The craving

Eleven years ago Constantin and his bride came to the land of maple, beaver and promise with little in their jeans. No kids. Tech background. Then they found this pathetic blog.

“Your insightful content has been invaluable to me and my wife, helping us grow our wealth significantly. Plus, we appreciate the delightful mix of dog and cat photos!” he says, fulfilling the MSU mandate.

Now they’re 41 (him) and 37 (her), both working, renting in the Big Smoke. Two bedrooms, 1,100 square feet. Rent-controlled at $1,700 a month.

How are they doing?

Better than most. Tax-free accounts are maxed, RRSPs gathering steam and the non-reg accounts plumping.

“Overall, our liquid net worth is approximately $1.57 million,” he tells me. “I strategically realize gains in years with lower income and contribute to RRSPs when our income exceeds $105K per person to optimize our tax savings.”

But wait. They’re unhappy. Living inexpensively with burgeoning savings, low overhead, good professional jobs and zero debt doesn’t cut it any more. They’ve become so… Canadian…

“Reflecting on our past,” C explains, “we regret not purchasing property around 2014, as our net worth could be around $2M by now. Friends who did buy have enjoyed both a better living situation and increased wealth.

“Given that inflation is decreasing, FOMO is increasing, and housing values have remained stable despite higher interest rates, would it be prudent to purchase a property for $1.5M with a $500K mortgage and keep the remaining funds invested? I understand this would deviate from the rule of 90, but we believe we can regain that balance within a few years. Thank you for your insights and guidance.”

It’s intriguing what our housing-first cultural mentality does to folks who come here with their heads initially screwed on straight. They get crazy.

First, the couple did not have enough money to buy anything a decade ago. Apart from that, if they had bought they certainly would not today have a liquid net worth putting them in the top 5% of the population. Unlike now, they would have been seriously whacked by a layoff or sustained period of job loss if there’d been a big mortgage to feed. They might have been caught in the dramatic run-up in loan costs following the pandemic. Of course, they would not have the freedom, flexibility and choices that they now possess, being able to relocate quickly for better opportunities or a mid-life change of scenery.

From a financial point of view, trading a $1.5 liquid portfolio for $1.5 million worth of real estate with a $500,000 mortgage means putting the bulk of their net worth into a single asset. Moreover, that asset will cost (property taxes, utilities, insurance, maintenance and financing) about $4,000 per month, or 135% more than they currently pay.

Over five years at current rates the mortgage will suck off $129,000 in interest payments (at 5.5%). After 60 months they will still owe $446,000. If the $1 million they used as a downpayment had been invested (earning a modest 6.5% – or half what the S&P has yielded since Covid) the gain would be more than $370,000.

So $129,000 in interest paid (retiring just $45,000 in principal), plus the loss of $370,000 on the downpayment and a debt in place of $446,000 five years hence. Meanwhile living costs more than double, hobbling the ability to save.

Why would anyone do this? It’s madness.

(a) For a capital gain because, you know, real estate always goes up. Except like now when it doesn’t.
(b) Because everybody else is doing it. Specifically friends who brag about their growing equity (that’s what homeowners always do) and likely lack enough liquid net worth to buy a new Subaru with cash.

As for risk, yes, financial portfolios can jack around routinely – even those balanced between fixed and growth securities as well as being diversified across asset classes, sectors and geographies. But for long-term investors, the results are irrefutable. Plus there is no property tax to pay, no land transfer tax when you buy or crippling commission when you sell, no renovations to finance, no mortgage payments, no insurance, no cable.

Real estate’s track record has been enviable, but also uneven. Houses, for example, have made no money for a few years now, while ownership costs have spiked. Property taxes are set to mushroom for years to come in most cities. Insurance premiums are ridiculous, and rising fast. A bevy of new taxes make owning more complex. Condo fees are relentless and grow as buildings age. The collapse of zoning restrictions may have far-reaching effects on valuations of SFHs. And what if there’s a recession? Real estate takes a brutal hit in downturns, while financial assets fare far better.

So, Constantin, it all comes down to one single thing. You feel owners have “a better living situation.” And for that you have come to this blog with a fine suck-up and a desire for validation.

Guess what?

About the picture: “Happy Discovery Day from the Yukon, Garth,” writes Lyle.  After 37 years of building houses I threw in the towel. Too many costly energy code changes , too much red tape, covid and labour shortages made me throw in the towel. I’m 60 and know there are more like me who could have kept building homes but got fed up with government red tap. I’m gold mining near Dawson City at a friend’s gold mine.  He’s been here for over 20 years now. What a treat it has been seeing how it’s done and no red tape. Lots of ice age bones and mammoth tusks coming out of the permafrost. Here is a picture of Charlie the golden retriever and Jimmy the miniature golden doodle with his summer hair cut. Patiently waiting for us out on the claim. It’s been a blessing for me being able to be here in Dawson City Yukon. Keep up the good work.”

To be in touch or send a picture of your beast, email  to ‘garth@garth.ca’.