Author Topic: Can I afford a 500K house?  (Read 17217 times)

1984

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Can I afford a 500K house?
« on: September 25, 2012, 08:21:22 PM »
We are in Canada where the housing market is globally insane. It might go down, stay flat or go up. It is really anyone's guess... At this point the question is not does it make sense to buy a house (I know that it doesn't), but plainly can I afford one.

A nice house in a central neighbourhood goes for about 500K. Nothing fancy, just something nice that we would like. How much money should one make to afford such a house? Assuming a 20% downpayment and recuring cost on the house: taxes (sky high this is Canada!), heating and insurrance of about 8000$ a year. We have no debt and have otherwise a fairly frugal lifestyle.


arebelspy

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Re: Can I afford a 500K house?
« Reply #1 on: September 25, 2012, 08:40:02 PM »
the question is not does it make sense to buy a house (I know that it doesn't)

Then why the hell are you?

Look at price to rent ratios.  If it's much cheaper to rent than buy (counting ALL factors - that you will eventually own the property by buying, but will end up with nothing by renting, that by renting you do not pay property tax, etc. etc.), then rent.

Bank the difference, invest it, and over time it will grow very large.  You can buy at that point, or when prices become more reasonable.

That seems like a market worth timing, as it's easier to do (longer trends) and profitable to do so, and you have another option (renting).  If renting will make you FI sooner, rent, and buy when advantageous to do so.

Speaking as someone who is a big fan of real estate and largely negative on renting.. There are just times when renting makes sense.
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Jimbo

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Re: Can I afford a 500K house?
« Reply #2 on: September 25, 2012, 09:04:43 PM »
Please don't buy in Canada right now! Go to greaterfool.ca whenever the urge is too strong.

But definitely rent right now...

And this is coming from an owner (albeit not of a 500k$ house)...

gooki

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Re: Can I afford a 500K house?
« Reply #3 on: September 25, 2012, 09:10:58 PM »
We are in Canada where the housing market is globally insane. It might go down, stay flat or go up. It is really anyone's guess... At this point the question is not does it make sense to buy a house (I know that it doesn't), but plainly can I afford one.

A nice house in a central neighbourhood goes for about 500K. Nothing fancy, just something nice that we would like. How much money should one make to afford such a house? Assuming a 20% downpayment and recuring cost on the house: taxes (sky high this is Canada!), heating and insurrance of about 8000$ a year. We have no debt and have otherwise a fairly frugal lifestyle.

I wouldn't do it, if all I had was 20% down. I'm looking at moving to a similarly priced home, but I'll be going in with 70 to 85% down.

What are your current rent costs?

As for what can you afford... I work on the philosophy that housing costs should be no more than 50% or one persons income. This will allow you to keep out of the shit should one of you become unemployed.

So based on this philosophy and an expected interest rate of 4.5% you should have a combined after tax income of at least $138,700. And realistically, the lowest wage earner should be $69,350 after tax or higher or more.
« Last Edit: September 25, 2012, 09:28:15 PM by gooki »

gooki

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Re: Can I afford a 500K house?
« Reply #4 on: September 25, 2012, 09:23:46 PM »
We are unfortunately rather old to wait a few years. There are no house for rent in our area. I am kind of done (read sick and tired) with living in an appartment.

Current income 7K a month, current expenses 3k (including 1350 rent). Income expected to increase steadily in the next few years but not by much. A central house will allow us to live car-free.

Back to my question: Can I afford a 500K house?

No. Your rent is half the cost of owning a home assuming a 25 year mortgage.

You mentioned being rather old, so I'm going to shorten the mortgage term to 15 years, gives you a minimum monthly housing cost of $3,666 over 50% of your combined income.

Again I wouldn't do it, especially considering your rent costs are modest. Invest your after tax income elsewhere, or look for a more moderately priced home.
« Last Edit: September 25, 2012, 09:26:29 PM by gooki »

Jimbo

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Re: Can I afford a 500K house?
« Reply #5 on: September 25, 2012, 09:24:36 PM »
You can afford lots of things if you don't have other financial goals...

If you buy now, be prepared to lose some equity.

And the fact that people called a bubble 5 years ago does not make it less of a bubble now, au contraire!

Seriously though, the writing is on the wall now, sales are dropping, people/mainstream media are talking about it...

I wouldn't do it. No house is worth making 500k$ unproductive to me.

But that is not my call.

