When is it NOT a Good Time to Buy Real Estate?

09 December 2019

Hey, you don't have to convince me.  Real estate is a buy-and-hold project and, as long as you have no difficulty making the payments, I believe it's a no-fail recipe for financial security.  

Since most buyers use borrowed money to get started with a purchase, any investment of their own funds is also dramatically magnified by the fact their return will be earned on the total of their money plus the bank's money.  Therefore, once calculated as a return on only the buyer's actual investment, the results are maginfied. 

Here is the statement that got me writing today: 

Is it true?  I don't just buy any ol' dramatic statement someone blurts out!   I thought of my home from 1998 to present.  Had I done no renovations whatsoever, it would have peaked in 2017 at six times what it was purchased for and if calculated conservatively on today's somewhat more modest prices, about 5.3 times the purchase price.  I wondered if that was an aberration.  After all, King Township, where I live and work, has seen extraordinary growth, according to this survey which attributes much of Canadian household wealth to real estate values. 

I decided to make some rough calculations using my favourite image of real estate prices in the GTA:

investing in real estate Toronto area

I invite you to do what I did next--take any spot along the graph and divide the home price at that point by two, then go back ten years and see whether you find, on average, Toronto area real estate roughly doubled each ten years.

The average GTA selling price of a home was up to $843,637 in November, 2019.  this means that ten years ago, November, 2009, if it has doubled, the price would have been $421,818.50--does that look about right on the chart above?  Imagine you put down 20% of that ($84,363.70) and borrowed the rest,  Interest aside (at historically low rates in any event), you put down $84,363.70 but now have an asset worth $843,637!   

You did have land transfer tax when you bought and you paid property tax (some part of which would have been factored into your rent had you been renting instead). If this was your home, you had living and maintenance expenses which would have existed wherever you lived, so largely don't factor into this equation, but more importantly, you were most likely able to earn that return free of income tax, something not generally possible with any other asset.

This exercise is elementary to many of you, but is worth illustrating to many of us.

So, as the saying goes, should you wait and buy real estate?  or buy real estate and wait?  I'll leave that with you.                                                                                                                                                                                                                                                                                               

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