Since I’ve been ranting non-stop about the unaffordability of the Toronto and Vancouver housing markets, every day someone has come after us in the comments or email by saying “You’re not taking into account house appreciation!” or “If you had bought a house in 2012, you would’ve been even richer!” Followed by all sorts of questionable and hand-wavy justification to make themselves feel better.
To which my response is: “You wanna dance?”
Hey, if you want to bring feelings to a math fight, go right ahead my friend. I will be more than happy to hand your ass back to you, all red and spanked.
Let’s math this shit up!
Let’s say we suffered the sufficient traumatic brain injury required to buy a house with the cash we saved in 2012 for $500,000 and sold it at the end of 2014 instead of investing. What would’ve happened?
According to TREB, the average price of a Toronto home 2012 was $497,130, and increased to $622,120 by 2015.
This gives us an appreciation of $124,990 over 3 years. Sounds like a pretty good chunk of change. That is a healthy 7.8% year-over-year gain. A 60/40 portfolio had about the same gain during that time, so these should be pretty close, right?
And here’s the part that everyone forgets. There are reams of little (and not so little) costs of ownership that would’ve eaten into this appreciation. Stuff like real restate agent commissions, land transfer taxes, lawyer fees, maintenance. You know, the stuff that real estate agents always brush off while saying “yeah, but prices always go up.” Let’s pull back the ugly curtain on that, shall we?
|Real-estate agent commission (5% to sell):||$622,120 x 5%= $31,106|
|Land transfer tax (municipal AND provincial)||$12,085.20 (source: TREB LTT Calculator)|
|Property Taxes:||$3,420.12 (2012) x 3 = $10,260.36 (source: Toronto Property Tax Calculator)|
|Lawyer fees:||$500 x 2 (buy and sell) = $1000|
|Home insurance:||$100/month * 36 = $3600 (source: Toronto Home Ownership Costs)|
|Maintenance:||You should set aside 1-3% of the price of your home for maintenance per year. So let’s say 1%. $4971.3 x 3 years = $14,913.90 (source: Toronto Home Ownership Costs)|
|Gas, Electricity, Water (included in our rent):||$125/month (hydro) + $125/month (gas) = $250/month * 36 = $9000 (source: Toronto Home Ownership Costs)|
|TV Cable (included in our rent):||$25/month * 36 = $900|
|Furniture||We would need to buy furniture to furnish the addition bedrooms. Assuming 10K and a 50% resale value = $5000|
|Total costs over 3 years||$88,365.46|
Holy shit. Even I was surprised by how high this was. This is like a whole Engineer’s salary in ownership costs! And that’s after taxes!
And keep in mind, in many ways I’m being extremely conservative. This house was bought with CASH, so there are NO interest charges. And most people then follow up their unaffordable housing purchase with a severe case of Keeping-Up-With-The-Jonsitis, filling their 2-car garage with 2 cars (bought using borrowed money, of course), then hiring maids and landscapers to take care of their house for them, then remodeling their kitchen because they HAVE to have the newest granite countertops, etc. We will ignore all that, but you KNOW the actual extra costs over renting are much much worse.
So our net profit would’ve been $124,990 – $88,365.46 = $36,624.54
Meanwhile, a 60/40 portfolio of $497,130 generated after-fee returns of 7% (2012), 8.39% (2013), 8.1% (2014). This gives us a return of $126,129 by 2014.
Extra costs of owning this portfolio? None. No insurance, no commissions, no stupid 2% MER, and not even taxes since the gains are either unrealized capital gains or dividends, which are basically untaxed up to $50k.
But, since we continued renting, we’ll need to deduct the cost of rent from the gains. We paid $850 per month for 36 months of this time, so our gains are now
$126,129 – $850 x 36 = $95,529
So that’s a gain of $95,529 over 3 years from investing and renting versus $36,624.54 from buying the house.
Actually sitting down and doing the math surprised even us!
By investing instead of buying, our gains were 2.61X the gains from the house. And this is during one of the most powerfully accelerated booms in house prices in Toronto! Both houses and stocks appreciated at about 7-8% year-over-year during this time, and yet investing absolutely MURDERS housing!
I find it hilarious when people say “the majority of your portfolio came from your savings not investing. That has nothing to do with not buying a house.”
Wrong. It has EVERYTHING to do with NOT buying a house.
Would we have been able to save and invest that much had we bought a house? Nope. The costs would’ve eaten up OVER 70% of our gains!
Clearly the people that chant “House! House! House!” do not understand the real costs of owning a home. If you just punch some numbers into the mortgage calculator (like the real-estate agent told you to), and ignore the real costs of owning a home, you have NO IDEA what you’re doing.
And that’s the real problem of houses as a wealth-generating tool. Yes, people have gotten rich off real estate, but if you were to ever dig deeper into their analysis, you realize that people like Financial Samurai or Paula Pant understand the complexity and math behind their decision on a level of complexity that most people aren’t even aware exists. The vast majority of people walk into an open house, look around for 10 minutes, coo at the granite countertops and fancy faucets and say “Wow, I could really see myself living here.” And then promptly get into a bidding war for more money than they’ll ever earn in their lifetime.
In other words, most people bring feelings to a math fight.
And that’s what makes real estate such a seductive and dangerous thing. We’ve gotten countless emails from people saying “the stock market seems scary and I don’t understand it, so I don’t want to invest.” There’s a natural fear of the unknown when it comes to investing, and in many ways that’s normal. There’s a natural tendency to fear what you don’t understand.
That fear is completely missing with real estate. People will absolutely throw good money after bad towards a house purchase they don’t understand. And that’s why most people never get rich.
Don’t bring feelings to a math fight people!
Math always wins.
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