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May 29, 2019 | Earning the GVS

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.

“Call me Pablo,” he said, “if you write about us. Now, Garth, would you please validate our decision to succumb to the hormones, or just lay on us for being fools?”

Of course. S’what we do here. Validate. Ridicule. Embarrass. Irritate. And, on rare days, educate.

Turns out Pablo & his love are some of those irascible, high-income young people that the old, fading snorts who scuttle around the steerage section love to pillory. Here’s the story:

I’ve enjoyed reading your blog everyday for years, but I’m here now to confess to the sin of purchasing a condo in the burbs of YVR.

We’re a couple of millenials in our 30’s with a toddler. We have a combined income of over $300k/yr with over $400k stashed away in all sorts of registered and non-registered balanced portfolios. We could not resist the flaccid housing market and decided to catch this falling knife. It was a fresh breeze of air not having to compete in a bidding war and forgoing typical subject-to clauses in our offer.

We ended up getting a condo in the 700’s range around $100k under asking, with carving out enough funds from our assets to avoid CMHC insurance (20% down).

While we expect the market to go even lower or remain half-dead for a long time, we feel pretty good about it. Now, Garth, please validate our decision, or else.”

For regular readers and others with no life, the advice here has been consistent and repetitive. If you need a house and can afford it without gutting your investments, imperiling you future or turning yourself into a walking debt zombie, yeah, do it. We all need to live somewhere. Owning real estate can stabilize your housing costs. You can nest and paint a room chartreuse. If it appreciates in value, the profit is free of tax. Financing with a mortgage is relatively cheap these days, and you can borrow against a house at any bank. There are obvious benefits.

But balanced against those are risks and costs. Property is ridiculously inflated in certain markets (you know where). Closing costs are insane, especially in the 416. Condo owners have zero control over escalating strata fees or special assessments. Property taxes are destined to rise with the carbon levy. It costs a bucket of money in commission to sell. In bad markets your property can grow illiquid. Owners pay more for insurance, have to finance all maintenance and foot operational overhead, all in after-tax dollars. If you sell and lose money, there’s no tax relief as with bad liquid investments. And, almost everywhere, is costs more to own than to rent when all costs are factored in.

The pachyderm in the closet, however, is emotion. Our society has a real estate fetish. People are bred to crave it. They believe property equals security. We all suffer from the myth of the Forever House. We believe having a baby means immediately acquiring insurance and land. And because the Boomers won the birth lottery, growing up with inflation and swelling real estate values, their kids have been indoctrinated, even though conditions have changed bigly.

But what of Pablo? His argument that buying was so much smoother (and cheaper) than it might have been two years ago?

Totally right.

This pathetic blog has made the same points. People pile in and chase assets when they are rising, causing more competition, stress, bad decisions and over-spending. Conversely, when stuff corrects in price, buyers vanish. We are pact animals, after all.

So kudos to P for bucking the trend. He took advantage of a Comrade-Horgan-induced BC market shellacking to buy at a discounted price, in the absence of competing bids, and in a more relaxed, cautious way, leading to a better outcome. Plus he maintained most of his liquid portfolio, creating diversification. Yes, prices could keep falling (and will). The bottom is unknown, and could be uncomfortably lower. But maybe not. It’s an open guess.

However, Pablo, a condo? Seriously?

You have a kid. There might be another. It’s impossible to expand a condo unit, so the walls could close in on you sooner than expected. In addition, monthly fees – like property taxes – are destined to increase over time as operating costs rise, and there is no way to escape. In addition, this is an apartment. Others live above your head, next door and below your feet. You can’t really control your own environment – plus, there’s no dirt. Your investment can be materially affected if the parking garage gets cracks or the pool craps out. The condo corp could have an insufficient reserve fund, or a dodgy management company. Lots of additional and inherent risks buying a concrete box (and it is concrete, right? Remember the leaky condo caper?).

For more than $700,000 in the burbs of Van you can actually buy a detached. Or even a cutsey little float home . Anyway, having some real in your real estate is never a bad idea. Likely you will learn this.

Otherwise, smart kid. You get a Garth Validation Sticker. That and five bucks will buy a Vanilla Bean Crème Frappuccino at Starbucks on Robson.

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May 29th, 2019

Posted In: The Greater Fool

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