Renting Gives a Freedom Mindset

Something that came to mind as my wife and I are planning a big overseas move is our housing situation. Renting makes moving so easy! A couple weeks ago we let our landlord know that we are moving. No problem, no costs. We called the utility companies and set a cancellation date. And we have been selling our belongings. We have no emotional attachment to our house because it isn't ours. It's just a comfortable roof over our heads that has served us well for the past two years.

Our stuff, after ten years of relatively minimalist accumulation, is being trimmed down to four suitcases and three boxes (two of them full of books). Aside from clothes, we are taking only those things which are most important to us. Some pictures of families and friends, some small keepsakes from experiences we've had together, a few books, our laptops, and some games. Our emotional attachments are in our photos and adventures, not 2x4 walls or the dining room wainscotting.

Some notable things. We could easily leave to go on our global adventure with little cost or hassle. There are virtually no costs to leave our house or move our financial assets to accounts that will work for us overseas.

Had we owned our house we would have been forced to sell or become absentee landlords. Selling would have costed approximately $20,000 after all fees, legal costs, and taxes are factored in. The $20,000 might be a small amount compared to our total net worth, but it would cover about one year of our expenses in Vietnam! Being landlords would have introduced management, tax, and other financial headaches.

As I've shared before, not owning a house has allowed us to maximize our net cash flow every month for the past three years. We've used that to save aggressively and invest! Our investment gains on these savings alone have been well into six figures.

But more importantly, home ownership can psychologically tie you down. The demand of large mortgage payments every two weeks, taxes every year, insurance every month, and promises of limitless equity can be financially restricting. Plus, the emotional ownership of the work put into your house, whether it is new floors or custom blinds, can give emotional attachment to your house. These things all work together to hold you back from a mindset of freedom and flexibility—the ability to take advantage of every good opportunity!

The Broader Mindset

I'm into thinking about finances, life, and risk in a different way from most. The truth is most of our peers would not be able to do what we are doing. This has little to do with incomes, and not much to do with our career choices. It has a lot to do with spending and priorities. The decisions we make every day.

Much of the poor decision making I see regularly in others can be blamed directly on housing and the immense pressure from your spouse, family, and friends to become a homeowner. Even if it is the riskiest and most restrictive decision you can make. Something to think about is if you owning a house is a good decision for you, or a preferable outcome for them.

In Canada we are in a housing obsessed culture. Last week I was seriously asked if I was buying a house in Vietnam. I laughed and replied, "No!", adding that we've been renting for the past three years in Edmonton. To their further shock of course. Really, you've got to be kidding me! What kind of warped mindset of home ownership is required to think that it would be normal or expected to buy a house, sight unseen, in a developing country with a shaky legal structure and questionable property rights? I'll continue to rent, thank you very much.

While most sane people simply view housing as a form of shelter that should be comfortable and affordable, here in Canada many believe housing is an investment, a never ending improvement project, an ever-expanding HELOC to tap into for consumer spending, and a crucial part of one's identity. This ideology is all backstopped by taxpayer-funded corporations and government policies intent on keeping the party going.

Fear of missing out has driven real estate prices to insane heights in many markets. Prices are not sustainable and have every marker of an inflated asset bubble—the days of the best gains are clearly behind us. A good time to buy was 1995 when a typical house costed three times your dad's salary.

Yet people are frantic, scraping together meager savings, borrowing from family, and binding themselves into monster mortgages just so they can boast of home ownership. This craziness when houses are priced at eight or ten times the average salary in our biggest cities. As students of markets we know insanity can continue for longer than we think, but how much higher can house prices possibly go in the long term relative to incomes?

Too many people are financially stretched thinner than a crêpe. I don't know how much weight I put into the frequent surveys that state more than half of Canadians are a couple hundred bucks away from bankruptcy, but certainly we live a tight, high stress, credit dependent culture. To me this sounds like a population that has about as much house as they can afford (or probably more for most).

Mortgage applications are thought of as a fudge-able subjective process rather than a firm legal contract that is signed and comes complete with a mile of small print. In these applications incomes are stretched, existing debt is hidden, and anticipated life events are not considered and certainly not disclosed. It doesn't matter if the missus is eight months pregnant and the family income will be cut by a third or more starting next month.

Savings and real investments are an afterthought, or nice-to-have, for most. A real investment should generate positive returns over time with some income. It should be liberating, not a source of financial and emotional bondage.

That doesn't mean we should think of investment gains as being a sure thing. They are not. Drops in our portfolios occur regularly and sometimes they are even painful. But nothing beats being able to access some cash for any reason at the click of a button. Nothing is better than the freedom of no emotional attachment to where your money is. The ability to move assets to the safest locations in the world is comforting, no matter where you physically live.

