The fog of regret

In May two years ago the average Calgary property sold for $519,000. By big-city maple standards, cheap. But that didn’t last. This year the May average was $612,636 – a jump of 18% over twenty-four months. Last week the average hit $628,800. That was 12% more than the opening week of last June. Meanwhile listings are up and the length of time it takes to find a buyer (19 days) is down.

“I am depressed by the current real estate situation here in Calgary,” says Rick. And he’s getting pressure at home.

As we all know, the Bank of Canada nipped its policy rate a quarter point last week, the first CB in a G7 country to start the easing cycle that will soon be global. There’s probably another chop coming in September, and yet another by Christmas. Once the US presidential election is out of the way, the Fed will be joining in. So it appears our guys will be down in then mid-3% range by this time next year.

Already there has been a little bump in the real estate market, as the Cowtown equity growth shows. But nobody is expecting a surge, the outbreak of bidding wars, or wild-eyed young couples scribbling offers while addled by FOMO. Not in Calgary. Not anywhere. The economy is cooling fast, the ranks of the jobless growing, the number of vacant positions is falling and there is a rising tide of economic uncertainty.

Maybe Tiff Macklem got it right. Rate drops on the cusp of a downturn. Before the discomfort becomes pain.

But back to Rick. Mid-forties. Two kids in public school. He makes $65,000 and she’s in the public sector, earning slightly more. In Calgary for a decade, renting a house (3k/mo) in a good hood.

Just prior to discovering this blog (his admission) Rick & squeeze sold their home because they wanted an upgrade. “Our original plan was to buy a better house when ‘there is blood in the streets’. Apparently, this will not happen any time soon as the interest rate is dropping and there is a mass immigration to Calgary,” he says.

“Currently, the housing market in YYC is crazy hot – pretty much there is a bidding war for every house, usually a 5%~10% adding on top of asking price is a must to secure a win in the area we are looking at. To the maximum level, I think we can afford to take a mortgage of 400K or 450K and drain all of our cash as down payment for a house priced at $700K~750K, this will yield to pretty much the same amount of expense as our current rent (not including tax and insurance). I know it is not safe and sustainable to do so – if either me or my wife loses our jobs everything screws up – and we don’t really have a bank of Mom to help us if this does happen.”

The background is that they cleared $300,000 from their sale two years ago – money Rick has been self-investing, with a dabbling in Nvidia stock. Now, with marital pressure weighing heavy, this blog dog is plagued by questions.

1. Should we wait longer until there is a pivot? So far I do not see any possibility of a pivot happening any time soon and I am having a FOMO syndrome – questioning myself and regret of selling the old house, and fear of never being able to get on the bus again.
2. Should we lower our expectations and start to seek housing with a lower price tag?  Town house/row house or duplex in the area we are looking at does have a lower asking price (400K ~500K). My wife hates these types of housing for some reason (probably due to the management fee @400~500/month). The benefit of doing this is it is more affordable for us and we can save a little bit monthly if we go down this route compared to the $3000 monthly rent we are paying.
3. If we choose to rent going forward, what kind of investment would be ideal for us so we can safely maximize the benefit of having cash in hand?

“Dr. Garth,” he cries,”me and my wife are both your loyal blog readers and we learned a lot from your everyday input. Could you please help us diagnose the situation and provide your thoughts if it is possible? We would be really grateful if you could help us with this.”

Well, the thing about making decisions is the consequences thereof. You sold to get more. The market advanced. You lost by not buying immediately – but couldn’t do so without taking on more debt. There was no rivulet of blood in the gutter following Covid, only a brief market pause. And Calgary is almost unique in all of the nation, with a market that withstood ten interest rate increases and a doubling in mortgage costs.

First, stop looking in the rearview. Yesterday’s gone. Regret buys nothing and usually leads to worse choices. There is no housing crash on the horizon, with lower interest rates feeding more sales and keeping prices in a stable range. That’s reality. Get over it.

Second, the priority in your life should not be a house (you already live in one) but your family. That $300,000 is all the net worth you have. Giving it up as a downpayment and then adding $450,000 in debt atop it is irresponsible without funded RESPs for your children and retirement savings for you and her. There are twenty years left to get ready, and shovelling all you have into one asset, then piling on big leverage, is a really dumb idea. As for investing, stop messing around with stocks and get a proper B&D portfolio in place. We told you how.

Third, buying won’t reduce your living costs, but instead push them far higher. The mortgage itself will equal rent (at $2,800) then property taxes, insurance and maintenance will add about $800 and the lost growth in the $300,000 downpayment is $1,500 (at a modest 6%). That means the house actually costs about five grand to carry – a premium above rent of more than 60%. And then, what if the Calgary market corrects? You’d be caught naked.

So buying means you spend more, owe more, surrender all liquidity, have no savings, increase risk and vulnerability and shortchange your children.

Why would you do that?

About the picture: “I’ve been reading your blog for many years,” writes Danielle. ” Thanks for all the continued great advice. Here is my pup, Patrick. Feel free to use this pic in your blog if you would like to.”

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