Latest posts by FIRECracker (see all)
- Guest Interview with Craig, Author and House Hacker Extraordinaire - October 7, 2019
- Book Review: Choose FI, Your Blueprint to Financial Independence - October 1, 2019
- Are You a Good Fit for FIRE? - September 9, 2019
I had a major case of déjà vu this weekend.
I visited two friends whom I hadn’t seen for years. And like so many of our other peers, they had two things in common:
- They own property
- They are stressed out of their minds
One of them has two rental properties (which he supports on one person’s income), and just bought a third.
The other one owns one house in the suburbs and just bought another condo downtown. Her condo fees are $700/month…just $100 shy of our rent when we lived in Toronto.
While we chatted over Korean BBQ and Soju, I had a glimpse of my old life. As I listened to my friend, Ellie, complain about her mortgage and long, stressful work days I saw my ghost. The ghost of FIRECracker’s past.
Ghost Me stared back, eyes rimmed with dark circles, dreading the upcoming Monday, when she’d have to get back on the treadmill, toss back a couple of Xanaxes, and continue worrying about her life slipping away.
Looking at Ellie, and seeing Ghost FIRECracker, it dawned on me how close I’d been to trapping myself in that life. A life I didn’t want, all because of FOMO (Fear of Missing Out).
Ghost FIRECracker had gotten the high paying job, endured the long stressful hours, and almost….almost bought the overpriced house. After all, all my friends were jumping into the market. What if I was missing out and would never be able to buy?
But luckily, I thought about FOMO in a different way. Instead I thought about FOMO like this:
- What if I was missing out on a life that I could CHOOSE rather than one dictated by the Boomers?
- What if I have a child and I miss out on their childhood because I’m too busy running the rat race and struggling to pay off my massive mortgage?
- What if I get ill and die before I make it to 65? What would be the point of my life?
But clearly Ellie didn’t see it that way.
When I asked her why she won’t sell her place and rent instead, she laughed. A derisive laugh.
“I can’t go back to renting!” She said. “I’ll miss out on all the investment gains!”
“And besides, if you have kids one day, you’ll want to grow some roots. “
I get it. The nesting instinct and FOMO are two of the main reasons why a homeowner would never go back to renting. Especially since their friends can’t stop bragging about the windfall they’ve made in the market.
Here’s the thing though. Those friends are filthy LIARS. Why? Because until they sell the house, they won’t make a single cent. And most people won’t sell and go back to renting. They’ll be too emotionally attached to the house and their identity as homeowners. So they will either keep the house or buy a bigger house. And then the cycle continues. And in 20 years, they’ll wonder where their life went. They’ll wonder why they didn’t get to spend time with their kids because they were too busy working. And now their kids are all grown up and they’ve missed the best years of their lives.
Home ownership has now become a cult in North America (In France and Germany, most people just rent). But it wasn’t always this way.
So how did it happen? How did we become so obsessed with home ownership?
Did we get scammed? Tricked into believing owning a home is the ultimate dream when, in reality, it’s a nightmare?
Yes and yes. Houses absolutely are a scam, and here’s why:
1. The Conservative Government Popularized Home Ownership
Traditionally, houses were a way for Conservative governments (specifically Reagan in the US and Thatcher in the UK) to secure more taxes and stimulate the construction industry.
After all, if you’re a homeowner, you have to pay property taxes. And if you’re stuck, worried about your property values, you’re more likely NOT to vote for change.
2. Property Tax is a Wealth Tax
When you own property, you have to pay property taxes no matter where you live. And you have no control over those taxes.
But when you invest, you actually pay FEWER taxes than the average working stiff. If the government ever introduced a wealth tax, people would immediate sell their stocks/bonds and move their money to another country. But you can’t do that with a house. If property taxes get out of control, you can try to sell the house, but then you incur closing costs and, oh by way, everyone ELSE would be trying to sell, so your house would be sitting on the market as supply overwhelms demand.
3. Speculators are willing to rent at a loss, to go after the capital appreciation
According to the Financial Post, “Ben Myers, vice-president of Urbanation, agrees that many investors in the GTA are not cash-flow positive on properties, taking the loss because they’ll make money on the underlying condominium.”
