Romana King’s book House Poor No More is a comprehensive collection of useful knowledge for all aspects of owning a home, including detailed lists of home maintenance tasks, improvement projects, and much more.  The writing is upbeat and engaging.  To the author’s credit, she quantifies the costs of just about everything.  Unfortunately, this book was written just before interest rates shot up, so several numerical examples look like they are from the “before times” (only 9 months ago).  As has been common in our society for many years now, the author is too positive about taking on large debts.  Those who took on far too much debt while ignoring the possibility of interest rate increases are now facing significant pain. Some Positives As a long time homeowner, I thought I had a good handle on home maintenance.  However, King’s comprehensive list of home maintenance tasks covers many areas I know little about.  The many things to check and possibly re...

Rising interest rates are causing a lot of unhappiness among bond investors, heavily-indebted homeowners, real estate agents, and others who make their livings from home sales.  The exact nature of what is happening now was unpredictable, but the fact that interest rates would eventually rise was inevitable. Long-Term Bonds On the bond investing side, I was disappointed that so few prominent financial advisors saw the danger in long-term bonds back in 2020.  If all you do is follow historical bond returns, then the recent crash in long-term bonds looks like a black swan, a nasty surprise.  However, when 30-year Canadian government bond yields got down to 1.2%, it was obvious that they were a terrible investment if held to maturity. This made it inevitable that whoever was holding these hot potatoes when interest rates rose would get burned.  Owning long-term bonds at that time was crazy . One might ask whether we could say the same thing about holding stocks in 2020 ...

Most of what I see about owning rental real estate is breathless cheerleading and come-ons for “real estate courses.”  It was a refreshing change to read John Champaign’s new short book Getting Started as a Small Scale Landlord .  At 67 pages, there isn’t any padding, and he provides solid information to help you determine if you’re suited to being a landlord and how to avoid the many pitfalls. As someone who isn’t suited to being a landlord, I saw warnings where other people might see opportunity.  “This book is about giving yourself a part-time job.”  I definitely don’t want a job, but others might welcome one.  Landlords must also be able to keep their cool and not back away from conflict.  I can do this, but I definitely don’t want to willingly bring conflict with unreasonable people into my life.  “If you can't say no to a crying, homeless woman, do not go into the business of landlording.” After the initial self-assessment to see if landlording i...

My wife and I bought our house in mid-1993. We’re at the young end of the baby boom, but we bought our house when we were fairly young. As a result, we’ve lived through the huge run up in house prices older boomers have enjoyed. In 25 years, the price of our house has gone up about 160%. So, how has this compared to our investment portfolio? Well, in that same period of time, our portfolio has had a cumulative return of 1030%. That might seem to end the comparison, but real estate is typically a leveraged investment. We paid off our home quickly, so we didn’t get much advantage from the leverage. But what if we had used leverage? The average discounted mortgage rate over that period was about 5%. Suppose we had put 10% down and made payments on a 5% mortgage for 25 years. The Internal Rate of Return (IRR) on our investment works out to 5.8% per year or a cumulative return over the 25 years of 307%. It might be tempting to add in a return from not having to pay rent, but...

Many people are familiar with Sean Cooper’s story of living extremely frugally for a few years while he saved up a large down payment, bought a home, and paid off his mortgage by age 30. Cooper built on the interest in his story by writing a book called Burn Your Mortgage . I expected to like this book because I believe paying off your mortgage and any other debts is a good idea (I paid off my first mortgage by age 28). However, despite many good parts of the book, there is too much cheerleading for home ownership for me to recommend it. A common theme throughout this book is treating rising housing prices as a permanent reality. “The last thing you want is to find yourself priced out of the market.” “It’s probably wise, if you’re in the financial position to do so, to buy now while you can still afford to.” Even though this book came out in 2017, it already has a dated feel now that home prices have been dropping in Vancouver and Toronto. Another part of this theme of rising...

