If, tomorrow morning, a man weighing 200 kg beat Usain Bolt in a race, would you assume that men who weigh 200 kg have now become excellent sprinters? Or rather that it is an exceptional case?
This is the analogy that came to mind the other day while reading the excellent paper1 from my colleague Marie-Eve Fournier on the fact that a house is rarely a retirement fund.
If this text has caused a lot of reaction, it is because it goes to the heart of one of the most popular myths in finance: that our main residence can be used to finance two or three decades of retired life.
This so-called power attributed to real estate is quite recent. It dates back 15 or 20 years, when falling interest rates increased the appetite for debt and increased the pool of potential buyers. And who says more buyers means upward pressure on prices.
Historically, residential real estate in developed countries has appreciated by around 3 or 4% per year, a hair above the level of inflation. However, over the past 20 years, in many places across the country, real estate has appreciated two to three times faster than that.
The gains in residential real estate then rivaled the gains in financial assets, stocks for example, which have a historical record of 9 or 10% annual appreciation on average.
In other words, for years a 200kg man (residential real estate) had returns equal to, and in some cases greater than, the returns of Usain Bolt (stocks).
When an asset perceived as risk-free offers as much growth as a risky asset, the choice becomes obvious. So our homes went from places that protected us from rain and wind to assets that would enrich us and finance our retirement for us.
Which leads us to the chronicle of Marie-Eve. She explains to us that people generally age in their house rather than selling it to realize their gain. And when they end up selling it, it’s often when they no longer have a choice, after the age of 85, when retirement has already been underway for a long time.
Saying that your home “is your retirement fund” makes sense in theory. In practice, it often doesn’t happen like that.
Do not invest elsewhere
This myth can cause a cascade of questionable decisions. For example, it can serve as justification for us to overpay for a house, because it will allow us to live well later (ironically, an expensive house will suck up a significant portion of our income and could act as a brake on our enrichment).
Then, seeing your house as your retirement fund can push you to invest little or not elsewhere. So we have the false impression of solving two problems at once. Especially since buying a house is socially rewarded. A house is clearly visible. An investment portfolio is invisible.
The appreciation of real estate also gave the impression that massive debt was a painless path to wealth.
We spoke in our pages recently2 of a man who earned $50,000 a year and was experiencing financial difficulties after taking out a mortgage of $250,000, five times his income. A prudent rule in personal finance is that the limit not to be exceeded for the purchase of a house is three times the annual income of a household.
In a world where real estate is only increasing in value, this rule is seen as outdated. But when prices stop rising, potential buyers disappear, or interest charges rise, the plan’s flaws become apparent.
In short, real estate seemed like the perfect asset.
I’m speaking in the past tense because real estate stopped being exciting this year. Houses for sale are piling up on online platforms. In 10 years, I have never seen so many “for sale” signs on my street.
The situation seems more serious in Ontario, where cut prices are increasing in an increasingly depressed market.
I don’t know the future. Maybe we’re seeing the start of something. Or maybe the real estate market will pick up in 2024, and the malaise of 2023 will be forgotten as quickly as it arrived. I’ve no idea.
What I know is that taking an asset that is located at an address, in a neighborhood, in a city, an asset that has just experienced more than a decade of extraordinary appreciation and entrusting it with your financial security long term is a dangerous illusion.
Yes, the 80-year-old who owns a paid-off home has an advantage over someone who has neither home nor investments. And the exemption on the capital gains of a principal residence – financed by all taxpayers, owners or not – is a gift that rewards the choice of purchasing a house.
But it’s much safer to rely on diversified assets that are easy and inexpensive to liquidate, like stocks, bonds, ETFs or mutual funds, to meet life’s expenses when you stop working.
The best time to buy a new vehicle
Speaking of getting rich, a listener asked TVA the other day when was the best time to buy “a new SUV or pickup” as a personal vehicle. The auditor said he had “a budget of $600 per month.” The columnist responded that it’s best to wait until toward the end of the month because dealers are looking to meet sales goals and can be more flexible.
This is all very interesting. But let’s avoid the elephant in the room: the best time to buy a vehicle is when you have the money to do so. I mean, paying for the vehicle in full. At once. Like a big boy or a big girl.
Having to spend money from the bank to buy something that depreciates like a vehicle is the gods of wealth’s way of telling us that we can’t afford to buy it.
It’s crazy that this needs to be said. But the benefits that the customer will gain if he buys at the end of the month will be nothing compared to the $10,000 or $20,000 that he will pay in interest during the term of the financing, depending on the model, the down payment and the agreed rate. If invested, this money paid in interest could hypothetically double in value after a decade instead of disappearing into thin air. We’re starting to talk about real money here.
What is the solution ? If he keeps his current vehicle and saves $600 per month, this listener will have $10,800 after a year and a half. There are 3,339 vehicles for sale at this price or less on Kijiji. Of these, 533 are vans. A much more logical avenue if you have little savings.