Moister mentality

Andrew and his squeeze are both 30, live in delusional Vancouver, read this troubled blog and earn $150,000 together. No debt. Nice. About $160,000 saved and invested. “I’m not sure I’ve ever seen you write about this,” he writes, “and since it is something we will be facing in the coming years I would be curious to know your thoughts.”

Like all moisters, they want real estate. “We figure we may join the property ladder in a couple of years when our portfolio could be around $250,000, hopefully when things have cooled a little in the housing market but perhaps not. This isn’t some investment strategy, we just want a permanent home to live in (yes, call it moister mentality if you will!).”

But is this possible? RBC said the other day you need an income of more than $200,000 and a big, fat 25% downpayment to afford anything with dirt attached in YVR. Given that this excludes the bulk of the population, anyone without a house already or equity to use, is pretty much pooched. But Andrew persists…

“I am making sure we stick to your rule of 90, so assuming we have around $250,000 that would be a down payment of $150,000 (60%). Based on our income and down payment I figure we could afford a property in the $600 – $750k region without putting too much stress on ourselves financially. I know that won’t get a lot in the lower mainland (a townhouse if we’re lucky!) but it is what it is.”

So here’s the question:

“What should we do with our portfolio for the next couple of years based on the fact we intend to buy a property? Do we still keep the 60/40 portfolio you always recommend, or drop it to a less risky one, say 40/60? I know you often say don’t change your portfolio based on what the market is doing, but this is based on long-term investing. If your horizon is short-term and you need most the money in a couple of years, how does this affect your strategy, especially as it seems like the economy could be beginning to stall within the next 2 years? I don’t want to find ourselves with a portfolio that is 30% lower than I had expected due to a crash at the worst possible time. Thanks for the blog! Been a daily reader for many years as most people seem to have been.”

First, to refresh: the Rule of 90 is pretty simple. Deduct your age from 90 to ascertain what percentage of your net worth should be in a house. The idea is young people can sustain more risk and debt. Old farts shouldn’t. Having too much of your net worth in any one asset (especially residential real estate in the Lower Mainland) could become a really bad idea. Mills can probably recover if things turn south. Boomers cannot.

But what about financial portfolios?

There’s a difference between money you save and money to invest. Funds Andrew and his bride want for a downpayment in 24 months should not be put at undue risk. Having said that, the best two-year GIC rate available is 3.3%, and every dollar earned outside of registered accounts is taxable. The inflation rate is about 2%, so the real return over two years on $150,000 is scant. But if Andrew’s determined to buy real estate (which is heading down in BC, and picking up steam) the best non-risk choices are a GIC or HISA. Sadly this means all their investment assets must be cashed in, and neutered. So should they decide not to become homeowners later, there’ll have been zero portfolio growth.

Here’s an option: buy a house with 5% down. Set aside only $30,000, not all of the current nut. As we’ve been telling you, central banks are growing dovish and bond yields have plunged. The big lenders are under pressure to maintain or even drop the price of five-year mortgages. It’s conceivable fixed-rate home loans will still be in the 3% range in a couple of years – so why not use this cheap money instead of your own, or be in any hurry to pay it off? Besides, 5%-downers often get the best mortgage rates since the banks know they’re CMHC-backstopped.

Sure, Andrew, you want a forever house, blah, blah. Everybody says that about their first home. But it rarely happens. So why lock up a lot of equity? Especially when you should earn 6% or 7% on a long-term annual basis investing your money prudently? If Comrade Horgan & the Dippers get their way, remember, the townhouse you pay $700,000 for might be a miserable investment.

Up to you, Andrew. But spending your wad on a rowhouse in Abby, PoCo or some other boring, soul-sucking burb a hellish commute from the city centre needs to have a reason attached to it. Having a ‘permanent home’ is a myth. Home is where the dog sleeps. And he doesn’t give two sniffs if you own it.