As we get closer to moving into our new home (and selling our existing one) I decided to look back on the financial return of our home purchase. I wish I hadn’t. On first glance, I think my house was a lousy investment.
We haven’t put our house on the market yet, but we will soon and I expect it to sell for somewhere between $500,000 and $549,000 (the range of outcomes has widened, especially to the downside, as the housing market slows down).
If it sells for $524,000, we’ll make $100,000 over the $424,000 that we initially paid for the house back in 2011. That sounds okay, but it represents just a 1.94% compound annual growth rate. Oof.
But it gets even worse from there.
Phantom Costs of Home Ownership
The year after we bought our home we spent $7,500 on landscaping the front and back yard, and putting up a fence. The following year, we spent $32,500 to renovate the unfinished basement.
That already puts us at $464,000 and I haven’t included phantom (unrecoverable) costs such as property taxes, insurance, and maintenance.
Thankfully, the brand new house didn’t cost much in terms of ongoing maintenance over the last 11 years. I’m going to be generously low and put this at $1,000 per year for a total of $11,000.
We paid an average of $4,000 per year in property taxes ($44,000 total), and an average of $1,600 per year for insurance ($17,600). That’s another $61,600 in total unrecoverable costs that we paid as homeowners.
We made mortgage payments, on average, of $1,600 per month. Over 11 years that adds up to roughly $211,200. I’d estimate $50,000 of that went to interest costs and $161,200 towards the principal.
Finally, there’s also the opportunity cost of capital – the $88,000 down payment we put towards the house purchase back in 2011.
What If We Rented and Invested the Difference?
If we had invested that amount in a globally diversified portfolio of stocks and earned 8% per year (not unrealistic, considering the S&P 500 gained 14.4% from 2011 to 2021) that $88,000 would turn into roughly $190,000. Call it a $100,000 opportunity cost.
Let’s say we rented a house for the last 11 years, paying the equivalent of our total mortgage payment each month in rent. We invested our initial $88,000 lump sum, plus another $550 per month that we saved from not having to pay property taxes, insurance, and maintenance. We’d end up with about $295,000 by the end of 2021.
Also, don’t forget the extra $40,000 we spent on renovations and landscaping. Let’s say we just kept that in cash under our mattress. We’d have $335,000 in savings and investments today had we rented and invested / saved the difference.
Instead, we put that $88,000 towards a house. We put an additional $40,000 into the house to finish the basement and landscape the yards. And, we paid another $72,600 in phantom or unrecoverable costs over the past 11 years, plus another $50,000 in interest costs.
Not So Fast
To counter that, the majority of our mortgage payments went towards paying down the loan principal and so we have that $161,200, plus our initial downpayment of $88,000, built up in home equity. We can’t forget about that so-called forced savings.
Finally, we should include another expense – $20,000 in realtor fees after the sale of our house.
By my count, if we sell the house for $524,000, pay the realtor fees of $20,000, and pay off the remaining mortgage of $170,000, we’ll end up with about $334,000.
In the rent-and-invest-the-difference scenario, we’d end up with about $335,000.
Related: Is Renting Throwing Money Away?
In other words, in both the buying and renting scenarios our starting position was $88,000 in 2011, plus another $40,000 of capital invested between 2012 and 2013. Our ending position in 2022 will be around $335,000 either way.
I’d say it’s pretty clear the difference is negligible between the two outcomes, and most likely leans towards buying for some of the intangible benefits of home ownership.
Final Thoughts
Home ownership has been a clear winner for many Canadians over the past decade or longer, particularly for those living in BC and Ontario. For some, it has been like winning the real estate lottery.
But for homeowners living in Alberta, Saskatchewan, or in Atlantic Canada, the math isn’t always as favourable. Home prices can stagnate for many years, and phantom costs eat into your returns over time.
Was my house a lousy investment? After a closer look at the numbers it hasn’t been that bad.
More importantly, I don’t actually consider my primary residence to be an investment. It’s a lifestyle decision, more than anything.
We didn’t win the real estate lottery, but we spent 11 years living in a house we loved and we’re leaving it richer in both wealth and memories. That’s good enough for me.
I’ve never heard so much interest in GICs before this year, but with stock and bond markets down and interest rates up it’s no surprise that investors are looking for a safe and profitable place to park their savings.
Just two years ago, a five-year GIC was paying a paltry 1.5% interest, while a two-year GIC was paying just 1.05%. Fast forward to today and you can find a five-year GIC paying 5.2% interest and a two-year GIC paying as high as 4.88% interest (source: https://www.highinterestsavings.ca/gic-rates/).
Meanwhile, investors are reeling as stocks and bonds have suffered significant losses this year. A balanced 60/40 portfolio is down around 15% so far this year and an all-equity portfolio is down nearly 17%.
