Home Buying in a Bubble

May 25th, 2010 · 3 Comments · Personal House

Yesterday I was in Guildwood Park and I went to the site of Scarborough’s oldest house. It is a small one room house made of logs. It is extremely modest, obviously built by the original settlers and still standing after 200 years.

Furthermore these days there is a lot of talking about how we are possibly in a real estate bubble and how we are headed for a correction because prices are out of control.

My visit to Scarborough’s oldest house really illustrated to me the shift in consciousness that has occurred during the last century.  The primary purpose of a house in my opinion is to keep you out of the cold and wet. Yet today’s marketing tells us that a house is just so much more than that. First and foremost houses are marketed as “investments” Then there’s the “dream home” concept of having a extremely nice house (better than your peers). Then there’s the mortgage concept which was to “help people” but really resulted in people being able to buy more expensive houses.  It has also resulted in people paying for their house for 30 years.

Unlike most people I don’t espouse these concepts. How about a return to a world where people buy the least house that will suit their purposes. I’ll never forget my visit to a 6000 square foot home in Brampton that housed an elderly couple. They had to keep the heat down to 45 degrees because the heat was too expensive and were trying to rent it out. I’m asking you what thought process these two people used to decide that buying a 7 bedroom, one office, 5 bathrooms house? Did they sleep in each bedroom once a week?  To my way of thinking this is a house for a multi-generational large family.

Usually the first thing a real estate agent wants to know is how much is your budget and what’s the most you can afford. Then they usually show you houses just a little out of your price range so you really have to stretch. They also emphasize location, location, location. This is pretty much another lie as far as I’m concerned. In spite of the news we are safer now then we’ve ever been statistically. Personally I think buying in an area that is close to your work will do more for your lifestyle than buying in a “great area”. Plus by the time the real estate agent is telling you that an area is “up and coming” it’s already pretty much already there.

These are my recommendations for buying in these bubblicious times.

1 – Buy what you need. You are a family of four? Three bedrooms max. Large backyard for the kids to play in. Area close to work so you can spend more time doing stuff that matters such as playing with your kids.

2 – Buy the most inexpensive house you can afford not the other way around. Ask your agent for all the listings in the area regardless of price. You need a three bedroom, two bath? Go look at the cheap ones first.

3 – Feel free to buy a cosmetically challenged house. Look beyond the decor, the furniture etc. Any improvements will be money in your pocket.

4 – Refuse to participate in multiple offer situations. Lots of people get caught up in this and go crazy. Don’t let your agent pressure you, there are many perfect houses if you stop buying into the hype. It’s dry and warm, it’s a perfect house.

This weekend a friend of mine and I went and saw a condo at Midland & Eglinton that was listed at $79,900. That’s affordable, it’s a decent area and the place was in surprisingly good condition. He could pay it off in 5 years and then enjoy the rest of his life mortgage free. Now that’s something to aim for.

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3 Comments so far ↓

  • Fritz

    Maybe we need to start spreading the word, and teaching in our schools about how marketers will do everything they can to get us to buy our products, to the point of putting our *needs* in jeopardy?

  • Devore

    Just browsing through your site, lots of very interesting information! I am not in the business, not do I think I will be, I just like reading interesting materials that are well written.

    This bubble business, and real estate(tm) industry in general, really bugs me. I don’t know when it started, probably when real estate agents became “professionals” and started working for high percentage-based commissions.

    The general mantra in the industry is to buy THE MOST house you can afford, and if you need to borrow or go above your comfort limit, that’s fine. Why? Because of appreciation and rapidly building equity due to extreme leverage. Where else as a regular person can you leverage yourself 20 to 1? (5% down) Some places will even finance your down payment, for negative equity right out the door!

    Buying anything for appreciation is speculation, pure and simple, and very very dangerous. What’s the first thing you hear from the industry? Real estate always goes up. Oh really?

    Investments should be primarily bought based on cash flow. Appreciation, like buying junior miners, is for the margins of your portfolio, not concentrated in a single heavily leveraged asset worth 8 times your gross annual income.

    I agree with the advice. Buy the least house you need for the least money, that is acceptable for you to live in, pay it off in single digit years, and get on with your life. Otherwise, rent, it’s not worth it getting yourself in a lifetime of debt.

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