Almost exactly three years ago, I bought a house in downtown Toronto. It was one of the hardest things I've ever done.
I'd been saving the down payment for 20 years, but prices were ridiculously high and bidding wars common. After viewing more than 30 homes, we put a bid on our dream house, only to be outbid by a measly two grand. Determined not to lose dream house No. 2, we turned to our agent for advice. As we huddled in a coffee shop down the street, she told us to raise our bid by $10,000 times the date of my birthday—and God help us, we did. It was a foolhardy thing to do, but we actually got the house.
I should have been elated—but I was overwhelmed by buyer's remorse. I feared I had just made the biggest mistake of my life. House prices seemed inflated and unstable, and I was sure we were in for a sickening crash. I hardly slept for a week. But the market didn't crash—instead, the housing gods stepped on the gas. Even with the recent cooling in Toronto, my cozy townhouse is almost certainly worth 40% more today than when I bought it.
In the October issue of Report on Business magazine, you'll find an addictively good read that delves into the absolute madness we call the Toronto housing market, which hit an unhinged new high this past spring. You'll meet a couple from Australia who dropped nearly $1.5 million on a home right at the giddy peak, paying 46% over asking. It's possible they had some buyer's remorse as well.
In hindsight, buying my house was the right thing to do, but not because the market happened to catch fire after I did. It was the right thing to do because, after years of renting, I wanted a place of my own that I could pay off before I retire. And besides, I could afford it. Now that I'm a homeowner, I realize that the value of your house is a pretty abstract number. If you're not planning to sell, and you can make your mortgage payments, it doesn't matter all that much where the market is going.
If I'd twigged to that sooner, I would have bought years ago, and I'd have a smaller mortgage today. But I was a personal finance editor at the time and, like most of my colleagues, I had been preaching against buying into Canada's frothy real estate market for years. Far better to rent, I counselled our readers, because if you rent rather than buy, your monthly payments will be lower, and you can invest the difference. You'll take on less risk, and you can build your net worth just as fast as you would by buying real estate, as your money compounds over time.
That argument sounded convincing to me, but over the past 10 years, it simply hasn't been true. Not only has Toronto housing vastly outperformed the stock market—average house prices are up by 130%, versus about 10% for the S&P/TSX Composite—but I now realize that real people, as opposed to soulless money robots, generally don't invest the difference; they spend it on Vitamixes and trips to Cancún. Even if they do sock away the money, most are terrible investors. According to a study by Dalbar, the average annual return in the real world over the past 20 years has been less than 3%.
My financial situation today is much healthier than it was just three years ago because I ignored my own advice, and that's pretty humbling. The crash I've been predicting for years hasn't happened, and even if prices plunged by 25% tomorrow, I'd still come out ahead. It bothers me that some pundits still insist that people should rent rather than buy. It was bad advice 10 years ago, and who knows? Even in this unbelievable market, it could be bad advice today.
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