…is this “opinion” video released on Monday via the Globe & Mail.
Honestly folks, this is one of the most unbelievable things I’ve seen in a long time.
Millennials, apparently, should rent forever, and that’s based on math, that makes positively, no sense.
Ugh. My words can’t do this justice. Just watch the video…
The “Information Age” has given us many things, both good and bad.
Never before has there been so much information, knowledge, opinion, and commentary, available immediately, at your fingertips, and on virtually every conceivable subject.
When it comes to the bigger subjects – life, health, dating, money, politics, religion, etc., the amount of information is seemingly infinite, and continues to grow every day.
Much of the information out there happens to be of the insight/opinion variety, and that’s where things get dodgy.
I suppose you could argue that there is no true “unbiased news,” but I think it’s safe to say that most people can differentiate between a CBC News report, and a teenager Instagramming.
So take this entire blog post with a grain of salt, since I’m a “blogger,” chalk full of opinion on a daily basis, who is about to critique somebody else, who put his opinion on the Internet.
The problem with this opinion, is that it was published by the Globe & Mail, which is has national reach in both print and online.
Don’t get me wrong, I love the Globe & Mail. It’s my favourite of the major newspapers.
The Star is too left, The Sun is too right, and in the spirit of Goldilocks and the Three Bears, I find the Globe & Mail to be “just right.”
But if the Globe, and other newspapers or media outlets, are trying to appeal to millennials and others who don’t want to READ a newspaper column by Christie Blatchford, Margaret Wente, Rosie DiManno, or any of the other talented, long-time, award-winning columnists, and instead want to feature video-opinions of the proverbial “man on the street,” then today’s media is simply succumbing to the lowest common denominator.
The piece I have issue with is in their new video section, in an “Opinion” feature that they’ve rolled out.
The videos are well-produced, and look authentic.
But when you boil it right down, this is a random person, opining on a very complicated subject, with virtually no knowledge.
Globe & Mail won’t allow embedding of their videos, so click on the image here and it will redirect you:
Wow. There’s a lot going on here!
I have a lot of problems with this video.
Let’s start from the beginning.
A random guy comes on screen and says, “Hey millennial! You want to buy a house? I don’t think you should, not now, or maybe ever.”
Well the most important word in that sequence is “I.”
Who are you?
I don’t want to attack this guy personally, because unlike 99% of internet commenters in 2017, and I respect that he put his name on this.
So I’ll leave it up to you guys to decide whether he is in any way qualified to be giving real estate advice. But maybe you’ll then ask, “Who is?”
So then comes this:
81% of millennials plan on selling their home.
Well no kidding?
As opposed to, what? Dying in their house in 60 years?
Everybody, at some point, is going to sell. So I don’t quite understand the point, and this is where things turn into a grade eight book report.
63% feel cash poor
57% fear rising interest rates
Source? No?
Then this:
“Polls show that millennials want to buy, and want to do it within the next five years.”
Wow. If the argument is that millennials “shouldn’t buy in five years,” then I don’t know what to say to that.
And here comes the point of this thesis.
Are you ready for this?
This guy thinks that millennials should consider renting FOREVER!
That’s some serious contrarian thinking.
But the absolute BEST part of his fatally flawed argument comes when he gives us this graphic:
I don’t understand this at all.
The author’s idea seems to be that the $216,000 in rent, which is a sunk cost, is HALF of the $500,000 that it cost to buy the same condo!
But the $500,000 is not a sunk cost.
Am I missing something? Because I don’t think I am.
His exact quote: “If you do the math, even after ten years of renting, you’re paying nowhere near what it would cost to buy.”
So what?
My socks cost a fraction of what my shoes cost, but they’re totally different.
The author here is essentially arguing that the $216,000 in rent is comparable to the $500,000 it costs to buy the condo – as though the $500,000 is a sunk cost!
“You’re paying nowhere near what it would cost to buy.”
This makes absolutely, positively, no sense.
This isn’t comparing two apples – one that costs $1, and one that costs $2.
This is comparing an apple that costs $2, and an apple tree, that bears fruit, over time, and remains in place, unlike the apple core (or rent…) that you discard.
The author may be unaware that………wait for it………..in ten years, you can sell the $500,000 condo, and get that $500,000 back!
He says, “And I haven’t even mentioned property taxes.”
No. But you also didn’t mention that in ten years, that property could double in value.
But even if it didn’t, let’s look at these numbers.
His idea that “stable rents” exist is silly. Rent will not stay the same for ten years. So by compounding an extremely modest 2.5% interest over ten years, that $216,000 is actually $241,993.
