Urban vs Suburban - 2 styles enter, one style leaves!

[fusili]

Originally Posted by geotag277

The problem with that analysis is that people actually live in their house - so while you are earning 0.6% you are also building equity in your home and at some point actually pay it off. Housing also has utility in that you can rent it out. In absolute terms considering just market prices for a house, sure it might not seem an attractive investment in those terms over the long term, but once you factor in rent alternatives/equity/utility the equation certainly changes.

Not to mention that a rapidly growing metropolis like Calgary will generally have much much higher returns than a tiny town with small population growth like Drumheller - both kinds of which are included in the same study.

Agreed. Calgary is a good market for real estate. But to think of it purely as an investment strategy is a bad idea. Those who over-leverage themselves to purchase units to flip or rent, without a really good understanding of the market and it's risks, are playing with fire. I think buying a home is a good idea because it is basically forced investment.

But those who buy homes they cannot afford because "hey, the market's always going up right?" or because "I can always rent this out, no problem" or "I know it's bigger than I can afford, but I am pretty sure I'll get a raise soon" are not making wise investment decisions. Buy a home you can afford, be diligent about paying it off, but don't treat it as the only equity you have or will ever have. Markets can crash spectacularly, and you don't want to be left holding the bag.

[MasterG]

Originally Posted by geotag277

The problem with that analysis is that people actually live in their house - so while you are earning 0.6% you are also building equity in your home and at some point actually pay it off. Housing also has utility in that you can rent it out. In absolute terms considering just market prices for a house, sure it might not seem an attractive investment in those terms over the long term, but once you factor in rent alternatives/equity/utility the equation certainly changes.

Not to mention that a rapidly growing metropolis like Calgary will generally have much much higher returns than a tiny town with small population growth like Drumheller - both kinds of which are included in the same study.

Good point. A bigger concern is that there are many and increasingly more, due to the relatively high cost of homes vs. incomes, where even if ownership is a good idea in the long-run (insert debate here).
Most will at least spend a portion of their life in a income level where they can't do it or if they try they risk ruin by stretching themselves too thin. Some will never leave that group.

Renting is the only solution for them. Much like getting a deal on a house, there are always pockets of very affordable for the area units that just slip under the radar.

I could see both renting or buying being the financially responsible decision depending on the deal and the short/long-run implications.

[RyLucky]

Originally Posted by freeweed

Not in the slightest. I qualified for a 5% down mortgage, had no cosigner, and had the bare minimum income to meet the 3x mortgage threshold (literally, within about $2k). Hell, when I applied for it I discovered a black mark on my credit history that went back 4 years that I had no idea about - technically at that point I was ineligible to obtain even a $500 credit card. Paid off the problem (wasn't worth fighting) and got approved for the mortgage within a day.

OK fine, I had a stable income, but that's not exactly difficult. I've had that since I was 15.

Don't get me wrong - I think there are serious flaws with the CMHC system - but CMHC insurance makes getting a mortgage pretty easy for anyone who can wake up on time every day to show up for work.

Originally Posted by freeweed

That house could easily have been purchased with $10K down. Yeah, your mortgage payments end up slightly higher due to the CMHC insurance, but as opposed to sitting around for another decade waiting to save another $40k?

I don't mean to pry into your personal finances, but does this mean that when you were straight out of school you put 5% down on a 200-400k house (10-20k down payment) with poor credit history and no cosigner and were earning 1/3rd of your house price annually (66-132k salary)?

I hope you realize that not everyone in their twenties aren't so fortunate to (a) have that salary or (b) have access to that kind of mortgage product without a cosigner and with credit issues. If you bought your house in 2001 for instance, the average income of 20-24 year old's in Canada was <20k/yr; <30k/yr for 25-29 y.o.s. Even those who earn far more than this will have trouble reaching a 3x cut off.

[freeweed]

Originally Posted by fusili

In Nate Silver's book, The Signal and The Noise, he points out that housing prices over the last 100 years, adjusting for inflation, have increased on average 0.6%. Not per year, total. Obviously in a growing city such as Calgary, this isn't the case, but housing is not as good an investment as many think. On average, it is a pretty poor investment.

I didn't say it was a "great" investment. I said it was one of the safest on the planet. And something that consistently matches inflation longer than most humans' lifespan is pretty safe. Just think of how much stuff DOESN'T. Most things humans are interested in depreciate or become worthless over a century. Plus... you get to live in it. It actually has utility value.

[freeweed]

Originally Posted by Policy Wonk

"Eating Your House" is an archaic strategy from another age because you just can't take for granted that you will be able to sell your house on your terms at a time of your choosing. You also can't take for granted that Calgary is going to be hot shit forever. The US is "Drill Baby Drilling" itself into a massive crude oil glut that is going to create a discounted domestic US price because they can't export it and if oil prices plummet there isn't an US politician who is going to do anything to intercede export wise. That is going to be devastating to Calgary and Edmonton.

