Entries from July 2011 ↓

Andrev is a Russian guy. Came here with his wife and two kids a few years ago. An engineer, he landed a great job and soon started saving for his family’s future. He knew he had to invest and ended up putting all their money in second mortgages promising 9%. Six months later the broker was gone, and so was the money.

“Why?” I asked, “did you do that? It was a crazy dumb investment with no security.”

Because, Andrev said, the mortgage guy was Russian. Like me.

But this piece is not about second mortgages, finding an investment opportunity or even Russian dudes. It’s about trust. And women.

Yesterday Money Magazine published an article on whether it’s better to rent or buy a home. This is a hot topic, with rate increases coming later this year, prices at a screaming pitch, and a swelling number of economists finally agreeing with me. You can get the tone of this particular piece from the lead: “Owning the roof over your head should still be a goal for most Canadians as paying rent is like paying someone else’s mortgage, experts say.”

Well, that got my attention.

In fact, here is the entire argument for renting-sucks, buying-good, using a $300,000 house as an example:

With interest rates currently so low, on the purchase of an average $300,000 property, mortgage payments are unlikely to be that much higher than rental payments. A fixed-rate mortgage of 5% and an amortization period of 30 years would put monthly mortgage payments at $1,521.02.

Adding in property taxes monthly payments are likely to be about $1,771.02, according to figures supplied by BMO. If a monthly rental of $1,200 increases by about 5% a year, after eight years your mortgage payments will be less than your rent, BMO says.

That’s it, property virgins, all the facts you need from a leading financial magazine (and bank) to make that secret, sweaty house porn addiction legit. No longer do you need to ogle those intimate red spots on the mls.ca site under the sheets with a flashlight. Get over the shame. Go and have closing climax.

Ooops. Maybe not. I ran some numbers.

So a $300,000 house with 5% down (like Money Magazine says), and a five-year mortgage at 5% spread over thirty years does indeed cost $1,520 a month. Of course, after 60 months, you’ll have paid $54,590 in interest, and reduced the $285,000 mortgage by just $18K.

But what the hell, we’re building equity!

Or not.

Over five years also count $15,000 in property tax (we’ll exclude utilities and maintenance), plus on buying there was $6,000 in closing costs (mostly land transfer tax), a charge of $7,900 for CHMC insurance and, of course, the $15,000 downpayment. If the down had been invested for five years at 7%, it would be $21,038. So the true cost of owning is $104,528, or about $1,742 a month.

Hmmm. More than rent.

But what about those evil landlords (like BMO says) jacking rents by 5% a year? Well, not where I live. In Ontario tenant-friendly rent control legislation pegs the allowable increase for 2011 at merely 0.7%. That is 2.3% below the current inflation rate, which basically means rents are decreasing, not humping.

So over five years rent (assuming this kind of change) would total $82,810. Once again that’s way less than owning – more than $21,000 less. If that extra were invested at 7% over five years, it would be $30,400. Also more than the homeowner’s equity.

So what happens after five years when the deflowered virgin learns this and sells? Then (assuming the house retained its value), she’d get $18,300 after paying commission and retiring the mortgage. Of course $15,000 is just the down payment being returned. So I guess this person has spent about $17,000 more that the renter to live in the same house.

And what might happen if real estate values fall? Right. Glub, glub. Selling would be impossible without actually finding new money to buy your way out. Rent wins.

OK, so how does this magazine declare: “Owning the roof over your head should still be a goal for most Canadians as paying rent is like paying someone else’s mortgage, experts say”?

Because the expert is Judith Cane, president of Antara Financial Group, in Ottawa. Says she: “I am of the mind that it’s always good to buy… it’s better, especially if you are younger to put your money into buying rather than renting.”

Now this is the part of this blog about trust. According to Cane, her financial advisory practice, “specializes in serving the financial needs of women. And their needs are different.”

If that means people need to be given incomplete information, guided into bad decisions and fed grossly inappropriate advice just because they’re women, then I guess they are special. But, of course, this is untrue. Women have an equal right to ethical treatment and full disclosure.

Hell. I hear some of them are actually as smart as guys.

But don’t tell Judith.

Days ago this blog mauled me for suggesting the US will not default on its debts, Europe will survive and returns from the stock market will track corporate earnings skyward. Since then (we’re on Internet time, after all), the debt ceiling crisis in Washington is all but over, the EU will save Greece’s ass once again, we have evidence our interest rates will rise, and markets celebrated fat profits by behemoths like IBM and Apple.

