TalkingPie wrote: ↑
Thu Dec 26, 2019 11:52 am
The thing that many members of the real estate cult seem to miss is that there are only a few ways of cashing in on real estate wealth.
Let's say you buy a house, and the value increases like crazy. You're all excited because you've made six figures' profit doing nothing. You can even borrow against this windfall and buy all kinds of consumer crap, but you still have a huge mortgage, which doesn't go away unless you sell the house. Now you've done that, but all the other houses in your area have also increased in value. If you want to downsize, then your new cheaper house has increased by a lesser dollar figure than your old house did, and you've gained some ground, but if you want to upgrade, as most younger people do, the houses you want to buy have increased by more than the house you sold, so you're worse off than if the market had stayed reasonable. And that's before we talk about the money you spend on realtor commissions and land transfer taxes, which are proportional to the sale price. Maybe you'll rent, but the rents have also all gone up as a result of the increase in property values. The only way to truly cash out is to sell and move to a lower cost area, which most are unwilling to do.
While all this is happening, you're living in an area where the younger locals have no hope of settling down where they grew up, which puts a divide between the haves and have-nots. All that everyone talks about is real estate. They put every cent they have into their houses, smugly playing the wise investor while hoping that the scheme doesn't collapse, hiding from their neighbours the fact that they're leveraged to the hilt. Housing never goes down, except for when it does (see: Toronto in the early 90s, much of the US in 2008-2009, and much of Calgary since the oil boom went sideways).
I live in an area where houses are still relatively affordable, and I'm here to say that that's better. Even though I'm already on the ownership ladder (older 2,700 sq ft home + double garage on a 25,000 sq ft lot), I have no desire to see a bubble form. Houses are more enjoyable when you can view them as just a place to live. Put your retirement nest egg into a diversified portfolio.
The emperor wears no clothes.
If you asked a stock broker what he thought about you buying a half million dollars of a single stock in a company leveraged at 75% or even 90 or 95% with annual fees of tens of thousands of dollars and tens of thousands more dollars to sell out and cash in.... he’d probably think you were nuts.
The things the real estate cult never tells you:
How much of your mortgage payment is interest in the first few years, and how much interest you will pay by the time you have your house paid off assuming you don’t dig into your equity like so many people do. Even more so if you’re paying CMHC insurance and fire/death insurance for the benefit of the banks, not yourself.
How much a realtor, lawyer, and closing fees cost when you sell a property... which either have to come out of your savings or equity. First time homebuyers think realtors are the best people in the world.. doing all of this work helping them buy a home for FREE!!
Home repairs... from a $2000 hot water tank to a $30,000 roof repair and appliances and renos all kinds of thousand dollar sundries in between. Nobody ever adds those up when talking about how much money they made when they sold their house.
That’s an awful lot of money to try and avoid “throwing money away renting” when renting is often significantly cheaper due to economics and the (usually) more established owners of income properties.
Then there’s the people who build up little rental empires all on the unsustainable rise of real estate values. What’s going to happen if the values reverse? Maybe smart renters with a bunch of savings will decide that’s the time to buy, and dumb ones won’t be able to afford rent because of the economic situation.
The only time a house makes sense is if you can buy one for about 3-4 times what your household makes in a year and you’re going to put over 25% down and live in it for at least 20 years... making extra payments that go directly against the principle. That way when you retire you won’t have rent or mortgage and an asset that you can sell when you can no longer live independently.
Otherwise, rent. Use your mobility to take advantage of employment opportunities. Put the extra money you would be paying mostly for interest into diverse and more liquid investments. Then when you are where you want to be in career and life and ready to settle down, buy a home in an affordable area.
That’s the advice I wish I would have given myself before being goaded by boomer parents to buy a house at too young of an age and yes making tons of money in transactions but also losing tons and being house broke for a significant portion of my 20s and 30s.