Buying that $500,000 condo, forget about with 20% down – let’s say a modest 10%, will cost you $953/month in interest, at current rates (and yes rates can go up). The maintenance fees would be $400/month, taxes $250/month, hydro $50/month. That’s $1,653/month.
I didn’t just make those numbers up to come out to an amount less than what the $1,800/month he quoted was. Those are real numbers, folks.
But forget about these numbers, for a moment.
What really bothers me here is that he’s essentially suggesting that the sunk cost of renting is equal to the sunk cost of buying, which is insane.
I just don’t understand this piece.
And I’m afraid that somewhere out there, a millennial is watching this video, thinking that “renting costs half as much as buying,” because that’s what this piece says.
Forget about the fact that, in my opinion, that $500,000 purchase in 2017 could be worth $900,000 in 2027. Or $700,000. Or $600,000. But bottom line, and I think 90% of you would agree, that no matter what happens today, tomorrow, in 6 months, 18 months, 36 months – in ten years, the price of a home will be higher.
“Millennials should never buy housing.”
Good Lord. I mean, just think about that advice. It’s scary that this stuff is out there.
Then again, I remember back in 2008, with Garth Turner wrote the best-selling book, “The Greater Fool,” in which he predicted the market crash!
The average home price is up 143% since then.
He cost his followers a lifetime of tax-free capital gains that they will never be able to recoup.
I, writing this now, have the benefit of hindsight, so my argument isn’t totally fair. But I wasn’t the one writing books about the market crash in 2008, before starting an investment fund to attract people who were taught not to invest in real estate.
And for somebody who is not in any way affiliated with real estate or personal finance to put together a video with deeply flawed math, and have a platform like the Globe & Mail promote it, is just so dangerous.
I’m not hammering on this opinion piece because it’s bearish in nature. You have to know me better than that.
I read every single article by Rob Carrick, who I think is an extremely talented writer and gives very level-headed advice on personal finance that I wish every single millennial out there would take to heart. And Rob, of course, is a real estate bear – a noted one, in fact. But I’ve done videos and columns with Rob in the past, and I think his articles and videos have a place at the forefront of the Globe & Mail.
But this “Opinion” video, by a random guy, with non-sensical numbers?
I can’t believe the Globe has trotted this out. I’m just shocked.
Buck
at 7:38 am
If you’re going to rent, you have to be as smart as this person with your money: http://www.financialsamurai.com/disowned-for-being-a-millionaire-why-i-still-wont-buy-a-house/ So, if you can’t follow that and do the work, then renting always doesn’t work.
Mr.Audi
at 2:42 pm
In 2007 I bought a condo for $265000 and sold it for $591000 now.
In 2007 I had $100000 if I would have bought AAPL shares at that time I would have had $956000 now instead by putting it down on the condo right now I have $591000….I believe one can make a point that buying a condo is not necessary the best investment.
Now shall you rent instead and never buy that is a completely different story but also if you think of real-estate as investment you must bare in mind that is possible that it will go down too and just up.
RE gain is tax free however is very difficult to take your money out on a short notice.
Steve
at 8:50 am
I’ve always wondered who rob carrick is and why he is qualified to be writing finance advice articles . Some of his articles are also retarded.
Pete
at 8:52 am
Including only the interest in the monthly payment of the buy option is misleading David. According to the RBC mortgage calculator, a 10 year mortgage at 2.69% on this property ($500K with 10% down) has monthly payments of $4410/month. A 25 year amortization makes the payments $2117/month, still above the rent of $1800, and that’s not including maintenance/taxes.
Looking at sunk costs, in 10 years, the combined total of the maintenance fees and property taxes is $78K. Assuming the mortgage is paid off in 10 years, that’s another $65K in interest. Those are sunk costs, and account for 59% of what a renter would pay ($242K over 10 years). Plus, that doesn’t include any repairs need to the unit itself, which a renter wouldn’t have to pay but a condo owner would.
You included the interest in the monthly payments, but if you look at 10 year amortization, BTW, the interest on a 25 year amortization is $173K, Assuming no increase in maintenance (yeah right), over 25 years the maintenance and taxes equal $195K. So your $500K condo has to sell for $863K after 25 years just to break even. I’m not saying it won’t happen, and as this market has shown, it could increase by that in a shorter time. But even on the low end, this person would be saving $317/month that they could be investing and growing. It’s not a clear cut answer one way or another based on this example. People tend to downplay the sunk costs of ownership and treat renting as foolish and I think its more nuanced than that.
