The long weekend marks the beginning of bug, infection, drowning and melanoma season, which is why we celebrate it. But this is also prime time for realtors – which is why they’ve been working so darn hard lately turning out misleading reports, manipulating the media and cooking numbers. Sales are down and yet Audi payments are relentless. You can see the problem.
The RBC Mortgages fake editorial I showcased in the previous post is a great example. The message to property virgins is simple: owners win and renters lose. You can also see the half-truths, subterfuge, misrepresentation and omissions it took to tell the story. At the end of the day, there is only one real persuader for buying a house right now. Yup, emotion.
So, kids, this post is for you. When your house-humping Boomer parents get on your case about buying a place and become an adult, they’ll probably use one of the 6 following arguments. Here’s how to defend yourself.
You’re throwing your money away on rent.
Quite the opposite. It’s cheaper to rent than to own (this blog has run the numbers many times). Renting means not having a mortgage and not making monthly payments which are 90% interest. Renters don’t pay condo or strata fees, or property taxes. They don’t finance any major repairs or get saddled with special assessments. Their insurance is cheaper. They haven’t shoveled tens of thousands into a down payment which earns nothing.
In fact, owners are subsidizing renters.
Example: my Toronto pad is a ritzy, three-storey, three-bedroom condo loft-townhouse with parking and a private backyard 15 minutes from downtown in a hood of multi-million dollar homes, which I rent for $3,200 from owners who got transferred and couldn’t sell it. They paid $800,000, and now subsidize me. To own it would cost me $800,000, which would earn $56,000 a year invested at 7%, plus $9,000 in fees and taxes. That’s $65,000, as opposed to the $38,400 I actually shell out. By owning it I’d be throwing away two grand a month.
But, owners build up equity. Renters don’t.
Wrong again. Every mortgage payment is comprised mostly of non-deductible interest. The amount of principal paid is simply retiring a small piece of the overall debt. Paying back a loan doesn’t ‘build’ anything. It’s just less debt.
If the house doesn’t appreciate in value (which most aren’t) then the thing you’re paying off over time only represents income you used to have, which you converted into house. It didn’t magically get bigger. Besides, thanks to the wonders of amortization, you end up paying 300% more than you borrowed. Some deal.
Moreover, equity is just another word for money. Renters who pay less to live in an identical house, have more money every month to invest.’hey can accumulate wealth many times faster than homeowners, especially in years when real estate flatlines (like the decade we are entering). Worse, owners have no control over rising property taxes, higher condo fees, falling housing markets or bumps in mortgage rates. Plus, like the guy who owns my digs, owners can find their assets turning into a major liability when they go illiquid.
Rates will never be this cheap again. Get a mortgage.
Get a grip, instead. Rates are cheap because the economy’s gasping. The feds brought in ‘emergency’ rates in 2009 to save us from going over the brink. The fact we still have them should tell you something. Like, it isn’t working.
Real estate values shot higher on those low rates, not on economic renaissance or ballooning incomes. In fact, wage gains are less than inflation, unemployment is rising and household debt sets a new record every month. This is a time you want to borrow up the wazoo and buy real estate at inflated prices?
Far better to wait for rates to rise and real estate to descend. If you buy and finance less, the monthly won’t be any higher, while your risk is lower.
Houses always go up.
No they don’t. That’s urban myth. Residential real estate is an emotional, speculative asset bought by many people who think TFSA is a motor oil. That’s why the greatest buying binges come when prices are the loftiest (like last spring), and why listings swell when the market bottoms. They don’t have a clue.
In absolute terms, housing is just as volatile as any other asset class. After the Toronto market peaked in 1989, for example, it took 14 years for prices to recover. When adjusted for inflation, downturns can be even more injurious to your wealth. The housing correction we’re working on now has the potential to be an enormous destroyer of equity, like the one which cost the US middle class $6 trillion.
You want to make money? Buy a house when nobody wants one.
Stocks can fall to zero. Houses can’t.
But your equity can. Isn’t that the same thing?
Someone who bought a $400,000 condo with 5% down and sees no price appreciation for three years, then sells, will have lost more than 100% of their money when they bail and pay the fees and transaction costs. Anyone with less than 10% equity in their real estate will be more than wiped out with a reduction in prices of 15% – which is certainly going to happen in most markets.
Imagine how many people over the next few years will be selling their real estate in a cold market, forced to bring a cheque on closing day. That would never happen with a stock.
Only losers rent. Nobody will marry a renter.
Since when is being in debt better than having freedom, mobility, diversification, balance and liquidity?
The final determinant of success is the size of your wad, not the grandeur of your pad. In the years to come, for all the reasons articulated on this pathetic blog, residential real estate is destined to be an under-performing asset class. An expensive, complicated, non-liquid investment that pays no interest or dividends, costs a bundle, and is unlikely to offer capital gains. When you can rent the same thing for half the cost while investing for twice the return, having tons of money in your old age for a hair weave, penile implant and a Hummer, who wouldn’t want you?
Happy Victoria Day.