Today this pathetic blog brings you another episode of its wildly incorrect “First World Financial Problems.”
Forget about climate change, massive flooding, fires, BLM, BIPOCs, reconciliation, Gen Z angst, cops vs encampments, ODs, the deficit, LGBTQ+ and that damn virus Delta thingy. Life needs more Greta Van Fleet and, yes, questions like this one from Audrey…
As a devout reader of your blog–thank you!–I have a question.
My husband and I recently retired and so have our friends. We’re both selling houses in Toronto and moving to BC. Due to hard work and smart investing, we each have enough money to buy a decent house with enough money left over to live comfortably.
Our friends (Bay Street finance guy) claims it’s best to buy his house for cash, which is what he’s doing.
My husband and I could also do that but we instead opted to take out the largest mortgage we could (just before quitting work!) to buy our house, assuming the difference between a cheap mortgage these days and the expected return of leaving more money invested in the better way to go.
Well, that’s easy. The Bay Street dude is foolish, emotionally needy or has w-a-y more money than he requires. These days you can still load up on five-year mortgage money at less than 2%. Meanwhile a balanced & diversified, Non-Cowboy® portfolio delivered 15% in 2019, over 7.5% in 2020 and is in double-digits so far this year. Moreover, the reopening trade has likely just begun.
Periods of economic contraction and recession are historically short (18 months or less) while those of expansion and growth are long (5-7 years). In 2021 we’re just coming out of the pandemic misery with the vax only now starting to flow around the world. Mr. Market (and this blog) saw it coming. We knew pandemics are always temporary, and financial assets have been delivering fat returns as we shunt into the Roaring Twenties.
Conversely, the monetary/CB stimulus and rivers of cash the pandemic brought are ending. Already the Bank of Canada has stopped buying mortgage-backed securities, unwound repo positions and slashed its weekly bond-buying by 60%. It was these things which helped goose residential real estate prices – along with the urban flight and WFH which will also be unwinding.
Here’s some evidence. Look what happened to real estate prices in Vancouver, for example, when Covid hit and the CB crashed rates and started throwing money around…
Source: Teranet-National Bank; Wolfstreet.com; GreaterFool.ca
Conclusion: financial markets will outperform housing markets. So why would you use your own funds that can earn 6% or 8% or 12% when [email protected] will give you bags of money at two per cent? Why not lock in a cheap home loan for five years while your portfolio grows by forty of fifty per cent during that time, then use the gains there to pay down the mortgage upon renewal?
Or, of course, one could create a tax-deductible mortgage. Simple. Banker boy could buy the digs with cash, arrange a HELOC for 65% of its value at prime plus a half (3%) and invest the funds in the financial portfolio. That would yield full deductibility on the line of credit cost, assuming that interest-only payments were made. (Ignore those who tell you investing in a balanced and diversified non-registered portfolio of various asset types does not qualify for claiming interest expense. In the real world, they’re wrong.)
The point of this is evident, Audrey, and you get it. Thanks to the slimy little pathogen, borrowed money is still incredibly cheap. Thanks to Pfizer and Moderna, we’re entering into a period of growth, recovery and expansion. It’s called the carry trade. That’s when you access funds at a low rate and invest them for a higher return, or use cheap money to gain a desired asset while deploying capital to create more wealth.
Besides, the party’s over for housing. In 2022 the Bank of Canada will begin raising rates slowly as its bond-buying activities come to a complete halt. The economy will normalize, workplaces will repopulate and investor interest will shift back to urban properties. What happened between March of 2020 and, oh, last month, will not be repeated in this generation. Thus, buying real estate with cash – unless you have bushels of it – is an emotional choice. Not a practical one.
Are you sure the guy was a Bay Streeter? Maybe he was in marketing, or compliance. They’re just weird.
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