Weekend Reading: Real Estate FOMO Edition

The Canadian media loves to talk about real estate – particularly Toronto real estate – and its seemingly unstoppable climb to new heights. The average home price in Canada reached $538,831 (June, 2020). That’s up 6.5% versus the same time last year. In a pandemic.

The national average doesn’t tell the whole story, though, as home prices in Toronto shot up an incredible 16.9% last month (year-over-year) to reach an all-time high of $943,710. Vancouver gets considerably less national attention than Toronto but its home prices rose by 4.5% to reach an average of $1,031,400.

I don’t write enough about Canadian real estate. I live in Lethbridge, AB, a small city of 100,000 people where the average home price is in the $350,000 range. For that reason I don’t view real estate with the same lens as those living in Toronto or Vancouver.

Rising real estate prices is a big deal for many Canadians. Young people can’t afford to get in the market and have been told for 12+ years to wait for the real estate bubble to burst. It hasn’t happened.

Toronto real estate prices 1994-2020

Looking at that chart, it’s certainly understandable for young Canadians to feel some real estate FOMO (fear of missing out). Getting into a house in Toronto or Vancouver at any time over the past 10+ years now looks like it would have been a great decision. If that trend continues, then why wouldn’t young people do everything they can to scrape together a 5% down payment (10% on the portion above $500,000) just to get a piece of the action?

We try to make the best decisions we can with the information we have at the time. It’s painful to look back and see that a decision to buy a house (or invest in a stock) would have led to a great outcome. But you have to remember why you didn’t pull the trigger in the first place. If that decision was based on sound reasoning then you can’t beat yourself up over an outcome that’s largely out of your control.

Real estate is such a polarizing topic and our views are often guided by our own experience. Boomers who’ve benefited from enormous price gains in the past 30 years might believe housing is a surefire investment and that prices will always go up (“Everyone needs a place to live. They’re not making any more land.”).

Young people living in major cities might believe homeownership is largely out of reach for them. The FOMO effect is real.

Meanwhile, those of us living in non-major centres might have mixed feelings towards real estate. The housing boom in Toronto and Vancouver is so disjointed from our own experiences with real estate that it may be difficult to empathize with people living in those cities.

My thinking on real estate is that homeownership is a highly personal decision. It should start with the idea that a home is not an investment, but a place to live. It should be a long-term decision, ideally staying in the same place for 10+ years. Its location should align with your lifestyle as much as possible and avoid stressors like unnecessarily long commutes and excessive maintenance. Finally, homeownership should not impact your ability to save for retirement or afford childcare.

If you can tick all of these boxes then it should not matter whether you buy a house in Toronto, Vancouver, or Lethbridge.

Unfortunately, soaring real estate prices in Toronto and Vancouver mean an increasing number of younger Canadians will have to come to grips with renting – something that people in New York and San Francisco have known for many years. The homeownership rate in San Francisco is just 37.6% and in New York it’s just 33%. 

Vancouver’s home ownership rate is 64%, and Toronto’s is 67% – just 1% off the national average. Something has to give.

This Week’s Recap:

On Wednesday I wrote about past performance and your expected future investment returns

From the archives: Here are 15 money saving tips to live by

Over on Rewards Cards Canada – understanding the difference between Air Miles Cash and Dream Miles.

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Weekend Reading:

Credit Card Genius explains what is a good credit score in Canada and is it good enough to be approved?

Barry Choi at Money We Have looks at grocery stores that price match in Canada.

Visual Capitalist ranks the best and worst pension plans in the world.

Of Dollars and Data blogger Nick Maggiulli explains why a metric called the Wealth Discipline Ratio is the most important number in personal finance: 

 “This is a measure of your financial discipline through both savings and investing.  It’s not just your savings rate, because it also incorporates how you use your savings to invest and increase your wealth.”

A report from the Canadian Institute of Actuaries looks at claiming CPP at age 70 vs age 65 and concludes that most people should wait to claim CPP benefits. While there are good reasons to take CPP early, I generally agree that deferring CPP to age 70 is a smart move.

There are fewer publicly listed companies today than there were in 1976. Michael Batnick explains where all the stocks went

Here’s an interesting look at how Covid-19 has impacted people’s investment outlook from around the globe.

At home, 8 million Canadians are rethinking retirement because of Covid-19.

MoneySense’s Jason Heath offers six strategies to help your kids financially.

Gen Y Money takes a look at the best travel credit cards for seniors. These typically will have better travel insurance benefits for those over the age of 65.

Gold has surpassed $2,000 and the Irrelevant Investor Michael Batnick explains what’s driving the price.

Episode nine of the Canadian Portfolio Manager podcast looks at currency-hedged ETFs and whether they make sense for Canadian investors.

Finally, Millionaire Teacher Andrew Hallam explains why you should ignore how the “smart money” invests right now.

Have a great weekend, everyone!

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4 Comments

  1. Claire on August 8, 2020 at 3:29 pm

    Not all boomers own homes or got into the housing market. I’m a younger boomer who has always rented. I recently had to make a “final” choice between retirement and buying a home. Purchasing a house would mean working well past age 65, probably into late old age. That really simplified things for me. So I opted to keep my investments working for me. I took an early retirement and live off the income from my investments.

    Now, there are a few things I don’t like about renting. I would love to own a pet, and I can’t. A garden for growing food would be fantastic; my small balcony is poorly situated for that. And with COVID, most of all I dearly wish I had a private entrance to my home, as I have to negotiate multiple common areas every time I exit the apartment, whether to leave the building, pick up my mail or do a laundry. (This last is true of many condos too, of course.)

    On the other hand, I have the freedom of being able to move whenever I want. Whenever there are facility issues, it’s the landlord’s responsibility to fix them. My investments are intact, and they’re continuing to provide a solid retirement cushion.

    I think my choice was the wiser one – for me. But if owning a home and living in it is the most important consideration, I have every respect for people who choose that. I just never considered home ownership an investment as such.

  2. GYM on August 8, 2020 at 3:32 pm

    Thanks for the mention! Have a great weekend.

    I’m just shocked how the market can go crazy here in Vancouver in the middle of a pandemic. Oh well, that’s what you get when interest rates are at a record low I guess.

  3. Mark on August 9, 2020 at 7:04 am

    One thing that appears to be fuelling the continued increase during the pandemic is the flight to the suburbs. I live in the outer portions of the greater Toronto area. Prices increased consistently in the last decade, but in the past few months we’ve experienced a crazy uptick. In the past month two bungalows on my street have sold for more than $1.1M and in at least one case for more than asking price. Yes, it’s a desirable location, large lots (~quarter acre in both cases) close to schools, shopping, etc but that’s a lot of money. However, for someone already in the market near downtown Toronto it likely looks like a steal. You are now working (near) full time from home, so no commuting worries, you trade a 23×90′ lot for a 50×190′ and you likely pocket $500K or more in the transaction. And you no longer have to deal with crowds in the city, long lines at the grocery store, lack of social distancing on city sidewalks, etc. In my small town, grocery shopping is more efficient during the pandemic. The move gives you space and peace of mind which are difficult to put a price on.

  4. Maria @ Handful of Thoughts on August 9, 2020 at 7:23 am

    In my opinion there is no real “Canadian housing market”. It’s so regional and varies greatly. The averages are highly affected by Toronto and Vancouver and are not relevant when looking at smaller centres.

    We would be much better off looking at the regional housing market we live in when making a decision. Real estate doesn’t always go up. We owned our previous home for 10 years and the value actually decreased. So we decided to hang out to it and convert it into a rental. If markets ever rebound in Alberta we can look to sell it then.

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