclosure boom \ overbuilding glut physically materialize, marketplace psychology should dictate that prices will be too high for a contrarian to stomach.

I have made a conscious decision that should those kind of risks appear, and/or the bottom comes naturally via stagnation, that it will pose as an opportunity to a value investor and would be something that I’d pursue investing at that point.

In the meantime, I perceive the greatest opportunity for myself being with the strategy of buy, hold and prosper.

P.S.: I hope to be posting a rough excel budget soon!

If real estate was undervalued before… (as Merrill says it was in 2004), why can’t it become undervalued again?

Just something to think about. It means that over the past 25 years, RE has been undervalued for about 22 of them. To me this makes sense in a city with an undiversified industrial base, unlimited land to build on, and susceptible to over-building and the natural cycles of the commodity business.

My best guess is that it wasn’t undervalued before, but is over-valued now, because prices do not take into account the risk that things will not go swimmingly forever, they are only pricing in perfection.

The 1990 peak in housing market unwinded with flat house prices for a long period as affordability slowly returned through a combination of income growth and lower interest rates.

Therefore, I think a straight line through the data from 1973 to 2005 would be too conservative, as housing in Alberta from 1998 to 2004 was more affordable than historical averages.

The report is here:

http://cfcr.ml.com/GetDoc.aspx?e=8pG0MM1yAlglSDwesEp6D0oMzsadHinm%2fpLZFcAYgGmM4GK9MUc22fLarWBn4e5eIeALda5cCmh4eo3LtXlJew%3d%3d&ctbDocIDs=10755267&v=1&m=pbZihNY3cWeyGu8PsB6YYaVVyaY%3d

I think the best approach to coming up with a realistic value based on trends is to put a upper and lower bound on the lines and then place a middle of the road best guess value. I think this methodology honours the overvaluations and undervaluations in the market better.

Barring the desire to do this, would you consider posting the raw Excel data so that readers can run the numbers on their own?

Thanks!

The only reason home owners would be remotely ‘happy’ is due to the last 2-4 years of crazed home-price growth. Subtract this most recent time period from the last 28 years and housing purchases in ~1982 look, at best, marginal and at worst like the worst financial decision any buyers of that period have made in their lives > Similar to how anyone who had purchased in that last 1-2 years will feel over the next 10 years. (Sorry)

The funny thing is some of these houses are still selling despite the flood of listings and the large number of empty houses.

In terms of the graph, looks like hyper inflation to me! Welcome to Canbabwe! Weee! A billion bucks for a loaf of bread some day soon!

This most recent cycle will be much more vicious in my opinion because people were buying with little or no money down, and maxing out their monthly payments based on extremely low (historically) interest rates. If you max what you can afford at 4.75% interest on a $400,000 mortgage with no money down, rates only need to go to 6%, and your annual interest payments will rise by $5000. For those living on the edge, that is troublesome.

If you don’t look at your home as an investment, and you don’t care about ROE, then buying at the peak doesn’t matter. It’s like buying a BMW. You know it is not a “good” investment, but hey, you like driving a nice car and are willing to pay for it.

Calgary’s average price is 2.44x what it was in Jan 2000. Dallas’s avg price (case shiller) is only 1.22x. Bubble cities like Phoenix peaked at 2.27x and has now dropped to 1.53x, a decline of 33% from the peak. San Francisco peaked at 2.18x and is now at 1.63x, a decline from the peak of 25% (and likely still dropping).

I would argue that looking at the price action over the past 10 years, and especially since 2005 reflects a bubble market, and not a slow steady market like Dallas. We shall see if I’m right.