Down She Goes

In the fog of macroeconomics, people live their lives and try to make good daily decisions. So while the inverted yield curve and Modern Monetary Theory are interesting, what your mom wants is w-a-y more relevant.

Bob knows. Here’s his real-life question, after which we’ll get esoteric.

I’m in a situation where my mother and failure-to-launch sister want to move in with me.  My wife and I absolutely want to help them because we’re super close and don’t have a lot of family left.   We have a great relationship with them so that isn’t a concern.  My house has enough space but would need about 60k in renos to make it work, sort of. To be honest, we’ve never been thrilled about the house, even though we’ve lived in it for 10 years.

I’m wondering if that 60k would be better used against a new house.  Ours is a great starter house and would sell quickly due to the shortage of listings in this price range in London.  As is, it would likely sell for 360k – newly renovated homes on my street are fetching 435.  Houses that would better suit our future living arrangement would be around 600-700k.

Our financials are pretty solid thanks to you.  35 years old, no kids; 60k on the mortgage, total carrying cost is about 1300/m (including utilities).  No other debt.  250k across registered accounts in a 60/40 investment split using ETFs when possible.  Gross income between the two of us is 180k. Mom and sis would chip in to cover bills, but it would not be much, maybe 1000/m between them (do they need to pay rent or can this be gifted?  What does the CRA think?)

Is this a crazy idea?  I know we can easily cover the bills, even with a temporary job loss, but I feel like I’d be buying at the top of the market, and in my opinion, higher priced homes will have more distance to fall.  The increased carrying costs would slow down my ability to invest, but the extra cash from mom and sis helps balance that out a bit.  It really boils down to:  spend 60k and have everyone a little uncomfortable, or slave away paying off a newly borrowed 300k but slightly enjoy the house more than the old one.

On the flip side of things, selling and rebuying would allow me to unlock my current home equity and take advantage of low rates – a 130k downpayment on a 650k home would avoid CMHC fees and allow me to lock in 5 years at 3%, leaving 150k from the sale of the house to invest. I’d really appreciate any advice you have, be it financial or mental!

This is simple. Sell and move.

Why?

First, you can afford to upgrade without gutting your investment portfolio, since you have $300k in equity to deploy from the existing house. Second, mortgage rates are ridiculously low, and trending lower. That will help goose the market value of your house and make a mortgage on the new one relatively easy to carry. With some bargaining you should be able to lock in at 2.5% or so – which is barely over the inflation rates. Third, you’re going to get a grand a month to help offset the bigger mortgage (the CRA need not know if mom & sis pay monthly overhead). Fourth, you want this. The family dynamic is with you. But don’t even contemplate adding them to the title – that would change everything. And, fifth, London is actually an active and promising market. The average price is cheap by Ontario standards ($335,000), recent sales activity has been brisk and market values have increased by 14% in a year. If mortgage rates were not headed even lower, you might expect this seller’s market to turn. But that’s not the case. And this is where the macroeconomcis come in…

Given the inevitability of an economic downturn at some point, the weird US president and the global debt bubble. Central banks are about to get busy. Germany’s getting a stimulus plan. China is cutting corporate lending rates. The Fed is expected to cut the cost of money at least twice in the next four months and the bank of Canada will be trimming its key rate by a half point – maybe starting as early (says Scotiabank) as next month.

Says the bank’s chief economist: “Given the evolution of risks, we now think the Bank of Canada should take some insurance and cut rates by 50 basis points by the end of 2020Q1. Were Canada an island, cut off from the rest of the world, such a move would not be necessary. As Governor Poloz has indicated a number of times, he considers the implementation of monetary policy within a risk management framework as have previous Governors. Risks to the Canadian economy are on the rise. Dependent as it is on international trade, Canada cannot be immune to the rising tide of protectionism.”

Fair enough. We get it. If the odds of a recession in the next year or so are one-in-five, central banks will work to mitigate things by chopping the cost of money. But there are risks – one of them being higher house prices in London, ON (and everywhere else), at least for a while.

“There are clear indications that the housing market is strengthening on the back of falling mortgage rates and strong population, employment and wage growth. Rate cuts would put upward pressure on home prices in some markets and encourage households to borrow. With household indebtedness already high, and with the Governor having spoken at length about the risks associated with high household debt, rate cuts could increase financial stability risks.”

Hmm. This warning comes just days after the news a bank in Denmark is lending mortgage money at 0% or less. Plus $15 trillion in government bonds around the world have negative yields. Central banks are now looking at a downturn without much ammo in their chambers. Don’t be surprised if we hit all-time lows in the next year, with GICs and home loans both well below inflation.

Will this bring 2016-type FOMO back to the real estate market?

Nah, unlikely. We still have the stress test, and it continues to sit north of 5%. Meanwhile, if the economy does take a dive, so will corporate profits, job creation and wages. Already household debt is ridiculous and house prices in major centers remain inflated. That’s why markets like London may actually outperform – where (unlike Toronto) starter houses are actually starter houses. Not hovels.

Given what’s coming, borrow lightly.