2012 vs 1984: Young adults really do have it harder today

[GP_Matt]

Originally Posted by hmmhmmcamo

lol what? that's a pretty convenient thing to ignore.

I thought it was. Interest rates are low now, but my statement was more general. If you bought your house 5 years ago the interest rate was +2% higher so you would have 5 years high and then 5 years low and maybe the next 5 are high again but in the end your payments stay relatively stable. Assuming that the interest rate doesn't climb steadily for 20 years, the more likely scenario is that it fluctuates instead while rent is linked to inflation which has a much clearer history of slowly increasing year over year since the invention of currency.

[calgaryrocks]

yea, the principal would stay the same, while the rent would increase with inflation (and fluctuate with demand also possibly)

[Cowboy89]

Originally Posted by GP_Matt

Something else to consider is that the rent will likely increase yearly for the next 20 years while your mortgage payments will not go up (ignoring interest variance). The $1600 in rent will most likely increase to $3000-$4000 in the final year.

Presumably if you've done the rent vs. own thing properly the accumulated investments you have instead of paying mortgage principal will spin out a return that should at least matches inflation while your home equity pays you nothing.

[blankall]

Originally Posted by Cowboy89

Why not rent indefinately until prices reflect owning as a cheaper option?
Right now that's actually a better financial option in most Canadian markets. The rental costs vs. owning costs have rarely been this cheap in Canadian history. The hypothetical young adult in question here might actually get more utility now a days out of paying half as much to live in the same style of property while not being tied down by a mortgage. They might actually have room in the budget to save money for their RRSP and TFSA. Seems to be that the more 'common' the sense of building equity through home ownership became the less 'sense' it made.

I live in Vancouver, the most overpriced market, and it still makes more sense economically to own. I bought my first condo about a year ago. I pay 950/month in morgtage plus 250/month maintenance. The condo rents for $1,300-$1,500/month.

In 35 years (assuming I don't accelerate), I will own the condo outright. Plust it is likely to go up in value, or at the very least move with inflation.

If you can get the downpayment togethre and know you are going to live in a place for a long time, it always makes sense to buy.

Edit: Should add, as interest rates are low, about $450 a month is going into principle.

[bizaro86]

Originally Posted by Cowboy89

Presumably if you've done the rent vs. own thing properly the accumulated investments you have instead of paying mortgage principal will spin out a return that should at least matches inflation while your home equity pays you nothing.

At the end of the period the investments will pay out some sort of interest/dividend/return. The home equity in a paid off house pays out in decreased living costs.

In round numbers, my house costs me $2500/month including mortgage P&I, taxes, insurance, etc. I could probably rent a similar house for $1800 per month.

But at the end of my mortgage, the home equity will allow me to live in that house for ~500/month of taxes/insurance/maintenance (current dollars). At the same time, the rental value is likely to have increased or stayed the same (current dollars)

I'll be collectinng a "housing dividend" from the paid off house.

It's quite a complicated mathematical model to determine which would be financially better, and there are a lot of assumptions that go into it.

[Lt.Spears]

Originally Posted by Cowboy89

Do the math, you're really just selecting which method to pay interest to the banks. Either directly through home ownership or indirectly through a landlord intermediary. Buying with a huge mortgage is really just renting money.

except the person at the end of 25 years of mortgage payments actually owns something...

[MarchHare]

Originally Posted by Lt.Spears

except the person at the end of 25 years of mortgage payments actually owns something...

So does the person who invests the delta between rent versus mortgage/maintenance/tax.

I own my home, but it's not as simple as you think to say that buying a property is always a better financial decision than renting.

[GP_Matt]

Originally Posted by Cowboy89

Presumably if you've done the rent vs. own thing properly the accumulated investments you have instead of paying mortgage principal will spin out a return that should at least matches inflation while your home equity pays you nothing.

I have done the calculations from the position of being a landlord and decided that owning was better than renting in the long run. But I am still a few years worth of rent increases away from being cash flow positive. If you add in the portion of rent that goes to the property manager then a house that I have owned for 5 years is now cash flow positive. Meaning in this situation a renter who started renting a similar unit 5 years ago would have been ahead for the first 5 years from a cash flow perspective and it will likely take another 5 years for the overall cash flow to balance out and turn negative. In that 10 years though I will have reduced my mortgage by 35% or so and the value of the house should have kept up with inflation.
By my napkin calculations that puts my 10 year gains on the $250000 property at $140000 less the money that I will pay to the property manager of about $20000.

[blankall]

Originally Posted by MarchHare

So does the person who invests the delta between rent versus mortgage/maintenance/tax.

I own my home, but it's not as simple as you think to say that buying a property is always a better financial decision than renting.

The only time you come out behind is in a situation where your house is falling in value or not gaining value over 30 years. Don't buy a house in St. Louis circa 1970. Most other places, you're pretty good.

[Lt.Spears]

Originally Posted by MarchHare

So does the person who invests the delta between rent versus mortgage/maintenance/tax.

