Yesterday Andrew sent me this email:
I just love your blog. Your advice helped convince me to sell my home in Ontario for a record high in the subdivision that I used to own. I took all the money and headed straight for Alberta. I’ve come across a “Deal of a life time” I think. I’m considering buying a show model town home from a developer that went bankrupt. The home was selling for $299,999. I can purchase for $269,999. The house also as $40,000 in upgrades. The house has full Alberta home owner’s warranty and is located in Cochrane 30km West of Calgary. I would really appreciate your view on this purchase . Your advice has served me well in the past .
Last night I responded:
Why would you want to live in Cochrane? — Garth
He just replied:
Thanks Garth, I spent most of the evening asking why? Could not come up with a good answer. The only reason is greed looking for a deal. Maybe it’s wrong to be on the side waiting for a crash, a lot of people are going to get hurt for me to get a good deal. I was lucky to get out of the market when I did. Thanks for the response, I was surprised you took the time!! and I’m glad your out of politics your too good for them and make more difference here on you blog.
Paul and Alicia rent in Vancouver. After reading this blog (they claim) they sold their utterly unremarkable house for $1.8 million, paid off the $650,000 mortgage and invested the rest, to become financially independent at age 38. She’s never forgiven me.
“Not a day goes by I don’t want to buy,” she wrote. “I know all the arguments not to, and I see the market starting to fail. There must be a dozen houses around us for sale, and nothing’s moving. But we hate this place we’re in – so small and bleak. I’m sorry, Garth, but I’ve had it. Go save somebody else.”
This week Khushi and Rick came to see me, vexed with choices. She’s a lawyer in Toronto. He’s an engineer, and they make big bucks. Saved $400,000 so far, all of it in the orange guy’s shorts. Why so much making so little, I asked? Turns out, like many newlyweds in their culture, they live in his parents’ basement. Everybody in the house knows why – to save money so they can buy a property of their own.
“So the money sits because it’s house money,” he said, “and we are under incredible pressure to buy, even though this is obviously the wrong time.” But not Khushi. She badly wants out, and a rented downtown condo for the next two years, even with a kid on the way, is cool with her. Rick is apoplectic at the thought of paying rent. “My mother will kill me.” Khushi thinks Mom might have to line up.
If there’s a thread tying these three small stories together, it’s emotion. Andrew would buy a house in a one-donkey town he’d never live in otherwise just because it looks cheap. And so greed leads him into a decision he’ll surely regret, because real estate’s easy to buy and hard to sell. It even made him gloss over the fact the guy who built the house failed financially. Duh.
Alicia’s house lust flows from hating her rented townhome. Intellectually she knows buying now in Vancouver is suicide, but doesn’t care. Of course, after she’s lost 20% on that $2 million house, things will change. The solution I proposed for her and Paul: Rent a mini-mansion in Shaughnessy or North Van and spend an extra $1,500 a month on rent for two years. Over 24 months that will cost an additional $36,000 and in 2014 when her $2 million dream house costs a fifth less they’ll have saved $400,000.
And Khushi’s exactly right. If Rick doesn’t put daylight between him and mom, he’ll be sleeping with his spreadsheets. They can invest their four hundred large in a diversified portfolio and, if they average 7%, have $800,000 in a decade and millions by retirement. Or, they can buy a house in Brampton at age 28, have no savings and a $250,000 mortgage. One basket, all eggs. Pure risk.
This pathetic blog may soon have to stop yakking about real estate, because there’s little to add. I think you can figure out what 2013’s going to bring. Steadily disappointing sales, swelling listings and eroding prices. Houses will turn illiquid in many markets as buyers do what they always do – retreat from a falling market. Don’t expect a crash, because it’s not going to happen. Instead, this housing deflation will be lengthy, insidious, relentless and destructive to middle-class wealth. Hardest hit will be those who have bought since 2010, the equityless virgins and house-heavy, cash-deprived Boomers. Plus, of course, poor BC.
There is a way out, of course. I’ll have more to say on this Tuesday night. If I can stop being so emotional.