I’ve been a happy homeowner for many years now. I prefer owning my home to renting. But I have no illusions that this is the better choice financially. Price to rent ratios today mean I’d very likely come out far ahead if I sold my house and started renting a comparable house. But I’m not going to sell because I choose to pay the price of ownership. Unfortunately, many homeowners need to believe they will win financially, and they come up with poor analyses to justify this belief. One such example comes from Sean Cooper’s book, Burn Your Mortgage : “Let’s say you bought a home a decade ago for $250,000, with only 10% down ($25,000). You later sold it for $400,000, making $125,000 in profit (for simplicity’s sake, we’ll ignore associated costs such as mortgage interest, mortgage insurance, property taxes and closing costs). Even though your home only went up in value by 60%, that’s a 500% return on your initial investment (down payment) of $25,000. Try finding that kind of ...

I’m no real estate expert, but I’ve noticed a pattern play out a few times, once when I sold my first house and a few other times watching friends and family members sell their houses. In these cases, the real estate agent did almost nothing until the listing was getting close to running out. There were no reasonable offers until shortly before the listing contract ended when the house suddenly sold. From a busy real estate agent’s point of view, this makes some sense. If you’ve got more houses listed than you can work on at one time, it makes sense to work hard on the listings you’re about to lose. If other listings happen to sell in the meantime, it’s a nice bonus. If this phenomenon is as widespread as my limited experience suggests, then homeowner’s need to develop countermeasures. Homeowners should prefer shorter contracts to longer ones. I’m used to 3-month contracts, but I’ve heard of 6-month contracts. Even 3 months is a long time to wait if the real estate agent isn...

Canadians don’t have to pay capital gains taxes on their principal residences. However, the definition of “principal residence” is quite flexible making it possible for families who own a second property, such as a cottage, to save substantial amounts on their taxes. Douglas Gray and John Budd, in their book The Canadian Guide to Will and Estate Planning , explain that your principal residence isn’t necessarily your “main place of residence.” If you own a vacation property, “as long as you, your spouse or at least one of your children occupy the vacation property for some period or periods of time during the year, that is enough to bring you within the principal residence definition.” “The fact that you show your home address on your income tax return does not mean that you are designating your house as your principal residence.” Further, “it is not generally necessary for you to decide which property is to be designated as the principal residence for capital gains tax purposes ...

They say that stocks are poised to crash just after everyone is unanimous about the wisdom of getting into stocks, and that they’re set to rise just after everyone is sure stocks are dead. Presumably, it works the same for real estate. I heard something recently that sounds like either a good sign for stocks or a bad sign for real estate in Canada. I hosted a get together where a friend who is a real estate agent told us about one of his clients. This client is frustrated with years of poor results from stock mutual funds and plans to pull all his money out and try to generate better returns buying real estate and collecting rent. This sort of thinking is great for real estate agents, but I’m doubtful it will work out very well for this investor. I know people who are well-suited to be landlords, but most of us are not. This story feels like either a great sign for stocks now that the last person is getting out, or more likely a terrible sign for real estate in Canada now that...

According to Will Dunning, Chief Economist at the Canadian Association of Accredited Mortgage Professionals (CAAMP), as quoted by Canadian Mortgage Trends , “190,000 jobs will be lost between 2013-2015 due to the maximum [mortgage] amortization being cut from 30 to 25 years.” Apparently, people making their living building and selling homes are in for a rough ride. However, this is an inevitable outcome of the necessary reining in of Canadian real estate. This 190,000 figure is split between “70,000 lost jobs in the new build market and 120,000 in the resale market.” Let’s look at new housing starts first. CMHC has historical housing start statistics going back to 1955 showing housing starts over the last decade well above the long-term average. As for home resales, CREA has statistics on recent home resale showing that home resales are perhaps just slightly above long-term average figures. However, these above average sales levels are happening at a time when prices are very h...

A guest post at Where Does All My Money Go? described a strategy for selling your home where you offer a low price in an attempt to create a bidding war . This type of strategy may or may not help the homeowner get a better price, but it will definitely help the real estate agent. In a nutshell, the strategy is to price a home at the bottom end of a reasonable price range and advise buyers that all offers will be reviewed on a particular day less than a week away. The hope is to generate a lot of interest quickly and create a bidding war that takes the price up to the top end of the price range. Note that this is likely to create a fast sale. Real estate agents benefit most from fast sales rather than higher selling prices . Higher selling prices increase commissions a little, but faster sales lead to more sales and this helps agents a lot. In almost all scenarios, this low-ball strategy helps the agent. If it works as planned, the house is sold quickly, and both seller and...

