Wednesday, 27 November 2013

Your house equity is a nest egg that won't be hatching. Prove it on NYT's interactive chart.

Canada leads the world for overpriced housing. The IMF reports we are paying 85% more to buy a home than to rent the same place. This is so far out of whack, it is going to crash. See for yourself with the NYT's tool below.

Rents will rise but it's more likely the price of a house will come down. Not long ago US pricing was in a bubble but that popped.  The chart shows it's a toss-up whether to rent or buy there. In Canada there is only one answer in almost every market for financial optimum:  Sell your place, tuck the equity somewhere where it earns interest, and rent a lovely home.  Use the savings between rent-and-buy for something better like a trip to Rome, an RSP, or a business start-up. Or better yet, put it into your Be-An-Owner-Again account for when the price is right.

If you haven't used this New York Times interactive chart,use it now. Plug in your numbers on the sidebar. (Note that taxes is a percentage, not a dollar amount). Then move the two sliders to guess how much you think prices and rents will change next year.   "Brown" is the colour of cash savings  and brown is what you want to see before you buy. Don't let if be too far in the future or you wont to be alive to enjoy it.  The house I tested last night as a "buy" made me worse off than a tenant for every one of the next 30 years unless I assume fast rising home values and startling rent hikes.  If you move the vertical bar, it will give you a report on where you stand at any year in the mortgage. The footnotes cover things like paying the Realtor commission when you sell and annual maintenance.

Even if you long ago bought your house cheaply and don't owe a penny, your equity would increase if you rented a comparable house and put  the sales proceeds of the dear old homestead into an interest bearing account, until such time that owning your own home is a good investment at a small premium over renting. A house is an asset and it's value should be based on what it can earn from a stream of rent money.

I wrote about this in 2012:  Housing bubble hasn't popped but compare prices in Vancouver and Ireland. I wrote about this in 2011:  Canadian housing over-valued? The Economist puts numbers to it. and again Worldwide house prices charted. Canada is riding a bubble.  Since then Australia, the UK and the US have reduced theirs.   We were out of line then.  Now we may be the riskiest housing play in the developed world.

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