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October 9, 2017 | ‘My Fear..’

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.

“I’m not a millennial,” Andy says, “so be nice to me.” Well, that doesn’t stop the Victoria dad from whining like one.

“Garth, I feel stuck and need your help,” he moans. “I’ve been holding off buying a home for my family in Victoria for a number of years now. There are regrets as we have had opportunities for a decent house within our budget in good hoods but have held out as we thought prices were going to go down. Then 2015/16 happened and now our prospects have diminished considerably. I’ve always been happy renting, that is until the last few years. We’ve been booted out so many times because of landlords selling/moving in. We have moved 3x in the last 4 years with our rent going up considerably each time.

“My question is this: With the new OSFI rules coming down the pipeline, are we better of rushing in now with 20% down and buying some townhouse outside of town (guh…not ideal), or do we wait and hope that the rules bring in much lower house prices and jump in when prices drop to a sustainable level My fear is we do the latter and won’t qualify for a mortgage despite a correction in prices because of the new rules and higher interest rates. We are an average income earning nuclear family the city, like that means anything anymore.”

So I asked him about the family and its finances. Turns out Andy has two infant children, a stay-at-home spouse, $100k in income, $140,000 in total assets and wants a house listed for between half a mill and $600,000.

Can he afford it? How about after B-20 lands (the new stress test)?

Well, if Andy & his family put 100% of their savings towards a down payment and get a fixed-rate mortgage at 3.5% (25-year amortization) they can afford a property selling for $501,500. After mortgage payments, property tax, strata fees and food, they’ll have about zero a month left. A risky, one-asset strategy with no leeway for dealing with an event (job loss, another pregnancy, dead car) or an emergency. But, no moving.

After the stress test is a fact of life, big changes. Now they must qualify for a loan at the current rate + 2%. So, at 5.5% the amount of mortgage money offered would shrink by more than $160,000 (from $383,000 to $216,000), so the home they could afford to buy would be one selling for $336,500. In this scenario they have less house and a lower debt, but a far larger monthly financial cushion.

So is this an argument to rush out and buy now? “My fear,” Andy says, “is that by that time higher mortgage and the OSFI rules will close that door for us altogether.”

This is why people fail, of course. Emotion trumps logic. It leads to rash actions. Then tears and marital stress ensue.

Logic tells us that after B-20 takes effect, governing the rate at which every single borrower must qualify, credit will shrink in a hurry. After all, it’s equivalent to rates spiking 2% overnight. Since people’s incomes are static, and the cost of life keeps increasing, either sellers drop their price or the real estate market freezes. In Andy’s situation, his purchasing power crumbles by a third as the mortgage increases 2%. In other words, $500,000 properties in Victoria won’t stay at that level for long after the change. So the worst thing he can do is buy one today – at peak house – then suffer a loss big enough to nuke his equity.

Poor Andy might not only piddle away $140,000 in down payment and closing costs, but end up with a mortgage of $382,000 on a house worth $336,000. What a disaster. His kids could be in med school by the time he recovers. Meanwhile he’d be living in a place he compromised massively to get (and never really liked), just because he hated moving.

See how real estate messes up your head? The notion of a ‘forever house’ – even one that sucks and can wipe you out financially – can be destructive and irresponsible. Andy’s primary job is to save, ensuring his family is financially secure, can weather reversals and his kids have the pile of money they’ll need to get educated. By thinking his role is to lessen disruption by shoveling net worth into an inflated asset, leaving the door open to risk and uncertainty, he’s making a big mistake.

Secretly, he knows this. Why else would be write me? Pathetic.

If you think the stress test is a non-event and real estate will cost more in a year than it does now, go ahead and buy. But it better be the F-house.

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October 9th, 2017

Posted In: The Greater Fool

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