Last call?

“We bought a house in Oakville in 2013 for 506K,” Brian writes me.  “We could sell that property now for 950K.  I’ve done nothing to warrant that gain, just painted and a few minor upgrades.”

Sweet. Windfall profit. So, whaddya going to do about it?

“I’ve debated the idea of cashing out now and just buying a nice townhouse in the area for 500K.  I’d be liquid then with a paid off home (overvalued at 500K but whatever).  we are 36 with 2 young kids in school.  They would be in the same schools with the move just with a smaller backyard, they can go to their friends houses for a swim if they want.

“We’d be freeing up 2k a month in mortgage fees, half of that could go to investments, the other half could go to lifestyle/travel. We already have pensions and savings plans for kids school. Any thoughts would be great.”

So I replied:

At what other point in your life could you make $450,000 in four years, tax-free, while reducing your debt and increasing your cash flow and future financial security?

What’s to debate? — Garth

And Brian replied:

“My thoughts exactly, why does everyone tell me it’s madness then?  The fear of missing out on future growth?”

Now, I’ve no idea who this guy is, other than he reads the blog and is therefore (naturally) a superior being. High IQ. Likely brawny with rakish whiskers, confident dog, planning to rescue wildlife this summer holiday, work on his doctorate, then buy a Harley. Typical. Or, maybe he’s the normal Globe or HuffPost reader, incapable of acting on rational thoughts because he’s under the emotional thumb of his dominant MIL and nest-happy spouse. Because, you know, real estate always goes up.

Thus there are two kinds of people when it comes to this all-consuming topic. One group believes house price growth is infinite and only idiots would leave the table. The other (much smaller) group are astonished at the bubble, understand it’s irrational, assume reality will return, think Mom is a loon, and know they’re staring a gifty nag in the snout. Brian, for example, realizes his house made more money than he did every one of the past four years, and tax-free. He also understands what goes up can come down as easily. Especially in a world of rising rates, Trumponomics, a 74-cent dollar, pervasive house porn, epic debt and rampant financial illiteracy.

Speaking of property lust, Jamie’s just sold a business in the wild fringe burbs of the GTA, now wants to downsize and move to Hicksville. The boring house he and Dawn own cost them $650,000 in 2007. “I told the realtor I want two million for it,” he told me on Friday, as they prepared to list it Monday. But that day at noon, a bully offer – $2.3 million, after the agent yakked about the property in his office. Will he take it? No showings. No stress. No vacuuming.

Nope. “I’m not leaving any money on the table.”

Well, this will be interesting. Ontario’s government revealed Monday it’s on the verge of bringing in one or more measures intended to douse the market’s flames next month, making legends out of guys like Brian and Jamie. The premier calls it a “comprehensive set of plans” to deal with out-of-control house prices in the vast GTA area, which has now infected locals all the way from Prince Edward County to Georgian Bay to the shores of Lake Erie.

Among the possible moves: (a) a foreign buyer’s tax, like in YVR, although local realtors say offshore buyers are just 5% of the market; (b) a special speculation tax levied on people who buy non-principal-residence properties; or (c) the ask Ontario made to T2 before the last federal budget, to increase the capital gains tax on secondary properties in order to nail flippers. We won’t know if one (or all) of these emerge in some form until the Ontario budget, now expected in a few weeks.

If Vancouver is any guide – where a narrow tax on foreign buyers ended up collapsing sales within just a few weeks in an unbalanced, frenzied market – the Big Smoke could be in for a jolt. It might be the Ontario budget, or higher mortgage rates later in 2017, or the simple fact listings are disappearing because nobody can afford to move, but rest assured some catalyst will occur.

The house pumpers will then sit around on this pathetic blog, stare into the campfire and say, ‘why didn’t we see that coming?’

The plot

Welcome to the Greater Fool, saving one young butt after another, while reminding everyone else that the fool who comes after is the greater fool. Like Aaron. “Started reading your blog a month ago and I’m a big fan,” he says, little suspecting what happens when you write me for advice.

“I’m a 26 year old in Toronto who makes about 30K a year. I moved back home 18 months ago to save overhead, and now I have about 50K in savings. My parents however just sold their home and are moving into a 2 bedroom Condo, with a nice chunk of change left over they’ve offered to help me with.

