Holding Off vs Overpaying now...

[condostar]

Here is the dilemma I am currently facing: Is it worth overpaying now and locking in an low interest rate vs holding off and buying when the market corrects itself. All we heard about is the real estate "bubble" and how we are bound for a correction. So let's say for arguments sake that is true. I'll assume a 10% correction in the real estate market, which in fact is not conservative at all. We will assume a 1% increase in rates, which is not unlikely by 2011.
Let's take a look at carrying costs in 2 scenarios. Let's assume that in both scenarios you will put down 20%, and a 5 year fixed mortgage and 25 year amortization. Location: Toronto.

Scenario A (Buying Now)

Mortgage amount: 400k
Interest rate: 3.7%
Monthly payment: $2039

Scenario B (Buying Later)

Mortage amount : $360k (10% correction)
Interest rate : 4.7%
Monthly payment: $2032

So after a 10% correction in the RE market, your monthly carrying cost is exactly the same. Am i missing something here in my analysis? A 10% correction is rather extreme. What are people waiting for? A crash with the rates staying at all time lows? Seems highly unlikely. I'm not too concerned about where rates will be 5 years from now cause that's too hard to predict when it comes time to renew.

Your two cents would be greatly appreciated!

 

[MAU]

If you were guaranteed those exact circumstances, and you were willing to wait, scenario B (buying later) is easily the best option.

Scenario A (Buying Now)

Mortgage amount: 400k
Interest rate: 3.7%
Monthly payment: $2039

Mortgage debt at end of 5yr term: $346,373.19

Scenario B (Buying Later)

Mortage amount : $360k (10% correction)
Interest rate : 4.7%
Monthly payment: $2032

Mortgage debt at end of 5yr term: $317,104.80

 

[cdr108]

MAU beat me to it ...

in the long term, the higher the mortgage amount, the more the interest paid to the bank over the length of your amortization.

in addition, if one had put 20% dp at the peak and the market corrected down 10-20%+ in 5 years, they may face problems re-financing as their equity has dimished dramatically.

 

[urbandreamer]

Wait. Double bottom coming, I know how to read charts.

 

[simuls]

Wait. A 10% correction, especially in condo's, will be an understatement. Think 15%+.

 

[SonOfaGun101]

There is going to be no adjustment in the condo market in the downtown Toronto and along the Yonge/Sheppard corridor. Toronto's real estate is dirt cheap compared to many other major cities. According to the 2009 survey of the most expensive real estate markets Toronto only ranked at #42 (at 4,007 US dollars per sq meter). Compare that to London UK which is at # 3 (at 20,756 US dollars per sq meter). I'm not comparing Toronto to London of course but do remember that we live in the largest, most important city in Canada with a lot of economic potential. The talks about prices adjusting have been around since I became interested in real estate 7 years ago and if I kept listening to these predictions I would've never been able to afford to buy anything even 2 years ago. The prices of real estate are ridiculously cheap right now compared to many other places in the wold that hold as much of significance as Toronto does. And here is an interesting prediction (don't remember where I read this so don't quote me on it) - Toronto's population is suppose to double in the next 20 to 30 years. That's huge! I say by holding off you may never see these prices again.

 

[SonOfaGun101]

There is going to be no adjustment in the condo market in the downtown Toronto and along the Yonge/Sheppard corridor. Toronto's real estate is dirt cheap compared to many other major cities. According to the 2009 survey of the most expensive real estate markets Toronto only ranked at #42 (at 4,007 US dollars per sq meter). Compare that to London UK which is at # 3 (at 20,756 US dollars per sq meter). I'm not comparing Toronto to London of course but do remember that we live in the largest, most important city in Canada with a lot of economic potential. The talks about prices adjusting have been around since I became interested in real estate 7 years ago and if I kept listening to these predictions I would've never been able to afford to buy anything even 2 years ago. The prices of real estate are ridiculously cheap right now compared to many other places in the wold that hold as much of significance as Toronto does. And here is an interesting prediction (don't remember where I read this so don't quote me on it) - Toronto's population is suppose to double in the next 20 to 30 years. That's huge! I say by holding off you may never see these prices again.

 

[TrickyRicky]

On the one hand looking at the numbers is logical. On the other hand the psychology of buying , selling, and owning is so complex as to render pure numerical analysis effectively meaningless. The only thing that matters is what is your buying objective, your real deep down warm fuzzy feelings buying objective?

If the answer to that question is to make as much money as possible as fast as I can to impress the ladies and make myself feel like a big man the answer I think is simple: Don't buy now. There are however countless reasons to buy, and that make buying worth more than not buying even when an analytical comparison of the two options clearly tells you not to buy. Besides the ladies (or guys) aren't going to be impressed if you don't buy either. They will still think you're action makes you a bigger man than your inaction even if you go down like an Italian fighter pilot. So the quest ion is if you don't buy because not buying is the sound advice, what is plan B?

