519-646-2222Buying a home is not a great idea
Buying a home is not a great idea for a whole bunch of reasons. Most people are socially hard wired to believe that buying a home increases their wealth, in fact it is the opposite – buying a home increases someone else’s wealth. Buying a home drains the purchasers finances and makes them more financially vulnerable.
I would like to posit that buying a home, especially in Canada, is a fool’s errand for most people, and in this blog we will discuss why that is the case. Let’s start with the basics, house prices have more than doubled in many markets in the last five years. Isn’t that a good thing?
You might think it is, because what you purchased five years ago doubled in price. Knowing that, most people would rationalize that you have just doubled your wealth but have you? Absolutely not, you have lost value. If I bought my home six years ago for $150,000 and sold it today for $550,000 surely I have made $400,000 right?
Probably not, most people who bought their home six years ago have already increased the amount of their mortgage to use the “additional funds” (extra debt) to pay down credit cards, buy furniture, home improvements or whatever. Likely they would not be “up” $400,000 but even if they were, all of the money they get from the sale would go to their next purchase, likely more expensive, and as a result they would accumulate even more debt.
If you sold your house for $550,000 you would immediately lose money – the real estate commissions alone would be $31,000, plus legal fees, plus moving costs, etc. In order to close the deal on the new house, even if the price were quid pro quo you would need to borrow more money – from who? From someone wealthier than you with enough spare money laying around they can afford to take risks. In the example above you would have lost 1/3rd of the original purchase price.
When you do buy a home, not only do you have to make mortgage payments, but you also have to pay taxes, geared to the price you paid, or as the property’s price increases – the adjusted value, if you overpaid for your house (as most people have), you will overpay for your property taxes. Then of course you must pay maintenance costs – I recently replaced a hot water water-tank for over $3,000. And, as if that isn’t enough you will pay insurance also geared to the price you paid.
Your income is not even close to keeping up with the inflated cost of housing, income did not double in the past five-six years, so why would you pay twice as much for something just because “interest rates are low for a short term”? Which is precisely why so many people did leap into the market at any cost, and foolishly bid up prices. In effect, you are creating a financial debt trap for yourself and your community.
From a different perspective, who really owns your house, is it you with a 0-20% stake or the lender with an 80-100% stake? Of course the lender has the larger stake and really “owns” the property which is effectively leased to you until you make the final mortgage payment. Meanwhile, you contract with the lender to preserve and protect the property that effectively does not belong to you and in which you reside.
As prices increase, encouraged by lower interest rates, the returns on investment (“ROI”) for the rich grow exponentially. If they only put out $125,000 at 8% (the historical average) the ROI after five years is $38,000. Now if the mortgage is for $450,000 at 2% the ROI for the same period is $41,000. If you had scads of money sitting around looking for a place to live, would you rather put out more at less for a larger return, or less at more for a smaller return?
Consider too that if you had $100 million to put out on mortgages, the management costs associated a thousand $100,000 mortgages would be a lot higher than those associated with one hundred $1 million mortgages. Lenders are never doing you a favour by lending you money, they are only interested in increasing their own wealth.
In Canada, as we have discussed many times in past blogs, first time homebuyers are encouraged to collapse their wealth (RRSP investments) and convert them into HBPs (Home Buyers Plans) that decreases wealth while increasing debt burdens. The resulting funds are then paid to a Government Corporation (CMHC) to insure lenders (as if they couldn’t afford to purchase their own insurance) and dramatically reduces the available funds for a so called “downpayment” (“administrative costs” would be a more appropriate term). The result is that in spite of the Land Titles Office Registration having the buyers name registered, the lender actually owns 100% of the value off the property, while the borrower has no equitable interest at all in many cases.