The Hard Landing: Toronto Home Prices Plummet

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FIRECracker

FIRECracker is Canada's youngest retiree. She used to live in one of the most expensive cities in Canada, but instead of drowning in debt, she rejected home ownership. What resulted was a 7-figure portfolio, which has allowed her and her husband to retire at 31 and travel the world. Their story has been featured on CBC, the Huffington Post, CNBC, BNN, Business Insider, and Yahoo Finance. To date, it is the most shared story in CBC history and their viral video on CBC's On the Money has garnered 4.5 Million views.
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Photo by kuhnmi @ Wikipedia.

So saw this scary headline the other day.

Toronto’s housing market is tanking, Business Insider.

Now, as much as people think I’m jumping up and down at the demise of our housing market, let me make one thing clear: I do NOT want a US-style housing crash in Canada.

The US housing crash was a cataclysmic black swan event that brought down financial institutions, cratered the stock market, and brought about a global economic recession that lasted for years. I keenly remember what it was like living through that, watching our investments plummet while at the same time fearing a job loss. We managed to get out of that without losing any money, but I wouldn’t wish that kind of stress on anybody.

And more importantly, it affected people (like us) who didn’t over-leverage into housing. Who cares if idiot Home Boners who can’t do math lose everything? But renters like me got dragged down with those idiots, and that was not OK.

What I was hoping for (and what our government was trying to engineer) was a Soft Landing. A gradual reduction of home prices, maybe 2-3% a year, for many years, that would bring national house prices slowly back down to their historical norm. Over-leveraged idiots with no slack in their budgets would watch their equity get eaten away as they throw money at their mortgage only to see their cash disappear, but no banks would go belly-up, no wave of job losses would happen, everything would stay civil. The idiots get screwed, but the rest of us would be fine.

This week, housing stats came out of the Toronto Real Estate Board.

Prices for single detached family homes fell 17.2 per cent in the GTA.

Toronto home sales plummet 35% from a year ago as new mortgage rules bite, Financial Post.

Well, shit.

For a comparison, here’s an article from December 2008 from CNN Money panicking about a “record” 18% drop in home prices. 18%. Versus 17.2%. And the American number was for the whole year. The Canadian one happened over a single month.

What the Hell Happened?

Well, a bunch of things. First of all, our government was trying to poke and prod the housing market into a Soft Landing for some time now, but none of it seemed to work. This January, they introduced federal regulations known as B20, which we wrote about here. Basically, the B20 regulations were designed to limit how much debt a person could take on. It added 2% onto the posted rate for every prospective homebuyer in the country when determining eligibility. The net result is that people qualified for less money, which means buyers had less rope to hang themselves with.

The problem was that provinces were implementing their own Soft Landing measures too. Ontario implemented a 15% foreign buyers tax last year. In British Columbia, that tax is 20%. Plus, they have a speculators tax of 2% annually of a property’s value if you own multiple houses. And on top of that BC has a an annual 1%-of-property-value tax if your house is deemed “empty,” meaning not rented or occupied for six months of the year.

And in isolation, all of these policies probably made sense to the people writing them. And I’m no policy expert or anything, but maybe they shouldn’t have done them all at the same time? Because I don’t think SFH prices are supposed to drop 17.2% in one month.

Here’s What This Means.

OK, so what does this price drop mean? Well, a couple things.

#1: Anyone who bought a house in the last year is now underwater.

I really don’t think Home Boners truly appreciate how scary debt is. When everything’s going up, debt is great! You managed to double your gains using leverage! Good for you.

But when things go down? Debt becomes a monster.

I may have mentioned this before, but Wanderer’s mom used to be a real estate agent. And when I asked her what the worst listings to work were, she would say foreclosures. Not only do the sellers not want to sell, the couple is usually fighting like cats and dogs.

In many home purchases, the decision to buy is not made equally. Usually, one person drags the other person into the decision. So when that decision turns wrong, the hesitant partner lashes out in righteous fury. “You see? You didn’t listen to me and now we’re screwed!” So Wanderer’s mom gets stuck trying to negotiate a sale in which the sellers are both uncooperative and going through a divorce.

Expect many Toronto Home Boners to be in this situation soon.

#2: The Government MAY Have Over-Reached

As a Canadian, I like our government. It doesn’t start wars, it gives us health care, and right now our leader takes such great selfies that he could fall back on a career as a male model should this whole politics thing not pan out.

Oh Justin. You can annex MY loins anytime you want! Photo By Women Deliver @ Wikipedia

But on this occasion, they may have shot themselves in the foot. The federal B20 regulations, plus a rising interest rate policy from our Central bank, plus a foreign buyers tax, plus an empty house tax, plus a speculators tax, may have been just a few too many things coming online all at once.

Bringing on new taxes with unknown effects is like training extras on the Walking Dead. The trick is to Stagger Them. STAGGER!!!

What Gives Me Hope

So am I selling all my TSX ETFs and giving up on the Frozen North? No. Or at least, not yet. Here’s what gives me hope that we’ll all be OK.

#1: Local Versus National

The statistics I’ve quoted are local. Toronto Single Family Homes down by 17.2%. But the American statistic was national. US home prices down by 18%. So I’m hoping that while Toronto may get fucked, the rest of the country won’t, and even though Toronto is the biggest city in Canada, the aggregate of the rest of the country not getting fucked will blunt the catastrophic impact.

What I’m watching very closely is if our banks start falling over. The 2008 housing crisis didn’t turn into the 2008 Great Financial Crisis until Lehman Brothers collapsed. So believe me, I am watching Home Capital very closely right now.

