We considered up-sizing our accommodations about two years ago, right before the birth of the kid. Our space met all of our needs but we could see it getting cramp somewhere down the road. With the excitement of possibly moving to a house, we started to picture the perfect place with the little picket fence. Emily and I had visions of rooms for each kid (because we do hope for one more) and separate studios for my music and her arts. We started to scope out the east end of the city; it had all the tell tale signs of a family friendly neighborhood: “affordable”, lots of young children, local restaurants and shops, farmers markets and access to public transportation.
One weekend we attended a few open houses to gauge the price of housing in the area. The eye-opening properties above the half million price range were in need of some serious TLC. 1200sqft fixer-upper semi-detached homes- considered “ideal investment properties” for renovators- had starting rates of $550,000. Multiple bids were sure to increase the price. One particular property we visited on the first day of its open house did not have a working kitchen; it was already entertaining four offers- one sight unseen. We were hoping to find a bigger place in the city but at this rate, will there be anything left at a reasonable price?
Earlier this week the Toronto Star reported that two properties on Rhodes Ave, a small street in the east end, sold for $69,000 and an astonishing $170,000 over asking. 689 Rhodes Ave was listed for $599,900 selling for $668,000. 639 Rhodes Ave. was listed for $549,000 and sold for $717,336. With houses ranging to almost three quarters of a million dollars, reporter Susan Pigg labels it the “last affordable frontier for first-time buyers.”
Both houses were sold in bidding wars that are sure to have left many a hopeful homeowner frustrated yet again. From the outside, the properties are unremarkable and leave for much to be desired. The interiors tell another story; modern renovations carefully staged with exposed brick and glistening fixtures certainly add to the premium. From the looks of it, the going rate for a house in the “last affordable frontier” comes with a price tag of at least $600,000.
Reality Check
Property ownership is traditionally viewed as a sound investment. It may well have been the case for the generation that came before but, unfortunately, it’s becoming far more out of reach for those today. The latest Toronto Real Estate Board (TREB) report pegs the average selling price for a home in the Toronto area at $560,948. A quick look at the numbers shows that while the average price per home is experiencing almost double digit percentage growth year over year, home sales are declining at an equally alarming rate.
In the words of the TREB, “Many people continue to be affected by the enduring shortage…which means they could not find a home on which to make an offer, or were facing stiff competition from other buyers.” Prospective homeowners are caught in a delicate balancing act of being forced to choose between putting up with their current living conditions and digging deeper into their pockets. Either way, buyers lose and houses continue to experience artificially inflating values.
Financial Implications
Practicality aside, let’s assume for a minute we’d be crazy enough to entertain a bid on such a property in a market of rising prices and stagnating inventory. With yuppie jobs, good credit and a desire for a house in a “good neighbourhood” for kid, we’d fit right in. With a $700k purchase price, we’d be able to scrape together about 25% for a down payment with equity from our condo. That would leave an outstanding mortgage balance of $525k plus $20k and change in land transfer taxes and other closing costs.
A 25 year amortization period at the current five year fixed rate of 2.99% would result in biweekly payments of $1,145. Over 25 years, we’d be subject to $219,058 in interest (assuming interest rates stay put), pushing the final purchase price of the house to almost $940,000.
Is it worth it?
Let’s continue our fairy tale of misguided optimism and pretend we’re the happy new homeowners of 639 Rhodes Ave. At sale price of $717,336, we’d be looking at increase to our current mortgage payment as well as another carrying a mortgage for another twenty-five years. Being tied to the gigantic half million dollar mortgage would reduce our savings by at least 7% which postpone our ability to reach financial freedom.
Factor in some reality and we’d paint ourselves an eerie picture. We would be able to maintain the mortgage payments on the condition we maintain our current dual income stream. If our incomes were to be reduced, for whatever reason, times would get tough quickly. We’d be house rich and cash poor; we’d be scraping by to meet mortgage payments. Sure, we could save up an “emergency fund” for a rainy day but $1,145 in biweekly mortgage payments would deplete the fund rather quickly.
