I have $75,000 in total savings and I want to invest it in a single stock. I feel so bullish about this stock, I’m going to take my money and use it to secure a loan for $700,000 at 3%, which I will also put into the investment. This represents a 9.3x leverage and I feel really good about it because historically this investment has done very well. I’m going to have to spend an additional $10,000 per year in fees, but I think this investment is worth it.
I’m in it for the long haul.
If you think borrowing 10x your money to invest in a single stock is insane, you’re right.
It is.
But it’s exactly what buying a house in Calgary, Alberta is. If someone told you they wanted to borrow 10x their money to dump nearly a million dollars into a single stock, you’d think they were gunning for bankruptcy. It doesn’t matter if that stock is Apple or General Electric, being “all-in” with your money + the bank’s in a single investment is stupid. Yet we do it all the time with houses.
I’m already familiar with, and therefore desensitized to, house prices in my city. Most of the homes I would consider for permanent residence cost about $1 million. When I find a house on Realtor.ca in a neighborhood I adore priced at $850,000, I quickly fire off an email to my husband-to-be. “Look at this one!” I coo, “At only $850K, it’s such a steal. Maybe we should go to the open house?”
Living in a city with outrageous house prices does wacky things to your brain. The numbers become normalized to the point that you can no longer process them rationally. If a mortgage affordability calculator tells you that you can afford a $1.2 million dollar home, you’ll prudently set your search criteria at a max of $900,000.
“I’m so frugal,” you think, “I’m searching 25% below my maximum purchase price, I’ll never be house poor like those idiots that buy the maximum they can afford”.
When you see a house priced at $700,000 or $800,000, you feel like your bargain-bin shopping. What’s more, when it appears to need any sort of work from appliance update in the kitchen to landscaping of the front yard, you think, “that’s ok, that’s why it’s priced so low. We can definitely upgrade those next year”. When you wade into the $600,000 homes and they look like condemned haunted houses, you can’t help but feel even more secure in your decision.
This gem still $599,900. I'm serious.
Sneeze too hard and it will fall down around you.#yyc pic.twitter.com/SeSETpe1AN
— Money After Graduation Inc. (@moneyaftergrad) March 6, 2015
Who wants to buy this for $625,000?
Nobody. #yyc pic.twitter.com/vUWhc2QbMo
— Money After Graduation Inc. (@moneyaftergrad) March 6, 2015
It’s still a really dumb decision.
It’s taken a few seasons of House Hunters for me to really grasp the rest of North America is not like this. I’ve seen people buy 4 bedrom, 2,500 sq ft homes for $250,000 and complain that it’s at the upper end of your budget. In some states people set budgets of $150,000 and have the nerve to whine that their realtor hasn’t shown them anything with a double-sinks in the master bath. In Calgary, $150,000 will get you a mobile home.
Yes, in a trailer park.
In the personal finance blogosphere, home ownership is the holy grail. Nothing quite says has-their-financial-shit-together like charming bungalow with an attached garage. “I won’t throw money away by renting!”, they exclaim, “You can either pay your mortgage or your landlord’s!”
People are typically ignorant or bad at math. Usually both.
Renting is always a sound financial decision in an overheated housing market. In a city like mine, it is significantly cheaper to rent than buy, but very very few people will actually work out the math.
The 2-bedroom, 2-bathroom downtown condo my fiancé and I currently occupy would retail for about $435,000. If you put 20% down (that’s $87,000), you’ll end up with a mortgage payment of $1,592 financed at 2.69%.
With heated underground parking and other amenities (honestly we have an amazing condo board), condo fees are probably around $500, possibly more. Add in property taxes and you’re paying $2,250+ per month to live here. Our rent is only $1,750/mo.
We use our extra $500 per month for savings and investments. The $87,000 down-payment we haven’t dumped into a house is collecting interest and dividends in our accounts. We’re sitting on it and waiting.
$87,000 invested at 5% with $500/mo in contributions will grow to almost $98,000 in only 1 year — a gain of $11,000.
In 1 year of home ownership, with $87,000 down and a $1,592 mortgage payment, you will have paid down only $9,916 of the principal (and $9,188 in interest on the mortgage!).
If the value of your home decreases even 1%, you’re even worse off. And yes, the house prices in Calgary are decreasing. More on that later.
Our landlords own this property outright. They bought it more than 10 years ago when it was priced at something less insane. Now it’s a pure income property for them, which is cool. Except property taxes and condo fees keep rising (but they graciously did not increase our rent). It’s a good play if they sell now, but they didn’t. We just signed a lease for another year.