Elaine Kurtenbach reports that there are signs that the red-hot Chinese real estate market is cooling off . Real estate prices in China have risen consistently for so long that people have come to believe that prices only go up. Our situation in Canada is much milder, but there are parallels. On a recent trip to China I happened to discuss housing prices with some PhD students. They talked about how their families were buying as many apartments as they could as investments. When I asked whether they were concerned that Chinese real estate might be in a bubble and that prices could drop drastically, they looked at me like I had two heads. It was clear that their perception of the safe path to wealth was to save money and pour it all into real estate. There are many Canadians who feel similarly. They buy homes bigger than they need on the theory that they will make money when they sell these homes. But there are no guarantees. It is better to buy the home you need, pay it off...

When selling your home it’s quite common for a buyer to make an offer that is conditional on the buyer selling his or her own home. Your buyer might then receive a conditional offer on his or her own home. This can lead to a chain of homes that will all be sold like dominos if someone makes an unconditional offer on the first home in the chain. An interesting situation arises when a chain of conditional offers forms a loop. It’s not uncommon for two people to buy each other’s homes. But what if we a have a loop of three people? Suppose that A makes a conditional offer on B’s home, B makes a conditional offer on C’s home, and C makes a conditional offer on A’s home? If everyone is aware of this loop then all the deals can close. But if nobody becomes aware of the loop then it’s possible for all of the deals to expire and no homes get sold. Longer loops are possible as well. I’d be interested to know whether real estate brokers share enough information to try to detect such l...

The commission costs of buying and selling homes in Canada may be set to drop. The federal competition bureau has wrapped up a two-year investigation of real estate practices and they are pushing for big changes. They want the Canadian Real Estate Association (CREA) to open up its Multiple Listing Service (MLS) to discount real estate brokers. Until now CREA has kept commissions on the sale of homes in Canada at artificial levels (usually 5-6% of the house’s sale price) by refusing access to MLS to any broker offering lower commissions. Because most homes for sale are listed in MLS, being denied access is a serious impediment for discount brokers. For now CREA is sticking to its guns saying that they don’t plan to grant greater access to MLS. This may ultimately lead to a showdown before the Competition Tribunal. It seems that we can eventually look forward to lower real estate commissions driven by market forces rather than a monopoly.

The fundamental problem with incentives for real estate agents is that the extra commission on a higher price is too small to be worth the extra effort.  Agents have little incentive to work hard to sell a house for the highest price possible.  The interests of the agent and homeowner are poorly aligned. Let’s look at an example. Suppose that a fair price for Hanna’s house is $375,000, and that her current mortgage principal is $275,000. After she pays off her mortgage and pays the real estate fees, legal costs, and other costs, she’ll have about $75,000 left over. If the sale price is $25,000 higher or lower, it would make a big difference in how much money Hanna gets. Let’s say that Rick, the real estate agent, gets to keep 2% of the sale price of the house for himself. Of course, the full cost to Hanna is much higher than this, but Rick only gets a fraction of what Hanna pays. This works out to $7500 for Rick. If the sale price is different by $25,000, it only mak...

What a great sounding idea: unlocking the value of your home. Whenever I hear this phrase, I picture piles of cash stored in my walls. What could be more reasonable than taking some of this cash out to make my life better? I usually hear advice about unlocking my home’s value from a bank that wants to sell me a loan or a financial advisor who wants to sell me mutual funds. But, so what? Do I really need to have so much of my money tied up in real estate? Some financial advisors even talk about the dangers of investing too heavily in just one asset class: real estate. For the sake of safety and diversification, do we need to take some money out of our houses and buy some stocks and bonds? To begin with, the idea that you can take some money out of your home without selling it is just a trick. You own 100% of your home regardless of how much you owe on your mortgage. If your house drops in value, the loss is yours, and the bank will still want the same mortgage payments. So, “using home ...