Reduced income is not the only money trouble that may potentially hinder mortgage payments. Interest rates have been hovering at record lows for several years and have nowhere to go but up. Be it in 3, 5 or even 10 years, an inevitable hike of interest rates would increase our financial burden with higher payments come the next mortgage renewal. Mix in the potential “softening” of the market, to put it lightly, a correction would result in the deflation in property values, leaving owners with a large pile of debt.
At the expense emotional and financial stability, homeownership just doesn’t seem like it’s worth it.
The Last Word
The inflated property values in the city are pushing the dream of the white picket fence further out of reach for many, and many will not realize the burden of what they’re choosing to take on. The writing was on the wall and affordability has officially been declared dead at the scene. The best course of action is to sit tight, wait for the coming market correction and hope for sanity to prevail.
Take heart; not all is lost. Home ownership isn’t a prerequisite for leading happy and fulfilling lives. The alternatives of renting or making due in a smaller space aren’t indicative of a lack of success or wealth. Many have coped with the reality of inflated housing, flourished and will continue doing so. The key comes from understanding that the price you pay does not always correlate with the value you receive.
Emily’s dad would use to take her and her siblings out to lunch for Chinese favorite of BBQ pork rice every Saturday while her mum worked. One day, he stopped taking the kids to the restaurant because portions were smaller, but the price went up. Emily’s dad didn’t believe he would be getting value in what he would pay for. No one likes to pay more for less. In the words of Warren Buffet, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.“
It really shouldn’t be any different with real estate.
How much would you be willing to pay over asking for you dream home?
Image Source: The Paper Wall, Toronto Star
I think that is just throwing money away because I doubt these homes will hold their value. Unless the listing agent is a complete dope, the houses should be listed at around their fair market value… give or take 25K, maximum 50K but that would be extreme in my opinion.
Agreed but unfortunately it’s a result of what I think is a sellers market. In many cases, listing agents are low balling list prices knowing that the low inventory will drive up the number of bids. In the end, agents get a hefty commission, sellers walk away with a tidy sum and the new homeowners are stuck with the debt. It’s only a matter of time…
I cannot wrap my head around the cost of places in Toronto, or Vancouver. I am all for the concept for space, but not with a price tag like that. Those are big chunks every two weeks. I currently rent, but also own a property in another town. And I like renting.
I had a conversation earlier this week with a chap who lives out in Sarnia; He pegs the going rate for a 3000sqft bungalow for $225k. Sure it isn’t in the city but gives some perspective. You know, finding tenants for our place and renting a larger place may be the way we end up going. Time will tell.
Toronto’s real estate market is ridiculous.
I myself am waiting for prices to drop lower and *until* they reach my comfort zone, I am willing to rent forever if need be.
Hear hear. Let’s hope those price drop sooner than later. I’m afraid as it reaches our comfort zone, it’ll start to get many fidgeting in their seats.
I have never had a traditional “dream home” that I must have. My dream home would be one that is completely impractical and even if I could afford 10 of them, I wouldn’t actually buy one. We have a modest home, but in a good neighborhood with an income suite in the basement. It works well for us. I can’t believe that anybody would feel comfortable spending that much on a house over the asking price.
Sanity paired with an income suite. An ideal situation if you ask me! For every crazy bidder I’m sure there are scores more scratching their head in bewilderment.
I live in Sydney, Australia, which is on par with Toronto from all I read!
I bought a place (1 bed, 1 car space loft style apartment, about 2km from the city, so walkable) for $465k two years ago. I had a 20% down payment. I pay around $2200 per month on the mortgage. This isn’t a place you could have a child beyond nursing for the one room (in my opinion of course… others could!). It, like Toronto, is a market people think is unaffordable, and some say (like my non property owning BF) that it’ll adjust.
I agree, I could lose my job, but with cash reserves, I’d have more than 6 months to put it on the market. Currently I rent it, and it almost covers the mortgage repayments (though my homeowners fees to the building management are high, and aren’t covered by the rent money). So I could continue to rent it out, and move into a smaller/cheaper rental til I worked again. Alternatively, the market, as you hope, could correct. In that case, I will hold the property. IT won’t get any further from the city, it’s in a older building (ie stood the test of time), I would happily ‘bunker down’ there (I lived in it for 18 months, til the BF and I thought to move in together, and decided to rent together for a number of reasons).
