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May 6, 2019 | The Smug Millennial

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.

Mike has perfect the mandatory suck-up. “I’m a faithful follower of the blog and I’m writing today to thank you for the free investment help you’ve offered me since 2014,” he writes.

Turns out he’s a 37-year-old single engineer dude who moved to the GTA that year with $450,000, “discovered Garth” and decided not to buy real estate. Instead, he invested in financial stuff. “After nearly 5 years of blog-readership I am writing you because for the period ending April, 2019, my net worth is $821,129, and this is a big deal since much of it is US$-denominated, which equals…. $1,005,238.

“Now I can join the ranks of the smug Millennials! It was worth the sacrifices, to be financially secure. I’m not sure what I would have done if you had not convinced me to be a ‘lowly’ renter. Thank you!!”

There’s a point to quoting Mike, other than making me feel good (which is enough reason, of course). He’s right. He’s smart, astute, focused. And being an engineer, he probably has a spreadsheet for everything down to oral hygiene.

So in 2014 the average detached Toronto house was changing hands for $1,056,114. Five Aprils later that has risen to $1,355,764. If Mike had chosen the route Re/Max wanted his gain would have been – after buying and selling costs – about $172,000, or 16%. Meanwhile a balanced and diversified portfolio has doubled that 3.25% annual rate of return. So even though the housing return was tax-free and the portfolio was taxed (albeit at an advantaged rate), the conclusion is stark. Mikey’s a 1%er now, with seven figures of investible assets. If he keeps this up, at age 47 he’ll have $2 million and can retire with a lifetime income of about ten grand a month.

Conclusion: houses don’t make you wealthy or financially secure. Even in the nation’s best market. And even after the grandest housing boom of all time.

The trumpets rang out Monday as the local real estate board gleefully announced a 16% jump in sales over last April and a little price pop (at least in 416 – the burbs languished). “The strong year-over-year growth in sales is obviously a good news story and likely represents some catchup from a slow start to the year,” said head realtor Garry Bhaura.

So why’s the GTA so out of step with the rest of the country last month? Or is it?

As Mike’s experience underscores, you just can’t believe everything your mom or a real estate board tells you. Canada’s housing cult has led legions of people into massive debt and a serious lack of diversification. So when property values waver, it can make a big difference to overall financial stability.

Just look at the real estate gold standard of a single-detached house in 416. Last month the price was $1.355 million, unchanged from 2018 – which represents a loss once inflation and carrying costs are factored in. Two years ago the same property was valued at $1.578 million. When you blend in buying costs (land transfer tax and legals) as well as selling commission, the loss totals more than $350,000 – a decline of 22%. And unlike a financial portfolio plop, this one is not tax-deductible. Ouch.

Yes, with a house you get to live there. But during the time you also pay property taxes, or condo fees, maintenance, higher insurance premiums and have a huge pile of equity producing nothing. Rent is cheaper. You see, without steady annual appreciation, residential real estate’s a non-performing asset. Tart it up all you want, same outcome. A house is not a financial plan. It’s an emotional asset.

By the way, this statement is worth noting. It’s from the chief market analyst of the Toronto Real Estate Board:

“While sales were up year-over-year in April, it is important to note that they remain well-below April levels for much of the past decade. Many potential home buyers arguably remain on the sidelines as they reassess their options in light of the OSFI-mandated two percentage point stress test on mortgages. Longer term borrowing costs have trended lower this year and the outlook for short-term rates, for which the Bank of Canada holds the lever, is flat to down this year. Unfortunately, against this backdrop, we have seen no movement toward flexibility in the OSFI stress test.”

Is the stress test really to blame for more and more moisters deciding not to shoulder three decades of debt in order to buy an insanely-inflated house that will suck off their savings and jack up risk?

Or is this all Mike’s fault? You know, for using his noodle?

Maybe there’s hope yet.

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May 6th, 2019

Posted In: The Greater Fool

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