If I were a property owner in Calgary right now, I’d put my home up for sale and take the money and run.
The Deutsche Bank says the Canadian housing market is as much as 60% overvalued, but most Canadians don’t give a shit because they don’t know what the Deutsche Bank is or why that assessment matters. Closer to home the Bank of Canada says the housing market is only a modest 20% overvalued, but everyone plugs their ears and la-la-las when this is said too.
When it comes to condos, Canada’s heading towards a glut, which is another thing almost no one seems to be aware of. Words of warning are primarily for cities like Toronto and Montreal, but overall there’s condo overbuilding across the country.
Furthermore, Canadians like debt. Albertans like debt the most, and they’ve borrowed a shit-ton of money to buy their dream homes in Stampede City.
But there’s more than that. Most prime property is still recovering from the 2013 flood, which damaged a significant amount of property in Calgary’s core. And for the past year, oil has been falling. Maybe that doesn’t mean much to you, except bewilderment that the price of gas doesn’t follow, but oil is Calgary’s lifeblood. Since the price has plummeted, there’s been a number of layoffs. Then more layoffs. The numbers are worse than they appear in the papers, because those only record terminations of full-time employees, but there are tens of thousands of contractors whose contracts simply weren’t renewed. They have mortgage payments, too. Mortgage payments that they will still have to meet, even jobless and without income.
Calgary house prices have only dipped slightly in response to the market fall. Maybe everyone’s in denial. Maybe everyone’s still holding up while they collect unemployment insurance, but things will probably get ugly when that runs out. Uglier still when all the debt they’ve taken on is also maxed out. Or maybe not. Maybe we’ll keep nourishing the Canadian dream, making it true by buying-in.
High house prices are a self-fulfilling prophecy: buying “before the market goes up” sustains these prices.
If you tell everyone that home ownership is a milestone, that it’s a financially sound decision, that it’s worth stretching yourself thin, they’ll buy in. And that will keep prices high. But there is a limit. We don’t think there is, but there is. House prices cannot go up forever, and the truth we must all accept is that the major gains have already happened. Our parents profited off real estate, not us. So it’s no wonder your mom & dad are trying to help you buy your first home: they think it’s the best investment you’ll ever make. It’s probably not.
For now, I’m a happy rich renter.
69 Comments. Leave new
By comparison, the prices out east are a significant fraction of what they are out west – prices are still significantly overvalued. However, almost everyone in my circle has this magical belief that home ownership is the be all to end all. I’m not sure what the rush to home ownership gives anyone. I understand the value of not paying someone else’s mortgage and wanting to invest your money in an asset. I also understand wanting to get value for your money. I don’t want to pay almost $500,000 for no space. I don’t feel renting is a “waste” of money which so many people I know feel. I like the freedom that comes with renting and knowing that if something is up, the property manager/landlord can deal with it. I’d rather not buy and end up moving back in with M&D because I invested all my money into a single asset and lost big time.
100% agree. Our building is damaged from the 2013 flood here, and that’s just one of the many reasons I like renting this property instead of owning it =\ Do I care if our patio doesn’t close properly as a renter? No. Would I care as a homeowner? Hell yes.
Wow, sounds like Canadian city housing prices are way overvalued! I think you’re very prudent to not buy now, especially given that (1) PITI + HOA are far exceeding rents and (2) the expected trajectory of housing market pop. Not to mention since rates reset on Canadian loans anyway (as opposed to the US where you can get a 30-year-fixed) you aren’t (as much) tied to buying a place while rates are still low.
Also you have a great deal on rent! That sort of place in my city– similar location and amenities– would cost 128% more to rent at only higher 44% housing valuation.
One caveat: Though I would say you are right that one should never look at their house as an investment, or at least an appreciating asset, I think it is important to note that it is the one and only place that average people are really effectively able to use leverage and overall is one of the best ways for wealth accumulation and transfer for Joe Schmoe.
Oh my goodness, this is insane!! I honestly have not a full grasp of the Calgary, Alberta housing market, but it’s incredibly interesting to read your synopsis & commentary on it. I have to guiltily raise my hand when it comes to saying that I live in a city where honestly $300,000 can buy you huge square footage (double vanity sinks, updated kitchens, huge backyard, etc.). Where $600,000 in your housing market would be a run-down property?! Whoa. I would definitely say keep renting and ride that out as long as you can! I mean the idea of saving $100,000 to $200,000 just for a down payment…I can’t think of many people who could afford and/or would like to accomplish that goal. We are in a market here where renting is actually more expensive than buying (if you do the calculations correctly and do not overextend yourself by becoming house-poor – never buy what you are fully pre-qualified for because that’s just insane!). My fiance & I are looking to buy (and I just posted about this today because our landlord just sold our house all too quickly!), but we’re coming down to the point where we may sell most of our furnishings (currently rent a 3 bedroom 1200+ sq. foot property), and rent an apartment downtown where we can experience the amenities, walk everywhere, and fully prepare for home ownership. Many decisions and choices to be made! It’s great that you have a full grasp on your market and understand the pros & cons!