“I’m not an investor, I’m not following the trend, I don’t have FOMO, I just need a place to live. I had hoped to put a down payment on a place, which my Dad will give a hand with co-signing mortgage and rounding out my down payment. The alternative is to rent, but the place I moved out of 18 month ago paying $900 is now $1800. And basically the city’s rent is even higher than buying. Everyone in real estate says get in now, prices are gonna get up to NY levels, but I take your points arguing against this and yes they are biased.

“So, in my situation, given everything you say re: not buying now/just chill, should I really feel too bad about getting into market on a 1 bedroom unit between 400-425K as opposed to throwing away half my savings on a 1 year lease at almost 2k a month on same sized unit? My logic was even a 5% loss/correction is equal to what I throw away on rent instead of building equity, no?”

No, Aaron. Let’s examine why.

First, I hope it’s not lost on you that your parents sold the family real estate, pocketed big bucks, downsized and left you homeless. So if they’re smart enough to cash out of property in these insane times, why are you hot to jump in? There’s no economic argument right now to justify buying a place in Toronto, especially a condo when tens of thousands are under construction. And, no, Toronto is not New York – which is the financial capital of the world. GTA has Drake, and the Leafs.

So with a one-bedroom apartment renting for $1,800 (you can find tons for less) is it really cheaper to buy for $425,000? Would you be further ahead even if prices corrected a little? Let’s see.

Buying that place with a 10% down payment requires $42,500 in cash, leaving a $383,500 mortgage and a $11,900 CMHC insurance premium (typically added to the borrowed amount). So, $395,000 from the bank. At the current three-year rate (2.59%), that costs $1,790 a month. Wohoo! Cheaper than rent!

But wait. There are condo fees, which would be about $400 a month on this unit, plus property tax of about $250. That comes to $2,440 – and you really should factor in the cost of the deposit, because if the $42,500 were invested for a 6.5% return it would yield $250. The true cost of ownership, then, is $2,690 every few weeks. It’s a $990-per-month premium over the average Kijiji Toronto one-bedder rent, at $1,700.

Over three years, Aaron, you’d pay an extra $35,640 to be an owner rather than a renter. Sucks.

But, I hear the realtors, specuvestors, amateur realtors and Brad Lamb cry, owners pay down principal with each monthly cheque. So even if you have to spend almost a grand extra a month to live, you’re building equity!

This is true. Over three years the loan is reduced by $35,100 – down to $387,300 – or almost exactly the extra amount sucked up away by ownership costs. So, where does this leave us?

The argument that owning is cheaper than renting in Toronto (or almost anywhere else) is false. There’s more money ‘thrown away’ by purchasing than renting – evident once the math’s correctly done and the hormones are washed away. But what happens to little Aaron, whose parents obviously don’t like him, if condo prices rise or fall?

Hmm. Well, if the unit is miraculously worth 10% more at the end of his three-year mortgage commitment, that would net him $467,500. From that he needs to pay the outstanding loan ($387,500), plus realtor sales commission ($23,375). And he must deduct his downpayment from the proceeds ($42,500) because that’s just getting his old money back. Then there’s the legal costs involved in buying and selling ($3,000 or more). And HST on the commission ($3,050). So the final profit is: $8,075 – the ultimate payback for spending almost $1,000 a month more than he needed to in order to occupy the same space.

But what if prices decline 10% (a likely scenario over the next three years for overbuilt condos). Now the sale price would be $382,500, less than the $387,500 owed to the bank. Aaron would have to pay $19,125 in commission and $2,500 in HST, and deduct his down payment of $42,500, resulting in a financial loss of $69,125. And just imagine what a 12%, 15% or 20% correction would mean.

As a renter Aaron has no market risk. The landlord carries that. He has no risk that interest rates will be substantially higher when he has to renew. He hasn’t taken the risk of concentrating all of his net worth in a single asset. If some numbnuts moves in next door, or above, Aaron can give his notice and move. If he lands a better job in Vancouver or Atlanta, he can go. And he has no financial obligation to his parents, who threw him under the bus anyway.

In short, why would a 26-year-old ever want a deed, a mortgage, a property tax bill or a chain? What am I missing? Besides, making $30,000 he doesn’t even qualify to borrow almost four hundred grand – too much risk. Unless Daddy cuts a cheque.

See, Aaron, it’s a plot. Run.