Ridiculous

[Potato]

You won't get me to disagree with that Financial Jungle BUT that is not what Garth Turner advocates. He says prices are going to fall sell your existing house and rent. That I do not agree with.

If you have managed to scrape up enough cash to buy already and are living there why on earth would you sell?

I agree that doing it just on Garth's say-so isn't smart, but if you think housing prices are going to crash, why wouldn't you sell now and realize your tax-free gain?

I'm not selling my paid off house which is worth about $300K (i bought at $150K) so that I can put the money in the bank for 3% interest or about $750 per month so that I can go live in a basement apartment somewhere with my two dogs and my husband and my 2 year old. (which is what I could afford if my calculations are correct)

To be fair, that's not the comparison Garth is making: look around your neighbourhood and other neighbourhoods for houses for rent that you would live in, that are as similar to yours as possible. Not basement apartments, but apples-to-apples comparisons. Maybe your area is different, but a lot of areas in Toronto and Vancouver have just gotten silly, so it makes a lot of sense to not buy (or if you already own, to sell) and rent, and wait for prices to correct.

One example is a house I was looking to rent recently: it sold this summer for $580k. I don't know why just months after buying it the owner decided to turn around and rent it out, but he is, and the asking rent is $2400/mo. 2.4x12/580 = 5%. If you lived in the nearly identical house across the street, and thought that there was even a moderate possibility of a housing crash, why wouldn't you sell and move in there (or try to sell to an "investor" who would rent your house back to you)? You can probably get 5% on your money, and have none of the risk -- even with your 3% figure as the opportunity cost, there's easily another 2% in property taxes and maintenance that you have to pay as an owner.

But maybe your area isn't as over-priced. Maybe the supply of rentals is poor so you can't do an apples-to-apples comparison. Maybe your dogs are violently destructive (or look that way in a landlord's eyes) so you can't get a rental... That doesn't mean it isn't an exercise worth going through for others.

What I am saying is the USE of the asset in the case of a primary residence is much more important than fluctuations in the Real Estate market.My house has doubled but even if it were worth half what I paid it it would keep me just as dry.

Well, since you have a paid-off house and intend to stay there, the fluctuations in the RE market are just paper gains and losses to you anyway, so you can probably ignore them without much risk of impacting your life. But that's not really Garth's target audience. It's the people who bought recently, the young couples who bought a tiny condo with 5% down, but who want to be outta there before junior #2 arrives in 5 years -- if the market turns down on them they could be in negative equity, which totally defeats the point of buying young and "getting on the property ladder". It's also the boomers who plan on selling their overly-large houses after the kids leave, and are counting on some of that recent appreciation to help fund their retirements: if they want to avoid losing it all in a downturn, they're better selling now and renting, and possibly buying their more modest retirement home after the correction.

And even for someone in your situation, it's hard to ignore the upside: if your $300k house (which is quite cheap by Toronto standards) were looking at declining to $210k (a 30% drop) in the next few years, you might be looking at $30k in costs to sell and move, and then you'd have to pay rent for a few years -- but that might be cost-neutral -- then after the crash hits you can buy back in, and are $60k richer for it (tax free). Or you could move out of your admittedly crappy neighbourhood into a nicer one, once the prices in the nicer one come down to $270k. The use is the same -- a home to live in, but by working the fluctuations you can get some additional uses too. The question is how certain are you that a correction will take place, and how big will it be? Obviously Garth is quite certain, and believes that the magnitude will be at least 15%, in which case it's hardly retarded advice.

[FinancialJungle]

Potato - the 3% return in your example is very realistic.

I grew up in a city called Coquitlam which is 40 minutes from Downtown Vancouver. There's a newer high-rise called The Parc. A typical 2-bedroom unit rents for $1500 per month, but a similar unit sells for $449,900.

If you take the rents and subtract property tax, condo fees and insurance, the CAP rate works out to just below 3%. The lowest 5-year rate is 3.99%, so factoring opportunity costs on the downpayment, one would have to subsidize a 1% premium to own rather than to rent. And, face the risk of substantially higher mortgage rates on renewal.

It's a little backward if you ask me. I mean, consumers are generally rewarded for buying in bulk. When you buy a house, you're buying in bulk; you're buying the utility of the house for eternity. I still remember a time when owning is cheaper than renting. Of couse that privilege was only reserved for the ones deciplined enough to save a decent downpayment.

[Berubeland]

The reason I used a $750 basement apartment as an example is because that is what I could afford to rent without touching my capital because in a high interest savings account I would make 3% which is $750 per month.