Here in Vancouver, and this is no exagerration, $1m buys you a tear-down. The average detached price is $2.4m.
The author is playing a bit of alarmist angle with the homess she’s showing. 500k buys plenty of house in a nice suburb of calgary. The houses she’s showing are probably in the beltline area of one of the most prosperous and highest income cities in North America. Not saying house prices aren’t high but let’s keep it in check, Calgary is certainly not Vancouver or Toronto( thankfully!)
But I would never want to live in suburbia. Doing so would increase my commute substantially, we would have to get a second car (+$500/mo), and then both my fiance & I would have to pay for parking at work (+$500)
Why would I buy a $500K home in suburbia if it would cost us an additional $1,000 per month + 45 minutes each to commute?
The problem with this article is that you aren’t comparing apples to apples. You talk about buying a detached house, and renting a condo. Your rent is an anomoly, so you should be comparing current average rent vs purchase of a similar unit.
But buying a home is similar to buying stocks – predicting when it will rise/fall is very difficult. If Saudi Arabia had continued the manipulation of the market, Calgary prices would have continued their climb. Hindsight is always 20/20. And that’s why I think it’s more important to make a property purchase based on what your needs and lifestyle are.
Hi Irene,
As outlined in the article, we rent a 2-bedroom, 2-bathroom condo that would cost approximately $435,000 to buy which would translate to ~$2,250 in monthly costs. We pay $1,750/mo in rent. We could purchase a condo exactly like the one we’re renting, except that doing so would drastically change our finances. We would have $87,000 that’s no longer growing and generating passive income in the market, we would have to put an additional $500/mo into housing costs instead of long-term investments, and we would be facing things like increasing condo fees and home maintenance costs. We would rapidly be falling behind financially, unless the housing market turns around.
Buying a home is nothing like buying stocks. I can put any amount into stocks — as little as buying 1 share of any company if I chose. With $100,000 I can invest in dozens of companies that pay monthly or quarterly dividends and will grow with capital gains. When you buy a house you invest tens of thousands of dollars, and then take out a six-figure loan to invest even more, in a single asset. Investing broadly in the stock market is far less risky than buying a home, and you begin to see a return on your investment much sooner.
What a great article. I get it. We rent a house for half the cost of the mortgage payment. Nobody else gets it. They want huge mortgages and don’t believe rates will ever go up. Yeah right.
Agreed. I hate this low-rate environment it’s lulling everyone into a false sense of security. Hopefully house prices take a hit when rates are raised… that combined with demographic changes (baby boomers downsizing), over-supply, restrictions on foreign investment, etc maybe they’ll even fall down to something reasonable.
this calculator will re-enforce your decision to rent
https://www.yourmoneypage.com/home/buyorrent.php
Nice, thanks!
Great analysis. I’m based in Toronto, so I found this article pretty cool as well:
http://blog.wealthsimple.com/are-you-missing-out-on-torontos-condo-market/
Being an early 20 something new grad, I’ll definitely be renting for a good bit of time.
This is really interesting to me, because here in Northern Ontario, it’s basically the opposite. Renting costs a lot more than a (reasonable/realistic) mortgage!
Plugging in the average cost of a house (which is ~$205,000 where I live) into the same ratehub calculator means a mortgage is $734-$903/month. Rent for a 1 bedroom apartment is roughly $800/month; a 3 bedroom is over $1500.
Obviously there are other factors to consider, but I know we are “throwing our money away by renting.” If only we have a downpayment saved! (And maybe a real job for me?)
If you plan to buy a house, you have to calculate some extra cost, like keeping your house in good shape, tax, unplanned repairs, etc. I think you just made a wise decision, by opting to invest your oney on something you feel confidendt with
Great post! If we had continued to live downtown, renting is by far cheaper then owning your home/condo. What we pay in the burbs (eastern Ontario)is probably equal to renting here or maybe a bit more expensive however; we have no plans on moving anytime soon. I am not delusional in thinking that our decision to buy does not come without all the cons listed above but since it was equal to renting out here it was best for us and worth the risk. We are aggressively paying down our mortgage for when (cause we all know that WILL happen) the interest rates increase. I think if we lived in Calgary I would feel the same way.
