On MP Garth Turner’s blog, a recent post about housing entitled “Jim to Jason” has generated over 100 comments so far. Here is the question that was posed to Garth by a constituent Jason (Jim is a reference to finance minister Jim Flaherty from earlier in the article):
I live in a townhouse in your riding that I bought with 15% down three years ago (10 years at 5.15%)…my wife is staying at home to raise our two children. We live modestly and don’t over-consume. My gut feeling is to sell the house (and realize the 70K gain), rent for a year or two and then buy back into the market when prices have depressed. My wife thinks I’m crazy….is she right?
Here is Garth’s response:
To Jason I would say, simply, there is only one reasonable course of action, which is to list the house as soon as possible, hope a hungry buyer comes along, and pocket the seventy grand. Go and rent a similar home for (likely) a lower monthly cost, and wait for the inevitable winds to howl through. Odds are the house will be worth less in a year than it is now, and a seller’s market will have turned into the same buyer’s feast that currently exists to the south.
In fact, you might want to question the whole notion of home ownership for a while. Consider that you face large, non-deductible costs of land transfer tax, mortgage payments, property taxes, utilities, insurance, plus hefty commission when you sell, and the lost earning potential of the money you used as a down payment. The only way to break even if is a substantial capital gain can be realized.
Given all that, you can often improve your cash flow by renting, rather than owning. Plus, if you do own a home and the market turns, you’ll find real estate to be an illiquid investment. You can always sell a stock or mutual fund with a single phone call, while it can take months to unload a home, with its value falling every day. In fact, this is already happening in spades to more expensive homes in the region – months on market, and offers for $100,000 or more off the asking price.
By the time your neighbours understand what you have just realized, it will be too late to take action.
I don’t think Garth is saying that everyone whose home has increased in value should sell and rent instead. He’s basically just saying “No, you’re not crazy, if you feel like selling and renting a comparable place I support your decision. For the most part the comments seemed to involve telling Jason he shouldn’t sell and although there were some good arguments, most were not, and involved things that surely Jason has already thought about.
One commenter mentioned that “for folks who have little ones, slipping from rental to rental, should the owner have to sell, is very hard on young families.” True, although I would argue that in this case the transition to the new place should be easier given the fact that the wife stays at home to raise kids. But whatever, Jason can deal with these issues on his own he doesn’t need anyone telling him that the move will be hard on his family.
Another comment said:
When you consider what it would cost them in realtor fees, lawyer’s fees, moving costs, and house rentals, is uprooting the family worth the hassle? . . . Sure, he can sell the house and gamble on the market–like playing the stocks–only with his home. Jason’s wife has obviously made a commitment to stay home to raise the children. In the present situation, she knows where she stands. If Jason sells the house out from under her–trouble. Just my 2 cents.
True, Jason must consider the costs involved with selling the home and the costs involved in buying a home, should he wish to buy again in a few years. Here are some supportive comments for Jason:
Garth has given you very good advice, should you and your wife decide to sell, invest your money well, do not take chances, plain simple interest (GIC’s) always go up and during troubled times you will sleep well.
Renting,…you will find a nice place and your costs for shelter, will be defined allowing your wife to set a planned budget in place, then in a couple of years or so you can look for nice home that is ready set go that meets your needs not your wants. By this time you will have over 25% to put down beating that deadly government mortgage insurance costs. If you can stay without any strain on your family or regrets when things go south, then do it. . . Bon Chance, good luck…..for starters you were wise to ask….so me thinks you and your family will do just fine.
There are a lot of silly comments too…
One person wrote that “Jason, your house is a home for your family, not an investment.” First of all I think Jason realizes that and probably never intended on selling but in light of the increase in his home’s value, he is weighing his options. Secondly, how is a rental property less of a “home for your family?”
Another said “renting is simply paying some person’s mortgage for them! At least if this family stays put and rides it out, they are investing in their own equity every month.” If the house goes down in value over the next 2 years, all the equity that has gone into the house in those 2 years will have gone down in value. Also, of course renting might be paying the mortgage for someone else (or providing someone else with income) but it may also be providing you with more money every month to invest (if your rent is lower than your mortgage was) or to spend.
Yet another said “I can’t believe that you, Garth, would giving such an advice. Renting only makes others richer.” This is the biggest renting vs. owning fallacy out there. Someone backed up the comment with “renting means money out the window. While paying mortgage, most is interest, but some comes off the principle. Whereas rent is all gone.” C’mon people give your head a shake! In general, rent ≠ mortgage payment, mortgages make others richer too (banks), and rent does go out window (just like interest does) but you can invest the difference (between what a mortgage would be and what your rent is (if lower)).