Buck
at 9:14 am
Yep
Izzy Bedibida
at 9:20 am
Great points. Those are things that are rarely talked about. The other point that is raely mentioned, is that the value/equity is locked in. You can’t access it until you sell.
I brought this up with a real estate agent once, and she mentioned that I can get a HELOC to access the equity. I see a HELOC as a loan that has to be repaid to the bank with interest. She kept quiet after that.
J
at 9:49 am
That’s a very valid point about the maintenance costs above and beyond the condo fees. Condo fees are certainly not all inclusive as there are additional costs for inside the unit as well as special assessments for large capital expenditures.
Other costs are omitted as well including insurance and transactional costs (realtor commissions, land transfer/sales taxes and legal fees can add up to 10% of the sale price).
Mike
at 12:15 pm
If you’re looking beyond the interest portion of the mortgage, then you’re missing the point.
David is right about comparing sunk costs to sunk costs.
Yes, the principal portion of the mortgage is a valid topic as it has to do with liquidity and affordability, but in the context of what the star of this video is saying, I would argue only the interest portion of the mortgage is valid in the comparison.
Marina
at 3:58 pm
Let’s put the math in perspective.
Assume over 25 year you are indeed $863K in the hole. On the rent side, you are paying $752K in rent wih a 2.25% annual rent growth.
That’s a difference of 110K !
Now let’s say you invested that 110 k at about $4500 per year over 25 years, even at 10% return you will get back just under $500K.
So whether you invest the money or buy the condo, you get the same amount at the end if the condo does not grow in value. and if you can get a steady 10% return, which most people can’t.
So any capital gains on the condo put you ahead, and over 25 years I’d bet there will be gains!
I think unless you have extenuating circumstances (e.g moving a lot or something else), or you have a very strong investing strategy, buying is better than renting. That’s my 2 cents,
Chris
at 4:04 pm
If you’re staying in the same place for 25 years, then yes, buying will usually make more sense than renting.
However, I don’t think too many people could imagine themselves living in their same first condo for 25 years. And it only takes a few home sell/buy transactions to really eat into your gains in real estate.
So again, the best answer when it comes to rent vs. buy is: “It depends…”
RPG
at 9:00 am
What about the comments about affordable housing? “Everybody should be able to afford housing.” Cue the image of Kathleen Wynne in front of the podium.
Chris
at 9:01 am
David, the source for the figures is likely this Angus Reid survey conducted for CIBC earlier this year:
http://www.newswire.ca/news-releases/to-sell-or-not-to-sell-hot-housing-market-makes-it-a-tough-decision-for-many-canadians-cibc-poll-618830624.html
As for this video, it’s far too black and white. Renting or buying is a complicated decision, in which you have to factor in a ton of things, including assumptions about home price appreciation, stock market returns, your own discipline (to save and invest), how often you will move, etc. etc.
I get what they were trying to do and the discussion they were trying to spark, and I’ve made no attempt to hide my bearish sentiments on real estate. But simply saying “hey don’t buy a house and rent forever” is foolish and far too simplistic.
Preet Banerjee made a much more detailed video, exploring the subject, which I think would be a significantly better primer for anyone (particularly a millennial) considering renting or buying:
https://www.youtube.com/watch?v=KAMeI4uHAFE
Kramer
at 9:04 am
Brutal video… making such broad generalizations automatically renders the video effectively useless. Videos like that only feed the unhelpful stereotype that millennials want it all NOW (i.e. a charming semi in Leslieville or the Beach) and are not willing to work/sacrifice for it. Invest/commit to a condo for an appropriate period. Need a house? A detached house? Really NEED one, or just want one? If you need one, buy a detached 3 to 4 bed house in Brampton for way less than a 2-bed condo in Toronto – there’s plenty of them available. There are options, and they require sacrifice. Every generation has less options closer to downtown than the previous. If that’s too hard to swallow move to a down market or a city that is behind a phase or two.
And If you’re buying property for STATUS symbolism of it, THAT’S ON YOU, not the entire market. Look in the mirror and decide why you’re buying. “People buy only for the status symbolism of it” sounds like something two kinds of people say – people who have never owned real estate, or people who bought for the wrong reason and got in trouble due to bad planning.
MOST people buy for the right reason – namely, buy a home or condo if you NEED a home or condo and/or if it MAKES SENSE financially – that applies to everyone: from a millennial 5 years into the workforce, to an executive from the USA here on a 5-year work assignment.
Maybe this is the problem – not knowing the difference between NEED and WANT… is that the problem?
If you can distinguish between the two then I don’t see the need to make such stupid generalizations for an entire generation.
