I, Candi


Unwisely, Catherine reads this blog. Her realtor friend, Candi, does not. Days ago Cathy sent Candi a link to my post about Van real estate’s current dismal condition, and the woman I counseled to sell, take her million, invest it and lease back her old home.

“Thought you would enjoy this,” Cathy says, in sending me Candi’s response. “I work with this lady – she is very nice, but not sure where she is getting her info from.”


Indeed. I thought it worthwhile to share this with you, as it is so typical of the ‘logic’ many realtors use in convincing people they should plunge themselves into debt and obligation to buy a home. The argument the realtor proffers is a financial one, simply that it makes better investment logic to snap a Toronto house for $500,000 than it would to invest a similar amount.

Cathy asked me for a few comments. First, the letter.

Thank you for sharing the blog with me, Yes it appears that lady who sold her home for over a million and re-rented back the same home was smart, however depends on where she was living in Vancouver. My parents have only doubled their money in short time with no interest payments as they paid cash for their home.

Based on our discussion earlier, I decided to calculate what a home of 500k purchase price would be after 25 paid out. Purchase price 500k. Down: 100k Interest rate 3.5%. Amortization: 25 years. Monthly payments: $2,496. Property Tax: $156,250.00. Interest total paid out: $248,905.50

Payout amount: $748,905.50 (total of 300 payments) plus property taxes $156,250. So in 25 years you would of paid out for owning this home about 905,155.5 Based on the growth rate after 25 years would be $1,356,882.57. This means that you would conservatively made $451,727.07 Oh yes about repairs and upkeep; my neighbours had a similar home after 25 years it cost them 200,000 in upkeep costs but their home was valued 200k more.

So based on my analysis owning is more valuable; of course for discussion you would have to find funds of investment that would make you return more than 1,356,882.57? Of course excluding the cost of living in a home and enjoying it, raising a family etc. Lots of intrinsic value in owning!

This is my view point and analysis based on what I’ve seen in the last 25 years. I don’t think our government or banking institutions will suffer the same faith of the USA. Canada is a young country still and we keep getting 180 thousand immigrants coming into Toronto each year. All based on supply and demand. — Candi

Well, that sounds simple enough, right? Just buy a house, pay it off, live there for a quarter century and make $450,000. What could possibly go wrong?

Lots, actually. Including listing to a numerically-challenged, ill-informed, semi-illiterate salesperson. For starters, basing 25 years of mortgage payments in current rates, which we all know are near historic lows, is absurd. In order for the value of this property to swell for more than two decades (at her average rate of 4%) means both economic and income growth will be required. Growth means inflation, and that brings higher interest rates. The historic norm for five-year mortgages has been 8%, not 3.5%. So, this is a fail.

Now how about the $451,000 profit after spending $900,000 on home ownership? Naturally the realtress ascribes zero value to the initial $100,000 down payment which, at 7% (the average return of the TSX over the past twenty years) would be worth $575,351 by the time the mortgage was paid off. Of, and there’s the commission to sell the place, which would be necessary to realize the profit. That’s $68,000. Suddenly that profit isn’t.

And how about the magic of turning $500,000 in Toronto real estate into $1.3 million in twenty-five years? Can anything even come close? Not investing in financial assets, Candi suggests, which means she probably never tried it. But $500,000 returning 7% for that period of time actually ends up being $2.86 million, which sure looks like $1.5 million more than the house – and plenty of money to handle some rent.

Wait, we forgot all those teeming masses of immigrants clogging the highway from the airport. “Canada is a young country still and we keep getting 180 thousand immigrants coming into Toronto each year,” says Candi. Actually all of Canada will receive 260,000 new residents this year, of which Toronto nets an average of 55,000 (according to the city). Last time I checked there was a new condo being built for every one of them.

Finally, Cathy, your pal says her parents “doubled their money in a short time” owning a house in Vancouver. Granted, Van has seen massive price inflation, and is now suffering the inevitable and painful trip back down. But the average house has taken nine years to double in value, and prices are now on their way back to 2012 levels. I guess Candi’s folks own a grow op.


One of the few true statements in this letter: there’s intrinsic value in owning. Of course there is. It feels good. Endorphins swim in your vitriolic fluid when you dream about it. Real estate is romanticized, idealized and lionized in our minds. It’s become the marker of achievement and social status, a surrogate for wealth. Cheap money and good house porn have brought us to this point, where a sweet realtor can not only make up numbers, but the facts justifying them.

If you lust for a house, Cathy, buy one. Just don’t call it an investment.

avatarGarth Turner - The Greater Fool posted Friday, February 8th, 2013.

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