If that comes to pass and you're short selling your house so you can haul ass to Toronto... so much for your retirement strategy.

If a homeowner, on average, ends up worse from owning their home - then there's simply no way buildings would ever get constructed. Because everything that applies to a homeowner applies doubly to a landlord.

In my life I've seen far more landlords suffer from housing crashes than homeowners. Owners... at least still have a use for the place. It's where they live. When a market crashes and you're heavily into 5 or 6 properties.. good luck with that.

Using the attitude of "but things can go down" nullifies the value in spending any money on anything. It certainly isn't an argument against home ownership, unless you never plan on living in one place for very long.

[freeweed]

Originally Posted by RyLucky

I don't mean to pry into your personal finances, but does this mean that when you were straight out of school you put 5% down on a 200-400k house (10-20k down payment) with poor credit history and no cosigner and were earning 1/3rd of your house price annually (66-132k salary)?

Without giving away too much - yes. 5% down on a $275,000 house, and our family income at that point was right around the $85k range (whatever 1/3 works out to). That's how we came to our maximum affordable house cost.

Officially, I had graduated university 9 months before we were approved for this. I'm not sure if that qualifies as "straight out of school" or not.

I hope you realize that not everyone in their twenties aren't so fortunate to (a) have that salary or (b) have access to that kind of mortgage product without a cosigner and with credit issues. If you bought your house in 2001 for instance, the average income of 20-24 year old's in Canada was <20k/yr; <30k/yr for 25-29 y.o.s. Even those who earn far more than this will have trouble reaching a 3x cut off.

Of course I realize that. First, I wasn't in my 20s. I was 31. Second, people have to take whatever they earn, triple it, and see what's available. Yes, in a lot of cases that means nothing at all, ever. Obviously not everyone can afford to get into the housing market early on, that's always been the case and always will be. But if Calgary's median income today is say $50,000, that means your average couple should be able to qualify for a $300,000 house. Which granted, doesn't get you much - but there's plenty of condos and townhouses in this city under that value.

If you're well below the average, or single - well yeah, then you're going to have to save for a long time. Again, that's always how life has been: poor single people don't often own houses. I don't mean to sound harsh or elitist or whatever, but that's reality. Also, in 2001 there were plenty of houses in Canada you could buy for $60-90k. PLENTY. Calgary had some, I know that for a fact because I know people who bought them. Other cities were even cheaper.

Disclaimer - I'm aware that credit may be (a lot?) harder to get these days. I got mine before the credit crunch. However, I know people personally who are as of this year qualifying for 5% mortgages, at roughly 3x their income. So the ability to do this still exists. These are people simply going to one of the big banks/credit unions. I don't understand what "access to that kind of a mortgage product" even means - you either qualify or you don't.

If you're arguing that there's no way the average 22 year old single guy right out of school can afford a double-garage detach house that was just built - well, yeah. Duh. That's not exactly news?

[geotag277]

Originally Posted by freeweed

If a homeowner, on average, ends up worse from owning their home - then there's simply no way buildings would ever get constructed. Because everything that applies to a homeowner applies doubly to a landlord.

In my life I've seen far more landlords suffer from housing crashes than homeowners. Owners... at least still have a use for the place. It's where they live. When a market crashes and you're heavily into 5 or 6 properties.. good luck with that.

Using the attitude of "but things can go down" nullifies the value in spending any money on anything. It certainly isn't an argument against home ownership, unless you never plan on living in one place for very long.

Even if "bad things go down", if you are a home owner, you can typically ride out whatever bad wave of economic crisis happens to be occurring. Even in the worst housing crash in Calgary during the 80s, home prices recovered in less than a decade. Prices in the USA for most major cities are on track to erase all the loses from the worst housing crash that country will ever see.

These kinds of economic catastrophes are blips on the radar for the investment horizon of a typical home owner.

[fusili]

Originally Posted by freeweed

I didn't say it was a "great" investment. I said it was one of the safest on the planet. And something that consistently matches inflation longer than most humans' lifespan is pretty safe. Just think of how much stuff DOESN'T. Most things humans are interested in depreciate or become worthless over a century. Plus... you get to live in it. It actually has utility value.

Agreed. It is an investment (not a good one), but has utility. Cars have utility, but are crap investments. Index funds or exchange traded funds are decent investments, but have no utility. Put me in the camp that thinks buying a home is an expenditure on a necessary utility, with a marginal side benefit of sometimes being a good investment.

When I refer to housing as an investment, I am not referring to cars, electronics or furniture. I am comparing it to investing in the stock market, mutual funds or other such traditional investment vehicles.