If I were to move and pay rent for an equivalent rental in my area I would be paying at least $1350 per month or double what I am making with my money. Every month I would erode my capital.

I could even afford a mortgage payment on a house in a cheaper area. My mortgage payment here was only $750.

Also there is another problem with your scenario.... timing. I have no argument that prices are overpriced and should go down in the future however no one knows when. So that couple with 5% down who decide to pay realty fees, mortgage breaking costs, will end up paying money to follow Garth's advice and might be fine after five years anyways. With CMHC fees they are already underwater from the very beginning. What a stupid idea it was to get into that situation but incurring thousands in fees is hardly superior. In a sense they have to ride it out. They are in a situation that they may be ok if they go forward but they are definitely screwed if they follow Garth's advice. On my house value $300,000 they would pay $30,000 and realty fees and another $15,000 to break the mortgage. They put only $15,000 down plus they paid CMHC fees which were added to the mortgage.

Plus if they made such stupid financial decisions in the first place they are not likely to not touch that money while they ride it out.

[CanadianCapitalist]

Potato - the 3% return in your example is very realistic.

I grew up in a city called Coquitlam which is 40 minutes from Downtown Vancouver. There's a newer high-rise called The Parc. A typical 2-bedroom unit rents for $1500 per month, but a similar unit sells for $449,900.

If you take the rents and subtract property tax, condo fees and insurance, the CAP rate works out to just below 3%. The lowest 5-year rate is 3.99%, so factoring opportunity costs on the downpayment, one would have to subsidize a 1% premium to own rather than to rent. And, face the risk of substantially higher mortgage rates on renewal.

It's a little backward if you ask me. I mean, consumers are generally rewarded for buying in bulk. When you buy a house, you're buying in bulk; you're buying the utility of the house for eternity. I still remember a time when owning is cheaper than renting. Of couse that privilege was only reserved for the ones deciplined enough to save a decent downpayment.

I live in Ottawa, which has much saner home prices than many other major cities. I agree that as an investment property, a $450K apartment that rents for $1,500 per month doesn't make too much financial sense -- hardly better than other fixed-income alternatives.

Still, I can see an owner might thinking differently. Let's say I'm employed and can afford to buy the apartment outright. I can rent but the rental payment comes out of my after-tax income. A $1,500 rent might actually cost me $2,300 pre-tax, assuming a 35% tax rate. It makes sense for me to own because owning the apartment is "earning" me close to 6%. Netting out condo fees, property taxes and insurance etc. might provide an after-tax "yield" of close to 4.5%. Not too bad, IMO.

Of course, I agree completely that it makes sense to rent until one is able to afford their own residence. It is simply speculation to rush into buying a barely-affordable residence thinking that properties will soon be priced out.

[CanadianCapitalist]

And even for someone in your situation, it's hard to ignore the upside: if your $300k house (which is quite cheap by Toronto standards) were looking at declining to $210k (a 30% drop) in the next few years, you might be looking at $30k in costs to sell and move, and then you'd have to pay rent for a few years -- but that might be cost-neutral -- then after the crash hits you can buy back in, and are $60k richer for it (tax free). Or you could move out of your admittedly crappy neighbourhood into a nicer one, once the prices in the nicer one come down to $270k. The use is the same -- a home to live in, but by working the fluctuations you can get some additional uses too. The question is how certain are you that a correction will take place, and how big will it be? Obviously Garth is quite certain, and believes that the magnitude will be at least 15%, in which case it's hardly retarded advice.

I agree that a family who is planning on moving in a few years anyway and can barely afford their home today might be better off selling and renting. Likewise for a senior couple planning on downsizing in the near future.

For most others, I don't see the upside. Selling and renting isn't very convenient. You might have young kids at home and moving would be a nightmare. You might like the neighbourhood and prefer to stay in it. Or the kids might be in school and moving would be a huge bother. Not to mention, selling, renting and buying again isn't going to cheap. There are commissions, moving expenses, lawyer fees, land transfer taxes etc. Net out the expenses and the savings may not be worth the inconvenience. Home ownership doesn't really boil down to dollars and cents.

[FinancialJungle]

A $1,500 rent might actually cost me $2,300 pre-tax, assuming a 35% tax rate. It makes sense for me to own because owning the apartment is "earning" me close to 6%. Netting out condo fees, property taxes and insurance etc. might provide an after-tax "yield" of close to 4.5%. Not too bad, IMO.

You mean a "pre-tax" yield of 4.5%.