That video sucked. Irritating.
Daniel
at 9:21 am
David I’m surprised you didn’t take more of an issue with Clement Nocos.
A Google search shows his constantly on the Internet complaining and asking for handouts.
Case in point, he obtained an unpaid internship on New York, and started a GoFundMe page asking people to pay for his living.
I’m sure his next video will follow up on his comments about affordable housing.
Boris
at 1:13 pm
https://www.linkedin.com/in/clement-nocos/?ppe=1
NDP campaign volunteer, UN intern, bunch of useless degrees, entitled little tit. See his video “why am I getting your lunch?” Because you don’t bring anything to the table.
NOBODY OWES YOU ANYTHING
A
at 4:11 pm
There is some other opinion video using a Google search saying he has three degrees and delivering lunch to other people.
I do agree that TGAM should try to retain some credibility by providing opinions of only qualified people.
One thing he did not mention was that you buy a home to provide stability for a family. An educated guess would be that he does not have a partner/kids at present. Personally, this is an overriding factor for me and there is really not a price I would not pay to ensure a good upbringing of my kid(s).
XYZABC
at 12:48 am
I saw that video.
I have the same shirt, i just burnt it.
jeff316
at 9:54 am
I don’t have much difficulty with the idea that renting could, long-term, save you money or reduce your risk. I think, with house prices at these levels, that’s a an assertion that could bear true in many scenarios.
But the prices/costs they’re using here are just odd – if we’re talking about Toronto. It is like they picked them out of thin air to make their point but, strangely, they picked numbers that undermine their own argument!
What are we talking about renting? The 1800$ rent figure is not particularly realistic if you’re looking for more than one bedroom. Newer build? Well then forget it altogether. And then this rent figure is made more unrealistic if within those ten years, you move up to something larger.
If you have a child, well then forget the whole thing. Renting a three-bedroom place, even an old one or duplex, is going to set your back 2500$. Rent a house and you’re talking 3000$ plus.
Geoff
at 9:58 am
I think saying you should never buy is as dumb as saying you should never rent. Every situation is different. I will say personally that anyone buying who’s under 30 had damn well better be sure that they aren’t going to be moving in less than 5 years as that can be hard to predict (job change, marriage, whatever) – a lot happens in your late 20s.
Also David – I personally don’t think you’re right in saying that renting is a sunk cost. A sunk cost is distinct from economic loss / gain. In your example, the condo may be able to be resold, but there’s no guarantee it will be sold for the $500K you paid for it (there’s a small country to the south of us that I can cite many examples from of this). A typical sunk cost fallacy involves continuing to use something that offers no utility or there are better uses of your money because you’ve already paid for it – “this machine doesn’t work well and there’s better options out there, but we spent $200,000 on it last year so have to use it” – not because the money is simply spent. My dinner last night isn’t a sunk cost simply because I paid out the cash and can’t get it back.
Ralph Cramdown
at 10:01 am
We’ve been living in our current apartment for 12 years. Our compounded annual rent increase has been 1.84%. The landlord puts it up by the maximum allowed amount every year. We are paying 10.8% of our household income (“net income” from 2016 tax forms, realized capital gains at 50%, unrealized capital gains not included) in rent. Freedom (before) 55 is scheduled in about 1 year, and involves http://www.yachtworld.com.
I don’t know how a typical millenial who reads this blog is planning on saving the $2M+ (excluding home equity) that his family’s retirement will require. Maybe the plan is to make huge on Toronto real estate, sell it, and move to BF Egypt while living on the proceeds. Whatever. Get on realtor.ca, pick your “forever house” (not the one you’d buy if you won the lottery, just the one you figure you’ll eventually get to with hard work and savings) and tot up the land transfer tax to buy it, and the realtor commission to sell it. Now go to yachtworld.com and see what kind of a boat you can buy with just that money.
Kyle
at 1:49 pm
Ralph, your situation is not as a result of renting vs owning, it’s the result of minimizing how much you spend on shelter. If instead of renting you spent 10.8% of your household income to buy over the last 12 years, you’d have been even further ahead.
Chris
at 2:13 pm
Ralph may not have been able to purchase a comparable property for 10.8% of his income. 12 years ago, price to rent ratio was not as bad, but still elevated (hence why I said he may not have been able to; maybe he could have). Today, Canada’s price to rent ratio is astronomical.
Please refer to the price against rent tab of the graph:
http://www.economist.com/blogs/dailychart/2011/11/global-house-prices
Kyle
at 2:49 pm
Like i said above price to rent doesn’t factor in interest rates, it’s quite possible back then he could have bought more house than he was renting for the equivalent monthly cash outlay. Also with interest rates falling over the last 12 years, his shelter costs would have been stable or dropping if he had bought. Unlike his rent that went up 1.8%/ year.
