Breaking down the Monthly Costs of Each!
With costs up on just about everything, this week we are looking at the benefit of renting or buying in this market or for the investors what do you need to break even on an investment.
To break down the cost of housing in each area I am looking at the average home price for the neighbourhood so far for 2023 and what the payments on those prices would be with 20% down and at a 6.5% interest rate amortized over 2 years.
We do have a rental guide that was developed by a Property Manager (request it here) that gives us a range of estimated rents by area and type of build, using the rental guide on the low end of the rental guide as a rule of thumb the average room $/room typically ranged from$800-$1,000. Tenants might be able to find better deals and rents location, condition, amenities, garages will also all play into how much rent someone is willing to pay. The numbers for single family homes appear to favour renting over buying at the moment, especially in the single family home market but with rates at the highest we have seen in a while, economists are expecting rates to come down starting in 2024 more on this below, which is a signal that rates have hopefully peaked. These monthly mortgage payments hopefully will be on their way down. For the most part investors right now it is not advantageous based on the overall market to get into the market, despite each property can be different , there are some good opportunities but they are fewer and further in between as costs of borrowing are quite high. For apartments in Kelowna specifically they are finding that the average rent for a 1 bedroom apartment is $1,991, for 2 bedroom$2,800, for a 3 bedroom $3,092. They are noticing a trend that 1 bedroom apartments are increasing faster than the larger units 1 bedroom prices went up by 58% compared to last month, 2 bedrooms by 8% and 3 bedrooms decreased by 1%
These mortgage costs do not account for the strata payments that will be incurred on the properties, which means they are likely under priced by $300-$400 depending on the strata. But the numbers make a bit more sense on the apartment side of things compared to the single family market.
Overall when looking at the cost of rent compared to buying there are more barriers to entry than just the monthly payment amount, the biggest things affecting homebuyers especially the first time home buyers is the with the way prices have gone is coming up with the down payment, which is another conversation for another day.
In conclusion, right now the numbers likely favour renting over buying. But with costs of mortgages at the highest they are expected to be in the next couple of years, rates and costs of home ownership is expected to drop. Like Central 1 Economics is predicting rates to drop by 2% in 2024 this will help your pocket book to the tune of $931 a month based on a $1,000,000 purchase and 20% down and rates dropping to 4.5%. When rates start to drop the demand on the housing market likely will increase as people get off the sidelines and now canafford to buy the type of home they have been holding off on buying. The next question which we don’t have an answer for but what happens if prices increase?
If the rates come down 2%, the payments on a $800,000 mortgage ($1M purchase price with 20% down)will be the equivalent to what payments currently are on a mortgage of $650,000 ($815,000 purchase price with 20% down). Buyers essentially in the next year assuming no other changes will have the opportunity to qualify for $150,000 more on a mortgage and providing they have the down payment would have an additional buying power up to $200,000.
We don’t know what demand will be like in the future but assuming it will increase just based on the sheer population growth numbers, for buyers also think about the additional competition you might be going against and what that will do to prices. Assuming rates have peaked, and inventory the highest it will likely be as we head into the seasonal inventory slowdown in the coming months, this is likely will be the best time to buy in terms of home prices (high seasonal supply, low demand due to rates).
Lest us know what your feeling out there in the housing market whether renting or buying. We would love to hear your perspective.
Obviously, we might be a bit more bias and encourage people to get into the housing market vs renting but homeownership might not make sense to everyone and we totally understand that, individual circumstances or a good existing tenancy might make it be beneficial to keep renting. Going with an open variable rate also gives you the option to benefit in the low home prices and the ability to refinance next year if/when rates go down without penalties.
From our perspective with population growth and lack of supply/new supply being built, Canada should continue to see prices to increase year over year. For the Okanagan right now might have higher interest rates (hopefully the highest they will get) but we are also seeing that rents have been also increasing based on lack of other housing options. Supply and demand plays a role in both rental and resale markets.
The question we would have for you, would you rather pay for something you own, get equity from and can control? Or pay into something that you cant control? If you are in a good rental situation with the hopes of homeownership, a best of both worlds could be to keep living in your existing rental, but also become a landlord buying a home to rent out, as long as it cashflows positive, you can come out a winner. We help buyers and sellers weigh their options. Feel free to reach out to go over your options. Have a great week!
Mark and Maddie