Editor’s Letter (September 2012): real estate crazy
A few blocks down the street from me, in Seaton Village, there’s a beautiful three-storey house with four bedrooms and tremendous character. Its owners, a pair of journalists in their 60s, bought it in 1972 for $35,000, which was $2,500 less than the asking price. When they moved into the neighbourhood, they were considered pioneers—none of their friends had even heard of Seaton Village. The property was a dilapidated rooming house, and the couple spent the next 40 years lovingly restoring it. When they put it on the market this spring, they got seven offers. The asking price was $1.195 million, it sold for $1.44 million, and the money they made will play a big part in funding their retirement.
This is the kind of story that drives members of my generation crazy. As baby boomers cash out on their real estate investments, their children are finding themselves either priced out of the market or buying houses they can’t afford. The big gamble of Toronto’s young professional class is that they’ll have the same luck in real estate as their parents. Torontonians in their 20s and 30s are throwing themselves into frenzied bidding wars, banking on the hope that Toronto house prices will continue to rise in perpetuity.
As close readers of this magazine know, we run a regular real estate feature that chronicles a prospective buyer’s search for a home. It’s called The Chase, but I have come to think of it as the over-asking page. The house hunter in question usually sets out with a budget, then confronts the disappointing reality of what that budget will buy, and often ends up spending tens of thousands of dollars more than planned. With the base interest rate holding steady at one per cent, first-time homebuyers can’t seem to stop borrowing, and house prices just keep going up and up.
No wonder Mark Carney and Jim Flaherty are worried. This summer, Flaherty made it a little harder for first-time homebuyers to enter the market by reducing the maximum amortization for a government-insured mortgage from 30 years to 25 years. Will this slow down the pace of purchasing? I doubt it. The city is growing, and there’s a limited number of houses on the market—especially detached, single-family homes along the subway line, which remain highly coveted. Plus, we keep fixing up our houses, renovating them, expanding them, upping their prices.
In this month’s cover story (“The Higher They Climb”), Denise Balkissoon takes us to the front lines of the cutthroat market, documenting the measures desperate buyers are willing to take to own a piece of this city. It’s stress-inducing stuff. Buyers now regularly forfeit the all-important step of a home inspection, jumping in with hasty, unconditional offers, only to discover after the ink has dried that they own a property with a crumbling foundation or ancient knob and tube wiring. Taking that kind of risk sounds bonkers to me.
Then again, the retiring Seaton Village journalists, the ones cashing in on their property this year, were considered a little bit crazy, too, back in the ’70s when they bought their house. Perhaps today’s house-buying risk takers will have the same luck as the boomers did before them. Will their properties continue to rise in value with time? For their sake, and for the sake of the city’s health, I hope so.
6 thoughts on “Editor’s Letter (September 2012): real estate crazy”
“Perhaps today’s house-buying risk takers will have the same luck as the boomers did before them”….yeah, 41x return in 40 years, no problem, we will all be able to sell the $1.44 mil purchase for $60,000,000 when we retire too….wheeeee!
I live in Edmonton Alberta where we had a housing buying craze a few years ago. The bubble has burst and housing prices have returned to normal or below. If I was to sell my house today, I could not get what I paid for it.
My advice to all you crazy hunters is to wait it out as things will return to normal and you are stuck paying a super high bill.
Hmmm…according to some calculations on retirement savings, 1 million won’t get a couple that far if you anticipate retiring at 65 and living 20 years, with some of that time allocated to being in a care home if health deteriorates. I don’t think it’s fair to say that boomers are cashing out at the detriment of younger generations who have to suffer and bear the high costs of property ownership. Perhaps in these days when housing prices are prohibitive, real estate as an investment is not a wise choice at all. While many will tout the benefits of owning your own home, sometimes it might be wiser to rent and store your savings in some kind of investment. Tough times also require some creative thinking. As you said, the couple spent 40 years restoring their home! How many people do we know who will spend the next 40 years living in the same house!?!
“Torontonians in their 20s and 30s are throwing themselves into frenzied bidding wars, banking on the hope that Toronto house prices will continue to rise in perpetuity.”
If that’s not a warning sign of a bubble, I don’t know what is. NOTHING continues to rise in perpetuity.
I’m on my 7th house purchased on my own. My first property was a condo before I turned 30.
My advice, buy the ugliest house in the best neighborhood that you can and then fix it up before you sell it. Look for something solid that only needs cosmetic updates.
Never buy more than you can afford and accept the fact that it will take years of buying, fixing and selling to work your way up to your dream home!
It’s scary out there, seen bursts in the 80’s, 90’s, 2000 on….it looks really bad if you are not in for the LONG term. Good luck speculators, you’re going to need it.
This editorial is extremely sensible in addressing the risk involved with buying into a bubble market. It’s important for buyers to gauge whether the bubble price they pay will deflate over the expected ownership time horizon.
However, in response to one of the comments, I don’t think it’s useful to think of it as a 41x return on investment. If they had invested the same money in a stock or mutual fund that returned 9.75%, they would have made the same money. Adding in the amount they paid for renovations, maintenance, property taxes, and other factors, and the amount they would have benefited if they had put $32k in a stock paying dividends in 1972, they lost quite a lot of money on the deal. For comparison, the Dow Jones average in ’72 had just passed 1,000 for the first time.
This is clearly an affluent and stable family, and they traded that money for quality of life factors that they valued. If someone today wants to look at this as a model, they need to approach the concept with those factors in mind. Is my family life stable enough to stay in the same house for 40 years? Perhaps not.
In the same way, today people should buy a residence because they prefer to own their walls, or because they want to anchor in a particular area for its community or quality of life, not as an investment. Irrational real estate investment buying was what broke the housing market in the United States. (People who saw more price appreciation year-over-year than they were paying in interest and property taxes were actually being paid to buy a house.) Economic structures have changed since ’72, and quality of life factors have changed right alongside. Few people think of buying a house as the economic equivalent of getting married; we just don’t think that far ahead, but we should.
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