Mortgage Slaves

by Mr. Cheap

Toronto Life had an excellent article some time back on mortgage slaves. The Canadian Capitalist has linked to this article before, and I think its an excellent question: is it worthwhile being house poor?

My ex-girlfriend and I discussed buying a place together a few times, and her feeling was always that to live in the areas she’d want to live in, it would cost so much to pay for housing that her quality of life would dramatically shrink. She felt that renting in a decent area, then having extra cash to enjoy life made sense. Now that the real estate market seems to be changing, her perspective seems to make more and more sense.

In a wild market where property prices keep going up and up, it seems to make a lot of sense to stretch the budget to the breaking point, buy the most expensive house you can find and reap the benefits of appreciation. This strategy requires that the party keep going. If prices plateau (or drop) and you’re having trouble making payments, life gets a lot less pleasant in a hurry.

I’ve been reading Garth Turners “Greater Fool” at Indigo when I have time to kill, and he makes an interesting case that we’re coming to the peak (or just past it) of a real estate bubble. Of course, he’s been saying this since 2006, so I’m not sure *HOW* much credit he should get when we actually hit a crash.

When housing grows away from affordability, its dangerous territory. Consider Japan’s real estate boom and bust. Consider Toronto’s condo crash in the 80’s. Consider the US’s current sub-prime crisis. A money article from 1992 sounds like something people might be asking right now in the US. We’ve been here before, and we’ll be here again. I suspects its a continuous cycle of people viewing their homes primarily as shelter, then over time they increasingly view them as investments, until there’s a crash and the family home becomes viewed as shelter again.

I was predicting to anyone who would listen that the Toronto market was going to die once the property transfer tax went into effect. My rationale was that it would heat up demand in the end of 2007 to beat the tax, everyone thinking of buying would buy, then 2008 would be an immediate slump. I’ve been apologizing to people I made this prediction to, as the the media kept reporting that the market was still doing well in 2008.

Then they said there wasn’t as much sales volume in Toronto real estate because of bad weather (riiggghhht). Since then they’re saying that high end properties are dropping in price, and sales volume is going down, but prices are still high (which, supposedly, dropping sales volume is the first step of a real estate decline). When I’m out walking around these days, there seem to be A LOT of properties for sale.

Anyone shopping for Toronto real estate right now, I’d strongly recommend holding off for a couple of months. I have a feeling prices will be dropping soon.

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