Doesn’t matter either way you look at it, point is if this:
A) if he had bought equivalent property to where ever he has been living for the last 12 years, it would be an additional asset still on his books that appreciated a tonne tax free for the last 12 years.
B) Or if he instead spent the equivalent amount of his income into purchasing whatever type of property that equates to, he would still have a higher terminal net worth as an owner than as a renter
Might have been Freedom 45
Chris
at 3:00 pm
Kyle, we can’t say that with certainty. For one, we don’t know where Ralph lives. If he lives in Toronto, then yes, in hindsight, buying probably would have worked out better. If he’s in Ottawa, maybe not so much.
S&P 500 is up 62% since Jan 2008. Ottawa real estate is up ~36% over the same time (sorry, would have gone back further but CREA only gives back to 2008, not the full 12 years).
https://www.google.ca/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1494446400000&chddm=928625&chls=IntervalBasedLine&q=INDEXSP:.INX&ntsp=1&ei=MmITWeHFCMWJ2AbrvbNQ
http://creastats.crea.ca/otta/images/otta_chart05_xhi-res.png
Kramer
at 9:06 pm
We should refrain from ever simply calling out returns on different asset classes over some random period. It is never useful.
To reduce risk you should diversify among asset classes whose returns are not correlated. No one should put all their eggs in one perfectly positively correlated basket, ever. If we’re talking about 100% real estate-allocated portfolios, then this is irresponsible investing. End of story.
Also, has anyone here brought up yet that when you’re finished paying off your mortgage, your housing costs are lower? You will only have to pay property tax, utilities, maintenance.
When you rent forever, you keep paying market rent forever. So you had better saved up lots in a diversified portfolio in that case as well.
Not set up to ever finish paying off your mortgage? That is irresponsible as well obviously.
What are we arguing about here again? Should millennials buy real estate? Individual case-by-case situation/decision, this video is ridiculously ignorant.
Kramer
at 9:09 pm
And what I meant to say was… 100% allocation to S&P index is also irresponsible investing. Equities is a (relatively risky) asset class, portfolio should be diversified among more asset classes, which is why simply comparing something to the returns of the S&P since a bottom of a market is not useful.
If you want to compare Ottawa Real Estate to something, at least compare it to a list of different asset class returns assuming that an investor is diversified between them.
Chris
at 9:04 am
Fair point, Kramer. Kyle and I were discussing hindsight though (rent vs. buy 12 years ago), so the only real way to determine which one worked out better is to compare returns on different assets over the time period. It’s not really a useful exercise for projecting into the future (past performance does not guarantee future results, and all that good stuff), but for our hypothetical debate, it’s really the only metric by which to judge.
I agree that you should be well diversified. I’ve tried to get that across in most of my posts. I’m bearish on real estate, primarily because these days, for most people, buying a house means putting all of their eggs into that one basket (simply as a function of the currently high prices). A home can absolutely have a place in a well diversified portfolio. It shouldn’t be your whole portfolio though.
Like I’ve said in a few posts here, there is no easy answer to rent vs. buy. It depends entirely on individual situation. Videos like the one this post is about are absurd. Equally absurd are claims that renting is throwing your money away. The decision is far more nuanced than either of these hyperbolic positions conveys.
Kramer
at 11:50 am
I’m moving my response up to the top… hopefully start a new convo on something here.
Ralph Cramdown
at 1:25 pm
For starters, our income has gone up by more than our rent, so we were spending more than 10.8% of income when we first moved in here.
But if we’d bought a house, our monthly payment would have been higher. And we’d have been living in a semi-crappy house in a semi-crappy neighbourhood, and our child would now be attending a semi-crappy school. Or we could have traded up and moved twice, spent about $100,000 on real estate commissions and land transfer taxes, and still have a huge mortgage to pay off. As it is we’re walking distance to the less crowded subway line that goes right downtown, in one of the best school districts in the city. And none of those increased homeowners’ costs (pick your own garbage can adventure, water rate increases of 9% per year, skyrocketing electricity rates) have affected us.
Given what has happened to house prices in the last 12 years, I would expect to be reading about thousands of millionaires able to retire early because of this windfall. But that’s not what is being reported. Where did all the money go?
Kramer
at 1:49 pm
It’s there, in market value equity… highly illiquid vs equities. Some individuals could sell and maybe retire early off it (depending on age and retirement expectations), but just like with one particular stock and all it’s shareholders, if everyone did that at once the market value will drop and prevent it.
