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ANALYSIS: Free money is impossible to resist, and that’s precisely what was pitched to me when I dipped my toe in two of Canada’s biggest housing markets.
It certainly seemed impossible for me to resist when I decided to make my first-ever real estate investment in early 2014; purchasing a modest downtown Calgary condo. At the time, Alberta’s largest city was by far the hottest housing market in Canada. With prices increasing by double digits every year it was outpacing even the likes of Toronto and Vancouver.
“You’re living here anyways, you might as well make some money while you’re doing it,” went the oft-repeated argument to me by local real estate boosters (the sort you can easily find in every major Canadian city). Even if I ended up selling after just one year, I could count on easily getting 10 percent more than I paid, meaning I would make a roughly five percent profit even after all the realtors, lawyers and the bank took their various fees.
For a $300,000 condo (roughly the average in Calgary) that would be a $15,000 profit after just one year! I’d have been crazy to resist an opportunity like that.
Then the price of oil crashed, tens of thousands of Calgarians lost their jobs (and those that did not started to fear for their livelihoods all the same). The city became a buyer’s market as the boom times went bust and a sense of fear swept the city. I was forced to sell for a loss when I moved back to my hometown of Toronto last month.
But it wasn’t just the collapse of $100 crude that caused the collapse of Calgary’s home price growth. Overbuilding, dramatic bidding wars and an overwhelming sense of boundless price growth all contributed as well -- and all those factors are continuing to drive the market down now that low oil prices have largely taken their toll.
“Are you going to buy a place here?” was the question put to me by pretty much everyone who learned I was returning to Toronto.
“Of course not!” I would instantly retort. “What would be the point?”
Immediately I would be given the same argument advanced by the Calgary market boosters back in early 2014: “The market is going to keep on climbing from here, all you have to do is hang on for a year or two and you can make free money!”
Yet the reason I was willing to invest in Calgary in the first place was because prices a couple of years ago, while climbing quickly, were at least still within the realm of basic affordability. The carrying costs (mortgage, taxes, condo fees etc.) for my Calgary condo were roughly equivalent to what I would have paid to rent a similar dwelling (“So why not build up some equity?” was my logic at the time).
In Toronto, the cost of owning the east-end duplex I now share with my fiancé would be easily more than double what we currently pay in rent. That might be worthwhile if prices were going to continue climbing dramatically higher for the foreseeable future; then we could cash out in a couple years and presumably make all that money back plus a tidy profit.
That scenario looks increasingly unlikely. A growing chorus of market experts are acknowledging double-digit price increases cannot continue and regulators, such as the Canada Mortgage and Housing Corporation, are warning red-hot markets like Vancouver and Toronto are risking a full-blown price correction; particularly if all those foreign buyers propping up prices decide to pick up and park their money in some other country.
Yet few if any first-time buyers are heeding those warning signs. Just like in Calgary only two years ago, buyers in Toronto still seem to be climbing over each other to win the right to pay a massive mortgage they can barely afford even with interest rates at historic lows.
Interest rates will not stay low forever (and, in fact, are nearly certain to rise before the end of this decade). I might be tempted to buy once rates start to climb again, culling those bidding wars, but I have learned my lesson: There is no such thing as free money in real estate.
Jameson Berkow was BNN's Western Bureau Chief, based in Calgary from 2012 until October 2015. He's now based out of BNN's Toronto Headquarters.