Good luck!

keith

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Re: Can I afford a 500K house?
« Reply #6 on: September 25, 2012, 09:36:42 PM »
Your posts in this thread make it sound like you have already made up your mind that you are going to do it anyway.

arebelspy

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Re: Can I afford a 500K house?
« Reply #7 on: September 25, 2012, 09:49:47 PM »
Your posts in this thread make it sound like you have already made up your mind that you are going to do it anyway.

Agreed.

The consensus seems to be that it's a bad idea, for a number of reasons. But if it's that important to you so that you're willing to make what seems like a mathematically bad decision and sacrifice a lot elsewhere...best of luck to you.  We all have our vices, that may just be a big one for you. To each his own.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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Jimbo

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Re: Can I afford a 500K house?
« Reply #8 on: September 26, 2012, 04:21:30 PM »
The sheer fact that you cannot afford an average house with a solid salary should indicate that these prices are overrated.

Worry not, there is no such thing as being 'priced out' forever. By definition, that is impossible.

Prices will come down to a more reasonable level in the next couple of years. No need to hurry.

My two cents.

arebelspy

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Re: Can I afford a 500K house?
« Reply #9 on: September 26, 2012, 05:56:02 PM »
Worry not, there is no such thing as being 'priced out' forever. By definition, that is impossible.

Prices will come down to a more reasonable level in the next couple of years. No need to hurry.

Exactly.  People in the US in 05 and 06 were worried about being priced out, so they bought.

Whoops.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Sparky

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Re: Can I afford a 500K house?
« Reply #10 on: September 27, 2012, 01:38:51 AM »
I ask this question all the time to my self and then proceed to punch myself in the face every time I realize how stupid and unaffordable the housing market has become in Canada.

I'm sorry, but when an 'average' house is starting to cost an person 6 to 10 times there average annual salary before tax per person, it's getting a little stupid. Or when you don't qualify for a normal, 10% down mortgage on an average salary to buy even a 2 bedroom 1 bath condo in the suburbs... Dumb.

500k average house are going to limited to baby boomers, MMM readers,  the wealthy elite and those who inherit a pile of money.

totoro

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Re: Can I afford a 500K house?
« Reply #11 on: September 27, 2012, 07:25:44 AM »
You probably can afford a house if you have 20% down and can make the payments with extra room to spare - the rules for qualifying for financing have been tightened and your bank/broker will tell you if you meet the criteria.  Is it a good investment right now?  Well, maybe, maybe not.

In order to consider whether it is a good investment, which is a different question, do a spreadsheet with all the costs set out for both renting and buying.  Google the web for spreadsheets and tools.  The NY times has one that accounts for principal paydown and lost opportunity costs on the money you put down which is not common in other tools but can make a big difference.  Compare the costs.  Then consider that we are likely in for a drop in prices.  How much, I don't know, but not likely to mirror the US given the overall restrictions placed on financing in Canada. 

Look at historic real estate cycles and consider whether you are going to hold for more than seven-ten years.  In my view, the market is most likely to be higher after this time period than now.  You will have to reach your own conclusion.  Consider the impact of leverage on this curve.  If you drop you lose big if you have to sell, if there is a rise you win big - all because the effects are played out on the borrowed capital as well as your principal.

Consider interest rates.  They are at historic lows right now.  This means it costs less to borrow.  If rates rise, prices my fall further, but your monthly payment will likely be the same.  Will interest rates rise short-term?  Likely not too much, but in a couple of years I'm not sure where we will be. 

Finally, consider your personal circumstances.  Is your job stable?  Do you mind being a renter?  Are you a homebody and have a deep-seated desire to own and personalize your home? 

After weighing all this, you may choose to do what I did.  Buy anyway but buy in a good location with a suite for rental income to ensure that you have a buffer and get a long-term mortgage and a tax deduction for the income for mortgage interest and expenses.  We have 10 years at 3.79.  Our housing costs in Victoria are very high, higher than where you are, but with rental income we are paying far less than it would cost to rent - a fraction in fact.  I am willing to ride out the cycles.  I love owning.  We DIY a lot and enjoy the benefits.

Also, your insurance costs are way out of wack. It is not $8000 a year to insure, but more like $800.  If you are going to ballpark the monthly costs of ownership other than mortgage I use the figure of $600/month (insurance, maintenance, property taxes).

I would avoid websites like greaterfool.ca - Garth has been predicting doom for many many years and is extreme.  I would also avoid the opinions of those in real estate who have a vested interest in a strong market.  Seek out experienced investors.



jp

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Re: Can I afford a 500K house?
« Reply #12 on: September 27, 2012, 07:59:37 AM »
$500k house on a combined income of $84k? 