#2: The Government Can Always Reverse Itself

The thing about 2008 is that nobody saw it coming. In this case, the crash (if it does turn out to be a crash) was actually caused by over-zealous government policy. Which I see as an oddly comforting fact. If our government inadvertently caused this crash, it can simply reverse their policies if their impact was too great.

And I know, depending on government to do the right thing is idiotic. But remember, our government is still run by someone who knows what they’re doing. And also, he has dreamy eyes.

So dreamy…

Soft Landing! Soft Landing!

So I am still waving the Soft Landing flag, and hoping someone who knows what they’re doing pays attention. The Home Boners? They’re screwed. They will be miserable, and stressed, and all their money will get sucked away by the invisible monster that their home has become. And that’s OK. They deserve it because they don’t understand how math works.

But the rest of us? We didn’t screw up like those people did, so we don’t deserve to get dragged down with their dumb asses.

The Hard Landing may have just started. Let’s all hope we don’t get squished.

Incidentally, I don’t know how I came across this but I recently stumbled onto one of Jim Collins’ old posts about how he bought a condo back in the 1980’s right as the housing market turned negative. It’s a hilarious read that I had no idea was lurking on his site. Check out The Godfather’s experience with a housing crash here: How I Lost Money in Real Estate Before it was Fashionable.



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85 thoughts on “The Hard Landing: Toronto Home Prices Plummet”

  1. So much for aggregates – Vancouver is likely heading in the same direction as Toronto, just a little behind.

    Fwiw, my expectation is that the politicians all saw the writing on the wall – the bubble was ready to implode no matter what they did – and figured it was better to be seen to be doing something rather than sitting on their hands. Things are going to be a mess for a while here. Thankfully most of my compensation is in US equity 😛

    1. I’m actually surprised it hasn’t started in Vancouver yet, where the new taxes are even more biting and prices are even higher. Maybe they haven’t taken effect yet?

      1. It has, it’s just less obvious. The big thing that I’ve noticed is that the sales mix has changed significantly – specifically, detached houses are taking much longer to sell. According to Zolo, the top level average number is down 7.9% YoY, but this appears to be largely for the aforementioned reason. Active listings are way up for everything except condos as well.

  2. Terror generally spreads from the biggest cities to the smallest cities. It’s just a matter of time before Vancouver follows as well.

    But I do you like are you point out that the government is the one to break the bubble, and therefore can reverse policies to support prices once again.

    US coastal city real estate markets of the sign for the past couple of years. Prices are simply out of control and way beyond income growth.

    1. Yeesh, you guys better not crash again too. I don’t think the world can deal with two crashing housing markets at the same time.

      1. yeah well it could be a lot worse than just two, there are a lot of places in the world that are facing similar housing crisis situations: yes places like San Fransisco in the states but also London and places in Australia and New Zealand come to mind.

  3. Hard landing, Hard landing, Hard landing, Hard landing, Hard landing, Hard landing, Hard landing ! I’m 90% in cash just waiting!!

  4. Not exactly related to crashing housing prices, but I just caught up with an old friend. He’s watched his condo in Raleigh go up up and up some more in a very popular part of town (it’s gone from $130000 to $200k+ in only 10 years, which is huge around here). But now he’s stuck. All kinds of bad news with their condo association and monthly fees have gone from <$200 to $550/mo and are about to climb to $900/mo to cover a ton of deferred maintenance. So no one wants to buy these units and he's kind of stuck living there in spite of wanting to move for job-related reasons (like a $25000/yr pay raise for moving to Florida). Oh the joys of home(b)ownership

    1. Aargh, why is it that even when people manage to win with houses it’s still a headache?!? What a useless asset class!

      1. Over the time span he’s owned his home he’ll probably come out ahead since buying is cheaper than renting in his area (or it was when he bought – now I’m not as sure since prices have gone up considerably in past 10 years). Depending on how many months/years of those huge assessments he ends up paying. And ignoring the loss of flexibility to take advantage of better career options outside of Raleigh.

  5. Gee for someone who “maths the shit of things” you have some real trouble differentiating what numbers you are dealing with.

    The SALES -that would be the numbers of units sold – dropped 35% year over year – as per the FP article referenced – the same article noted that average PRICES dropped 12% year over year but it is unclear as to what was averaged in those prices.

    Averages are very poor things to quote – eg. if you and I and our closest family are all in the same room with Bill Gates (or Warren Buffett) then on average everyone in the room is a billionaire – certainly a very valid statistic but a grossly stupid thing to quote.

    Further I’m surprised you didn’t use the numbers for single family homes – much scarier with a 41% sales drop and 17.2% price drop – again on average – while the sales of condos dropped 30%, oh but surprisingly the prices went UP 10% – interesting use of PLUMMET.

    The article also when on to say that comparing FEB 17 to FEB 18 was a bit of apples and oranges as the 1st quarter of 2017 was a flaming market – let’s wait and set what the yearly numbers look like before calling a hard landing.

    So much for accurate reporting on your part.

    1. There is more truth in this comment than there was in the author’s whole blog post.
      Good on you for calling them out on it.
      If people are going to take the time to write about the Toronto or GTA real estate market they should do so with more honesty.

    2. Yup. Condos did go up because idiot home boners panicked when B20 bit and they found out they qualified for less than they thought. And rather than think “well gee, maybe I should do something else with my money,” they went “MUST BUY SOMETHING! GAHHH!”

      I recently spoke to a friend back in Toronto who just bought a condo for $1M. That’s objectively stupid. Don’t worry, condos won’t escape the damage. Their time will come too. Just wait.

