March 28, 2023

Warning about houses as an investment target

Financial planner Robb Engen did something bold yesterday on his popular, long-running blog Boomer & Echo. He revealed his own household finances in a way that goes against the basic Canadian belief in personal finance.

Engen and his family plan to sell the Lethbridge, Alta., home they bought for $424,000 in 2011. Based on the projected sale price of $524,000, he estimates a modest average annual growth of 1.94 percent.

The idea that houses are an investment is the foundation of Canadian real estate. Mr. Engen’s story shows that we need to think more about this. Some areas of the country never participated in the increase in rental year prices, and prices are on average falling across the country. It can take years for recent homebuyers to find that prices are going up much more than they paid.

Engen’s home average annual gain of 1.94% represents the kind of analysis most people do when evaluating the investment value of their real estate purchase. Mr. Engen, who is a qualified financial planner (QAFP), dug deeper. First, he included expenses such as realtor fees, landscaping, basement renovations, property taxes and insurance. Then he added the money used for the down payment from the lost opportunity cost of investing in the house.

Final Verdict: Owning a house produced pretty much the same financial result as renting and investing the money saved while not owning it.

Mr. Engen notes that home appreciation in BC and Ontario has been a lottery for some buyers. “But for homeowners living in Alberta, Saskatchewan or Atlantic Canada, the math isn’t always so favorable. Home prices can remain stagnant for many years, and ghost costs eat into your returns over time.”

It is a timely warning. The national average home resale price was about 22 percent below the February 2022 peak in September, and there is now a risk of the economy slipping into recession. Prices may fall further or stop in different parts of the country.

In the long term, houses can be expected to rise on average at an annual level equal to or slightly higher than inflation. We may get double-digit upswings like we saw in 2021, but that’s abnormal. A market that is too hot can turn too cold.

Order Carrick on Money

Are you reading this newsletter online or did someone forward the email version to you? If so, you can sign up for Carrick on Money here.

Rob’s Personal Finance Reading List

Baggage for carry-on use

All kinds of great ideas for packing everything you need in a small suitcase, including squeeze bags, packing cubes, and solid shampoo and toothpaste. Win baggage check-in on your next flight.

12 package affordable housing markets

Cities where you can afford a house that matches the household income in that location. Lots of choices in Western Canada.

Consumable fetish item for anxious parents

A baby stroller as a symbol of consumption.

The best ways to send money abroad

A look at 10 options for transferring money digitally to people in other countries.

Ask Rob

Q: Do you have to pay inheritance tax?

A: There is no inheritance tax in Canada, but a tax may be levied on the deceased’s estate.

Do you have any questions for me? Please send me. Unfortunately, I cannot answer each one individually. Questions and answers have been edited for length and clarity.

Today’s financial tool

Confused about the differences between tax-free savings accounts and registered retirement savings plans? This detailed primer helps clear things up.

Cashless zone

Fifty six date red flags. A humorous addition to the new Stresstesti podcast episode about the high costs of dating.

Who do I follow on Twitter?

Food professor, i.e. Sylvain Charlebois from Dalhousie University’s Agri-Food Analytics Lab. Insights on food inflation and more.

check this out

A video explanation of why mortgage rates are rising, with an emphasis on variable rate loans.

In case you missed these Globe and Mail personal finance stories

“Every now and then I have these mini-crises where I feel like I should get a job,” says the recent retiree.

– Statscan failed young Canadians by underestimating the impact of housing inflation

– How to start skiing or snowboarding without breaking the bank

More Rob Carrick and money

Order the stress test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the conversation on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.

Even more coverage from Rob Carrick:

#Warning #houses #investment #target

Leave a Reply

Your email address will not be published. Required fields are marked *