Not to say that owning is never a good idea, just that it is not always a slam dunk to own vs rent.
Probably owning in Toronto or Vancouver is a slam dunk, over the long haul, which should always apply to real estate. Yes, I have done a few "flips", but always recognizing that the market can turn on a dime and one should be prepared to hold said flip for years, so it should also be able to support itself as a rental.
Looking at Toronto and Vancouver over the long term, i'll offer a couple of examples. In 1945, my parents bought their West Vancouver house, on a large corner lot, with views to downtown, the west side, UBC, etc. They paid $8,500 and sold for $11,500 in 1950. The house was a heritage house, moved from the lot in the 1980s. The lot was then subdivided into 3 lots, each with a current BC assessed value of about $1.5 million. That’s just for the land. My parents took their $11,500 and bought a house in Lawrence Park in Toronto for $20,000. It too has appreciated nicely. Some ups and downs, yes, but somewhat more up than down.
For those who suggest that owning is unwise and simply a matter of replacing renting a house with renting money from the bank, let me observe that there are few landlords who hand over the keys to the house after 20 years or so, saying you have paid enough, and the house is now yours. But bank mortgages tend to get paid off, and the house becomes yours, whether you like it or not. Moreover, unlike rent, which tends to rise with inflation, the principal secured by a mortgage tends to be paid down instead of increasing. It does not get adjusted upwards to keep pace with inflation.
Take my folks’ Lawrence Park house. Their 5% mortgage was paid off in the 1950s, but let’s say it wasn’t. Let’s say they paid $5,000 down on the house and negotiated a mortgage of $15,000. Hell, let’s go wild and say they obtained an interest-only mortgage and, to this day, in 2016, they still have never paid off a dime. So what? How much of a struggle would it be to make the monthly interest payments today on a $15,000 note at 5%? Paying rent on that same house would be a tad more. I recently did a bit of online nosing around and found a house on Cheltenham Ave., not far from their place, said to be currently under a one-year lease for $8,500 a month. Hmmmm.
Then we have the oft-repeated admonition that the present low interest climate cannot endure for long. It is subject to climate change and a warming in interest rates. We are supposed to be quivering in fear. It will bring about the denouement of the housing market and life as we know it. Baloney.
I have owned a number of houses in Vancouver and lived in 3. One I bought as a home in 1979 for $110,000, assuming a B of M first mortgage of about $60k with 3.5 years left on it at 10.25% interest - a very good rate at the time. Real estate was booming, despite interest rates in the 11% range. Soon the place was worth well over $200,000 so I borrowed $120,000 from the Bank of BC, granting a second mortgage to secure a revolving line of credit at prime + 1.75%. I used the money to buy other houses in Vancouver. Soon the prime rate started to rise. The rate was always set on Thursday. Every Thursday it would go up by a quarter point, often a half or three quarters. In my home we started calling Thursdays “Black Thursday”. In no time the prime reached an astonishing 22.75%! Anyone here old enuff to remember that?
At that time, an investment property I owned with a partner had a Fidelity Trust $20,000 first mortgage at 10% and the rest was borrowed on our revolving lines of credit. I was paying prime plus 1.75%, so my rate was 24.5% - about $25,000 a year on a mortgage of $100,000. The CA who worked for me was from Israel. He said that in Israel there is no such thing as a mortgage because inflation is always rampant. He said the interest rate would be out of sight if one could borrow. He was convinced that was occurring in Canada. He predicted the prime would hit about 40%. There were dire warnings to that effect…that the rate would just keep rising. My partner and I were delighted to replace our line of credit with a mortgage on our shared investment house from Household Realty Finance at 23.99%. Yippee! We locked in at a low rate!
So yes kids, there was lots of pain felt back in them days. Many, many were crying the blues, saying that was it for the housing market forever. Prices would never get back to those early 80s prices. Only a fool would ever buy even a personal residence or any other real estate again, blah, blah.
I saw my own house go from $110,000 in 1979 to about $275,000 in 1981 and down to about $140,000 by late 1983. Easily cut in half. But, I decided against suicide. Could not think of a nice, clean, painless way. Interest rates dropped to a very reasonable 12% or so over the rest of the decade. I sold in that climate in 1989 for $525,000 - almost a five-fold increase in just 10 years, despite all the interest rate bloodletting and attendant gnashing of teeth. That $525,000 was land value at the time. The house was a tear down and is now long gone. I checked with BC Assessment online a few minutes ago. The assessment? Land $2,994,000 and buildings $1,803,000. for a total of $4.8 million. I know, not an “investment”, but a fair rate of return whatever you care to call it. Tax-free to boot if a principal residence.
As a corollary to the exciting times precipitated by a surging prime rate, it was a good time to be a Vancouver real estate lawyer, not just conveyancing. When prices were on the rapid rise, it was not unusual to see an interim agreement signed for a sale, say at $100,000, with a closing 90 or 120 days hence. Well, come closing, the property was now worth $125,000 and suddenly the vendor becomes decidedly reluctant to sell and give away $25,000. Time for a specific performance lawsuit! The flipside was a couple of years later when prices were on the downhill. With a deal signed at $250,000 today, the value might be $190,000 come closing. Few people feel really good about honoring a commitment to pay $60,000 over market. So, again, all kinds of machinations would go on over forfeiture of deposits, more actions for specific performance, damages, etc. All good clean fun.
So, back to my original point, cities like Vancouver and Toronto, and perhaps half a dozen others in North America, can be pretty safe bets over the long term. I am not sure I'd want to be a first time buyer in either Vancouver or Toronto today and I think sitting on the sidelines a bit won't hurt. Regardless, however, of any coming "correction", I think today's prices in both cities will come to look cheap in another 25 years or so.
The quote below raises a valid point.
You have a $500k mortgage and the interest rates rise a measly 2%, at renewal time can you afford an extra $1000/month to keep your home? Not sure that most people could,...
This is the main reason why I only buy properties that have sale prices well below market already, I build in the correction because, with the amount I own, I couldn't afford an interest rate rise if I didn't.
That should be basic lore to getting into real estate. Envision an absolute worst case scenario and ask yourself if you can weather it. If yes, then go for it. When in doubt, stay out.
There are no doubt still living many Vancouver real estate "investors" from the 1980s who lacked either the intestinal fortitude or the financial capacity to get through the tumultuous times and either lost or gave up Vancouver houses. They find themselves living in a mobile home park in the hinterland, looking up the BC assessment values on what was lost. That would not feel good.