  6. What goes up…..

    Rather than gawk at the wreckage coming, I hope your investment-focused readers are already thinking down the line about what opportunities this will present. Maybe not this year, but in the not so distant future (and not just in real estate specifically). Just a thought.

  7. Hey gcai- lighten up. A quick search on Toronto housing market brings up a laundry list of shitty news. While you might take great pride in nitpicking numbers, the facts of the article are, using my colloquialism, “directionally correct.” Anyone in Toronto with a maxed out mortgage or highly leveraged / speculative real estate investments is gonna get an education… Pounded up their ass a penny at a time.

    Oh yeah, I don’t know the definition of a soft landing. But a “hard landing” is a crash that you walk away from. Learnt that after 3 years as a UH-60 helo crewmember…

    I would suggest many Toronto property owners fasten their seatbelts, then place their tray tables and seatbacks in the upright position. 🙁

    1. Anyone in Toronto with a maxed out mortgage or highly leveraged / speculative real estate investments is gonna get an education… Pounded up their ass a penny at a time.

      Oh dear God. I love this. I am going to have to start using that phrase myself now.

      Pounded up their ass a penny at a time. Bwahahaha.

      1. I’m from Toronto and the mainstream media is not really talking about this. I think once it hits the water cooler talk you can pretty much confirm you won’t get pennies pounded up the a$$, because prices will be as low as they’re going to get. TBD….

  8. I believe it was a 17.2 percent drop in a year for single family homes from what I read elsewhere. I mean who is shocked by this..the price gains we saw the past few years were just stupid..parabolic moves always go down as fast as they go up and humans never learn.
    Another comment..I find the use of the f word and other strong language diminishes the value of these articles. You don’t need to throw swear words around to make yourself appear cool or hip or whatever.
    And one more comment..I find our prime minister an embarassment and even worse so am embarassed by Canadians shallowness in electing a fluffball like him to run the country. Judging by Firecrackers comments and other millenial women around me it seems many Canadians voted on the basis of image and glitz over substance and we will all pay the price for this at some point. T2 would be great as a PR man..marketing man..host of E Canada..but not to run a country.

      1. Hey, he’s giving us legalized weed. I’m on board!

        And as for the use of the f word, I’m not doing it for shock value. That’s just how I talk.

        I’m such a lady.

        1. I find your language authentic. “Being a lady” gives me the same willies at 67 as it did at 27.

          I have a flip in the works here in a big expat destination in Mexico. (Have been flipping for 3 decades, so save the lecture.) I have been verrrrry carefully watching the Canadian housing market as 50% of my potential buyers are Canadian. I am an older American woman and Trudeau is uber hunky. Just sayin’.

    1. Victorious I agree – he’s a drama teacher by trade… not an economist! I have no faith in him. Plus, he said budgets balance themselves. Clearly as his budgets keep demonstrating that is not true.

  9. Surprised by the level of hyperbole and animosity. While the price’s in Toronto may well be

    dropping, a lot of millennials sold their homes in T.O. and bought the same size house here

    in Hamilton for half price and banked the other half. Not to mention starting a slew of

    Fantastic restaurants & coffee Houses.

    All I can offer is my local homeowners rebuttal.

    In 2008 I bought my house here at auction for 100k cash, dropped

    in 200k in reno’s and now have it valued at 500k.

    Mortgage and reno’s paid. For a profit of 200k in 10 years. Relatively speaking, and I don’t

    pay rent while living in a fantastic pad I built with my own goddamn hands. Sweet…as the

    the vegetables I grow in my garden!

    I get you are referring to a VERY SMALL population sample of over leveraged under

    capitalized dreamers, however, allowing ones bias to distort statistical truth is uncool.

    There are many paths to financial independence, if you’re not helpless.

    Here is a link to the current real estate stats around Hamilton which show an average

    11.9% drop from last year. So What?

    https://www.zolo.ca/hamilton-real-estate/trends

    1. “A lot of millennials sold their homes in T.O. and bought the same size house here in Hamilton for half price and banked the other half.”

      Christ, I hope so. That would indicate that a lot of millennials were able to time the housing market. It sounds like YOU managed to do that, and you’re patting yourself on the back for making the right call. Good for you. You did make the right call.

      But I think you’re in the minority. I’m now getting emails from people saying “My home is underwater! What do I do!”

      1. This is the risk we all take, if they have a long term goal, steady employment, like the neighbors, and have some headroom against interest rate creep, then stay the course. But as we have seen in other crash’s, many don’t have this, and believe house prices will go up forever, they are the speculators and Tom Vu alumni.

        wish them luck

    2. Or if you’re a millennial like me you rented for a few years and then bought your first house in Hamilton as the prices were coming down this year, making sure to find a cash-flow positive duplex that will be paying me back for years to come regardless of the value of the property. Plus having new students constantly moving in and out will help me side-step the rent controls by turning over new leases often enough to increase rent to market value every so often.

    3. Hamilton is great I grew up there. I would love to live there. But I’d be interested in knowing where all these millenials who moved there are working, because there are few professional jobs available there. Say I move there for that rare IT/finance/marketing job, then it dissappears as such jobs so frequently do these days. It’s likely I would have to find my next job in Toronto, and commute. The commute is 2+ hours each way on the highway in stop and go misery, and by train it is also a long commute and service is very limited. It just isn’t a viable option unfortunately.

    1. If you paid off your mortgage and don’t need to sell, you’re fine. Say hi and congrats to your folks for me. They did the real estate thing properly.

  10. The sad truth…although not your flavor, as prices drop it’s a good time to buy and become a landlord. One persons misery is another’s opportunity. Just sayin.

