Thursday, July 14, 2016

Home-Buying Dreams

I’ve written several times about the benefits of renting in Canada’s high-priced housing market (see here, here, and here). What I hear back from many young people is some version of the following:

But owning a home is one of my dreams. I want to have children and raise them in a house, not some apartment.

This is quite understandable. I bought my current home to suit my children’s needs. We’re near a school and have a nice big yard they played in when they were younger. I can certainly understand why my sons and their peers want the same thing for themselves and their own families.

Unfortunately, today’s house prices are much higher relative to incomes than they were when I was starting out. For many young people today, stretching to buy the house of their dreams is a bad idea financially.

Does this mean the dream of owning a house is dead? Absolutely not. The path may be different from what it was for me and possibly more difficult, but there is still a way.

The first thing to realize is that Rome wasn’t built in a day. Most of my peers rented apartments for a few years before they bought a home. My own path involved renting apartments, then renting a row house before I bought my first house.

The key while in the renting phase is to save money. Owning a home comes with property taxes and significant upkeep and repair costs. Renters should be able to build savings while they rent.

Another thing to realize is that renting doesn’t necessarily mean living in an apartment. While it makes sense to start out with cheaper rents, it’s certainly possible to rent row houses or even a detached home once your income can support the rental cost.

If housing prices remain high for some time, millennials my end up renting longer than my peer group did, but that could change. For anyone who rents and builds savings, a housing crash could be the perfect opportunity to jump into home ownership. But you have to be saving a down payment to be able to take advantage of lower house prices.

There is nothing wrong with building a career and savings while renting progressively nicer places to live. You might even choose to rent a nice place to raise children. There is no need to put off having a family because you want to own a home first. The important barriers are income and savings, not home ownership. At some point while building a good life based on renting, you may benefit from a housing crash and jump into buying a home.

It’s hard to imagine how housing prices can keep climbing as fast as they have been. Who could afford to buy homes at double today’s prices? I know that sounds dangerously close to making a prediction, but we’ve had many cases of house prices dropping in the past, and there is no reason to believe it won’t happen in the future.


  1. I've said it many times, the dream of homeownership is one of longest running, and perhaps most successful modern marketing schemes.

    It began with an American real estate developer selling newly built suburbs to soldiers returning from WWII; it's been nothing but gangbusters since then. Prior to that, house prices were much, much more relative to income, perhaps because residential real estate had yet to be "monetized" -- a house was a utility, not a financial instrument. More importantly, perhaps, was the fact that there was no social stigma to renting (and raising a family in a rented abode). It's was what almost everyone did, here in North America and abroad.

    Big forces -- banks, municipal and provincial governments, mortgage brokers, builders, resource industries, etc. -- do not want the housing dream to end, even going so far as trying to turn a nightmare into a dream. The reliance on emotion is high and heavy.

    Remove Vancouver and Toronto from the picture and (I think) the average Canadian house price is somewhere around $300,000 (~4x gross family income; adjust for income across geography). Those living in "bubble" environments, even with a 50% price crash, won't even be able to afford a house (@$500,000); it'll be an environment like the US where those with money scooped up even more ownership (i.e. the rich get richer).

    Point being, people should attach a good heft of logic to their dream.

    1. @SST: I don't think we can do much to dampen the dream living in a nice home. What concerns me more is the feeling that owning is so much better than renting the same house, and the feeling that you have to jump in now before prices get further out of reach.

  2. So, you are advising that young people should time the market. Because it always works so well.

    1. @BHCh: No, but thanks for playing. I think people should choose the cheaper option. When house prices are high, renting is cheaper, and if house prices drop enough relative to rents, then owning is cheaper.

    2. US shares are expensive, so don't buy them. Emerging markets are cheaper, choose them. When it swaps, sell all shares in China and buy US. Got it.

    3. @BHCh: You can be as obnoxious as you like, but your characterizations still make no sense. I can choose an asset allocation for stocks, but I'm not sure how to partially rent and partially own a house.

    4. Yes, I remember people like this from 10, 20, 30 years ago. Don't buy, rent houses are expensive, wait till the price drops... I would still be waiting if I were to follow that advice. In fact I just bought the house when I needed, enjoyed the ownership, paid off the mortgage and minimal interest rather than wasted money on rent and made a LOT of money. Prices on my properties more than doubled every 10 years. One could get really unlucky if they buy just before prices drop, just as this can happen with shares. On average you will be a lot better off buying just as with shares. And as with markets, it's only easy to predict if something is cheap or expensive when looking back.