I think everyone's situation should be analyzed on a one-off basis. For me, I'm not sure if I'm still in the 35% bracket after maxing out RRSP every year. Even then, marginal-tax-rate is the tax rate for the last dollar earned, not the last $27,000. Realistically, there are very few cases where one can "earn" a notional pre-tax 4.5% yield.

Some might call me reckless, but I see no reason to own even though I can buy a condo outright. My portfolio yields >4.5%, which is practically tax-free due to the dividend tax credits.

The dividends are greater than my rents, so every month I have extra left over. I'm not living in an inferior neighbourhood/unit. I'm not depriving myself. This is where I'd be buying, but I see value in renting, and I choose diversify my wealth in a conservative portfolio rather than tying it up in a Vancouver condo. Condos and townhomes aren't money in the bank. I know people who almost went broke owning a leaky townhome.

[Berubeland]

I am a property manager by trade so the day I buy I would have to do better than 4.5% on real estate otherwise it's time to keep moving and find a better deal. My personal expectation is that on the day I buy it I make more than that. Then there's the appreciation from sweat equity (renovations) which would make me even more, then additional appreciation from gentrification, then the hedge against inflation.

The best deal I found for someone was mispriced by the agent as attached even thought it was detached then the layout allowed us to add a bachelor apartment. The couple selling was divorcing. The home inspection knocked another $5000 off the price. Altogether the initial price was $145,000. She made $2000 per month income off the place for two years and sold it for $235,000 two years later. That was in Mississauga. When she sold it in a week I thought she definitely left $20000 on the table. But that's just me. So I'm not quite sure what rate of appreciation that is but it's more than 4.5%
Anyone can do this, you just need to look for deals

[steve_jay33]

I am a property manager by trade so the day I buy I would have to do better than 4.5% on real estate otherwise it's time to keep moving and find a better deal. My personal expectation is that on the day I buy it I make more than that. Then there's the appreciation from sweat equity (renovations) which would make me even more, then additional appreciation from gentrification, then the hedge against inflation.

The best deal I found for someone was mispriced by the agent as attached even thought it was detached then the layout allowed us to add a bachelor apartment. The couple selling was divorcing. The home inspection knocked another $5000 off the price. Altogether the initial price was $145,000. She made $2000 per month income off the place for two years and sold it for $235,000 two years later. That was in Mississauga. When she sold it in a week I thought she definitely left $20000 on the table. But that's just me. So I'm not quite sure what rate of appreciation that is but it's more than 4.5%
Anyone can do this, you just need to look for deals

Yes but that example was when home prices were doing nothing but going up. Not so sure that is example is true today. If your "flipping" house you better be able to do your own renovations.

[Berubeland]

Yes but that example was when home prices were doing nothing but going up. Not so sure that is example is true today. If your "flipping" house you better be able to do your own renovations.

Easier to say those deals don't exist than to spend the time looking. I know that today one street over from me, there is a boarded up house owned by a contractor, one street the other direction there is a vacant house with no shingles on it. I bet you could get a steal on them. Near Danforth and Danforth there is a two bedroom bungalow that has had a couple raccoons living there for a while. In the thousands of MLS listings there are mistakes there are people desperate to sell there are death and divorces. These are all buying opportunities.

Your right because I am a property manager I get rock bottom prices on contractors. Next time you want your house painted call 20 people like I did to find the guy who would paint a 3 bedroom townhouse for $1000 including the paint. Same with the guy who refinishes the floors. Same with the plumber. Same with the locksmith. You can do this too. Just call tons of people until you get the price you want.

I'm not flipping houses. Right now I am intrigued with huge empty industrial buildings that could be split up into smaller easily rented and sold industrial condos. I don't have any takers for that project though. As everyone tells me industrial in Canada is not doing well right now. Funny thing I notice is that those small industrial condos have a very low vacancy rate.

http://www.icx.ca/propertyDetails.as...ertyId=8737159

Smell the desperation. The guy who owns this wants a deal bad. Just out of curiosity I drove around it and it looks like it's been vacant for 2 years. I wonder how much money this guy has spent on TMI in the last few years?

So please don't tell me there are no deals out there because there are. Of course if you don't believe they exist you won't look for them either. I urge you to look for the deals.

[Berubeland]

Here's a deal at

http://www.realtor.ca/propertyDetail...ertyId=8715153
Its a grow op needs work obviously but $245,000

Closest similar house to it is semi but $459,000.

http://www.realtor.ca/propertyDetail...ertyId=8697509

Closest detached house seems younger and higher end at $749,000

http://www.realtor.ca/propertyDetail...ertyId=8613588

Do you think you could get this problem fixed for $200,000. I'll bet I could. But that's just me