This tedious, pedantic, hectoring but incredibly manly blog has asked the questions a few times now. Why stretch to buy a house during a recession? And pandemic? Which is getting worse? Huh?
Alas, even seasoned blog dogs are giving in to their pants. Witness Dan. “I’ve been reading your blog for 10 years and I’m kind of surprised to be asking you this as perhaps it goes against everything you have been preaching… but maybe not,” he whimpers.
“I’m considering upgrading my home, just north of Toronto. A house in my neighborhood has been on the market for a couple of months as it was priced too high about 2 mil. I’m told I can get it for 1.8m. If I sell my current house I’ll get approximately 1.4mil. Prices are high here but they are way off the highs from 3 years ago.
“I currently have 150k left on my mortgage so will be taking on about 600k in mortgage. It’s a clear upgrade on my current home and it has a well set up basement apartment which would easily bring in $1500/month. We can afford the 600k mortgage without renting but I like the somewhat passive income that it will provide.
“Household income is just over 200k. We have a good pension are 45 years old and have about 300k in financial investments. Perhaps this question makes your eyes roll and resolve to give up preaching. I hope not!”
Now there’s a lot we don’t know about this guy. Like his profession, kids, pension details, retirement plans, investment assets, job security or family obligations (needy parents, clingy children). No real estate decision can be made in isolation. And this is a doozie. Especially in days like these.
What’s Dan proposing? For starters, increasing his debt by a factor of four. Second, he’s probably burying a bucket-full of tax-free capital gain in another property, which constitutes a gamble – that inflated real estate values will stay that way until he needs the cash. Third, he’s not buying because it’s urgent, but because it’s an ‘upgrade.’ La-de-dah. And he justifies a $2,000,000 property in the outer burbs by saying he can take in a tenant for $1,500 a month. Seriously? A dude in the basement of your mini-mansion, sharing the driveway and wandering, unshaven in the backyard?
More to consider: a $600,000 mortgage at today’s rates of 1.95% seems delicious, but will things look the same in five years when it renews at 3%? This purchase will generate $36,500 in land transfer tax, plus closing and moving costs. So, kiss the better part of fifty grand away. Selling the existing place will cost another $84,000 in commission. Plus HST ($12,600). And there may be a break fee for the existing mortgage. More property tax for the new place, too. Also, Dan would end up with over 80% of his net worth in a single asset. Never smart.
And did I mention there’s apparently some virus going around? Ontario’s new cases have exploded higher in the last few days, bringing (today) another job-sucking set of restrictions. Meanwhile some right-wing militia nutjobs tried to start a civil war in Michigan. Not that far away. And maybe an indication of what the US post-election months will bring. Scary guys with black pickups, Trump flags and AR-15s. Yikes.
These are external threats nobody can control, or even completely anticipate. Meanwhile the NDP-Liberal coalition government in Ottawa is mulling new taxes on the wealthy in order to ensure everyone gets their $500 a week in benefits. Are people living in $2 million compounds considered rich? Do you think this might be a good time to keep your head down and live quietly among the masses?
So stocks jumped again Friday. It’s been a remarkable few sessions lately, despite the president of the United States getting a deadly disease (which was a blessing from God, he says), more infections everywhere, tons of layoffs and intense political skirmishes. Trump seems more erratic than usual. In a tweet he nixed months of negotiations to craft a new stimulus bill, then two days later embraced it. He’s walked away from the next debate with Joe Biden. And the polls suck for Republicans.
The conclusion: Wall Street’s coming ‘round to the view that he’s toast. And it’s okay with that. Better than okay, actually. The worst-case scenario would be a contested outcome after November 3rd. A clear Biden victory is a superior outcome.
“We are getting more comfortable with the “Blue Wave”,” says analyst Ed Pennock. “Biden is gradually winning the Electoral College race. The increasing clarity is giving rise to an increase in risk-taking. Will Biden spend more? Probably. And the market’s fine with that. We do expect market Volatility to increase in the next 2 to 3 months. Fears of a contested election are receding.”
Now, add in Covid therapies, like the stuff they pumped into 45. Then a vaccine, globally distributed in 2021. Sustained central bank fiscal stimulus. Plus trillions more in government economic support. If the virus has a winter crest, then starts to recede come spring, Dan will wish he’d sunk his money into something other than a pile of particleboard and glue in the GTA tundra.