A few days mean little in the scope of things, but if I were sober, drug-free and celibate (one out of three is a passing grade), here’s what I’d be doing:

Selling my house if (a) it constitutes the bulk of my net worth (b) I have no equity (c) I’m retiring soon with a crappy income or (d) I’ve made stupid money just by living in it. After a decade of over-performing, real estate is about to become one of the worst possible assets to own for long-term appreciation. Houses will once again become possessions, instead of investments. If you have a real estate capital gain and don’t crystallize it now, you could successfully impersonate a bag of hammers.

Second action: I’d exit precious metals. Anyone caught long in gold and silver in the months to come will get a real good lesson in the dangers of avarice. Have you made money in the past three years? Absolutely. So harvest that gain. Once it’s clear even to the sackcloth set that America will never default, never devalue, that minor European countries can keel over largely unnoticed and the global economy is actually expanding, PMs go back to being interesting rocks that impress dentists and werewolfs.

Thirdly: I’d worship liquidity and load up on quality financial assets. You know – the ones I keep ragging you about. Sector and index ETFs in Canada, the US and the emergers, as well as small caps; preferreds in banks and insurers along with commercial REITs for income; government, corporate, real return and high yield bonds for income and cap gains. All nicely balanced so the growth assets and fixed income hedge each other, evening out volatility and giving you far more predictable returns. Shelter interest in an RSP or TFSA, and avoid high taxes through capital gains and dividend income. And never, ever, ever be more than 72 hours from cash.

Of course the world will continue to teeter and terrify – but the days of God-gold-&-houses are coming to an end. Most people won’t notice until the moment to act is a speck in the rear view mirror. The forces of mammon are on the move.

Let me give you three small examples.

First, evidence a real estate ennui is gripping even house-horny BC. Vancouver’s Royal Columbian Hospital has just lost $3 million on a giant vacation home lottery intended to raise bushels of money for a big reno. Now the hospital will have to divert badly-needed operating revenues just to clean up the lotto mess.

Figuring 120,000 people would spend $100 on a ticket with a good chance to win a luxury vacation home in Kelowna, Whistler or Vancouver Island, hospital officials were shocked when two-thirds were unsold. Said they: “We are certainly not going to move forward with something that the public doesn’t really want to support.”

And here’s an answer to the question of whether owning a house for 20 years is a better investment than owning, say, stocks.

This para from the Wall Street Journal, penned by a business professor, which should put Mikey the Re/Max nimrod into an oxygen tent:

“If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850.”

Finally, the ultimate evidence – a veritable, marital, pièce de résistance – that real girls are turned on by liquidity. (I knew that.)

Andre’s getting married to Liz. This was his note to me last night:

There comes a time in a man’s life when he must settle down, get married, start a family. And when this man has beendiligent about earning, saving, investing . . . how does the saying go? The best laid plans of mice and men . . . ? However, just a few days ago I received the following email from my fiancée (the big day is September 3rd). She’s just finishing university and works part time at a bank.  We’ve recently found a basement suite to rent in Langley that is just a few blocks from my work for $900/month that we’ll be moving into after the wedding. (Note: to my knowledge she has never seen your blog or any like it). Here is her email…

———
Liz writes:

I’ve been trying to figure out on my own my thoughts on owning a home in the future etc and I want to see if I’m missing some numbers. I used our amortization and bank employee interest rate as of today to figure out my calculations and Ed [co-worker] said the average mortgage we see at the bank is for $500,000 and the interest I would get today would be 3.79%. Am I missing something?

5 years no mortgage ($900 dollars rent): $54,000 ($10,800 per year)
plus utilities

5 years mortgage (%3.79 fixed over 5 years on a $500,000 mortgage – $2,318.53 payment): $139,112.06 plus taxes and utilities and upkeep. (ONLY $49,535.29 paid off of mortgage)

If someone did not get a mortgage they saved $85,112.06 over 5 years. Plus they are able to make a return on this money they have not been paying into their house, so this could potentially add another $6,852.39 using a 7% return. The total amount saved is $91,964.45. Saving approximately $2,000-3,000 in property tax a year could add at least another $10,000. So the grand total is over $100,000 dollars saved compared to $50,000 in equity in the home after five years. Plus home insurance which could be approximately $1000 a year adding another 5000.

——–

Cold feet? Hmm, for some reason I think we’ll be just fine.

Andre. Dude. When you tire of Liz, send her over.

A. Total. Goddess.