[Ramsayfarian]

Originally Posted by geotag277

Even if "bad things go down", if you are a home owner, you can typically ride out whatever bad wave of economic crisis happens to be occurring. Even in the worst housing crash in Calgary during the 80s, home prices recovered in less than a decade. Prices in the USA for most major cities are on track to erase all the loses from the worst housing crash that country will ever see.

These kinds of economic catastrophes are blips on the radar for the investment horizon of a typical home owner.

I'm more worried about an increase in interest rates. If we ever 16% like back in the early 80's I'm hooped.

[RyLucky]

Originally Posted by freeweed

Without giving away too much - yes. 5% down on a $275,000 house, and our family income at that point was right around the $85k range (whatever 1/3 works out to). That's how we came to our maximum affordable house cost.

Officially, I had graduated university 9 months before we were approved for this. I'm not sure if that qualifies as "straight out of school" or not.



Of course I realize that. First, I wasn't in my 20s. I was 31. Second, people have to take whatever they earn, triple it, and see what's available. Yes, in a lot of cases that means nothing at all, ever. Obviously not everyone can afford to get into the housing market early on, that's always been the case and always will be. But if Calgary's median income today is say $50,000, that means your average couple should be able to qualify for a $300,000 house. Which granted, doesn't get you much - but there's plenty of condos and townhouses in this city under that value.

If you're well below the average, or single - well yeah, then you're going to have to save for a long time. Again, that's always how life has been: poor single people don't often own houses. I don't mean to sound harsh or elitist or whatever, but that's reality. Also, in 2001 there were plenty of houses in Canada you could buy for $60-90k. PLENTY. Calgary had some, I know that for a fact because I know people who bought them. Other cities were even cheaper.

Disclaimer - I'm aware that credit may be (a lot?) harder to get these days. I got mine before the credit crunch. However, I know people personally who are as of this year qualifying for 5% mortgages, at roughly 3x their income. So the ability to do this still exists. These are people simply going to one of the big banks/credit unions. I don't understand what "access to that kind of a mortgage product" even means - you either qualify or you don't.

If you're arguing that there's no way the average 22 year old single guy right out of school can afford a double-garage detach house that was just built - well, yeah. Duh. That's not exactly news?

That clears things up. I thought you were arguing that it was easy for young people in their twenties to buy as oppose to rent. And, credit is a lot harder to get these days.

[Policy Wonk]

Originally Posted by freeweed

If a homeowner, on average, ends up worse from owning their home - then there's simply no way buildings would ever get constructed. Because everything that applies to a homeowner applies doubly to a landlord.

In my life I've seen far more landlords suffer from housing crashes than homeowners. Owners... at least still have a use for the place. It's where they live. When a market crashes and you're heavily into 5 or 6 properties.. good luck with that.

Using the attitude of "but things can go down" nullifies the value in spending any money on anything. It certainly isn't an argument against home ownership, unless you never plan on living in one place for very long.

It isn't a question of being worse off, you need to live somewhere and home ownership makes sense for most non-transient people. But as an investment, particularly as a potential retirement strategy it is insane, you just can't take for granted you will be afforded the opportunity to stay in your home long enough to sell it for a windfall.

Other than the potential for the nation-wide condo bubble to burst, the forces that will drag on housing prices will have already dragged on people.

If you find yourself forced to relocate for employment from an economically depressed Calgary, you are not well positioned for the greatest return on your investment. Maybe over thirty years you will do okay, but I don't think eating cat food in your empty house till then is anyone's idea of a life.

[fusili]

Originally Posted by Ramsayfarian

I'm more worried about an increase in interest rates. If we ever 16% like back in the early 80's I'm hooped.

I got a mad ridiculous rate on my first five years, but am definitely not banking on it staying that way. We are nowhere near as bad as the sub-prime straight up predatory rates (which f'ed everyone, not just homebuyers), but I am always wary of short term fixed low rates.

[freeweed]

Originally Posted by fusili

I got a mad ridiculous rate on my first five years, but am definitely not banking on it staying that way. We are nowhere near as bad as the sub-prime straight up predatory rates (which f'ed everyone, not just homebuyers), but I am always wary of short term fixed low rates.

Be a lot more wary about variable rates. While I'm 99% sure the government will do everything in its power to keep interest rate increases.. moderate.. my folks knew a lot of people who lost their homes in the 80s on variable rate mortgages. Like practically overnight. At least when you're locked in, odds are you have some time to prepare.

[fusili]

Originally Posted by freeweed

Be a lot more wary about variable rates. While I'm 99% sure the government will do everything in its power to keep interest rate increases.. moderate.. my folks knew a lot of people who lost their homes in the 80s on variable rate mortgages. Like practically overnight. At least when you're locked in, odds are you have some time to prepare.

