Bay Street money manager Ming Lam isn't against home ownership – he's just against ownership at prices that he thinks are higher than they should be.
He admits that this view often leaves him standing alone at cocktail parties.
“You just bought a house? Are you nuts?” is a sure conversation stopper, he agrees, laughing.
Mr. Lam has been bearish about Toronto's real estate market for years and he cautions that people who think buying a house is always a good investment may not fully understand the costs.
A principal at Silver Heights Capital Management in Toronto, Mr. Lam is an avowed renter. He knows there's an emotional element to owning a house but he has an emotional attachment to making money.
He believes people are too quick to plug some numbers into a mortgage calculator to see what house they can afford compared with how much they might shell out in rent. Often they go into denial about the taxes, depreciation and maintenance.
A property tax rate of 0.8 per cent on an $800,000 property is $533 a month, he points out. In addition, owners have no choice but to make major repairs such as replacing the roof or installing a new furnace. He thinks a realistic estimate is about three per cent of the value of the house per year.
Once those sums are paid out, the amount available to put towards the mortgage is drastically reduced, he argues, and makes renting the more attractive option.
Mr. Lam recognizes that he possesses something many homeowners don't: The acumen to invest in assets other than real estate. In other words, he can take the money that he saves by renting and funnel it into stocks and other investments.
Many people would plow the money saved into Caribbean vacations if they didn't have the forced savings plan that a house provides.
“If you don't have the discipline to save and invest the money from the cost savings of renting then buying a home might make sense for you even if house price levels are higher than average,” he says.
He says there are lots of barometers people can look at to determine whether real estate in Toronto is expensive or cheap right now, but in his opinion house prices and income levels should have some correlation over long periods of time.
“Generally speaking, I think that the average family should be able to afford the average home,” he says. “It's a simple litmus test and one that I think most people would agree with.”
He's not sure that Toronto house prices pass the test right now with a ratio of something like seven to one. Low interest rates are driving the “affordability” of real estate, he adds.
He doesn't know what interest rates will do in the future, but he thinks potential buyers should be stress testing their notions of what they can afford. What if interest rates were four or five per cent higher?
“I'd certainly want to know how it would affect my finances – just in case.”