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August 18, 2015 | The Newbie

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Poor Aaron just found this blog. His life is now pooched. Or, perchance, it is saved. Let’s see what happens. This is the story thus far:

“My wife and I own a townhouse in Oakville that has appreciated in value by over $150K since we bought it for $409K in 2012. The townhouse has about $280K in mortgage left on it. We have been seriously considering using this equity to “climb the ladder” and buy a detached home for around $700K.

“My wife is of the opinion, however, that we should keep the townhouse and rent it, ultimately acquiring about $1 million in mortgage debt. She is confident it will continue to appreciate in value and our accountant has assured us of positive cash flow in a variety of scenarios, including apocalyptic interest rates in the next five years.

“I just found your blog today, and after reading your previous half-dozen posts,I would imagine you would find this plan absolutely insane. OK, so let’s say we are willing to sell the townhouse. Does your “don’t buy real estate” warning apply to second time home buyers as well?

“I think we are doing pretty well right now as far as Millennials go. Why ruin a good thing?”

Araon, dude, I’m not sure who you should replace first – the wife or the accountant. They’ve both got you on the path to perdition.

First, you’ve made nothing on the townhouse until you sell and realize the gain (less commission and whatever the market conditions may dictate). That could be a surprise. Even if you get your price and end up with over $200,000, you’ll have a mortgage of $500,000 after buying a detached house for seven large (good luck finding that in O’ville).

Of course, rates have bottomed so count on a renewal in five years at substantially higher levels. As we know, there’s an inverse relationship between rates and prices, so odds are your house may be worth less at the same time your loan costs more.

Does your wife and the bean-counting guy get that?

Anyway, that’s the best-case scenario. If you decide to keep the town house while buying a detached home, the mortgage debt rises to $1 million. Hopefully you make several hundred thousand dollars a year or have an investment portfolio worth seven figures, because otherwise these people have turned you into a synth. Owing a million on two residential units should scare the crap out of any sentient person.

Besides, the numbers don’t work. With a mortgage, insurance and property tax you can’t rent the townhouse (they fetch $1,800 there) for enough to carry it. Meanwhile the $200,000 in equity would earn nothing, while an equal amount was amortized within the new mortgage. Lose. Lose.

The whole dumb strategy rests on your wife believing real estate will always go up, because it has. Maybe you should tell her about plunging commodity values, the national economy, looming Ontario tax increases, runaway societal debt, expected rate hikes or real estate saturation. Why would you retain an asset with negative cash flow and an uncertain future capital value? Does your wife enjoy subsidizing tenants? Has she been sneaking into the prime minister’s campaign events?

“Nearly 70 per cent of Canadian households own their homes and friends, in this campaign,” he thundered in Ottawa two days ago, “we are pledging to build on this record to do even more to provide the personal and financial security that a home represents.” So far this includes a permanent reno tax credit, a 40% goose to the RRSP-buyers plan, relaxed CMHC landlord regs and get-tough talk on foreign buyers. I know this is arousing, but perhaps you should keep her less stimulated.

Face it, Aaron, we’re in the end stretch of this market, which was created by cheap money, greed and lax rules. With prices at historic highs, even as the economy wobbles, there’s never been this level of risk in residential real estate. My guess is you and she have a one-asset strategy like most people – especially if you’re a Millennial, too young to build up a stable of financial assets. Now, after seeing some paper gains on your modest house, you’re ready to jump into landlordship and bloated debt.

Well, go ahead. It’ll be instructive to see what happens. Sounds like you’re good for at least two more blogs.

By the way, tell her to let the PM know that the last (and only) time homeownership reached this level in the US was just before the market imploded. Mention as well economists have concluded when so many own houses it actually hurts the economy – since people stop moving around for better jobs and opportunities.

Well, Aaron, glad you joined us. That may yet show a glimmer of manhood. If you can change out your brake pads, you can stay.

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August 18th, 2015

Posted In: The Greater Fool

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