That’s why demographics are so crucial to all of this… most notably age distribution.
Appraiser
at 6:39 pm
@ Ralphy: Re: “cashing out”. Good news never makes the news, that’s why you never hear about it. Do you actually believe that if it’s not news, it’s not happening? Shuuush…..
M
at 3:29 pm
They say there are two wonderful moments in a boat owner’s life – the day he buys it and the day he sells it. Good luck!
J
at 10:54 am
“But bottom line, and I think 90% of you would agree, that no matter what happens today, tomorrow, in 6 months, 18 months, 36 months – in ten years, the price of a home will be higher.”
Per TREB’s data, after peaking at $273,698 in 1989, average Toronto home prices took until 2002 to recover – 13 years later. And that’s in nominal dollars. Adjusted for inflation, Toronto home prices didn’t surpass that level until after 2010 – 21 years later. (This is why you shouldn’t factor in any expectations that prices will increase beyond inflation when deciding to by a home.)
http://www.trebhome.com/market_news/market_watch/historic_stats/pdf/TREB_historic_statistics.pdf
http://www.bankofcanada.ca/rates/related/inflation-calculator/
Chris
at 1:18 pm
Good points, J. I don’t think any of us should assume to know what any market (real estate, stocks, gold, oil, etc.) has in store for the future.
A few years ago, many very smart people were saying we’d have $200/barrel oil in no time at all…that prediction hasn’t worked out so well.
Boris
at 1:01 pm
The Globe is so far left Dave…cmon man. The Post has actually been pretty fair, the most fair, of its treatment of news, specifically politics. The Globe has a love affair with our dope of a PM and mutant of premier.
I agree with everything else. Hipsters gonna hipster. Globe and Mail personal finance articles are fake news.
Kyle
at 1:45 pm
Dumbest video ever. The Globe has a history of giving real estate bears a platform because it generates lots of clicks.
Agreed with David, it is pure stupidity to compare purchasing an appreciating asset to paying an expense. Every time you make a mortgage payment, you take some of your income and add it to your equity. Home values tend to also appreciate tax free over time which further adds to your equity. Sure the property could experience drop in value, but unless it goes to 0, it will still be an asset on your balance sheet, and unless you sell it, it will likely recover and continue to appreciate.
Every time you make a rent payment (which also tends to appreciate over time and never gets “paid off”) you take some of your income and kiss it good bye forever.
Secondly, renters also pay property taxes, maintenance fees, mortgage interest and principal, it’s just that they pay it on behalf of their landlords’. If you are comparing similar properties renting will not be cheaper than buying in the long run, if that were the case then landlords would quickly become extinct.
Chris
at 2:18 pm
Every time you make a mortgage payment, you also take some of your income and kiss it goodbye forever, in the form of interest payments to the bank.
As I discussed in my other reply to you, price to rent ratio is currently astronomical in Canada; thus many newer landlords are probably cash-flow negative on their rental properties. They are likely relying on appreciation to make the investment worthwhile.
Like I stated in my original post, rent vs. buy is a complicated discussion, which changes depending on one’s personal situation, as well as assumptions that are impossible to know for certain in advance (home price appreciation, stock market growth, etc.). There’s no one-size-fits-all correct answer.
Kyle
at 2:39 pm
Price to rent does not factor in change in interest rates. Just cause prices are high, doesn’t mean it cost more to buy.
Chris
at 2:54 pm
Fair point, price to rent ratio just looks at the price of owning compared to the price of renting; not the montly carrying cost of owning.
However, with home ownership costs as a percentage of median household income at 64.6% as of Q4 2016 (according to RBC), I continue to suspect many recent purchaser landlords are cash flow negative on their property.
http://www.rbc.com/newsroom/reports/rbc-housing-affordability.html
As many have stated, this video is wrong in assuming that buying is always a bad idea. Assuming that renting is always a bad idea is also wrong. Both paths have their pros and cons, and neither will prevent financial success. But if you own and move frequently, you will eat away your gains. If you rent and don’t save/invest, you will not even earn gains. And as I’ve said, we have no clue what the stock market or housing market has in store for us.
Kyle
at 3:00 pm
This i can agree with. Rent vs buy, is not always black or white. Depends on lots of things, how long you stay in your place, location, what else you do with the rest of your disposable income, and the market.
But one thing that is black or white, is no one should over-extend on shelter costs.