Investors want to stop the bleeding in their portfolio and are considering short-term GICs as a temporary solution. Those with new money to contribute don’t want to throw good money after bad, so they’re looking to GICs as a source of decent returns today.
GICs are a perfectly sensible investment for someone with a short-to-medium time horizon who is looking to maximize their return without taking on any risk (besides the risk of tying up your money for 1-5 years).
But the trouble with GICs as a market timing investment strategy is their lack of liquidity. We don’t know when stock and bond markets will turn around, but we know throughout history that returns after a bear market have typically been strong. If your capital is tied up in a GIC, even for a year, and markets start to rise quickly, you miss that opportunity to recover your losses and/or participate in those gains.
Consider my own experience with GICs.
Back in early 2009 I received a $7,500 bonus from work and decided to put that amount into my RRSP before the March 1st deadline. I was naive about investing, but knew enough that the mutual funds in my group RRSP were down substantially. With the RRSP deadline looming, and knowing that I had to put the money into *something*, I chose a 5-year GIC at TD Bank that paid 5.5% interest.
I still kick myself for this decision, because the Great Financial Crisis bottomed on March 9th, 2009 – shortly after I purchased that GIC.
The result? The five-year GIC turned my $7,500 into about $9,800.
Had I invested the $7,500 into a Canadian equity fund (let’s use iShares’ XIC as the proxy), I could have turned that $7,500 into nearly $16,000 thanks to the roughly 16% annual compound growth rate in Canadian stocks from March 2009 to March 2014.
Now that’s an example using a relatively small sum of money. But I’ve had conversations with investors who want to put several hundred thousand dollars of their portfolio into GICs.
Some of these investors think we’re headed for many years of poor returns, so let’s assume they invest $200,000 in a five-year GIC paying 5.2% interest. After five years they’ll have about $257,700.
Maybe investment returns over the next five years won’t be as strong as they were from 2009 to 2014. But let’s make a not so unreasonable assumption that stocks return 10% annually between November 2022 to November 2027. That would turn your $200,000 into about $322,100.
I don’t have a crystal ball to see how this will all play out, but I do know that every bear market ends and that stocks and bonds will eventually reach new highs. It’s just a matter of when.
This Week’s Recap:
We had a wonderful time in Paris earlier this month. I’ve always heard mixed reviews about Paris – the negatives being that it was dirty and full of rude people. I didn’t find that at all. The city was clean and the people were lovely, despite my poor attempts at speaking French.
Our apartment overlooked the Eiffel Tower, which made for great views but the neighbourhood was a bit too touristy for us. We wandered over to the 2nd arrondissement where we found some amazing vegan bakeries and restaurants. We’d definitely stay in that area next time.
I know I revealed in my anti-goals post that I did not want to ever go to Disney, but with eight days in Paris we decided to take a short train to spend a day at Disneyland Paris (for the kids!). It was fine. Lots of waiting in line, lots of overpriced souvenirs, but the kids had a blast in the Marvel and Star Wars areas (ok, Dad had fun there too).
We saw the Louvre, spent a fabulous day in Versailles, and even took the kids to a Michelin star restaurant for dinner. Out of all of our travels this year, Paris is definitely at or near the top of the list.
I managed to update and repost a reminder to fill out a T1213 form so you can crush your RRSP contributions next year.
And, the Canadian Financial Summit took place last week and I hope you got a chance to catch my session on retirement readiness planning.
Weekend Reading:
The biggest financial news story from this past week was the CBC Marketplace expose on real estate agents facilitating mortgage fraud for a fee. This practice of falsifying income through fake employment records, bank statements, and T4s helped unqualified would-be homebuyers get into the housing market.
Another big story is the fall out from a class action lawsuit against Visa and MasterCard, the result of which means businesses in Canada can add a surcharge to customers who choose to pay with a credit card.
This opinion piece on the credit card surcharge topic sums up a lot of my thoughts as well:
“The Canadian government needs to step in and cap interchange fees. With the cost of living already so high, it’s unreasonable to add an extra one to three per cent to our bills. This lack of consumer protection is massive negligence on the part of the Canadian government.”
Erica Alini writes, as interest rate hikes continue is it time to lock-in your variable rate mortgage? (subs)
PWL Capital’s Ben Felix says that investing in your own financial literacy might be one of the best investments that you can make:
Michael James on Money looks at instances of the inevitable masquerading as the unexpected.
Jason Heath addresses something I wrote about in the intro of this post – is now the time for long-term investors to abandon stocks – with a similar response.
Want to retire earlier and stay healthy? Andrew Hallam shares an investing strategy to do just that (tl;dr it’s VBAL, XBAL, or ZBAL).
I love these first-person retirement stories in the Globe and Mail. Here’s one who’s struggling with the new-found freedom that retirement brings:
“But who was I these days? No longer a professional and yet not ready to embrace the “retiree” label, either: I don’t golf. I don’t yearn to travel. I don’t have grandchildren. Maybe the classic retirement profile of family and leisure activities doesn’t fit everyone, but it sure didn’t fit me.”