I like this post, despite being a buyer last year in a similarly expensive market. For US folks, the NYT has a great interactive rent/buy calculator that helps with the math.
All those people with 6 figure blue collar O&G careers jacking up all the home prices 🙂 It’s scary when a city’s economy is mostly held up by one industry. I definitely wouldn’t want to buy there right now.
Thank you for this article! My boyfriend and I have a house in mind in the next couple of years and every time we look at real estate, I want to give up and move home to Sask (although the market is quickly becoming inflated there too). I’m glad I’m not the only one looking around Calgary and feeling like there are crazy people in charge of the market. Our 2 year plan is quickly turning into a “can we raise children in our tiny townhouse?”. I have a feeling if things don’t start coming back down to earth, we’ll have to move to a small town in order to buy a house.
I live in Calgary and although I do agree that it’s quite overpriced here, there are many deals to be found now with the oil layoffs and the house prices slowly declining. My friends just sold their 3 bedroom 2 bath starter home – 1500 sq ft – in the nice SW area for $325k. When we were looking for a place a couple years back, you couldn’t find anything remotely livable for $325k so I’d say the correction has already begun.
Hopefully it isn’t actually 60% overvalued since we bought a condo last year for $270k – even though we didn’t buy it as an investment, just a nice place to live in – but at least we were one of the very very few who saw that rates were going to go up eventually and locked in for 10 years at 2.89%. 9 More years of peace and quiet before we have to think about higher rates, should be mostly paid off by then I hope
Holy shit, you could literally buy 10 of my houses for less than $700k. I see a lot of people say that renting is better than buying, and now I understand why (and why I’ve always disagreed). The houses that you pictured would probably retail for something around $30K in my city, maybe less.
Wow, where do you live? As I said earlier, here in Vancouver, a tear-down is literally $1m.
Obligatory rent-vs-buy calculator link.
Glad to hear another voice of reason on housing!
I agree with everything you say. The market is insane right now. What I would say though is that the money you have in stocks, I hope its a small weighting in Canadian stocks. When the housing bubble pops it will surely take down the market with it. Invest more in the US.
Very small in Canadian stocks. Don’t trust the banks carrying all the mortgages, and oil is hurting the Canadian market overall.
I have the bulk of my cash in US and International investments right now.
Would you recommend buying once you can pay almost all of the house price in cash and pay very little interest? Or do you still think it is better to rent?
It’s all a matter of whether or not you feel you’re getting value for your money. Right now, I feel like we’re getting better value for our money as renters rather than home owners, but this might change in the future, and the size of our down-payment is only one factor.
Even if you buy a $500,000 house in cash, it’s not the same as putting $500,000 in stocks. For example, if your stock portfolio is paying 5% in dividends per year, $500,000 will generate $25,000 in passive income — that’s a powerful amount, it’s even more than our rent right now. Would it be better to own and have no mortgage payment? Or better to rent and use passive income to pay the mortgage? In both scenarios you’re essentially enjoying no direct out-of-pocket living costs.
I definitely feel more comfortable putting more money down because that reduces risk of carrying such a big debt. However, I’d still be upset if I bought a house for $800,000 and then a year later it falls to $700,000, no matter how much money I put down.
It’s really a matter of waiting and weighing the monetary and non-monetary costs & risks… because there are a lot of benefits to home ownership that have nothing to do with cash, namely the emotional significance of creating a home for your family and feeling that the space is “yours”. I’m waiting to see changes in interest rates, housing prices, population demographics, and our personal circumstances before I make a decision.
More cash is definitely good, but regardless a home is not always the best place for that cash..
Where are you getting 5% in stocks. I have a house fully paid for (worth $500K) and would like to sell and downsize to travel, but where to put the money??? With a diversified ETF I can only get 2-3% BEFORE fees. Every rental property in my area (Kelowna), commercial or residential, has a cap rate of less than 4%…
I’ve made double-digit returns in my portfolio ever since I started investing. 5% is fairly modest, and represents an average to include less profitable years.
If you have an ETF that provides a 2-3% dividend, you only need to see 2-3% in capital gains to make up the difference. 5% is very small.
This certainly applies in Vancouver, a city where the Mayor has made is developer buddies rich with a glut of condos, and which is now a place for corrupt foreign investors to park there money in real estate. The government doesn’t keep stats on foreign ownership becuase they know it would not paint a pretty picture. Vancouver has very few head offices and once you take construction and real estate out of the picture, the economy is not very strong. A bubble about to burst…
Bridget, interesting post, but a couple of points.
