Over the weekend while I was going through the Saturday Globe & Mail I came across an article with an eye catching headline – “The great Canadian real estate fallacy”.  It was written by Marcus Gee as an Opinion piece.  His point was that buying your home as an investment is a “fallacy” and being a real estate Broker I had to read it!  Beyond trying to learn something and/or picking up some different opinions, I was curious because whenever anyone finds out what business I am in, inevitably the first question is “So how is the market?” or “Is the market going to keep being crazy?” or some variation of this. With COVID it is often, “What’s going to happen to the market after COVID?”.  They ask these questions of me like I have a crystal ball but, of course, I am expected to answer in a reasonably intelligent fashion. 

Either way, they are all good questions – one year ago in mid March it was anyone’s guess.  We know that the head of CMHC (Canada Mortgage and Housing Corporation) predicted a 18% drop in prices (which he later apologized for), others were less pessimistic but ultimately weren’t sure. I would say that thanks to some aggressive moves by the Bank of Canada with regards to interest rates and moves by other bodies prices have rebounded and right now we are seeing an extremely robust market that reminds us of the Spring of 2017.

What I find interesting about this article is while he is saying it ISN’T a good investment he gives all the reasons why it IS a good investment but the only reasons he gives for them not being a good investment are general “warnings” or “sayings”.  Some of the reasons Marcus Gee gives for it possibly being a good investment are;

●      The Economy will roar back post pandemic;

●      Interest rates are at a rock bottom;

●      Newcomers to the country means an increase in demand for housing

These reasons are all factually true, and I think anyone would agree that once we can go out to restaurants, shop for retail and goods with relative freedom that money will get spent.  The term “retail therapy” is being spoken more often now than ever before with regards to this.

The reasons that the writer feels real estate as an investment is a fallacy are;

1. “Something happens” to put fear into buyers thus causing prices to drop – suddenly people thinking they must sell. “It happens…for every kind of asset from oil to gold to stocks”.

2. Homes are “just a commodity like anything else subject to peaks and valleys in price”

3. Prices dropped in the 1980s and they will again – “when is anyone’s guess. No one really has a hot clue…but count on it”

I believe the author’s belief that what goes up MUST come down is true for a ball thrown up in the air but is not a rational investment strategy. It doesn’t take into account, when or how much? That is not to say there won’t be or hasn’t been corrections or the current sales frenzy will continue forever (it won’t) but looking at facts and owning a home knowing it is also an investment is a sound strategy. Here is why;

1. You home IS an asset but you also get to enjoy this asset. You need to live somewhere and you can pay rent or a mortgage (in a way, another form of rent) but over time (since 2000) prices have gone up thus increasing the value of your asset. See Figure 1.

2. This “investment”, if it is your principal residence, has a zero capital gains tax. In other words, if you purchase for $100,000 and sell for $1,000,000 you pocket “900,000. Most any other investment is subject to Capital Gains Tax which is 50% of your tax rate. So if you are near the highest tax rate of 50% then you pay 50% of this 50% or 25% of the $900,000 or $225,000, thus only pocketing $675,000.

3. The fact is Toronto is getting 200,000 newcomers every year, plus students and other people who need a place to live thus driving up demand

4. The Canadian economy is very strong and looked upon extremely favourably internationally and Toronto is the engine that drives that economy.

The one point I do agree with Mr. Gee about is that it is an investment and prices can change. They can go up or down, especially in the short term. If you bought in January 2008 and tried to sell in January 2009 you would have lost money, but in 2010 you were ahead of 2008. For this reason, speculative real estate purchases or “flipping” – buying a home, renovating it, and selling it quickly – is risky. All the signs must align. Real estate prices must go up, your renovation costs must meet your budget and you must sell at a profit. For most homeowners who live in their home for 5, 10, or 20 years (or more) I do believe it is a sound investment.  Even the author’s own purchase in the 1980s where he stated “the market crashed about 5 minutes after I purchased my home” has probably turned out to be a good investment if he held onto it and is likely worth 4-5x what he paid for it.

Write below with your thoughts, reactions and general comments.

For further reading, have a look at my own outlook for the Toronto Real Estate Market in 2021. Here

To read the full article please click on the link below.

https://www.theglobeandmail.com/canada/toronto/article-the-great-canadian-real-estate-fallacy/