    1. Eh, I’m done with real estate. Even if I get in on a good buy price, I think what we’ve just discovered is you can’t tell when’s a good time to sell. Making money on real estate is just like timing individual stocks.

  11. There are advantages to owning real estate. The below comments are not meant to be combative. It’s meant to give another perspective on real estate investments. We own real estate and the below details how it has worked well for us. Sorry it is long.

    -We don’t want all our money in the stock market. Buying REIT stocks/index funds still means your money is in the stock market. Why put all our eggs in one basket so the saying goes? When the stock market crashes or when we are in a bear period, it can be pretty scary to have ALL my money in the stock market.

    -Real estate has worked out really well for us. We paid off our primary home 5 years after buying it. Living in our 3 bedroom primary home, mortgage-free, cost much less than renting a 3 bedroom home (esp. in the area where we live). In the future, in our late retirement years if we choose to sell our primary home we do not pay a capital gains tax. Buying real estate has increased our net worth even more. This means even more money for retirement or money left in our estate for our two children.

    -Early in our marriage we bought two rental condos and our tenants have almost paid off the first rental condo’s mortgage (getting our tenants to pay off the mortgage works, we have proved it to ourselves with this first rental condo). The second rental condo’s mortgage will be paid off by our tenants by the time we retire. In our retirement years, rental income will give us another form of diversified income (in addition to stock market income, company pension plans, CPP, OAS).

    -For both rental condos we only paid 20% (of our own money) of the initial condo purchase price as a down payment. The tenants’ rent cheques pays the condo mortgage, maintenance fee and property tax. There are separate water and electricity meters for each unit and since it’s usage base, the tenants pays for that as well.

    -Just because we own real estate it doesn’t mean we haven’t been able to build our stock market portfolio. We have 7 figures in our stock market portfolio.

    -Like the stock market, real estate prices can go up and down from year to year. Like the stock market, real estate prices can crash and can have bull/bear periods. Like the stock market, if you are investing in real estate for the long term you can come out ahead in your retirement years.

    -We have 7 figures in our stock market portfolio and we can RE. It is because of both our real estate investments and our stock market portfolio that I have been able to RE and be a stay at home Mom to our kids. My husband can RE if he wants but he still likes his job. He has a defined benefit plan at work (the longer he stays the more money he will get in retirement) and we would like to have plenty to live on in our retirement years. We would like to have enough to support our potential grandkids’ education. Whatever we don’t spend before we are gone we can pass it on to our children/grandchildren.

    -We have set up roots here by electing to buy real estate. We have family here. We have two young children who like their school and like hanging out with their school friends. We love traveling but the full time nomadic life is not for us. We don’t want to have to live in south east asia, Mexico, etc. so that we can stretch out our dollars to meet our yearly budget. We would love to take vacations there though.

    -I can see my kids feeling lost if we pull them out of their environment to go live the nomadic life. They wouldn’t get to spend as much time with their grandparents and aunts/uncles/cousins. Play dates with their friends will not be as frequent.

    -If people don’t invest in real estate there wouldn’t be enough supply out there for renters. Hence, everyone does the part they want. Renters don’t want a mortgage so they rent. Tenants pay off the owner’s rental mortgage. As a rental real estate owner, it works to my advantage if there is a small population who don’t believe in owning, it means there will be sufficient demand for my rentals.

    -Real estate investments can work out quite well. The media writing articles detailing that real estate prices have gone down by this and that percentage will not cause me to abandon my long term investment plans. There are plenty of articles written about stock market prices going down or a stock market crash happening soon. This also will not cause me to abandon my long term stock market investment plans. Like the stock market, the long term real estate investment journey will be filled with hiccups, bumps and crashes. Also, like the stock market, when prices go down, that’s the time to invest.

    -Just like the stock market, there are pros and cons when investing in real estate. Not all real estate investments are doomed for failure. There are many many people who have invested successfully in real estate. As there are many many people who have done well in the stock market.

    1. Like a few reader commented, buying a house is not necessarily financial ruin. Some have stated they bought their house 10-15 years ago and paid it off in 5-10 years. This is great if you were in a position to buy 10 years ago (at the last dip) – the right age, the right job, the right stage in life. Some of us only arrived at this stage of life recently and are not able to purchase (not in Toronto at least).

      I feel that those reader and FC are having two different conversations at the same time. FC is referring to people buying in the last 2-3 years, in Toronto, at extreme prices with high leverage and with no financial breathing room. Many out of FOMO. These people are not the kind of buyers who will be in a position to purchase 2 investments condos which are cash-flow positive, not in a position to pay their mortgage in 5 years, nor build a 7-figure portfolio. And all because prices in Toronto are extreme. This part is true.

      Similarly true is that not every homeowner is in the situation of being young, first time buyer with a low-paying job. Most homeowners bought a long time ago (10+ years), are making payments on their mortgage which are well within their means, intend on staying put for life and are content in their house. This is the silent majority that FC is missing. In a region of over 6M people (GTA), about 200,000 real-estate deals were done in 2016-2017. That’s not too much.
      And anyone who bought prior to, lets say, 2014 or 2015 is not underwater after those last few crazy years of gains. Anyone who bought a Toronto house for 300K-600K (very normal prices 5 years ago or more), and watched it climb to 800K+, can see his home value drop down and shouldn’t care. And again, this is probably the vast majority of people. They don’t make headlines, they don’t buy 4 investment condos, they don’t go on TV to show their renovated home. They just bought a home, made some kids, living their life happily.

