June 13, 2021 | The Tort

Corey’s in crisis. Life was all plotted, the way lawyers like it. Predictable path: career first, then wife, then house. Clause by clause. Motion, discovery and deposition.

Alas, she split. So at 41 he has the means and motive, but no opportunity. Naturally (as all troubled lawyers do) he wrote me:

“I make $200k plus a bonus (last year gross comp was $320, year before $254). Right now I rent, at a cost of $2900 for a condo in Toronto.  No car, TFSA is $90k in growth etfs/some individual stocks and RRSP is $170k, 80/20 equity/fixed.  I had intended to buy real estate with someone but now I have $330k in cash sitting there. Do I buy a place on my own? The semis I am looking at are around $1.2mm.  Mortgage plus tax would be about $5000 with $240k down payment. If I don’t buy now might be too late in a year or two the way things are going, am at bit of a crossroads. Your advice would be appreciated!”

Well, counselor, there must be a reason to drop a quarter million dollars on something, absorb a million in debt and almost double monthly living costs. Is buying half a house in Toronto worth that kind of investment or financial sacrifice for a single, jilted, guy?

The only reason he’s vexing: FOMO. Buy now or buy never. Recency bias – what just happened will go on forever. Soon slanty semis will be $3 million. Everybody knows that.

Well, Corey needs to consider the alternative to a house he doesn’t need. If he hangs on to his $590,000, continues to add a hundred grand a year and adopts a more predictable portfolio, in ten years he should have $2.64 million. By age 61 that becomes $6.67 million, providing an annual retirement income of $425,000 for life, while basically retaining the principal amount.

Now, he’s going to be a well-off guy whatever the outcome. Unless of course, he marries and divorces. Or has three kids who all want to be dentists and expect him to finance it. But buying a house (or part of one) that he doesn’t need at the very moment when prices have never been higher and knowing the costs of his seven-figure mortgage will only increase in the future seems, well, criminal.

This also begs the question many people ask now – is it ever a bad time to get real estate?

This blog has oft offered this advice: buy a house if you need one and doing so will not gut your finances nor imperil your family. Corey doesn’t need four bedrooms and three bathrooms. He fails the first test.

There are compelling reasons not to buy, based on a person’s personal situation.

Primarily (of course) is when you can’t afford it. Real estate costs a fortune in most places and the overhead just starts there. Add on closing fees, insurance, condo charges or maintenance, property taxes, financing charges, renos and the staggering costs of selling. If this sucks off too much net income (like 40%) the ability to save for retirement, kids’ education or unforeseen events disappears. That is risk, and danger. It’s gambling.

Also consider the debt. Canadians have borrowed 41% more than last year and now owe $2.1 trillion. Interest rates are at historic lows with but one direction in which to travel. Debt servicing charges will rise. A lot. And interest paid on residential mortgages (unlike investment loans) is not deductible from taxable income. Nor are property taxes (as in the US). All costs associated with a house are financed in after-tax dollars – the substantial upfront cost of the principal residence exemption from capital gains tax when you sell. Today, when guys like Corey contemplate a $1,000,000 mortgage on one side of a house, you can see the risk.

Think about this, too: change. Mobility. A flexible life. Real estate can be a comforting anchor for the sedentary and unadventurous, but a deadweight upon ambition. Owning property which prevents relocating for a better career is a drag. Markets can turn, of course, with real estate becoming illiquid (seriously, kids, it happens) and a wealth trap. Marriages and relationships can tatter, making jointly-owned housing a financial quagmire. Life is full of surprises.

Despite the stigmatizing of renters these days, leasing instead of owning can bring immense liberty. The freedom to move for opportunity. An escape from increasing property taxes, condo fees, repairs or maintenance. Quick mobility. The ease of new experiences when relocating to a new hood, city or even country is unencumbered by marketing and selling property. No realtors. Plus, it’s cheaper. Almost always property owners subsidize their renters. That means tenants have an enhanced ability to save, invest, be liquid and build a financial defense against uncertainty. Especially lawyers making big bank.

So, buy if you need and can afford. But never be so fatuous as to mistake real estate as the goal of life.

Garth Turner June 13th, 2021

Posted In: The Greater Fool

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