    5. Wholeheartedly disagree with that assumption.

      The economic environment from "10, 20, 30 years ago" which allowed the "prices on my properties more than doubled every 10 years" no longer exists. This is a bias I see even with close family members (e.g. "You can't go wrong buying real estate!"). Thus, we won't be enjoying the massive price movements of the past (outside of pockets of speculation).

      It also makes no sense to buy blindly without any kind of analysis, especially when prices have "doubled every 10 years" but income levels have not. Buying a house just to fulfill some kind of emotional/mental void and putting yourself in financial jeopardy is definitely not wise.

      "On average you will be a lot better off buying just as with shares." Also disagree, as the two are not comparable. An owner of shares can merely sit on them for decades; an owner of a house must continually spend money. Stocks are an asset, a house is a liability.

    6. 1. Economic environment is always different from 10, 20 years ago. This is just as valid an argument for not investing in the stockmarket.

      2. "We won't be enjoying the massive price movements".

      Unless you have a crystal glass, you have absolutely no way of knowing that.

      " analysis... financial jeopardy". Sure. Same goes with any expenditure. If you spend without analysis or overstretch yourself then you are putting yourself in jeopardy.

      "house is a liability".

      Eh... No. No. No. It's an asset according to how the word "asset" is defined in a dictionary.

    7. 1. So you're saying we're going to see yet another 30+ year bond bull market? And mortgage rate drop from 2.5% down to 0.5%? It'll be interesting to see how that's engineered.

      2. I know what has driven market prices over the last 30+ years, absent those forces, the same movements will not be present.

      3. It's an asset as far as you deriving utility. Apart from that, a house is, in reality -- not textbook theory, a consumer durable good. If you don't keep pumping money into it (liability), it will decrease in both price and value.

      But we all must think and believe what satisfies us. :)

  3. "If you don't keep pumping money into it"

    One issue you are having is that your statements are generic while house prices both current and future depend on a range of factors such as location. In some cases due to local market conditions the value of house is equal the value of land. In such cases money spent on repairs are wasted and the price does not decrease if you don't spend.

  4. The statement is not generic, since ALL mortgage rates are based on bond prices, thus affecting ALL house prices.

    If rates were static, then other factors, such as location and renovations, would have a greater effect on the price of the house. When rates drop continuously for 35 years, those factors have a much reduced effect. You can deny this all you want, doesn't make the economics of it less true.

    I also mentioned "outside pockets of speculation", such as the $2 million 'crack shack' in Vancouver's wealthy Point Grey neighbourhood. Put that house in Winnipeg and it would fetch $20,000.

    Probably the largest contributing factor to market price, outside of bond rates, is economic strength. Just overlay recessions in Alberta with their housing market and you'll get an idea.

    Not only do houses require "pumping money" to buoy the market price, but also the value. If I don't spend money to maintain the at least the functional quality of the asset, then it has decreasing value/utility (e.g. leaky roof, broken furnace). By using the asset, I am slowly consuming it.

    This problem does not occur with other assets such as stocks -- I might by a share of Coke which was issued in 1919, it'll be no different in value or price than a share issued in 2012. Do you think a 95-year old house with zero capital input will have the same utility or price as a four-year old house built right beside it?

    The argument still stands, there are good times to rent and good times to buy.

  5. There are some generic conditions, such as interest rates, bond rates, employment, average income, whatever. Then there are location specific conditions. Prices could be dropping in A but increasing in B.

    My current house is old, refurbished 10 years ago. It has been maintained but the building is worth zero. It's large and comfortable for us but people who buy into the area would knock it down and build something much bigger with 15 rooms. The property is worth quite a bit over 1.5M purely due to the value of the land. I could knock it down and build something to sell for several millions, but short of that any money spend on property adds zero value.

    This is just one example where your theory does not work. I am thinking it's not the only example. I heard exactly the same arguments on how houses are overpriced when I bought my second house for 100k (pounds). 4 years later I sold it for 240k pounds. The area became much more popular in the intervening 4 years, which was easy to predict.

  6. "...the building is worth zero...the property is worth quite a bit over 1.5M purely due to the value of the land."

    Then we agree -- a house is not an asset.

    However, the same "generic conditions" will still affect land prices.

    1. When you buy a house, it's not just the building but also the land ir stands on. Both represent an asset. A car is also an asset. Anything of value is an asset. Your argument is really with a dictionary.