      What makes me way more concerned is the potential for a stagnant economy coupled with huge deficits which are unpayable in a climate of decreasing tax base. The only way a government can combat that is higher taxes (biting into income, investments incomes included) and inflation coupled with increased money supply in order to devalue the currency and be able to pay debts with effectively printed money. This is a scary prospect for people purely living on their portfolio. This is the nightmare scenario where every person who bought a 1M$ house can easily pay his mortgage in Canadian dollars since the government is printing them away (with higher prices and higher salaries) but those Canadian dollars will be 40-50 cents (US), so people who’s salaries didn’t keep up find life hard to afford (especially while abroad). This can really mess up a retiree life if their income is fully tied up in a portfolio which may not keep up with inflation. I wish it was a CAD only nightmare scenario, but our neighbors to the south have started their inflationary ride and are running stupendous deficits already.

      And don’t even think about mentioning fiscal responsibility as the way out of this mess. Fiscal responsibility is what FC and Wanderer are preaching. I works well on a personal level (sometimes, for some people). It must work for anyone who plans on RE. But it doesn’t work on a national level, especially not in time and countries of hyper-polarized politics. Anyone suggesting reduced spending can not get elected. The voting masses are sucking at the tit and will not vote for a dry cow…

      1. Not saying housing is always a bad investment. But I think a lot of people are about to realize just how scary being underwater on a house is. You’re literally trapped.

        Also:
        “The voting masses are sucking at the tit and will not vote for a dry cow…”

        Ewww….

    2. A bit of a rebuttal to this… I’ve numbered your points to make this more clear

      (1) We don’t want all our money in the stock market. Buying REIT stocks/index funds still means your money is in the stock market. Why put all our eggs in one basket so the saying goes? When the stock market crashes or when we are in a bear period, it can be pretty scary to have ALL my money in the stock market.

      (2) Real estate has worked out really well for us. We paid off our primary home 5 years after buying it. Living in our 3 bedroom primary home, mortgage-free, cost much less than renting a 3 bedroom home (esp. in the area where we live). In the future, in our late retirement years if we choose to sell our primary home we do not pay a capital gains tax. Buying real estate has increased our net worth even more. This means even more money for retirement or money left in our estate for our two children.

      (3) Early in our marriage we bought two rental condos and our tenants have almost paid off the first rental condo’s mortgage (getting our tenants to pay off the mortgage works, we have proved it to ourselves with this first rental condo). The second rental condo’s mortgage will be paid off by our tenants by the time we retire. In our retirement years, rental income will give us another form of diversified income (in addition to stock market income, company pension plans, CPP, OAS).

      (4) For both rental condos we only paid 20% (of our own money) of the initial condo purchase price as a down payment. The tenants’ rent cheques pays the condo mortgage, maintenance fee and property tax. There are separate water and electricity meters for each unit and since it’s usage base, the tenants pays for that as well.

      (5) Just because we own real estate it doesn’t mean we haven’t been able to build our stock market portfolio. We have 7 figures in our stock market portfolio.

      (6) Like the stock market, real estate prices can go up and down from year to year. Like the stock market, real estate prices can crash and can have bull/bear periods. Like the stock market, if you are investing in real estate for the long term you can come out ahead in your retirement years.

      (7) We have 7 figures in our stock market portfolio and we can RE. It is because of both our real estate investments and our stock market portfolio that I have been able to RE and be a stay at home Mom to our kids. My husband can RE if he wants but he still likes his job. He has a defined benefit plan at work (the longer he stays the more money he will get in retirement) and we would like to have plenty to live on in our retirement years. We would like to have enough to support our potential grandkids’ education. Whatever we don’t spend before we are gone we can pass it on to our children/grandchildren.

      (8) We have set up roots here by electing to buy real estate. We have family here. We have two young children who like their school and like hanging out with their school friends. We love traveling but the full time nomadic life is not for us. We don’t want to have to live in south east asia, Mexico, etc. so that we can stretch out our dollars to meet our yearly budget. We would love to take vacations there though.

      (9) I can see my kids feeling lost if we pull them out of their environment to go live the nomadic life. They wouldn’t get to spend as much time with their grandparents and aunts/uncles/cousins. Play dates with their friends will not be as frequent.

      (10) If people don’t invest in real estate there wouldn’t be enough supply out there for renters. Hence, everyone does the part they want. Renters don’t want a mortgage so they rent. Tenants pay off the owner’s rental mortgage. As a rental real estate owner, it works to my advantage if there is a small population who don’t believe in owning, it means there will be sufficient demand for my rentals.

      (11) Real estate investments can work out quite well. The media writing articles detailing that real estate prices have gone down by this and that percentage will not cause me to abandon my long term investment plans. There are plenty of articles written about stock market prices going down or a stock market crash happening soon. This also will not cause me to abandon my long term stock market investment plans. Like the stock market, the long term real estate investment journey will be filled with hiccups, bumps and crashes. Also, like the stock market, when prices go down, that’s the time to invest.

      (12) Just like the stock market, there are pros and cons when investing in real estate. Not all real estate investments are doomed for failure. There are many many people who have invested successfully in real estate. As there are many many people who have done well in the stock market.

      Me:

      (1) REIT’s are not stocks and as a result will have different behaviours. It’s just as much owning real estate as owning an investment condo is.

      (2) a. This is anecdotal survivorship bias. From your statement it’s impossible to tell whether this would be the case based on pure luck or good planning. Maybe the market was just in the correct place when you bought? b. One thing that a lot of folks discount is the cost if tying up that much capital. Hint: it’s probably similar to what a monthly mortgage cost would be. Your paid off home is costing you investment income

      (3) Again, survivorship bias. I can tell you for a fact that particularly as you move upmarket in some parts of the country, this is currently an impossibility. You cannot cover the costs of a $1.5M home on $4000/month in rent. The true costs are close to $10000/month. This is the rental situation in Vancouver, for example.