1. If you are planning on buying in one year you shouldn’t have any of you down payment in equities, which you would need to do to have an expected return of 5%. So your 5% return on your $87k is not realistic, more like 1%, before tax. Equities are great for a 5-7 year time horizon, but not less.
2. Fine to rent, but you must be disciplined to save and invest properly for 25 years, so when those who have bought, paid of their mortgage, so therefore no longer have mortgage payments, you have enough income from your investments to cover the rent. Unfortunately, many people do not invest promptly, so are better off having the forced savings plan of a mortgage to help them out.
Hi Grant,
We’re not “planning on buying in one year”. We’re planning to buy when we can get the best value for our money. That might be next year, it might be 5 years from now, it might be never. I’m not worried about my asset allocation in the meantime.
Likewise, I’m not worried about people who are not disciplined enough to save and invest, and for whom a mortgage is their only reliable savings vehicle. This website isn’t for those people. Those people can enjoy being house poor for decades and then have the bulk of their net worth tied up in their primary residence for the rest of their lives. This website is for people that are smarter with their money.
This. Likewise I’m “planning” on buying in ~5 years after the crash, but there is nothing strict about that timeframe. If stocks are down, I can just wait for a recovery. If renting continues to be cheaper, I can continue to rent. Or if I really get a hankering to move and stocks are down, I can just eat the loss or put less down — market risk is not going to translate into disastrous life risk here. No reason not to invest, and I’ll likely leave my funds invested until I know I’m down to months before buying. So I’ll continue to use a decent equity-weighted rate of return in the rent-vs-buy analysis.
Housing correction will possibly coincide with a broader market correction (whether that’s limited to Canada or more broadly). If you have to dip into equity holdings to finance a proper downpayment (20%), it seems like dangerous territory to me.
I am struggling with this, and am old enough I won’t be renting for more than 5 years. So I’ve gone pretty equity heavy in my defined contribution pension for retirement (85%), but things are lighter in my deposit fund so that I don’t have a shortfall if suddenly one day I find myself buying.
As I’ve already mentioned, I have no intention to buy any time soon so I don’t really consider my current holdings part of a “down payment”. We have substantial cash savings, but I’m not about to leave $100,000+ sitting in cash if I have no intention of buying a house any time soon. We will continue to add to our cash reserves, as well as our equity holdings, and when/if we do choose to buy a home, we will determine what investment vehicles we want to use to do so at that time.
Wow, I keep forgetting how out of control expensive homes are in Calgary right now. I completely agree with your analysis and decision. Oh, and I love that Rob Carrick mentioned your mild profanity usage in his column 🙂
haha I feel like I’m becoming known for my swearing as much as my non-BS finance advice 😉
We live just outside of Boston, MA and prices are almost as ridiculous as your area. We’ve started looking at a town further north of Boston because we both work in that town and they have excellent schools. BUT. Oh god the prices. So many of the houses are in the $600-700k range. Then you see one for $400k and it seems like a miracle…but then you check out the open house and you can see why it’s “such a steal”. We’ve been saving for a down payment for years, but to be honest, the big reason I want to move is to not have to deal with the parking situation in wintertime. I WANT A GARAGE! AND A DRIVEWAY! Yes being closer to work would be good. I guess we could look to rent in the town we’re currently looking in. But like you said everyone keeps on the “you’re throwing your money away” attitude which, as you point out, is not really the case. Thanks for this excellent post!
Great summary with lots of supporting numbers and commentary. For years we have been brainwashed to buy a house and not to throw money away. Sometimes it makes sense to buy sometimes it does not. Sometimes the money equation works out to buy. Sometimes it does for personal reasons and sometimes to get more space in the neighbourhood you want.
I like the analogy of the stock but it leaves out the fact that you need somewhere to live. We have moved a lot and bought 4 houses along the way. 2 worked out OK financially and the other 2 were about break even. We never did hit the timing right on. Some people have done really well with that…not just our parents but when the markets soured they bought at the right time and are reaping the rewards now. That time in Toronto was 1997 – 2003 and again after the 2008-9 softening.
In the overheated markets you are talking about, the music will likely stop some day though we have been saying that about Vancouver for 15 years. People need to be aware that there is a possible downside and that the next time to buy if you need to is after a correction. Just like a stock.
Great food for thought. Thanks!