No, you can't afford it.  I  don't even need to know any other information.   That's ridiculous, unless you have a couple mil sitting in the bank that you neglected to mention.

totoro

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Re: Can I afford a 500K house?
« Reply #13 on: September 27, 2012, 08:10:43 AM »
Hmmm.  Missed that income information.  You would likely not qualify for a $400 000 mortgage on that income - I get a $320 000 max  with 20% down.

arebelspy

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Re: Can I afford a 500K house?
« Reply #14 on: September 27, 2012, 08:29:58 AM »
I'm not sure where jp got that info.  OP posted asking how much income should one have to afford 500k.  Never posted their income.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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jp

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Re: Can I afford a 500K house?
« Reply #15 on: September 27, 2012, 08:49:43 AM »
I'm not sure where jp got that info.  OP posted asking how much income should one have to afford 500k.  Never posted their income.

I saw it right here, a response the OP apparently deleted (but not before someone else quoted it):


We are unfortunately rather old to wait a few years. There are no house for rent in our area. I am kind of done (read sick and tired) with living in an appartment.

Current income 7K a month, current expenses 3k (including 1350 rent). Income expected to increase steadily in the next few years but not by much. A central house will allow us to live car-free.

Back to my question: Can I afford a 500K house?

No. Your rent is half the cost of owning a home assuming a 25 year mortgage.

You mentioned being rather old, so I'm going to shorten the mortgage term to 15 years, gives you a minimum monthly housing cost of $3,666 over 50% of your combined income.

Again I wouldn't do it, especially considering your rent costs are modest. Invest your after tax income elsewhere, or look for a more moderately priced home.

As you can see, current income is $7k monthly... he doesn't state whether that is net or gross... but with with  $3000 of expenses now, probably going to be more like $5k with the new house... it really doesn't matter, they can't afford it (well they can probably "afford" it if they don't want to save, but since he is older, I assume that saving needs to be done). 
« Last Edit: September 27, 2012, 08:53:27 AM by jp »

arebelspy

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Re: Can I afford a 500K house?
« Reply #16 on: September 27, 2012, 10:43:45 AM »
Ah, good call.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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AJ

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Re: Can I afford a 500K house?
« Reply #17 on: September 27, 2012, 10:59:52 AM »
A nice house in a central neighbourhood goes for about 500K. Nothing fancy, just something nice that we would like. How much money should one make to afford such a house?

$166k-$250k per year gross (2-3 times one's combined annual income is the rule of thumb. 2x is what our grandparents used, 3x is more up to speed with the modern higher cost of housing).

twinge

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Re: Can I afford a 500K house?
« Reply #18 on: September 27, 2012, 11:09:56 AM »
Quote
$166k-$250k per year gross (2-3 times one's combined annual income is the rule of thumb. 2x is what our grandparents used, 3x is more up to speed with the modern higher cost of housing).

I've seen mixed on this approach--is it the cost of the house that should be 2 x 3 or the cost of the mortgage (i.e., loan minus downpayment)?

$_gone_amok

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Re: Can I afford a 500K house?
« Reply #19 on: September 27, 2012, 11:20:47 AM »
According to the bank's loan terms you should be able to afford a 500K house without any problem.

30 year monthly payment of a 320K loan at 4% rate is only $1527 dollars which is not much more than your rent.

This response is strictly an answer to "if you can afford it" question.  Since OP asked a simple question, you get a simple response :)




kdms

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Re: Can I afford a 500K house?
« Reply #20 on: September 27, 2012, 11:32:50 AM »
Quote
$166k-$250k per year gross (2-3 times one's combined annual income is the rule of thumb. 2x is what our grandparents used, 3x is more up to speed with the modern higher cost of housing).

I've seen mixed on this approach--is it the cost of the house that should be 2 x 3 or the cost of the mortgage (i.e., loan minus downpayment)?

I believe it's the total cost of the house...ie purchase price

Portland Man

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Re: Can I afford a 500K house?
« Reply #21 on: September 27, 2012, 11:33:55 AM »
Quote
$166k-$250k per year gross (2-3 times one's combined annual income is the rule of thumb. 2x is what our grandparents used, 3x is more up to speed with the modern higher cost of housing).

I've seen mixed on this approach--is it the cost of the house that should be 2 x 3 or the cost of the mortgage (i.e., loan minus downpayment)?

3x is also more in tune with current interest rates.  30 years ago interest rates were 3-4x what they are today, making the monthly cost of an equivalent loan more than double what it is today.