Chris
at 3:05 pm
Kyle, my man, we finally agree! Exactly, anyone looking at renting or buying needs to really consider a lot of things. It’s a very nuanced decision, and as one of the biggest investments of your life, you need to analyze it carefully.
Jack
at 3:17 pm
@Chris: “… I continue to suspect many recent purchaser landlords are cash flow negative on their property.” In this suspicion, you are not alone:
http://www.movesmartly.com/2017/03/data-shows-nvestors-are-speculating-on-single-family-homes-across-gta.html
Libertarian
at 2:35 pm
As every other commenter has said, the video is ridiculous.
So my advice for any millenial reading this who is going through the rent vs. own debate, first thing he/she should do is become financially literate and financially disciplined. Once someone masters those two things, he/she will likely succeed in life whether renting or owning.
The commenters on this blog have an interest in these topics, so they have the knowledge, but the vast, vast majority of people out there don’t have the slightest clue when it comes to money management. Those people should be careful before they decide to sign their life away on a lease or mortgage.
DonaldQuack
at 10:40 pm
After the most recent ‘expose’ on condo flipping and all of the RE bear articles every day – I’ve boycotted G&M. I won’t even read their articles online as it gives me heartburn to read their incredulous socialist views.
These guys have a problem with anyone making money. Landlords = bad, renters = good.
In all seriously this is the worst advice ever and I encourage everyone to stop giving G&M the time of day. They are ‘fake news’.
Tom Cressto
at 5:48 am
Buy high, sell low (to me).
RT82
at 9:38 am
Of course the video is dumb but this post east a bit harsh.
David, millennials or anyone for that matter shouldn’t be taking financial advice from you or the video.
Houses appreciating in value, while good on paper, is of no practical use if you don’t have cash flow to live.
Kramer
at 12:31 pm
I guess most of the posts (like this video) revolve around an on or off, black or white, all or nothing decision on whether real estate is “a good investment”, and treat it as if it will be the only asset in the individual’s balance sheet. While it seems the average person has below average investing and financial planning knowledge, it should be RARE when a homeowner’s entire net worth calculated by:
Assets:
Market Value of House
– Liabilities:
Outstanding Mortgage
= Net worth
= Equity in House and NOTHING else
That should be rare… except with first time homebuyers. Because of high prices of real estate vs a “young person’s” savings (and this is not new… was the case 7 years ago as well), when someone sets out to buy at a relatively early age, they are often liquidating EVERYTHING they have in order to get a downpayment together… we’ve heard the expression “beg, borrow, and steal in order to get the downpayment so you can get into the market”… this would certainly assume that some people are going 100% of portfolio into Real Estate if they are buying when they are young.
With this in mind… the real question should be:
Should a first time homebuyer (millennial or otherwise) buy real estate when it means:
+ THER ONLY ASSET will be the downpayment on their property
– THEIR LIABILITY will be a gargantuan (it’s so rare you get to use that word) Mortgage
= The ENTIRE Net Worth is the equity in their home
In a perfect world, the answer to this would be absolutely NO. The individual should have a healthy pure downpayment (20%) and some reasonable amount in a diversified portfolio on the side.
But I think what goes through most first time homebuyers’ minds is:
– I need a place to live anyways… it’s buy or rent or live in parent’s basement. No other option.
– I will build equity through paying my mortgage; a forced savings (this is valid, people respect their mortgage)
– I will have the rest of my life to build up my portfolio in other asset classes***
*** this is the most important point.
Will they actually have the rest of their life to build up other asset classes? And this is where it is PURELY dependent on the individual, and why parents always ask their kids the most annoying, ear piercing question on earth – what’s your five year career plan?
In a perfect world a first time homebuyer would forecast their financial for the next 10 years… factoring in: Inflation, Expected salary increases based on their career plan, Future costs (if you are planning to have a kid in 3 years you sure as heck better build that in). Then do some scenario analysis around interest rates impact on mortgage.
If you do all that and find that you are able to save a required $X per month to actually build up your portfolio in other investment classes, then buying real estate might be a good idea if it’s the right life choice for you (you have a long time horizon, reducing market risk and illiquidity risk).
But I would be surprised if 1 of 50 first time homebuyers do this exercise. The focus seems to be on “can I afford the mortgage payment, electricity, and to eat food 3 times per day” in order to get in now.
I think that the qualitative benefits of being a homeowner wildly overvalue real estate… but the thing is that virtually everyone values that aspect the same way… which makes it real. This is common in many alternative asset classes. Extreme example: fine art is just paint and a canvas and a frame… Only with fine art you will have A LOT more people say “Whatever… I would not pay for that, it’s just paint, a canvas, and a frame”.