I own my home, but it's not as simple as you think to say that buying a property is always a better financial decision than renting.

Let's be honest, what person does that? Most of the time that extra money goes to a car payment or some other form of luxury

[Cowboy89]

Originally Posted by bizaro86

It's quite a complicated mathematical model to determine which would be financially better, and there are a lot of assumptions that go into it.

Indeed. The key assumptions being, return on investments, rent escalation, and house price appreciation. The people who say 'always' own will discount what their investment returns will be and make the assumption that their house will appreciate higher than inflation for the duration of their mortgage (On a macro level that really can't persist for 30-40 years). You also have to consider the risk management of having all your net worth tied into one piece of property as well vs a diversified liquid portfolio.

[Cowboy89]

Originally Posted by Lt.Spears

Let's be honest, what person does that? Most of the time that extra money goes to a car payment or some other form of luxury

If you're using Real Estate as forced savings then we're not really making an economic arguement but rather a behavioral arguement. There isn't a good arguement against buying a home for the person who will always pay their bills ontime but cannot for the life of them avoid blowing any extra cash that comes into their bank account.

[Cecil Terwilliger]

Well the 1984 people have it worse because of the totalitarian government, Big Brother, perpetual war with Eastasia and Eurasia, punishment and imprisonment for thoughtcrimes.

All us 2012 people have is the end of the world. You might think the end of the world is worse but I'd prefer straight up dying to living in constant fear.

[wookster]

Originally Posted by Cowboy89

Do the math, you're really just selecting which method to pay interest to the banks. Either directly through home ownership or indirectly through a landlord intermediary. Buying with a huge mortgage is really just renting money.

Maybe I'm reading this incorrectly but I really don't know how this can be considered remotely the same. While both basically provide a roof over your head, and yes, both with pay interest to the banks, but after 10 years or so you when you own your home you have an asset that is worth something as opposed to renting where you have nothing of worth to show for it.

Sure housing prices can go down, and the house may not be worth as much as you bought it for but in the end its still worth something and that something is more than you will have at the end with renting.

But again, I may have read this incorrectly and missed your point entirely...

[Cowboy89]

Originally Posted by wookster

Maybe I'm reading this incorrectly but I really don't know how this can be considered remotely the same. While both basically provide a roof over your head, and yes, both with pay interest to the banks, but after 10 years or so you when you own your home you have an asset that is worth something as opposed to renting where you have nothing of worth to show for it.

Sure housing prices can go down, and the house may not be worth as much as you bought it for but in the end its still worth something and that something is more than you will have at the end with renting.

But again, I may have read this incorrectly and missed your point entirely...

Presumably there's a difference between the cost to rent a place and a cost to own it. If you choose to rent purposely it would be with the intent to save and invest the difference between the two. So you would end up with investments instead of home equity.

[V]

I'm very disappointed that this discussion veered away from ol' Gramps ranting about how easy kids have it these days, and denegrated into a discussion of rent vs. own. I blame CC and pylon for their lack of involvement in this thread.

[Lt.Spears]

Originally Posted by Cowboy89

If you're using Real Estate as forced savings then we're not really making an economic arguement but rather a behavioral arguement. There isn't a good arguement against buying a home for the person who will always pay their bills ontime but cannot for the life of them avoid blowing any extra cash that comes into their bank account.

I would call it human nature, not anything else. I bet 90% off people would spend the extra money. Yea some might use it as investment money but the reality is that most people wont and that's why owning is better. You can live more comfortably with more goodies while renting, but financially it's smarter to buy.

[Phanuthier]

Originally Posted by Lt.Spears

I would call it human nature, not anything else. I bet 90% off people would spend the extra money. Yea some might use it as investment money but the reality is that most people wont and that's why owning is better. You can live more comfortably with more goodies while renting, but financially it's smarter to buy.

And to go full circle, that is why young adults have it harder today.... don't know how to save extra money.

[afc wimbledon]

Originally Posted by V

I'm very disappointed that this discussion veered away from ol' Gramps ranting about how easy kids have it these days, and denegrated into a discussion of rent vs. own. I blame CC and pylon for their lack of involvement in this thread.

why I oughta!

[Hack&Lube]

Originally Posted by MarchHare

I think you're vastly over-estimating the number of people who make that much money right out of college. The average gross income for the entire country (which includes people in the prime of their careers after 20+ years in the workforce) is only $45k.

According to this site the average salary for someone with a Bachelor's Degree (not just recent graduates but all employees, including those with many years experience) is $69.9k.

For high-demand technology jobs, average starting salaries are between $40-50k according to this site.

For engineers, starting salaries range from about $45k to $60k (source).

I just started a co-op in old & gas company a lot of the other students only expect low to mid 50K when they start out. Don't know where this 80K number for 22 year olds is coming from. Maybe 28-35 year olds in this city is more realistic average for 80K range.