For someone offering financial advice to the masses I find it worrisome that you don’t seem to be able to differentiate between home prices and land value. Those properties listed are listed as land value only, meaning the opportunity it for someone to knock it down and start over, those aren’t meant to be a home for someone. However I feel you must have already known this, since you do seem somewhat intelligent, which leads me to my conclusion that you are simply misleading people in order to reinforce the point you want to make. Shame on you.
LOL
Right, because if there’s a housing correction of 10% or 20% those land values will remain constant. The home next door will retail for much less but the price of this shack will hold true because of it’s “land value”.
The buyer can knock it down and start over. Now it’s an even worse use of their money. Not only are they paying an outrageous price for property, now they need to dump hundreds of thousands (millions?) into making it liveable, hoping to god they can sell it for profit at the end.
By the end of this year I will have 300k invested in mostly US and international equity funds and bonds and almost no debt.
I still rent. People make fun of me but I am not buying until I can almost pat cash. I reinvest my investment gains and income.
Its a great position to be in. If I lost my job I could live for years.
A crash is coming. Even if the government cuts rates more.
“If I lost my job I could live for years.”
This.
Most people can’t grasp this. You can’t eat your house. You can’t sell it off piecemeal to pay your bills. You can with stocks.
The crash is coming (and least to Calgary). The government has run out cutting room with rates.
The worst part about renting is dealing with landlords who ask to see pay stubs and try to increase my rent every chance they get. They figure because I have a healthy incme they can try to skim more off me.
Regarding the $600,000 homes depicted in the article. Yes, if you want to buy in some established downtown central location you may only find a crapshack for that price. But there are many lovely homes available a little outside of the downtown core for that price or less. And if one wants to go the route of a condo, you can still find perfectly decent 2 bedroom condo apartments outside of the downtown core for about $200,000. (I live in Varsity, a popular area by the university, and there are presently several starter condos available near me in that $200,000 price range.)
Hi Dave,
While I understand the appeal of lower house prices outside of the city centre, I don’t want to take on the additional commute time & costs. My fiance and I currently share one car — and 90% of the time it remains parked as he walks to work and I take public transit. If a move necessitated getting a second vehicle, or even just meant we would have to commute together in our one car and then pay for parking, it becomes less financially attractive. There’s no point in saving $500 on housing costs if you’re going to add $500 in extra vehicle costs.
Also, we prefer the downtown urban lifestyle. I spent 2 years at the UofC, and it was a pain to get to, even by train which drops you off directly on campus. It’s in the middle of nowhere, with virtually no life around it in terms of shops, restaurants, or bars. I prefer to live within walking distance of Calgary’s best restaurants and major attractions, it’s worth a premium on housing costs.
I think people vastly discount how much they are really paying for that suburban lifestyle, not only in hard costs, but in sheer numbers of hours wasted in a mind-numbing commute.
http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-commuting/
This is a fantastic article! I love MMM thank you for sharing!!
It’s true the time wasted is a huge cost.. right now I use my commute to read or listen to podcasts. This gives me a free full hour each day devoted more or less to personal and business development. It’s really valuable.
I agree that buying a home (house or condo) can be an expensive endeavour in Canada, especially in the major cities, but the one thing I don’t get is all this talk by the crowd that believes home prices will correct substantially and that’s gonna be their opportunity to buy in. I own a home in a suburb outside Vancouver and when I bought is 2007 for 500k I thought I was grossly over-paying as this same home sold for $340k in 2001 (a 47% increase). I nearly cried signing the legal papers. Well it’s now 2015 and my neighbours just sold their home for $1.288 million. And your thinking, “that’s the point! Housing is overly inflated.” But what If I didn’t buy in 2007 and waited for the housing prices to go down like so many of the so-called experts were screaming back then? Could I have saved $700k+ in the past 8 years to buy this same home? Fuck no. Even if house prices drop 60% (highly unlikely) or even 75%, I’d still be in the black. I get it, home ownership is hard to attain in certain parts of Canada, but when you’re renting that lovely downtown condo near all the shops and your landlord slips a letter under your door to get the fuck out, you may wish you had the security of owning your own home.
But that’s the thing: we can buy any time. That’s the luxury of cash. Our $100,000 will just keep growing — at this point, faster than house prices in Calgary. We can buy next year, or two years from now, or never. That’s the luxury of choice aka. cash.
Will prices rise indefinitely? Doubtful. Like I said, they’re already down in Calgary (and are still headed that way). It’s not the same as Vancouver. The suburban sprawl can go on forever here, we’re not limited by an ocean.