      (4) Also survivorship bias. Also, it discounts your cost of capital. Do their rent cheques also cover the lost income (5-6% annually) on your 20% down?

      (5) Great. That’s a smart thing to do. In order to do that in Vancouver, for example, you’d probably need to be approaching $5M in net worth, which means you already make/have a tonne of money. This doesn’t describe most folks, btw. I earn in the top 1% here and it doesn’t even describe me.

      (6) Long term studies show that the real estate market does worse over the long term (see: Case-Schiller (sp?)). Real estate increases in value in proportion to inflation while tying up your capital that could be used to produce a higher ROI.

      (7) Fantastic, see #5

      (8) Common fallacy. Renting your home doesn’t prevent you from being rooted in your community. Owning your home isn’t some sort of magic beans in this respect, unless of course it means you’re forced to be part of a community that you’d otherwise hate, because you’re trapped by your house.

      (9) Again, a fallacy. Renting doesn’t require you to be a nomad. Some people like the flexibility of renting for this reason, many people remain where they are and rent long term.

      (10) Sort of true. It definitely requires someone to take on the risk, but taking on the risk is not always a good or smart idea in every circumstance. I’d argue that right now in major Canadian cities, landlords are immensely stupid to be taking on the risk, including those landlords who have long term holdings that they purchased a long time ago, because the cost of their capital being tied up in real estate is easily dominating their returns. Whether you’re ok with that is a different question entirely.

      (11) And when prices go up enormously, that’s the time to sell. I don’t hold on to stock that went up 200% in value, for sure. I sell it. A bird in the hand is worth two in the bush. (ie: your 200% gain can easily evaporate, or get larger. No one really knows. The only thing you know for sure is that you have a huge uncapitalized gain)

      (12) Again, time and place. Sometimes it’s a good idea, sometimes no. In major Canadian cities right now, real estate is a terrible investment.

  12. Your article is a good read. It is my hope too that we don’t see the sort of credit-crunch inspired fall of 2008. We are a smaller market if that has any bearing. I think that what we will see is people quietly, desperately, and miserably continuing to pay their mortgages. Yes, the divorce rate may rise and there will be a lot of marital strife in the marriages that survive.

    What I hope is that we see a change in behaviour. I still see many veiled references to taking a wait and see approach to buying real estate, using all those investments for the “real” reason to have them. I disagree with that as I believe it is a deception. In the long term, I believe it is best to focus on having and maintaining investments, as you have, because it provides the most flexibility.

    These days, being flexible, not being tied to a property, is really the better choice. Not to say that there is anything inherently wrong with owning real estate but rather that it should not be an end in itself nor should it be the largest type of asset within a portfolio. Financial independence should be first and foremost. If real estate figures into that, great, but I think too many people have not really done the analysis that you have done to see what real estate costs and they are too easily swayed by their desires. Really, as my grand mother used to say, if you have money, there are always deals.

    1. I don’t think we’re going to get a credit crunch either, but this is going to be painful for a lot of people. Unlike stock market crashes, housing crashes take a decade to recover.

  13. Big ERN offers solid counterpoints to Millennial Revolution’s anti-homeownership arguments starting just after minute-53 of today’s ChooseFI episode:
    https://www.choosefi.com/066-the-emergency-fund/
    He asserts that in general homeownership is financially better than renting when calculated over 10 year+ periods. ChooseFI hopes to run some rent vs. own comp analyses for Friday’s wrap up show.

  14. A house is never an investment unless you are renting it. It is a lifestyle choice, a luxury generally that might make sense if it doesn’t crater your financial plan. Which is why I bought a very inexpensive house and still live in it, because they just are not investments or at least pretty terrible ones. That being said it really doesn’t matter what happens to the market value of the house. The mortgage company can’t make a margin call on the debt, as long as you keep paying the mortgage you’re good even if the house isn’t worth what you paid. Since you rarely can recover the money from your house while you are alive and living in it (why it isn’t an investment) then if the payments are in line with your income its all good because you still get what you agreed to, living for free in the house for the price you agreed to. Only your heirs will lose money and hey, that’s not your problem. If living in that house was a good deal in your mind it should remain a good deal even if others later can get a better deal. You still got exactly what you paid for. Not much different than holding a 4% ten year bond for ten years. If interest rates go up then the bond value might drop to $5 but if you hold it to term you still get the $10 plus 4% interest which is what you signed up for. In fact from a cash flow standpoint dropping house values will cut your living costs because your property tax will drop, it is almost a bonus!

    1. I have a hard time with a house is NEVER an investment. I own rentals and my own house. I view them all as investments. In fact I don’t purchase real estate unless I am really sure it is an investment that will grow my portfolio. I also own stocks etc. My rentals are like dividend investments, they pay monthly dividends. My primary residence I view as an investment, one that I manage. I can increase the value with sweat equity if I choose. If I choose a house wisely I can see market gains. The only issue is that selling my investment takes longer to get in my bank account.

      1. Owning rental housing is a completely different thing. If you do the math right, those ARE investments. What I have a problem with is going into massive debt to buy houses because housing always goes up. They do not. And we’re about to learn that the painful way.

        1. “What I have a problem with is going into massive debt to buy houses because housing always goes up.”

