One Sunday this spring, some weeks ago, an astonishingly ugly house in North Toronto was swarmed. It’s a semi, built like its neighbours about 90 years ago, mutual drive, residential street, one block north of an arterial. Current owners added an addition to the original 1,100-square foot, two-storey cube, hiring Frank & Daughter Firewood, Junk Removal and Quality Additions (or equivalent) to do the work. Rooflines don’t match, the exterior’s stucco-over-OSB and the lack of design work makes the squirrels gag.
But it was listed for under a million, in a hood where the detached faux chateaus fetch $1.6 million and tear-downs are eight and change. There were seven offers, and it changed hands for the equivalent of $1,000,000 and eight Kias.
This is what house lust does. It’s also the catchment curse afflicting young parents who think their snowflake children must attend Homogeneous High. The price to pay in a hood like this is staggering. In fact, it’s starting to overwhelm Darren.
I am 30, married, and have been looking to buy a house in Mid-Town Toronto for 2 years now. I haven’t pulled the trigger yet. I couldn’t get by this sinking feeling that there was something fishy going on in the market. I spent hours with spreadsheets trying to justify a million dollar house, as that was what people I knew with similar incomes were doing. But I can’t get past the numbers… Yes, I could probably swing it right now… and so long as I only have 1.23 kids (who god willing will never want a post-graduate degree), 0.75 pets, and so long as nothing bad ever happens to me, my spouse, or my house I could probably even save a little for retirement. My reality (to be) is 3 kids, 2 cats (by force), a bad stomach, and no handy skills.
Anyway, someone recently (finally) turned me on to your blog, and that fishy feeling finally had met a friend! Okay, maybe not a ‘friend’… more like that older kid I used to hang out with who let me try his cigarettes and explained the realities of life to me before I was ready to fully appreciate them, but untimely I was better off for knowing him also.
Now to my question. Does it make more sense to rent or to buy in Mid/Down Town Toronto? My wife and I have an income of $200,000 with $225,000 saved. We live for backyards and want to be somewhere this summer where we can get some fresh air. I’ve been trying to figure out if it makes more sense for me to purchase a house for somewhere between $800,000 – $900,000 (which would basically drain about 75-95% of my savings if I put down 20%), or rent a house where in mid-town it ranges anywhere from $2000 – $4000 per month in which case I could keep our savings in investments. Do you have any suggestions on this??
Well Darren, that $900,000 house will also take $28,200 in land transfer tax and another two grand to close, so now its $930,000. Putting 20% down ($186,000) leaves you with savings of just $39,000, and a mortgage of $744,000. The monthly payment will be $3,600, or $4,300 including property taxes and insurance (no maintenance). The downpayment at a 7% return would give you $1,085, so that must be factored in, for a true monthly cost of about $5,300.
So much for cash flow. Buying the trendy, sought-after house will cost 32% more than renting it for four grand a month. So why would you do so?
Of course. (a) Potential capital gains and (b) whatever emotion (lust, greed, pride, guilt) has you by the throat.
The emotion is your problem. The finances are simple. If you find a North Toronto home for $900,000, it’ll be a fixer-upper you have neither the money nor hairy-sweaty-manly skills to rebuild. As we slide into an inevitable real estate correction your investment (even in a high-demand neighbourhood) could well lose 5-10% of its value, then flatline. After five years this would mean you spent $78,000 more on ownership than renting, and lost about $120,000 in equity. By the way, you’d still owe $638,631 on your mortgage (and mortgage rates could be set to double by then).
So, if you sold it and paid 5% commission, then retired the mortgage, you’d walk away with $152,244, or $30,000 less than your initial deposit. Add in the premium over renting ($78,000), and your family would have spent $108,000 more to own the same home you could have leased. Of course, if some people are correct and real estate loses a fifth of its value, the cost would be far higher. So tell me again why you need to do this, when you’re raking in big salaries and putting away gobs of money?
You want a suggestion? Burn the spreadsheet. Abandon open houses. Get new friends. Embrace your skepticism and common sense. And stay here for a group hug and a smoke.