That’s not investing, that’s gambling. This is what’s driving up the prices. Not foreign investors. And once the cheap debt stops, the real-estate party will too, which brings me to my next point…
4. Interest Rates Are Determined by the Bond Market, not the Bank of Canada
Here’s probably a phrase you’ve heard before: “The Bank of Canada will never raise interest rates, so housing prices can never go down.”
This is a misconception on how interest rates work. Interest rates are determined by the global bond market, not your own government.
Our interest rates are pegged to the US’s. So even if the Bank of Canada doesn’t raise interest rates, if interest rates in the US go up, it can affect our interest rates.
5. Home Inspections Are a Thing of the Past
With the Toronto housing market so insane, people are forgoing house inspections. Inspectors are finding all sorts of problems (termites, mold, structural issues), after the papers have already been signed. This can cause thousands of dollars in unexpected costs, and unsuspecting homebuyers will be left holding the bag.
6. Houses prices have gone up, but salaries are stagnant.
“Vancouver’s price-to-income ratio is 11.2, while Toronto’s is 8.2”.
Back in our Boomer’s parent’s era, the price-to-income ratio was a measly 2 or 3.
“With an average price of $627,395 in the Greater Toronto Area, a household would need income of at least $209,000 or so to be in sync with the guideline of having a price-to-income ratio around three”.
Which is insane, since the avg family income in the GTA is only $75,000—nowhere NEAR $209K.
We wanted to buy a house back in 2011. But once we stumbled into Financial Independence, we realized that having a portfolio that PAYS you passive income to travel the world is WAY better than having a house that constantly costs you money (insurance, maintenance, property tax,etc).
But nobody understands this. So they keep asking, “if we don’t buy a house, what’s the alternative? Invest? That can’t be safe? The only other “safe” option is sticking our money in a savings account, earning 1.5%. That doesn’t sound very sexy.”
And no, no it’s not. And it doesn’t make sense either. Because what FEELS safe isn’t really safe at all.
Our parents keep telling us to buy houses, because it’s the only investment they understand. Because it feels “safe”. And the only alternative is putting your money in a savings account.
Why do we think this way? Because they never taught us about investing in schools. In fact, when I graduated high school, I knew more about soil erosion than ETFs. What is up with that!?
No one tells you that when you lock your money away in a savings account paying 1.5%, you are actually LOSING money to inflation. Since interest is taxed at your marginal rate, you are losing between a third and a half of that gain to taxes. So at 0.75%, you aren’t even beating 2% inflation, making your money worth less and less over time.
Compare that to a balanced portfolio, earning an average of 6% year after tax. If you had 100K invested instead of sitting in a savings account for 30 years, the difference would be a staggering $449,222 after taxes! (100,000*(1.06)^30 -100,000*(1.0075)^30).
Equities are a natural hedge against inflation. As prices rise, companies charge more and make higher profits. That profit gets passed to you, the investor, either in the form of dividends or capital gains (as companies become more profitable, they can invest and grow their businesses, increasing the value of their shares). And because investment income is taxed more favourably than interest, you get to keep way more of those investment earnings than the tiny interest paid to you by the bank.
And if you still think investing is too risky, please go and read our investment series, where we explain how to build a balanced, diversified portfolio, using indexing.
And if you still want to include real-estate, consider including Real Estate Investment Trusts (REITs) in your portfolio. That way you can still take advantage of the rising real-estate market, without having to lock all your money in one risky asset. In fact, the REITs in our portfolio went up 22% in the past year…higher than the 16% rise in GTA house prices. Meanwhile we’ve never paid a penny in property taxes or maintenance, and we’ve been getting an income from the rents paid by the tenants in that REIT.
So this is why we invest. Unlike houses that keep sucking money from my friends’ pay-checks, our portfolio pays us, so we no longer need to work. And unlike their houses, we don’t need to pay for broken shingles, or leaky roofs, or flooded basements. And if the value of their house plummets in a down market, they get paid nothing. Our portfolio, in contrast, keeps paying us dividends, even if the capital values drop–like during the 2012 Grexit, Oil crash of 2015, or Brexit.
So, there you have it. Houses are a scam. They suck away your life energy, cause you to lose time with your kids, force you to be chained to your stressful job…and yet people continue buying them. Why?
What are your thoughts on home ownership?
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