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February 15, 2016 | Emotions

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.

Another tale of two cities. Actually, make that four.

“Here’s an update for ya,” says Paul. “I took your advice and put my Halifax house up for sale. It has been on the market since August and is currently listed for $15K less than I paid for it 5 years ago and I haven’t had a call on it since Christmas. Brutal.”

By the way, Paul’s house in Atlantic Canada’s largest city sits empty, since he has to relocate for work to Calgary (of all places). He reports that his Cowtown landlord just lowered his rent by $200 a month, which tells you something else.

Meanwhile in the GTA, meet Pam, who I think is pissed at me.

“My husband and I have been married for about 6 months and moved in with my parents to save money.  He‘s an engineer and makes $150,000 a year and I am a teacher at about 46,000.  We make good money and yet my husband is still not interested in moving out of my parents’ house – until the market “corrects itself”.

“This is where I am confused, my dad and my husband have been discussing this correction for years (while also quoting your blogs) and still nothing has surfaced, in fact I think it is increasing quickly.  Everyone around me is buying homes and condos all over the GTA (buying, selling and flipping condos apparently making lots of money in the process. Most people advise me to never rent because all that does is pay someone else’s mortgage and I tend to agree with that.  As well, they all encourage me to get into the market soon to gain trading power for the future.   So my question to you is, how do I know you, my husband and my dad are the right ones and everyone else around me are the wrong ones? I have heard all about the low interest rates and low down payments and such but, nothing has changed! This correction has been predicted for years and housing prices are still on the rise, are they really ever going to go down? Especially, with talk of interest rates going into the negatives. If I did buy a house now and the correction did occur would it completely devastate our financial situation? BTW, I hate you.”

And now, in Vancouver, here’s Jason, 27, also with a fresh bride:

“We rent in downtown Vancouver, within a 10 minute walk of both of our work locations and manage to put a good chunk of money into our investments every month with the money we save by not having any debt. If we manage to stick to this plan we will have a substantial nest egg in later life. Sounds great hey? Then, this weekend happened. My father in law is a very nurturing father to my wife and will do everything he can to help her. He came to us with a proposal.

“He tells us he is investing into an apartment. He already owns a SFH (no mortgage) in Richmond and wants to put more money in the booming Vancouver real estate. He cannot fathom why we pay $1,800 to rent a one bedroom apartment, telling us we are throwing away our money. He proposes 3 options with his investment plan: 1) He buys an apartment and rents it to whomever. 2) He buys an apartment and rents it to us (with the intention of us paying a lower rent). 3) We buy an apartment together at whatever % of ownership we prefer and pay him a portion of the rent based on the % of ownership.

“The only option I consider is option 2, who wouldn’t want cheaper rent? However, my wife sees this as a great opportunity to get our foot in the door of the crazy RE market in YVR. She accepts we can’t afford a place on our own, but with her parents she thinks it’s a smart idea.

“Calmly, I proceed to explain why it’s a bad idea but it all goes over her head. She says let’s run the numbers, which I’m glad to do as it will prove my point and she will now get it. I tell her to buy (even if we split it with her parents) we would have to suck out all of our investments for a deposit, and our mortgage would add over $1,000 to our monthly expenses. This would mean we have nothing in investments, and nothing going into investments for the foreseeable future. All of our eggs go into real estate in a market that by all economic standards should be imploding any time soon, we have nothing in investments and are tied down for years.

“Suffice it to say the fiscal argument didn’t go down well and there were many a tear shed that night. ‘But I want to feel like I own something’, she says. You warned me of this Garth, and it’s happening.”

The common thread here is emotion. Paul’s depressed he can’t sell his house. Pam’s angry she can’t buy one. Jason fears he’ll be crushed by a father-daughter tag team. Paul discovered real estate equals risk and loss. Pam’s scared of not getting into the market. Jason is vexed and must choose family or logic. At the heart is the most emotional of all assets, which more than ever is messing with people’s heads.

This weekend down payments went up, so anyone buying between $500,000 and a million has to cough up 10% over the threshold amount. In the lead-up to the change, the inevitable happened. One beater house on the wrong side of Toronto had over a hundred showings, 13 offers and sold for $149,000 over ask. The listing agent attributed it all to a beat-the-changes mentality. Perversely, trying to save some money on a down payment cost the buyer more than a hundred grand in a bidding war. The young have so much to teach us…

More consequential are new capital requirements now in place for lenders to pace the growing risk in residential real estate, plus higher CMHC fees on the issuers of mortgage-backed securities. These changes have already led to creeping mortgage rates, even as the economy sinks along with oil. That economic decline, by the way, is why houses in Halifax are going unsold, and rents in Calgary are falling. Job creation has fizzled, and in five weeks we’ll see a federal budget bathed in red ink.

There’s nothing inherently wrong with owning, or wanting, a house. But it should never be your life’s goal. Nor should it replace all liquid wealth, plunge you into unrepayable debt, inflate your living costs or turn into a speculative financial play. If you can’t afford it without cleaning you out, don’t buy. If it makes you inflexible, immobile or unable to adapt in an economy in flux, then wait. If houses in your hood are crippling, move. If you rent, be smug.

If you doubt, think of the people torn up, in tears, terrorized or terrified by real estate. And the big event hasn’t even started.

Emotions? Highly overrated.

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February 15th, 2016

Posted In: The Greater Fool

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