Is Real Estate in Victoria Good Value?

I love Victoria. Not to say that it is perfect (there is plenty of room for improvement), but I love it. I love it because this is where my husband and I have decided to call home. This is where our family is, and where our future is.

But does that make buying a piece of Victoria right now a good decision?
Or am I better off renting a piece of Victoria for the time being?

After all, my husband and I both have good jobs, and we command a better than average household salary. We will also be debt free in the near future and should be able to come up with a modest down payment. So why, if we can buy, should we continue to rent?

One way to answer this question is to examine the fundamental value of real estate in Victoria. So what is fundamental value? Fundamental value, is the sum of the future payoffs, discounted to the present. In the case of real estate it is the amount that is equal to the sum of the future rents we would have had to have paid to live in the same place, discounted to the present value. If buying a house in Victoria is a good fundamental value, then we can buy for less than the sum of the future rents we would have had to have paid to live in the same place, discounted to the present value. If house prices are presently more than this amount, then buying real estate in Victoria, right now would be a poor choice, as we could live in the same place for less by renting. If house prices are equal to the fundamental value, then it’s a toss-up between renting and buying.

I will assume the following:
Rent is for a 4 bedroom 2 bath home in Fairfield located on Dallas Road.
Buying is also for a 4 bedroom 2 bath home in Fairfield located on Dallas Road.
The time horizon is 30 years.
Rents increase at a rate of 4% per year.
The discount rate is 3%.

As I presently rent a 4 bed, 2 bath home on Dallas Road, I will use my present rent of $2200 per month.

I will also use the 2008 BC Assessment assessed value of my rental home of $990,000.

Would buying the home I am currently renting at $990,000 represent good fundamental value right now?

And the answer is….
NO, not even close. Right now the fundamental value of the home based on the above assumptions is $896,337.93. The 2009 assessed value is $93,662.07 above what would represent the fundamental value. And arguably the present value of all of the future taxes and maintenance should also be added to the assessed value, as when you buy a house, you also buy the privilege of these additional responsibilities, however, given that I did not include the value of future property appreciation, this is probably a wash. For my present home to be a good fundamental value to purchase (cash, outright), my rent would have to presently be $3285.66.

Looks like I’m better off cooling my heels for the time being…at least by this metric under these assumptions.