After sharing my rent vs. buy calculation method a few weeks ago in Part 7, I feel ready to once again tackle the Canadian infatuation with housing. In this post we will look at incentives. One thing I love about math is it takes emotions out of decision making.
Over the years I've personally found people with a vested interest in housing--like your real estate gal and mortgage guy--love to stoke emotions for their benefit instead of helping you make good decisions. Remember that greed and fear we talked about in Part 4?
Incentivized to Line Their Pocketbooks
One thing I always feel is important to look for in any decision making process is finding the incentives. This is because incentives powerfully influence people's decision making and beliefs. Ask an economist; it's all they study.
If you were to ask your real estate gal about the current housing market, there's a really good chance they would tell you it's a great time to buy. This is despite housing being extremely overvalued in historical terms and renting beating out buying in nearly every large city across this land.
If you were to show a real estate dude a quick Moose Math rent vs. buy calculation, I can guarantee they will try beat it down any way they can think of. Words like historical returns, equity building, security, stability, future, and investment would flow like the Ganges--relentless and polluted.
The incentives for real estate dudes to work in housing-obsessed markets with droolworthy price increases and panicky buyers are huge! Every time a wood-fibre arrangement changes hands, 4%+ of the purchase value is up for grabs in commissions.
Panicky buyers are fantastic clients because they are quickly sucked into deals, easily coerced and misled, and never back out of deals. Most of them aren't even doing those dreaded home inspections (aka: deal busters).
Why work in a balanced market where people take their time to look for the biggest purchase of their lives and deals fall through after home inspections when you earn thousands effortlessly selling houses in hours? You don't even need to know the home's real value. It doesn't matter to hordes of salivating buyers eager to part with their hard-earned money and enter a debt spiral that will drag them down for the rest of their lives.
Your real estate dude is powerfully incentivized to look out for #1. They stoke the real estate fire because it's really really good for them. Be very careful trusting what they say!
Insane Leverage Means Exploding Prices
Only in real estate will a sales gal tell you buying overpriced assets at 19:1 leverage ratios (5% down) is a "good investment". If you turn around and sell the "investment" tomorrow, you're already in the hole because the sales gal will take the first 4%, TNL@TB will charge you break fees, and CMHC will still take their cut for insuring your brain-dead decision.
If the value of the house drops even 10% (very likely to happen!), most Canadians would be financially ruined. Leverage always increases risk, but 19:1 is fatal.
These sky-high leverage ratios are part of the reason why house prices are so high. Canucks who can barely scrape together a few dimes are piling into houses they can't really pay for. It's all good when prices are increasing, but it's a true financial disaster when prices slip.
If they can't save for a downpayment, I can't wait to see what happens when the roof needs replacing, the washing machine breaks down, or the furnace goes kaput. I'm sure they're not putting aside their $5,000 a year for maintenance! Nevermind retirement math...
They say don't ask your barber if you need a new haircut; I say don't ask your real estate guy about houses. Real estate floggers are not incentivized to look out for you. Period. No matter how the industry portrays themselves in constant ad campaigns, they are simply salespeople looking for their next huge commission. You need to do the math and consider the real incentives every time.
On Wednesday I will talk more about sharing finances in relationships, then Friday it's Part 9 of housing.