The payment for mortgage of 2x your income in 1981 @ 14% would take 28% of your gross pay.

The payment for a mortgage at 2x your income today (4%) accounts for only 11% of your gross pay.

jp

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Re: Can I afford a 500K house?
« Reply #22 on: September 27, 2012, 12:40:44 PM »
According to the bank's loan terms you should be able to afford a 500K house without any problem.

30 year monthly payment of a 320K loan at 4% rate is only $1527 dollars which is not much more than your rent.

This response is strictly an answer to "if you can afford it" question.  Since OP asked a simple question, you get a simple response :)

But the home is $500k, with 20% down... so the mortgage is $400k, not $320k. 

at 4%, that is $1900 per month-- without taxes and insurance.  Total cost is about $2400 per month just to have the home.  Then you have additional square footage to heat and cool, and a yard to mow... it is probably twice the cost of his current housing expense.  Just sayin.

totoro

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Re: Can I afford a 500K house?
« Reply #23 on: September 27, 2012, 12:43:33 PM »
The OP is in Canada where I am.  Assuming no other debt he is going to qualify for approx $320 000 mortgage with most lenders.  Max house price of $420,000 not including closing costs.

It Figures

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Re: Can I afford a 500K house?
« Reply #24 on: September 27, 2012, 01:23:28 PM »
I'm in Canada too.  Read this: http://www.greaterfool.ca/2012/09/24/pooched/  and you'll stop thinking about buying ANYTHING right now.

totoro

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Re: Can I afford a 500K house?
« Reply #25 on: September 27, 2012, 06:11:28 PM »
Yes, if you read my post above you will see I recommend against reading Garth Turner's website.  He has been predicting catastrophe for five years now.  His advice is, imo, extremely suspect.  Cherry-picking stats (ie. sales in TO down 70% while failing to report prices were up in August) and calling the end of the world annoys me.  While real estate may be in for a downturn, I do not believe we will follow the US trajectory down.  If you call a fall for long enough you hit the end of the real estate cycle.  His blog is geared at selling his books and finding evidence of a crash which then sells more books.

Here are is a counterbalancing view:

http://www.canadiancapitalist.com/garth-turners-dodgy-advice/

Jimbo

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Re: Can I afford a 500K house?
« Reply #26 on: September 27, 2012, 07:01:55 PM »
Yes, I suppose what happened in the States WAS extreme. But why would it not happen in Canada? We are immune?

Garth Turner, if one thing, does not call for the end of the world. In fact, he spends half of his time telling doomers that the capitalism system will not fall. He just says you shouldn't have all your net worth in a house. That doesn't mean don't own.

Anyway, let's see if in 2016 (10 years after the US bubble) prices are higher than peak. I have serious doubts.

Let's agree to disagree, clearly you will not believe me, but I can't see why Canada would not crash while the whole earth did...


totoro

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Re: Can I afford a 500K house?
« Reply #27 on: September 27, 2012, 07:32:52 PM »
End of the world was a hyperbole for a drastic crash in RE. 

As for whether this will happen in Canada, it is not a matter of immunity.  While open to debate, my own personal views on this are that we are overvalued but this overvaluation has been built on low interest rates combined with a little looser credit combined with consumer confidence.  We have and have had much stricter lending criteria.  Borrowed funds just are  not as easy to come by as in the US and it costs more to borrow.   Our economy has not suffered the downturn that has been experienced in the US.  Worldwide, some markets have crashed, but some are booming:  http://www.globalpropertyguide.com/

Affordability is one way to look at it and probably more accurate than house prices, unless you are buy with cash.  If you are buying with cash, wait for the market to drop.  If you are buying with leveraged dollars then you will have to consider the impact of interest rates. Right now, affordability is a little elevated and house prices have risen a lot, but a rise in interest rates could trigger bigger drops because affordability is impacted.  Here is a website that you can look at and read back through if you are interested in these matters: househuntvictoria.ca 


keith

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Re: Can I afford a 500K house?
« Reply #28 on: September 27, 2012, 09:36:22 PM »
Hmmm interesting. OP deleted his reply posts and stopped responding.

I am honestly curious to see what he has to say after all these responses, but I think he is done with us.

arebelspy

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Re: Can I afford a 500K house?
« Reply #29 on: September 27, 2012, 09:52:24 PM »
Hmmm interesting. OP deleted his reply posts and stopped responding.

I am honestly curious to see what he has to say after all these responses, but I think he is done with us.

Seems like we didn't say what he wanted to hear, so he decided to take his ball and go home.

Oh well.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.