Yeah, I will be aggressively paying down my mortgage during my 5 year fixed period. I bought a place that I could very, very comfortably pay the monthly payments, and will likely increase them by 50% in the next few months. I am hoping to be paying the maximum amount both monthly, and with additional one-time deposits by year five. Gotta pay as much of it off when the interest is low.

[Full Mountain]

Originally Posted by Policy Wonk

It isn't a question of being worse off, you need to live somewhere and home ownership makes sense for most non-transient people. But as an investment, particularly as a potential retirement strategy it is insane, you just can't take for granted you will be afforded the opportunity to stay in your home long enough to sell it for a windfall.

Other than the potential for the nation-wide condo bubble to burst, the forces that will drag on housing prices will have already dragged on people.

If you find yourself forced to relocate for employment from an economically depressed Calgary, you are not well positioned for the greatest return on your investment. Maybe over thirty years you will do okay, but I don't think eating cat food in your empty house till then is anyone's idea of a life.

I only treat my home as a cost reduction in retirement (i.e. no mortgage) not a input.

[Me&You]

Originally Posted by fusili

Yeah, I will be aggressively paying down my mortgage during my 5 year fixed period. I bought a place that I could very, very comfortably pay the monthly payments, and will likely increase them by 50% in the next few months. I am hoping to be paying the maximum amount both monthly, and with additional one-time deposits by year five. Gotta pay as much of it off when the interest is low.

Call it different risk tolerance or expectations of opportunity cost, but I completely disagree with your intention to pay it off when interest rates are this low. Current mortgage rates are essentially free money. There are an almost infinite number of ways to generate far greater returns in fairly liquid investments with moderate understanding and involvement. Most of the people I know are mortgaged to the hilt right now and using cash for other investments.


Edit - I should add that this is all entirely circumstantial. In your case, where your payments are very comfortable and (if) you feel your job is stable, and you feel comfortable making alternative investments, then I stand by my opinion. If someone is a marginal borrower, doesn't have a stable job, isn't comfortable (=competent) in making other investments, etc, then no, I'm not advocating the equivalent of getting a second mortgage and putting it all on black.

[geotag277]

Originally Posted by Me&You

Call it different risk tolerance or expectations of opportunity cost, but I completely disagree with your intention to pay it off when interest rates are this low. Current mortgage rates are essentially free money. There are an almost infinite number of ways to generate far greater returns in fairly liquid investments with moderate understanding and involvement. Most of the people I know are mortgaged to the hilt right now and using cash for other investments.


Edit - I should add that this is all entirely circumstantial. In your case, where your payments are very comfortable and (if) you feel your job is stable, and you feel comfortable making alternative investments, then I stand by my opinion. If someone is a marginal borrower, doesn't have a stable job, isn't comfortable (=competent) in making other investments, etc, then no, I'm not advocating the equivalent of getting a second mortgage and putting it all on black.

I'd agree with this. You are already paying down the mortgage very fast by leveraging the historically low interest rates. By using your other free cash in more diversified investments, you can respond to higher interest rates down the road by paying lump sums when it will actually matter. Doing it prematurely while interest rates are still so low doesn't make a lot of sense. You will still have the same opportunities to refinance and pay lump sums once the interest rates rise.

[Ramsayfarian]

Originally Posted by fusili

Yeah, I will be aggressively paying down my mortgage during my 5 year fixed period. I bought a place that I could very, very comfortably pay the monthly payments, and will likely increase them by 50% in the next few months. I am hoping to be paying the maximum amount both monthly, and with additional one-time deposits by year five. Gotta pay as much of it off when the interest is low.

My first place I almost doubled up on my payments for a year or so and it made a huge difference. If you can, paying weekly helps a bit as well.

[suburbia]

Originally Posted by freeweed

Be a lot more wary about variable rates. While I'm 99% sure the government will do everything in its power to keep interest rate increases.. moderate.. my folks knew a lot of people who lost their homes in the 80s on variable rate mortgages. Like practically overnight. At least when you're locked in, odds are you have some time to prepare.

I know people who lost homes in the 80's also. The regulators have learned and the experiment was shown to have not worked. When things went south more recently, instead of increasing rates to keep government revenues up, they slashed rates, and the system recovered in fantastic form. If people still point to the 80's, they've missed the boat.

[suburbia]

Originally Posted by Ramsayfarian

My first place I almost doubled up on my payments for a year or so and it made a huge difference. If you can, paying weekly helps a bit as well.

Interestingly, paying weekly doesn't actually save you any interest, rather, what it does is add 4 more one week payments, which if you convert back to monthly, it would be like paying a 13th month.

I actually keep mine monthly, but simply amortize faster (so same as what weekly would do / mean, but I don't have months with extra payments).

Anyway, off on a tangent at this point. I will tell you this ... anyone who thinks I'm a finance or home owner amateaur is quite mistaken. Any of course I've enjoyed paying down on my mortgages by accepting rent from people who think renting is where it is at