Some weeks ago, a most ugly house in North Toronto was swarmed. It’s a semi, built like its neighbours about 90 years ago, has a mutual drive, is on a residential street, one block north of an arterial. The current owners added an addition to the original 1,100-square-foot, two-storey cube. Rooflines don’t match, the exterior’s stucco-over-OSB and the lack of design work makes the squirrels woozy.
But it was listed for under a million, in a ’hood where the detached faux chateaux fetch $1.6 million and tear-downs are eight and change. There were several offers, and it changed hands for just over $1,000,000. This is what house lust does. And, it’s starting to overwhelm Darren, who wrote:
“I am 30, married, and have been looking to buy a house in Mid-Town Toronto for two years now. I haven’t pulled the trigger yet. I couldn’t get by this sinking feeling that there was something fishy going on in the market. I spent hours with spreadsheets trying to justify a million-dollar house, as that was what my friends with similar incomes were doing. But I can’t get past the numbers.… Yes, I could probably swing it right now … and so long as I only have 1.23 kids, 0.75 pets, and so long as nothing bad ever happens to me, my spouse, or my house. I could probably even save a little for retirement. My reality (to be) is three kids, two cats (by force), a bad stomach, and no handy skills.
“Now to my question. Does it make more sense to rent or to buy in mid/downtown Toronto? My wife and I have an income of $200,000 with $225,000 saved.…”
Well, Darren, a $900,000 house will also take $28,200 in land transfer tax and another two grand to close, so now its $930,000. Putting 20 per cent down ($186,000) leaves you with savings of just $39,000, and a mortgage of $744,000. The monthly payment will be $3,600, or $4,300 including property taxes and insurance. The down payment invested at seven per cent return would give you $1,085, so that must be factored in, for a true monthly cost of about $5,300.
The emotion is your problem. The finances are simple. If you find a North Toronto home for $900,000, it’ll be a fixer-upper you have neither the money nor hairy-manly skills to rebuild. As we slide into a real estate correction, your investment could well lose five to 10 per cent of its value, then flatline. After five years, this would mean you spent $78,000 more on ownership than renting, and lost about $120,000 in equity.
So, if you sold with five per cent commission, then retired the mortgage, you’d walk away with $152,244, or $30,000 less than your initial deposit. Add in the premium over renting ($78,000), and your family would have spent $108,000 more to own the same home you could have leased.
You want a suggestion? Burn the spreadsheet. Abandon open houses. Embrace your skepticism and common sense. And get new friends. You’ll need them soon.
Post City Magazines’ real estate columnist, Garth Turner, is an author, investment advisor and former MP.