You have paper profits until you sell, otherwise it’s just unrealized gains. No, you couldn’t save $700K in 8 years, but you don’t actually have $700K either. Not until you sell. And then when you do, if you still need a place to live in Vancouver, $700K doesn’t have the same buying power it did 8 years ago, does it? In an ideal world you could sell and buy something more affordable elsewhere and pocket your six-figure gains. But if you’re not selling, or if you sell and roll that win into another property, it’s a sum zero game. Your gains only exist on paper, not in your bank account. You would need to sell, and likely move, to realize them.
Cash is earning maybe 1.0 to 1.5% tops. That’s less than real inflation so your cash is actually de-valuing. Stocks? Sure. A monkey could have made double digit returns the past 6 years in CDN and U.S. Equity index funds and etf’s. And those profits? All paper gains till you sell. And after you sell, you pay taxes (unless TFSA of course). Do stock markets go up forever, too? Ha. I understand your overall point – why leverage so much money to buy one asset. Why commit so much money to interest payments. Why buy high when there’s a chance the market will slide. But everyone needs a place live. By renting instead of buying you’re making a decision to apply your capital to other means. The vast majority of CDNs are financially illiterate. They regularly lose vast sums of money in the investment arena. Purchasing a home may actually be a good place for them to deploy and store their capital.
You’re using your excess income after paying your rent to save and invest but you’re assuming that everyone who purchases a home has zero excess income after paying their mortgage payment (or a lot less than renter) but I’ve managed to save a lot of money since buying a house.
And your point that my house is worth squat till I sell? Absolutely true. I bought it as a place to live and raise my kids. It’s future value – up or down – was never part of the decision making process.
This is a great article, and the main point is well received. Considering how imbalanced the market is, just stay smart and rent until you find something perfect.
Plus if I may steal from another article I read recently, it’s not your net worth that counts, but your cash flow. It’s very nice to behave notional equity, but it’s nicer to have cash in your bank account.
All that said, housing and mortgages used to provide a target for families, many of which began with little. You and me sweetie, we will buy this house, raise this family, save and mend and stretch until we own it ourselves and our kids will have more opportunity than did we, and at the end we will sit on the porch swing basking in golden light.
The target can still be the same.
I agree 100% with your post. It’s nice to read an article that mirrors my own feeling. But as you know, today most people make you feel like a major loser for renting and not owning. And to some level it is true, by renting I am assisting another person with their mortgage payment. I am in Calgary, the city has a very mediocre transit system, not much going for it other than oil. I cannot understand what justifies the ridiculously high real estate pries. Your pictures of those crumbling hovels and their prices says it all; I too am mystified. No matter what seems to happen (collapse in oil price, floods, layoffs, etc) RE prices seem to go only up. Yet people keep buying. Who are these people?? What do they do?? I’ve come to the conclusion that with my average job/income I will never be able to afford a property in Canada’s big cities (Calgary, Vancouver, Toronto).
Further to what I was saying previously, reading articles like this is what makes you feel like a loser in this economic system:
http://business.financialpost.com/personal-finance/young-money/eternal-truth-of-personal-finance-no-4-dont-be-a-renter
I am so disappointed that this is both written by Jonathan Chevereau AND from only last month.
While you can come out ahead by renting, a lot of people won’t save the difference. Instead they’ll blow it on a big screen TV or vacation.
Dang expensive Canadian real estate! $100k would mean you could buy an entire house for cash here in Nebraska. Of course the jobs pay less so there’s that… I rent too. I’m happy with it.
I agree with your conclusion about renting but your evidence is mostly incorrect. I live in Calgary and follow the real estate and rental markets.
You have presented a distorted view of prices by only considering the inner-city. The houses you posted as examples are priced for the land and your agent would know that.
Also, if “most of the homes I would consider for permanent residence cost about $1 million” you need to lower your expectations. I recently sold my home (2000 sf, 3 bdrm, 2.5 bath, quiet street in a nice kid-friendly neighbourhood, close to schools, shopping, and restaurants) for under $500,000. High by most American standards but not Toronto/Vancouver crazy. Yes I commuted 30 minutes but so did half a million other people – it’s just what you do for your kids.
By the way, my ROI on that house over 13 years was 8% per year before interest, taxes and maintenance. I’m pretty sure I could have done better owning BCE and Royal Bank stock, but we had to live somewhere for those years.
By the way, your rent? Vacancies in Calgary are almost 0%. For Calgary that place is a steal. Stay there as long as you can.