Essentially, i know I could keep hoarding cash – but like you two, I LOVE travel and would have likely continued to dip into it for more and more pricey trips :p I could put it on index funds or stocks and bonds (I do have a small $10k portfolio), but I am risk adverse. Not that property isn’t risky, but I can live in it if need be. I suppose I ‘bought in’ (pardon the pun) to the dream of home ownership, and I’m yet to wake and think it’s a nightmare. Maybe my rental return is lucky (ie higher than it should/could be), maybe I earn too much (it has been said!), or maybe I’m stubborn in achieving my ‘dreams’ even if they are a little skewed rationally… I saved, and with that money, I sunk it on an apartment. Longer term, the plan will be to use it’s equity to buy a bigger ‘family’ home with the BF, where, we don’t know…
From everything I’ve read, Sydney does seem to be experiencing the same crazy effects brought on by housing inflation that we’ve been experiencing here.
It’s always hard to find the middle ground between practicality and all the naysayers. We thought about renting out our condo and renting a bigger space. If we did, we’d end up in a similar situation where rent could cover the mortgage but we would still be on the hook for condo fees. We’re going to stay put for as long as we can. Others do more with less!
We’ve invested our cash reserves into indexed funds in our registered accounts. I’m comfortable with the risk seeing that they’ll increase in value over the long term. For the risk adverse, a higher asset allocation towards fixed income could mitigate market turmoil. I agree that while property can be risky, you can live in it. Unfortunately, I think that some may end up not being able to afford higher mortgage payments should interest rates go up. In that case, they’d be forced to sell- maybe even at a loss. I’ve been hearing more stories about people that are house rich and cash poor; those stories don’t end well. At least with positive cash flow, you’ll always know that you can find somewhere to live. Either way, it sounds like you have your bases covered with the best of both worlds (property and a cash reserve) and are ready to weather the coming storm!
I think the interest rate is an interesting variable – my first two years, I fully fixed my loan amount, and now I’ve got 80% fixed and 20% variable, meaning for the next three years, only about $70k will be susceptible to the interest rate movements. I’m ok knowing that I might lose out with rates going down, but I can see the writing on the wall that they are at record lows, and won’t stay that way, so even if I lose out for some of the five year period, longer term, I feel comfortable.
I think it is important to note that home ownership isn’t for everyone. I agree that sometimes it just isn’t worth it and I think that everyone needs to work out what their individual goals are before they rush out and get into something that might not be right for them.
Looks to me like you are taking a very prudent approach and so I am sure if you do end up buying one, it will be right for you and your family.
Thanks for stopping by Glen. I agree; home ownership isn’t for everyone. Unfortunately I think that people often don’t realize the potential long term implications of buying homes in the current housing market conditions. I guess it’s hard to break the traditional bias towards home ownership and to get rid of the stigma associated with renting. If we get past that, its full speed ahead to reaching our goals.
Affordability is a real problem here in Auckland (on par with, perhaps worse than Toronto), compounded by the disgusting level of quality of our housing in general (ESPECIALLY rental property, which makes renting for life a pretty unappealing proposition). Unfortunately I see no light at the end of the tunnel.
I hear ya. I guess the only thing there is to do is to bite the bullet and wait it out.
Reading this blog post was both depressing and relieving for me. Its depressing because, well the obvious, housing prices are over inflated. Relieving because I bought my house in 2004 and don’t have to go through this pain again (I hope).
At the time that I bought my house I thought the prices of housing was already inflated. I had been searching for two years and the price of houses just kept going up and up and up. I paid OVER the asking price in an effort to circumvent a bidding war.
At that time, I thought I overpaid only to see now that the cost of housing is still going up! So the valuation of my house has probably doubled if I were to put it on the market.
For current homeowners its great, but what if you need to move? You’re still up against over inflated housing prices even if you do walk away with a tidy sum from the first sale of your house.
From the sounds of it, you’re on the better side of the predicament; I agree- even if you were to sell, you’d be left to buying at an even more inflated price which would surely leave you worse off. Unless you’d be willing to sell and walk away from homeownership until housing prices come back down to earth…possibility?