Ch-ch-ch-changes

When BeeMo’s chief egghead Doug Porter said days ago the Toronto housing market was “dangerously detached” from economic fundamentals, he echoed a favourite theme of this omniscient blog. Acknowledgment is the first step to redemption. There’s hope for Bay Street economists yet.

For those who try not to think with their pants, the next step is cashing out of an asset class that is insane, unsustainable and, yes, dangerous. This was the advice offered here to delusional, house-lusty Vancouverites in the past, which most of them ignored. Too bad.

The stumbling block to pocketing the biggest, tax-free capital gain of one’s entire life seems to boil down to five emotional words: “But where will we live?” This has been complicated lately because a tight housing market – no supply and lots of demand – has spilled over into rentals, where there are bidding wars for GTA units that are actually habitable. Moreover, lots of people who have owned houses for decades just can’t stomach being tenants. It’s silly, illogical and cultural, but so real.

“We used to think that way,” says Cheryl, a new retiree who wrote me on the weekend. “At first we were totally freaked at the thought of selling, and then when the place went fast in this insane bidding war we even more freaked about having to rent.”

By the way. Cheryl and Dan’s house in the northern end of the GTA sold in days with seven offers and for $120,000 over asking. Suddenly they had $1.6 million – which was $1.35 million more than they had the day before.

But they were homeless. What now? Try to find a rental where the dog could join them? That eliminated about six in ten candidate places. Try to stuff thirty years of life into a 700-foot condo in a downtown building full of hipsters, bicycles and pizza odours? No way. And what about the process itself of renting? With the need to cough up a credit score, personal history, rental application and references, they felt like second-class citizens begging for shelter. So demeaning.

“Here we were,” she says, “millionaires. And we felt like garbage.”

So there you go. This is why the average 905 detached costs a million and a nice semi in a good 416 hood goes for $2 million or more. There’s a 10-day supply of detached houses across all of the GTA, with constant demand resulting in bidding wars and historic prices every time a rare listing pops up. The once-in-a-generation opportunity to cash in on a tax-free boodle of money is not being taken – even by retired people with no kids or jobs – because selling, buying again or finding a rental scares the poop out of them. Sad.

Let’s get to the next chapter, and find out what C&D did.

“What we decided to do,” Cheryl added, “was to follow our boy.” The kid’s enrolled in a BA program at Dal. And since Dalhousie University is in Halifax, that’s where they thought they’d begin the search for a place where people can realistically afford to live without crippling debt or stuffing a million into a property and then having to worry about retiring on CPP. By the time the search was over, they’d found a property on an acre on the sea about a 30-minute drive from the nearest big shopping centre. Century house, restored, three bedrooms, two baths, garage, little barn, oceanfront access, all-in, $380,000. (Kind of like this one.)

So now they had a house, paid for, and $1.2 million. Invested in a balanced, diversified, low-vol but robust portfolio, they expect to average 6% a year after all fees, for an income of $6,000 a month. And when it’s paid out to them largely as return of capital, the income is non-reportable, not boosting them out of their rock-bottom tax bracket. That keeps the dividend and capital gains taxes in the ditch. So they have it all. A house. No debts. Six grand a month. Low taxes. And there’s still $1.2 million sitting there.

“Here comes the suck-up part (I know you demand every email contain one),” Cheryl wisely concludes. “Without your ‘pathetic’ blog none of this would have happened. We’d still be sitting in that boring suburban house with no pensions and a couple of hundred grand in RRSPs staring at retirement and wondering how we were going to pay for property taxes, or a new roof or our son’s next degree. Now we have it all.”

Plus some snow, of course. The first bad storm of the season hit a few days ago. But this week it will be ten degrees. And I hear they even have the Internet in NS.

The moral: Don’t be afraid of cashing out of an asset at the top. Even when it’s your house. But neither should you fear change. The alternative could be way worse.