Below is an analysis on Richmond housing market and an attempt to establish the value of a home in relation to it's economic return as an investment.
What's the real value of a Richmond home?
The real value of a home is when the rental income can cover the cost of mortgage payment, property tax, maintenance, etc. When a market analysis (using 5% interest rate and 35-year amortization) is done comparing home values and their returns on investment, home prices in Richmond are found to be unrealistically high as shown below:
| Home value | Market rent/mth | Cost of investment* | Return per month |
Break even value @ 5% |
Break even value @ 2.25% |
| $250,000 | $1,200 | $1,523 | -$323 | $185,000 | $270,000 |
| $400,000 | $1,600 | $2,356 | -$756 | $250,000 | $363,000 |
| $630,000 | $2,000 | $3,469 | -$1,469 | $360,000 | $521,000 |
*computed at 5% p.a interest rate and 35-yr amortization, plus property tax, maintenance, etc.
Cheaper to rent than to own
The above analysis shows that it is cheaper to rent than to own except at the lower price range around $250,000 and when the interest rate is at 2.25%. As shown above, at historical interest rates around 5%, it is cheaper to rent than to own.
Generally, renters may quit renting and decide to own their homes when the cost of ownership is not more than 30% above their rental payments. As shown above, renters may opt to continue renting, until home prices decline significantly.
Break-even return on investment
Home prices in Richmond (and metro Vancouver) are much too high and cannot be justified as shown on the break-even analysis above. The lofty home values can be attributed to buyers who are willing to accept low or negative returns, while making gains on capital appreciation. Home prices at current level in Greater Vancouver is not sustainable. As can be seen from the illustration above, rental returns are not able to sustain current home prices.
You can view the metro Vancouver housing price chart here. The correction in 1994 took 4 years to bottom out in 1998 and another 5 years to recover to the 1994 level .
Market confidence & low interest rates
The critical factors affecting home prices today are buyer confidence, low interest rates and low supply of homes. The market dynamics can shift over-night with a change in market sentiment if interest rates rise significantly. Current low interest rate environment is not expected to last long. Eventually, higher interest rates will result in the housing market making a correction. A balance market will come about when the rental return from the investment is more in-line with other investments.
When renting is an option, home buyers may want to wait and see how the economy and interest rates play out in the near future.
Click the link to view Vancouver and Richmond homes currently listed for sale.