Retirement can mean a loss of identity — how to bring happiness to your next act.
Most rich-looking people are just folks with high salaries who spend a lot. Discover how the fake rich and your work colleagues could be hurting your wealth.
Travel expert Barry Choi reports that Aeroplan is now freezing accounts due to travel hacking.
Finally, a great episode of the Freakonomics podcast on whether personal finance gurus are giving bad financial advice. Some economists apparently think so.
Have a great weekend, everyone!
The Canadian Financial Summit is a three-day virtual conference featuring 35+ Canadian personal finance experts (including yours truly) speaking on a wide range of topics from investing and retirement, to pensions, real estate, financial planning, inflation, and much more. It’s Canada’s largest personal finance and investing conference.
This year’s conference takes place October 12th to 15th and boasts an all-star line-up of speakers, including Ben Felix, Jason Heath, Rob Carrick, Fred Vettese, and Dr. Wade Pfau. You’ll also find interviews with popular personal finance bloggers such as:
- Boomer & Echo’s Robb Engen (<–that’s me)
- My Own Advisor’s Mark Seed
- Mixed Up Money’s Alyssa Davies
- Tawcan’s Bob Lai
My interview with co-host Kyle Prevost is on a topic that I’m passionate about – retirement readiness. We talked about my retirement readiness checklist, along with the dangers of what I call the retirement risk zone – the period of time between retirement and taking your government benefits. Then we got into housing and what I’ve seen Canadian retirees doing with their home equity to ensure a comfortable retirement.
You can watch my session with Kyle on October 13th (or at your convenience if you purchase the All Access Pass).
There will be a LOT of other topics covered, and you can check out this link to view all the speakers and talks that will take place.
Once again – this event is completely FREE to attend. However, if you can’t make it for the scheduled date/time, you will be given the option to purchase a special any-time, anywhere, All Access Pass that will allow you stream the entire conference at your leisure.
This Week’s Recap:
We’re currently on the last stop of our revenge travel trips for 2022. I’m writing this from an apartment in Paris that overlooks the Eiffel Tower – not too far from this gorgeous spot pictured below:
It was a heck of a long day getting here but we’re feeling rejuvenated this morning and ready to explore this amazing city.
Last week I wrote that investors are ready to capitulate after nine months of poor returns, and then went on to share all of the good reasons to stick to your investing plan.
Many thanks to Erica Alini for including my thoughts on her terrific front page feature in the Globe and Mail on how incredibly expensive it is for young adults to start out on their own in 2022.
Weekend Reading:
Author Mike Drak, who wrote an excellent three-part series here on designing your retirement lifestyle, has written a new book called Longevity Lifestyle by Design – redefining what retirement can be. He graciously offered a free download of his new book to Boomer & Echo readers, which you can get here.
Does active investing work in the information age? Portfolio manager Markus Muhs has the answer.
Retirement expert Fred Vettese says that thanks to a rare event, deferring CPP to 70 may no longer always be the best option.
Indeed, he found another case where taking CPP this December leads to a better outcome than waiting until 2023.
The tl;dr version is that for those who are not yet taking CPP, the expected benefits are adjusted by wage inflation, whereas those who are already receiving CPP get an increase that’s based on price inflation. Since price inflation is expected to be much higher in 2022, and the inflation adjustment for CPP recipients goes into effect in January, a 69-year-old who was planning to wait until 2023 to take their CPP would be better off taking it in December.
Of Dollars and Data blogger Nick Maggiulli wrote a great piece on why you shouldn’t try to optimize your life:
“Unfortunately, your life isn’t a math equation. You have to accept that you can’t maximize every experience. You will make mistakes. You will behave sub-optimally. And that’s okay.”
Here’s My Own Advisor Mark Seed on how to split money with your partner. My wife and I have a joint account where all the bills are paid and then separate accounts for our own guilt-free spending.
Many young people shouldn’t save for retirement, according to research based on a Nobel Prize-winning theory. This lines up with Fred Vettese’s recent book, The Rule of 30.
PWL Capital’s Ben Felix explains the Private Equity Pitch – an asset class that comes with fees estimated at 6-7%:
Scared about running out of money in retirement? This doctor’s repeat prescription for bear and bull markets means you’ll never have to worry about it ever again.
Scared about how you can protect your wealth while the global stock market crashes? The answer lies 2000 years ago in ancient Greek mythology.
Andrew Hallam is the best.
Mortgage broker David Larock explains why central bankers must now let the fires burn.
Fee-only planner Jason Heath looks at when it makes sense to withdraw money from your corporation to invest personally.
Finally, Rob Carrick on what to say when someone asks the most dreaded question in personal finance: Will you be my executor? (subs)
Have a great weekend, everyone!