One last comment: “Jason you have to choose whether your house is a home or an investment. It can’t be both.” I don’t really understand what that means, but I can only assume that what this person means is that by selling the home you will no longer have a home (because you’ve treated it as an investment and it can’t be both!) and that a rental is somehow not a home, and that selling a home and moving to a rental is somehow “investing”? I don’t get it…why are people making this so complicated? He’s not losing a home here, he’s just changing homes and pocketing $70k?!
Very well said! I turned from an owner to a renter about 13 months ago and haven’t looked back since. And why should I? My “earnings” are up $9,000 in 2007 just because of this switch.
Home is as much as investment as stocks. For instance, I don’t think a rationale person would pay a $1 million home that rents for $1000/month. i.e. 1.2% rent yield. Yuck!!!
Why not buy a basket of conservative stocks yielding 3%, pay the 1.2% in rents, and reinvest the rest of 1.8% back to the portfolio? Rents probably hike 4% annually, but time and time again, most dividend stocks go up 8-10% per year. So you get a higher dividend yield AND higher dividend growth.
I can’t imagine there being any equity in a home bought 3 years ago.
Rents typically spike near the end of a housing downturn, which drives buyers back into the market.
At this point, I think it is a foolish decision. It could have worked well a year ago though.
David, has a housing downturn even started? It hasn’t in Vancouver, maybe it has in other parts of Canada. I had heard that prices in Alberta had started to come down. But anyways I don’t follow too closely.
Why do you think it’s foolish? Because you think his rent will be too high? Have you considered the $70k capital gain? Why was a year ago different?
I disagree with some of this. It really depends on the cost of the house and how much closing costs are when the townhouse is sold and re-bought. For instance if the house is worth $200,000 and the commission to sell is 6%, you can immediately chop off $12,000 from that. You pay other costs as well (inspection, lawyer, etc). When you repurchase in a few years, you’ll pay another set of closing costs. While you own a home you can write off interest. You can’t do that while renting, unless law is different in Vancouver (I believe thats where this is taking place).
I still think you can come out of this with some extra cash, but not as much as you are hoping for.
I’m pretty sure you can’t write off interest on a home in Canada unles you bought it for the purposes of earning income or running a business. In fact isn’t the Smith Manoevre designed to get around this?
You definitely can’t deduct renting (except in Ontario you can, at least we did it when we were students in Ontario). So the “Jason” in Garth’s blog article lives in Ontario where he can deduct his rent but not any part of his mortgage payment. So that turns your tax ideas on its head a bit. 🙂
You’re right he’s got to consider closing costs and all that. When he said $70k gain, we don’t know if that was gross or net.
A high school friend just sold a bungalow with a $200,000 gain and instead upgraded to a new house. I would have found a nicer (but cheaper) house to rent instead and wait for the market to cool down.
If Jason decides to rent for 3 years before getting back into the market he can take his $70k and park it somewhere and make some interest, hopefully offsetting the closing costs and other fees. Actually he can park all the equity that was in his home in low-risk investments. I would assume his monthly rent will be cheaper than his mortgage payments were before (in Vancouver this is pretty much a given right now).
It doesn’t turn my tax idea on its head as I said “unless law is different in Vancouver (I believe thats where this is taking place)”. I’m not sure of Canadian law but I have a rental house and my personal residence south of the border and each has different things you can write off. It’s important to look into all of that, and that’s all i was trying to point out. Regardless, this is a good topic and I know a lot of people who are considering the same thing.
Just to clarify though, unless we’re talking about investment property/rental property “While you own a home you can write off interest” is definitely not true in Canada, right?
I couldn’t say for sure because I live in the USA. For my personal residence I can write off the mortgage interest. For my rental I can write off virtually every expense there is, including the gas mileage I use to check up on the property.
I did a quick Google search and I saw a lot of forums and blogs talking about what you can and can’t write off in Canada. It seems like you can write off interest from your mortgage on a rental from the responses I was reading but I wasn’t able to find the law regarding personal residences.
If you know of a good source, I’m all ears.
I’m pretty sure that in Canada you can’t deduct anything on a primary residence but on rental property you can (because it’s for the purposes of earning income).
As for renters, rent and property tax are tax credits in Ontario, which means it’s not a huge rebate…and rent paid has no tax consequences in BC. So you are right, rent is basically not deductible, and neither are homes (unless it’s a rental).