Thursday, November 27, 2008

How much will you pay for your next house?

Garth has an interesting post on becoming a property vulture. One of the reasons we stayed away from buying a house was the arrogant attitude of builders, realtors and pretty much everyone else in the real estate food chain. Hopefully, the last 15 months will have given them some idea of what's about to come. But certainly, by the time we reach a bottom in terms of economic activity, housing, commodity prices and morale, almost everyone in this country will begin to treat their customers with respect.

Moving on to the main point of the post, the most important question that one must ask is-what is the fair value of house? How much will you pay for the house?
As I've mentioned in a couple of posts last year, the following metrics will be of help:
  • Cost per square feet. I think $100/sq feet is a very reasonable number. Accordingly, for the links that bearclaw posted for 1700 sq ft properties, they will be fairly priced in the $175k range. Some might find the price outlandish, but for me it's merely the representation of a cookie cutter shoe box on a tiny lot in the middle of prairie with harsh winters, half trick economy and no recreation other than a big mall.
  • Price to Rent Ratio. The old school fair value of a property was 100 times monthly rent. Assuming the current rental rate of this property at $1700 , it values the property at around $170k. But given the current level of elevated rents, the actual rent in the not so great times might be only $1300. So based on this metric, the fair value will be $130k.
  • Cashflow positive etc. A lot of 'investors' buy properties based on this metric. I'm not a huge fan of this method.
  • Historical values. Some say 2002 prices will never return to Edmonton. Perhaps. But to get a true sense of 'normal times', we must go back to the years when Edmonton used to be associated more with 'block heaters' and 'rednecks' than prosperity and oil sands. 2002 is a good year for making that comparison. Economy had started getting out of the gutter of late 1990s bust and things were beginning to sell. Builders were selling fairly priced homes that were affordable and had good quality. A friend of mine bought a similar home (to the ones shown above) in 2001 for around $165k in south Edmonton. You could buy similar homes in the $160-$190k price range until 2004. And then the caravan trips began.
  • Buy versus rent metric. Don't use the calculators provided by the realtor organizations. The best ones I've seen is from NYT and using the calculator.
You can guess that the time for me to buy is quite a bit away. I won't rush into buying inasmuch as even if prices don't fall beyond a certain point, they are likely to languish there for a while.
For most people a house purchase will be the biggest purchase they make in their lives. Most people unfortunately, spend too little time on this. They won't haggle, negotiate or simply walk away from the purchase. And the consequences of such nonchalance are seen in years and decades ahead.

Your thoughts?
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