If I had to commute 30 minutes, we’d need a second car. That would negate any savings on a mortgage. We’re very committed to only having one car and maintaining short commutes (preferably walking) from a lifestyle, financial, and environmental perspective. Calgarians are addicted to their cars, and “needing” a vehicle is very normalized here. We never want to need a car to get to work, and we never want to “need” 2 cars for anything.
(I realize most people disagree or don’t understand this standpoint, but it’s one we have)
Our rent is very good, and we will definitely stay as long as possible (especially if house prices stay high and rents continue to increase). We lucked out with great landlords and an awesome location.
Vacancy in Calgary, however, is climbing and will continue to do so as these new condo units go up + people leave the city as the job market stays stagnant or decreases. The Herald says vacancy is currently 3.4% and average rent for a 2-bedroom is $1,300 http://calgaryherald.com/business/real-estate/vacancy-and-rental-rates-both-rise-in-calgary-apartment-market
Our low rent is definitely helping us save. I’m interested to see what happens over the next 12 months, though I’m already thinking it’s likely we’ll renew our lease here again (our landlords will probably increase our rent at that time!)
I appreciate your desire to live in the inner city, but I must agree with JGBlake that your article is giving a distorted view of Calgary prices to many other readers. As I said previously, one CAN live in a lovely starter condo for about $200,000 in Calgary and still be close enough to the city center that Torontonians would blush to have it so good in their own city. BTW, I have lived in Varsity (as a working adult) for over 2 decades. The commute to downtown by bus and train (or even by bike in nice weather) is fast and easy. And I have never owned a car.
My boyfriend and I bought our first townhouse in an older Calgary Suburb a year ago. What blew me away was the amount of money they were willing to lend me. I pull in a decent income (nothing INSANE, but solid) and have great credit so, without my boyfriend’s income, they were willing to lend me upwards of 600K$, which I ran away screaming from. “But interest rates are so low” they would cry! And when I ran the math with higher interest rates, I actually had to sit down. Why would they ever suggest such high loans! We also stepped away from high bidding wars, watching people dump $ after $ to something was clearly getting way over valued for the area. We ended up buying with 20% down, a healthy emergency fund in our back pocket and cost of housing under 25% of our income, as well as a place that is well managed and where we could get insurance for special assessments.
I think what scares me about the city is how willing people are to jump on the debt train. It’s something I see in lots of places, to be honest but a lot in YYC. It’s like no! Debt is terrifying!
I too am in a dilemma on whether to purchase a house now or to wait and save more money. So far it’s been to save more. Also, I’m in no rush to take on the responsibilities of a homeowner, such as cutting the grass, winter snow removal, general upkeep, and having to pay property taxes. As for now, I’m in no hurry to buy a home.
Amen! I think about the added maintenance in just pure time-cost, nevermind monetary cost, often. I love the luxury of not paying to fix things as a renter — ie. we will need a new dishwasher soon, and I’m so glad that’s not going to come out of my pocket!
Really powerful illustration here. A friend of mine recently bought at house, and went on and on about how my partner and I were silly, less fortunate than they are to not be considering buying one, too. Well, we aren’t. And we won’t be. For a lot of reasons, including the ones you explicitly laid out here. renters ftw!
Amen! It totally depends on your personal financial situation and the housing market you live in… unfortunately too many people just put blind faith in home ownership as a solid financial plan, they can’t imagine it going wrong (and it can go really, really wrong)
Wow, those prices make me want to pass out. I live in Texas in a town with a population of 120,000. Our 3/2, 1500sf home was $130,000 and that included upgraded granite counter tops, tile throughout the house and other things we would consider aesthetically pleasing and a very nice, livable home. For us, it really was better to buy. A 3/2 decent apartment or rent house here would be the same or more than our monthly mortgage. My parents live a couple of miles just outside of town on 5 acres and their home is valued at $185,000. I am also amazed when watching House Hunters that some are looking for a home with a budget of $600,000….blows my mind!
Where I live now (Portland, Oregon), it made more sense to buy. My husband and I put down a ghastly 5% for our $220k 1800 Sq ft 3 bd 2.5 bath two years ago. Our $1300 payments (including the dreaded pmi) were about a $400/month increase on what we were paying for our 2 bd 1 bath apartment.
Merely two years later, though, and the apartment we were renting goes for $1600+. The renting market here is so unreasonably inflated that we legit cannot afford to sell our house and rent again. Plus, a house on our block just sold for 60k more than we paid two years ago.
I know the market won’t stay that way forever, but in a place where rent is overvalued, I’m happy my mortgage payment will change only minimally in the next few years (and drop by almost $100/month when our pmi is done).
If I were anywhere in Canada, though, I’m sure we would have made a different decision.