          Here’s the thing: your writing has a tendency to NOT describe that context. You tend to generalize that homeownership is a “waste of an asset class” and homeowners are “homeboners.” The problem I have with this is that in the vast majority of calculations, homeownership renders a better result than renting does. I encourage you to listen to this Monday’s ChooseFI Episode 66 with Big ERN (start at minute 53) – he references you specifically and explains why homeownership is often the better option. I think you effectively maligning homeownership as idiotic to 10’s of thousands of people is not cool. I’ve posted some of the academics of homeownership on your FB threads in the past and automatically get ridiculed as if I’m some sort of dope who doesn’t get it – a homeboner. Like Big ERN, my homeownership has consistently produced free housing and a net positive return creating both a better daily living experience and an economic one when compared to renting. The ChooseFI conversation will continue into the Wrap Up show this Friday (66R). I think it would be appropriate and interesting for you to write a response to the 66 episode in which they disagree with your overriding brand premise.

          1. Your housing isn’t free:

            – maintenance
            – taxes
            – higher insurance costs
            – opportunity cost of capital
            – interest payments on mortgage (if you have one)

            Pretending that it’s magically ‘free’ just doesn’t make it so.

            As to the negative connotations of homeowners from the author – holy smokes, you apparently miss out on what a social pariah you get to be considered for being a lowly renter.

            1. BikeMike, check out ChooseFI Podcast Ep. 66 starting at minute 53 for a more detailed clarification of “free.” I do not understand your social pariah comment. I’m just talking about the math.

              1. I did. I listened to all of it. And what they describe is not free by any description of free that makes sense (still paying taxes, maintenance, etc) PLUS they explicitly indicate that they are discounting the opportunity cost of the capital tied up in the property. This is a major gaping hole in this argument.

                You complain about FC’s attitude towards homeowners (homeboners) being extremely negative. The vast majority of homeowners, particularly those who have been lucky to have bought their home at the beginning of the current run up, treat renters as if they’re some kind of lepers and as though their incredible luck to have been born at the right time makes their decision making somehow brilliant. Personally I dread conversations about housing precisely because of this.

                  1. Yes, except that they run up at different rates. In the long term houses run up at approximately the rate of inflation (which makes sense, since they’re a component of inflation), whereas equity markets have tended to increase at a higher rate over the long term. As the podcast you referenced pointed out, non-inflation adjusted numbers tend to run around 10%.

                    As to that website…. a couple of things that are wrong:
                    – holy moral hazard batman. A website that schleps houses thinks that owning homes is better? Surprise!
                    – it figures mortgage interest at 3.0% over 30 year. Good luck with that
                    – there’s no accounting for maintenance
                    – no accounting for taxes
                    – no account for opportunity cost of capital

                    So, *maybe* the mortgage vs rent is breakeven. Certainly not the *cost* vs rent, however.

                  2. The page you pointed at accounts for rent increases.

                    In Canada at least there is no 30 year fixed rate mortgage at 3%. In the us mortgages at 3% are a relatively recent thing that is unlikely to stay. Good luck with that.

                    I believe that maybe you’ve done ok owning your own home, but I also believe you are absolutely wallowing in survivorship bias. It’s ok to be the recipient of good luck – believe me, I know it – but it’s by no means an indication of your own skill. Concluding otherwise is potentially deadly.

          2. I am going to have to check that out.

            But for the record, I never maligned all Home Owners as Home Boners. A Home Owner is someone who owns a home. A Home Boner is someone who owns a home, but is also an idiot who can’t do math and makes all their financial decisions based on emotion while getting offended at anyone who suggests they don’t know what they’re doing.

            If you self-identify in the second group, that says more about you than me.

        2. Agreed. Massive debt freaks me out too. I just was responding to stevearks comment that the house you live in is never an investment. I argue it can be. I think that’s many purchasers buy homes with too much emotion, not enough thought. Each and every home I’ve purchased including my own residence, I have bought thinking as an investor……even my dream home I live in now. I intend to live here for foreseeable future……but anything can change and I know that purchasing under market value forcing appreciation with SMART renovations, my INVESTMENT is golden. In our favor of buying over renting is my husband being a MMM type guy who likes to and can fix things himself. I feel strongly that IF people choose to buy, it’s much more than math alone. Working it out on paper is one thing, but also being honest with yourself as to how a purchase will affect you. Too many go on buying frenzies after purchasing new appliances new furniture etc etc.

        1. Good stuff. I’ll look forward to reading. It’s a healthy FIRE debate and full of nuances. My perspective focuses on long-term homeownership (10+ year’s). It’s a dicier equation when looking at rent vs own in short, sub-5 year, periods. Peace!

  15. Just like recessions and corrections, it happens, 82 was the worst i have lived thru, people were throwing the keys in and walking away, but if you had kept it, and just paid the mortgage, 10 years later it was like it never happened. The same in the US, no, you did not get rich on it, but the ones who held and did no panic, it all came back.

    I have a house, and don’t care, let it crash 30-40%… its not an investment, its a place to live, and sorry to say this, its cheaper than renting.

    cheers

    1. Sure. You didn’t do something stupid because you understood that a house is a cost, not an investment. That thinking causes you to try to reduce the cost and pick up a good house as cheaply as possible. That’s the right thing to do.

      The people in Toronto, however, were not doing that. And now we have to watch and see how bad the damage gets.

