Let’s look at whether or not real estate is still a good investment, shall we?
In the 1980s, real estate was booming in certain parts of Canada. Sure, interest rates were incredibly high (though not as high as they would become in the early 1990s), but housing could be acquired for a low cost, and due to the high level of immigration that was being experienced at that time, rentals were snapped up left, right and center.
My parents purchased a fixer-upper duplex that they renovated in the Lower Mainland area of BC for $70,000, and held it for a year before they sold it for almost a $100,000 profit. While they held the property, they lived in part of it, and rented out the other part, creating a situation for themselves there they didn’t have a mortgage.
Was real estate a great investment for them? YES.
They went out to buy and sell property three times over thereafter. One house they purchased in 1992 for under $100,000; they sold it when the market wasn’t great in a town that hadn’t grown into it’s britches yet, so they didn’t make much of a profit off of it. When the house sold on the MLS a couple of years ago, it sold for $1.1M. That is some great passive income!
But things have changed drastically since that time. Many people believe that the Canadian housing market is in a bubble. Some believe that Vancouver and Toronto are in grave danger of bursting, creating a housing market crash like that of the USA in 2008/2009.
That’s yet to be seen, but I think we can all agree that housing isn’t as great of an investment as it was 25 years ago.
Why?
Housing isn’t an amazing investment unless you can buy it for low and sell it in a short period of time for a much higher profit.
Here’s why:
Say you mortgage a house that cost $450,000. Let’s say you bought it last year at 3.5%, 5 year closed rate mortgage, for 25 years (no down payment.. ease!). Your monthly payment is just under $2,250.
You live in it for 5 years, and you end up selling it to a nice family for $500,000 (for ease of calculation). Sounds like a nice, $50,000 profit, right?
Not so fast.
Over the 5 year term of your mortgage, you spent more than $73,000 on interest alone –this isn’t paying down your balance, it’s just on interest.
You’re out, then, $23,000. You actually took a loss of $23,000. You’d have to sell it at $523,000 to break even.
Now, think of it like this. Say it’s a four bedroom, three bathroom home, in a relatively desirable neighbourhood close to transit and amenities. It has a big yard, and to rent the home, it would cost $1900/month, not including utilities. You’re spending $22800/year on rent, which equals $114,000 over the five year term if you had merely rented the house instead of owned it.
Now it’s looking up. Instead of being out $114,000, you are only out $23,000; you get the rest back in your pocket once you sell.
Even if you sell it at $450,000, you would still be coming out ahead compared to if you rented.
What you’ll really be seeing a difference in, for this situation, if you owned the house, is in the maintenance, property taxes, and other costs that come along with home ownership.
Housing as an investment also depends on where you live. If you live in the US, it is more likely to be a good investment than if you live in Canada, where many people consider the housing market to be “in a bubble”.
Is housing a good investment in your area?
Great informational post and well written to boot. Not easy to make this topic sexy. Whether or not housing is a good investment in our area (Houston, TX), I wish we’d stayed in our apartment. It was a great local, simple living, and about $350 less a month. We could have invested that $350 in all kinds of ventures and enjoyed our 3rd floor balcony view. Our house, although it is a small 2 BR, has been nothing but a stranglehold on our finances. We are trying like hell to pay it off over a decade early and save on the interest. When it’s paid, at least we can live cheaply then.
Brooklyn is going through a serge of increases. Ridiculously fast. I really believe NYC is getting out of control with their prices. However many many people still think it’s a good investment.
Yes Brooklyn is crazy…as if the prices are high enough already. My mother-in-law started looking at houses last year and the listing/selling prices have gone up for houses that are in a lot poorer condition. Even houses in slightly less desirable locations are going up. And houses are being snapped up pretty fast too. If I didn’t see it, I wouldn’t believe it. I don’t know if its a bubble or what…but it is out of control
I’ve heard that Australia might be in a housing bubble as well. As an American who has lived through the housing bubble here, I know that housing bubbles in other countries are going to have an impact here as well. I think real estate is a relatively risky investment that should be considered carefully before jumping in.
We know all about housing bubbles in the UK – we are in a permanent one. But it is self-created – we just don’t build enough houses. The problems in the US, Spain, Ireland are of uncontrolled building. In particular in the US, well, it’s a big country! In the sticks I guess land is cheap. In the UK on the other hand, while it is not exactly overcrowded (whatever some people say), there are all sorts of controls on building (this is Europe after all) and in particular low cost starter homes are just not built.
In the business sector though it is a different affair completely. If a family goes bust (lose their job etc), then they still have to live somewhere. If a business goes south, then it just closes down and quite possibly defaults on any mortgage or stops paying the rent. Commercial property is far more volatile than domestic property.
With housing, it is all location, location, location. We are lucky where we live (or wise to buy here). The property crash over most of the UK hasn’t really touched us – I think anyway. We haven’t tested the market but keep getting letters from the real estate people wanting to buy – ‘we have X people looking for a property like yours ‘ and so on.
And when I last did the sums, the value of our house has increased by about 3-4 times the total mortgage payments. As I said, lucky. But many people are not so lucky.
Like most things, housing is a gamble. You pays yer money and takes yer chance.
Ditto in Auckland, NZ. We have a shortage of property and no solution in sight.
I guess that’s a better problem to have than a surplus of property!
I think the problem with housing is that people have started to expect that they can buy a house and then turn around and sell it within a relativity short period of time for a tidy profit. What makes housing a good investment is being able to create income off of a rental property, or price appreciation on a home you own for a long period of time.
I would say it is still a good investment but you have to look it as a long term investment. I would eventually like to buy a few fixer-uppers and renovate them with my bf for sale or rent.
I think its amazing how much the housing market varies depending on the area. I don’t know a lot about it, but that always blows my mind.
I know a few folks living in Ontario (I live the US, Chicago) who I visited a few years back. One conversation included discussion of waiting for prices to go up even to sell and buy a bigger home…or pocket money. I just thought that the prices seemed out of line with affordability for many, and eerily similar to what many in the US faced in the early part of the last decade.
Here, housing is seemingly rebounding along with interest rates going up. I think the time to buy was 6 months to a year ago.