Perhaps millennials are the first generation to start to detach from the qualitative benefits… “Millennial revolution” (and maybe even this jackass on Globe and Mail though his math and everything else are useless) are among the first to try to broadly say:
“Look, some of us DID do the financial planning forecast, and we are NOT going to go all in on real estate for the first 10 years of our careers and feel trapped/enslaved by the gargantuan liability on our balance sheet… the qualitative benefits are no longer worth it… it has reached the breaking point on that whole thing… we value being out and having experiences and sitting in our nice home with a fragile water tank hanging over our heads is not worth it (that was meant to be a metaphor for the risk of being under water one day).
So, instead, of spending $100,000 on a downpayment + $10,000 in fees, we will invest that $110,000 and put ALL OUR focus on building up our portfolio in many other wonderful asset classes…
And when we TRULY NEED TO OWN A HOUSE, we will buy then…
YES, even if the market is higher then, so be it… because you know what? Maybe the market will be lower then… and YES, that IS possible people.
And YES, we will need to pay rent in the meantime, but that’s fine too, because we did our financial plan and we can pay rent AND diligently save and invest with the balance and have other qualitative benefits without the massive debt burden making us insane and constraining/determining our paths.
If millennials or ANY other first time homebuyers have done their individual financial forecasting and have come to that decision, I would not argue against them.
To conclude, I would like to say that I personally would NOT bite the hook that “Millennial Revolution” uses to try to brainwash people… once again they overgeneralize and try to prescribe something for everyone. I HATE THAT. The best decision will be determined by the thousands of details that make us all different.
Kramer
at 12:44 pm
I just rematched the video with the perspective above… some of the points he makes are reasonable, he should have just stopped right before the whole “$216,000 vs $500,000” part and left it at that.
Based on what he said before that stupid part, if I was a first time homebuyer, I wouldn’t buy today unless I had a 20% downpayment, the equivalent in a diversified portfolio on the side, and a good reason for settling down into one property. I don’t see many millennials being in that position. Maybe that’s his point. Which isn’t as idiotic as me and many others jumped to at the onset.
Chris
at 1:48 pm
Good points all around Kramer. I agree with pretty much everything you said!
Kramer
at 2:37 pm
Muchos gracias for saying.
Now I wonder, let’s say that the financial strength requirements for “responsibly” buying a home at TODAY’s market prices are:
– 20% downpayment
– A reasonable amount in a diversified portfolio on the side.
– Ability to pay mortgage and all other monthly living costs and save 10% of gross salary into growing that side portfolio.
– A life reason for settling down into one property for a long horizon.
Such financial strength is dependent on income, savings/inheritance, and interest rates.
So, what % of current first time home SHOPPERS (millennials or otherwise), meet this criteria? Certainly there are some… some people do in fact have good jobs, some people may have saved or inherited savings and want to deploy it in real estate and other investments. The banks play a huge role in making sure the buyer’s income can afford the mortgage they are seeking (and stress test higher interest rates), and require minimum downpayment. So a high % of the shoppers qualify and are allowed to buy… but what % has the financial strength to truly do it responsibly?
Maybe it’s that the younger of the millenials just don’t see it as possible in the near term, let alone responsible… not even dream/goal setting worthy… i.e. saving $100K downpayment and $50K into a separate investment portfolio just doesn’t even compute in the near term… Unlike when only 7 years ago saving $40K meant you could stretch into a $400K Danforth TTC Semi and not feel strangled or at huge financial risk. So they are setting a new near term dream that doesn’t fixate on real estate. Not insane.
Anthony
at 11:58 pm
Excuse me for stating the obvious, we don’t have $500K, it’s not an actual option.
peggy
at 11:25 am
Is this guy not aware of the crazy cost of renting? My friend recently had to leave her apartment due to her landlord selling the house that her apartment was in. She had not been looking for a place in many years and was shocked at the experience. There would be open houses for rentals. People literally lined up to view an apartment for rent. Bidding wars that would ensure that the prospective tenant had a much higher income than she had. She said that this experience was very intimidating, not to mention stressful, as she had only 2 months to find a place in a very competitive market. She found a basement apartment which was not nearly as nice as the one she had left. At least she was not out on the street. This guy must own a home already. Maybe he lives with his parents. In any case he is obviously clueless as to the reality of the current renters market!
Solomon Tell
at 5:09 pm
Today, with the fast life-style that everyone leads, credit cards get this amazing demand throughout the economy. Persons from every discipline are using credit card and people who aren’t using the credit card have lined up to apply for even one. Thanks for giving your ideas about credit cards.