  16. In fact, I bought my primary house more than a decade and a half ago for a very good price. The mortgage was paid off 5 years after buying it. I have lived in the house mortgage-free since. I plan on owning this house for another 20-30 years and if I sell it in the future, since it’s my primary home I won’t be paying a capital gains tax. This cash will add to my retirement fund in the later years or I can put the cash in a trust fund for my heirs. In today’s dollars, my primary house is already worth more than double of what I paid for it. Over the multiple future decades, my primary house will be without a shadow of a doubt worth alot more than what I initially paid for it. It is in an excellent location. My other two properties are rental investments (my tenants are paying off those mortgages). If people don’t want to buy real estate in the short term, good! I will have no problems renting out my two investment condos (I never have any problems renting them out anyways as they are in excellent locations). Like I said, if I have more than enough in my stock market portfolio then it is in my best interest to diversify or park my money elsewhere. If I have more than enough I don’t need to try to be even more greedy in the stock market. My personal preference is to not have ALL my money in the stock market.

    1. Great! You actually seem to know what you’re doing. You didn’t get into too much debt, and you seem to know how to calculate cash flow on investment condos.

      People in Toronto are actually buying up condos, renting them out for negative cash flow because they didn’t factor in all the costs properly (or even looked up what rents the market supports), and are betting it all on increasing values to make their purchase make sense.

      Those are the idiots that will become roadkill. You’ll probably be fine.

    2. As I mentioned in my reply to your previous comment, this is a prime example of survivorship bias. You bought a house 15 years ago when the numbers were completely different than they are today. Congratulations. Glad you had the luck to be born at the right time for that to work out, but it is by no means true that if you did the same thing today it would work out the same way.

  17. So first the Van housing market cools because of the foreign buyers tax and now TO. Wonder if this is pushing the Bay Area market to new red hot limits, overseas money fleeing the VAN-TO market for California? Check out this insane sale for a small house. USD $2 million. I grew up in the Bay Area. These are neighborhoods that we built for working class families. Now even high paid techies can’t afford them.

    https://www.mercurynews.com/2018/03/02/sunnyvale-home-shatters-new-record-with-enormous-price-tag/

    1. Could be. If I know anything about the Chinese (which I do) we tend to move in herds. When discrimination happens, we flock away to friendlier shores. It actually pains me to see Canada turning people away towards the US.

  18. Thanks for sharing. I haven’t heard of this in the US news at all.
    I’d say keep calm and have some cash available. This might be a good opportunity for you guys.

  19. I suspect that FireCracker has let her experience in the specific market conditions in the GTA over the last few years – where people have been overleveraging to speculate on highly overpriced houses – colour her perception of home ownership.

    Girlfriend and I are currently house shopping in the Montreal suburbs after renting in the city for ten years. We’re open to renting another, larger apartment, so we’re definitely not home boners; it’s just that buying a nice, modest bungalow with a yard and garage for $300-375k, for whose stress-tested mortgage one of our two incomes can qualify (after putting 20% down), seems to make sense for us at this stage of our lives. And lots of people, my single-income parents included, did well financially while providing their families with nice places to live before us, too. And let’s not forget that lots of early-financial-independence trailblazers got rich either despite, or because of, home ownership.

    I appreciate and admire FC’s and Wanderer’s accomplishments and message, but if they push this anti-home-ownership message too far, basing their perception of the entire concept on one market in one middling global city during one point in history, I think that they risk becoming a parody of themselves.

    1. Oh, this is totally a Toronto/Vancouver thing. Montreal seems like a different country with sane people right now. Reasonable valuations, non-crazy people. If I paid attention in high school French, I’d totally be there with you. I hope you don’t get sideswiped by Toronto’s idiocy…

      1. Well, we’ll see. The realtors right now are saying that the Chinese are coming into Montreal, and that they’re pushing up prices in the suburbs as a result of the locals who’ve sold in the city. There’s definitely an element of FOMO being pushed here right now, and the market has been on the biggest upswing in a while. That said, 6% YOY is hardly heart-stopping, and we haven’t really seen what the full effect, if any, of B20 will be here. My perception from the limited time I’ve been shopping is that nice houses are moving, but it’s not a frenzy. I really can’t say which direction I think that things will go in the coming year, but I would guess that the market will continue to rise moderately.

        Regarding speaking French: there’s still a minority of people who live here which don’t speak the language, and some suburbs west of the island are almost more English-speaking than French, while McGill and Concordia Universities ensure that there’s a ready supply of anglophone young people from here and abroad. I myself couldn’t speak the language fluently until I was well into my 20s, and I was born here. If you really want to come here, don’t let a lack of French fluency stop you – just keep an open mind about embracing the language and you’ll be fine.

  20. The Canadian housing collapse is the worst on record (to clarify) and it’s going to get worse before it gets better. A bunch of people in the US predicted it a year ago.

    You guys have been 100% right in identifying and criticizing the Canadian housing bubble the past few years, but now that there is a large correction about to play out, buying real estate in Canadian cities will become attractive in a couple years… may be worth re-evaluating.

  21. Thanks for another great article! you are an amazing and talented writer and have just killed my dreams of homebonership in Toronto temporarily haha.

    Keep the articles coming! 🙂

  22. For everyone complaining that FIRECracker is painting all homeowners as stupid and touting the virtues of property ownership and the returns on their investment condos and the like, understand that FIRECacker did none of that. She labels as “homeboners” all the people who are obsessed with buying a home and insist others do it because you’re SUPPOSED to own and real estate is ALWAYS the best investment and that’s that. In this article (and in pretty much every other one on this blog), she talks about people who buy homes at unrealistically high prices.

    Homeboners have boners for homes. Easy way to remember it if you forget.

    I know we all have our own paths to take, but maybe we should all lend an ear to the girl who retired at 31 to travel the world, ‘kay?

    Kristy, you know you’re doing things right when you have so many negative comments. At least here, the negative comnentors are reasonably smart. The people that comment on your YouTube video and mainstream media appearances appear to suffer from brain damage.

    Sincerely,
    ARB–Angry Retail Banker

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