 

[Kenny]

There is going to be no adjustment in the condo market in the downtown Toronto and along the Yonge/Sheppard corridor... The talks about prices adjusting have been around since I became interested in real estate 7 years ago.

The prices adjusted downwards in late 2008/early 2009, so it's not just "talk". Real estate prices do fluctuate. A 10% correction would not be unheard of.

 

[daveto]

There is going to be no adjustment in the condo market in the downtown Toronto and along the Yonge/Sheppard corridor. Toronto's real estate is dirt cheap compared to many other major cities. According to the 2009 survey of the most expensive real estate markets Toronto only ranked at #42 (at 4,007 US dollars per sq meter). Compare that to London UK which is at # 3 (at 20,756 US dollars per sq meter). I'm not comparing Toronto to London of course but do remember that we live in the largest, most important city in Canada with a lot of economic potential. The talks about prices adjusting have been around since I became interested in real estate 7 years ago and if I kept listening to these predictions I would've never been able to afford to buy anything even 2 years ago. The prices of real estate are ridiculously cheap right now compared to many other places in the wold that hold as much of significance as Toronto does. And here is an interesting prediction (don't remember where I read this so don't quote me on it) - Toronto's population is suppose to double in the next 20 to 30 years. That's huge! I say by holding off you may never see these prices again.

Thank-you for your insightful analysis.

btw, you wouldn't have any links to the either of the reports you quoted?

 

[SonOfaGun101]

Thank-you for your insightful analysis.

btw, you wouldn't have any links to the either of the reports you quoted?

Yep. Here is the real estate analysis article.

http://www.globalpropertyguide.com/...arkets-in-2009#most-expensive-property-market

In regards to the population doubling in 20 to 30 years, I believe I read that in Metro on my way to work one day and thought it was interesting. However, as many of you said anything can happen between now and any time in the future and relying solely on statistics is not always a smart idea, but since none of us are psychics (I could be wrong about this one), statistics is all we got!

 

[SonOfaGun101]

Also, if you look at the article I posted above, it states that Monte Carlo (Monaco) is the most expensive real estate market in the world. To be honest, I've never even heard of Monte Carlo (except from some racing game some time ago) so I started researching and it ends up that if anyone wants to buy a bachelor apartment there, lets say around 300 sq feet, they will be paying 2 million dollars and up! I had no idea such prices existed anywhere in the world!

 

[CN Tower]

. Toronto's real estate is dirt cheap compared to many other major cities. .

Indeed. So are hotel rates:

http://www.hotels.com/press/hotel-price-index-2008.html#destinations

By your logic I will now proceed to buy up every hotel room in the city and announce to the world that mighty Toronto is no longer a bastion for bargains but a global economic powerhouse worthy of major city hotel rates! I will then proceed to raise my rates up to the levels of other top global destinations such as New York! Moscow! Dubai! Venice! London!

In 90 days I will bankrupt and so will anyone who thinks that Toronto prices are 'undervalued' on a world scale,

 

[cdr108]

http://www.globalpropertyguide.com/press-relations/Most-expensive-real-estate-markets-in-2009#most-expensive-property-market[/url]

Also, if you look at the article I posted above, it states that Monte Carlo (Monaco) is the most expensive real estate market in the world. To be honest, I've never even heard of Monte Carlo (except from some racing game some time ago) so I started researching and it ends up that if anyone wants to buy a bachelor apartment there, lets say around 300 sq feet, they will be paying 2 million dollars and up! I had no idea such prices existed anywhere in the world!

based on the values in that chart, more like $1.5 miilion CDN (where $1 US = $1.10 CDN) for Monaco, Monte Carlo.

from your 2 posts above, I get the feeling you are under 30 years old, so you may be limiting your experience and perspective to only the past decade.

 

[SonOfaGun101]

Indeed. So are hotel rates:

http://www.hotels.com/press/hotel-price-index-2008.html#destinations

By your Sesame Street logic I will now proceed to buy up every hotel room in the city and announce to the world that mighty Toronto is no longer a bastion for bargains but a global economic powerhouse worthy of major city hotel rates! I will then proceed to raise my rates up to the levels of other top global destinations such as New York! Moscow! Dubai! Venice! London!

In 90 days I will bankrupt and so will anyone who thinks that Toronto prices are 'undervalued' on a world scale,

You are right. I could be completely wrong, but I have a lot of faith in Toronto. I've seen this city change drastically in the past 15 years. I remember when downtown was a scarry place and now it's a booming metropolis. The numbers are helpful in regards to deciding whether to invest or buy a property at such inflated prices. But you also need to have some sort of an idea of how things will pan out in the near or far future and logic doesn't always play into these decisions. Also, think about this way - whenever you buy a pre-construction condo you are investing into our city's infrastructure and its future. Take Cityplace for example, I know a lot of people hate it but it's done wonders to the city. It gave way to more development west of it and created a community where one never could've existed before. And no matter how crappy the park turned out, we now have a public space that anyone can potentially access and enjoy. I will take that over a private golf course any day!