I firmly believe that renting a modest, but comfortable house is a key element of long term prosperity, especially given the prices we are seeing today. Even where house prices are more reasonable, think about the other restrictions you might experience by taking on home ownership. Choose to put freedom first in your decision making.

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Is It Time to Buy?

Before we get into this post, I just want to thank the readers who contacted me about the comment verification plug-in failing. I've installed a new verification plug-in that seems to work well and is easier to read than the last one. Comments are back!

Canadians love housing! For nearly two decades now, housing has been the economic story in Canada. Thousands of us have become fantastically rich on paper as prices of tiny lots and chipboard went to the moon.

Of course ridiculous amounts of leverage helped. Prices have only about doubled in the past 10 years, but at a 19:1 leverage ratio the gains on equity appear enormous!

The real estate pushers got really rich! With billions of dollars of housing changing hands each year and 4-5% of that for grabs in sales commissions, these folks have made hay.

When times are good, thanks in large part to horrible government policy, the pushers celebrate the rising "natural" condition of the market.

When prices begin to fall, thanks again in part to horrible government policy, these same middlemen furiously point fingers.

An Update on the Market

Well, at the end of summer 2018, prices and sales volumes are falling in nearly every major Canadian housing market. Things are not looking good at all for sellers or people who extended themselves to buy real estate.

Toronto and Vancouver, the two big Canadian market movers, have seen a massive sales collapse in their single family markets. Sales=to=listings ratios have exploded. We are now in what the pushers call a "buyers market". But that doesn't mean it's time to buy!

Prices are slowly falling alongside, but the real reckoning hasn't started yet. The condition of these big markets reminds me of the Prairie markets back in 2015. Eyes have not been opened yet.

For example, the largest Prairie markets, Calgary and Edmonton are continuing their multi-year price slide across the board. The slide began with low volume and isolated good deals, particularly in the condo space. But it has spread and the price concessions are growing rapidly.

Although the house pumper MLS numbers seem to paint a rosier picture, units in my townhouse complex are selling for almost 20% lower than their brand new price seven years ago! Single family houses in Edmonton that sold for $500,000 ten years ago are now selling for $400,000.

Factors Driving Real Estate Prices

As I've stated before on this blog, house prices are primarily the result of interest rates and household income. With a dose of consumer optimism or pessimism to extend the market one way or another.

Household income needs to expand over time to see an increase in house prices beyond the normal rate of inflation (1-3% per year). In the short term, a fall in interest rates can expand borrowing capacity leading to higher prices while a rise in interest rates leads to price compression.

If the Canadian real estate markets were solely dependent on household incomes, the price of a house would be around $290,000 today. That's if Canadian households spent 20% of their income on mortgage costs (the historical long-term average).

Higher income regions like Toronto, Calgary, and Edmonton would see higher house prices. Same goes for areas that appeal to high net worth individuals, certain areas in southern B.C. for example.

However, it does not explain an national average house price of $630,000. These insane valuations are not economically justifiable in our current circumstance.

No region of Canada is even remotely comparable to the world's higher priced regions like Hong Kong, New York, San Francisco, Singapore, or London.

These are the finance, culture, and industry capitals of the world, filled with millionaires and billionaires who can afford expensive homes. And they are not millionaires just because their houses have increased in value, I'm talking real financial assets with the representative income.

Where Things Are Going

Our house price explosion is purely due to a combination very ominous factors. Record household debt and leverage ratios, extremely relaxed borrowing standards for over ten years, reckless government policy support, and a population that is convinced housing is a get-rich scheme rather than a roof over your head.

These big, long-duration parties come with nasty hangovers, and don't be fooled: no party lasts forever.

Over the past few years an untold number of Canadian families have taken on mortgages of $500,000 or more. The monthly payments are approaching $2,700 at today's best discounted rates. As rates creep up over 4% (yes, it seems to be happening), those payments will balloon over $3,000 a month.

Did I forget to mention, that is after-tax money. If you are earning in the 40% tax bracket, you need to earn a gross income of $5,000 just to pay the mortgage.

Those who took on these monster mortgages when the 5-year fixed rate was less than 2.5% will be shocked when they renew at the end of their terms. They will have a choice of paying at least $500 more per month for the same mortgage, or, if they are lucky, refinance and stretch out the term to keep the payments low.

Already a few years ago, deep-diving economists were raising alarm bells about borrowing. There are more than 1.8 million households with monthly mortgage payments exceeding 20% of their net household income. This group has an average savings rate of -13% of their household income.

The evidence suggests at least hundreds of thousands of households across Canada are perpetually dipping into household equity, or accumulating other debt. Canada might not be the U.S.A., but it turns out people are behaving the same here as the Americans in the 2006-2008 period.

I believe many who already stretched themselves farther than they should have will be forced to sell. If I'm correct, we may be looking at an American-style downward spiral right here in Canada... where no Canadian thought it could ever happen.

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