Wednesday WTF: June 21, 2017
Absurd Home Prices
Welcome back to Wednesday WTF, my weekly rant on things that waste your money. This week’s victim is way too easy. Since when did a house cost both arms and legs? These days it isn’t uncommon to see average homes in London, Ontario costing upwards of 350-400K. That doesn’t even come close to the Toronto and Vancouver markets where houses cost upwards of 1 million dollars on average. Makes you wonder who’s buying these homes? With the housing market going nuts, I have come up with 2 factors about this market that have me weary.
1) Low-Interest Rates
Interest rates are at a historic low. This means that we have easy access to money and debt accumulation. The problem when rates are this low and debt is so easily acquired it can artificially create a sense security when in actuality things might not be well. Far too many people have been told what they can afford without actually knowing it to be true. The word that keeps getting thrown around is “bubble.” This “low-interest-rate bubble” can be trouble for those who didn’t do their homework. If you have a monthly budget that has you just barely affording your mortgage than any rise in rates could hurt you dramatically. Back in the day interest rates of 10-18% weren’t uncommon. Today they are hovering around 2-4%. If they go even a few points higher a lot of people will be in serious trouble. Make sure within your budget you have priced in possible interest rate increases so if and when they do go up you are ready.
2) Buying Homes without Conditions and Bidding Wars
With the market being so red-hot it has created a weird situation for home buyers. They are often caught in a spot where they have to buy a home without placing conditions in their bid. Think of it as buying a car without being able to look under the hood. The seller has told you there is a new V-6 engine in it and later you find out there is a lawnmower engine. Almost all homes prior to this craziness were bought under a condition of home inspection. These days with multiple offers coming in for the same home, buyers are being forced to place offers without conditions or they won’t even be in the game. A home in Toronto was rumored to get as many as 59 offers. How do you compete with that? This leaves people bidding amounts far more than the home is actually worth. This also leaves people placing bids for houses way out of their actual price range. That is where you get the million dollar shack in Toronto. Unless it is sitting on an oil well I have no interest in that nonsense.
The point of this post was to make you think about what you are getting into when buying a home. This market has created a seller’s market that leaves the buyer vulnerable. To me that is unacceptable. When it comes to buying a home I believe it should be an equal and fair transaction. When an environment is created where homes are being bought with no condition offers it leaves the buyer extremely vulnerable. This also allows for swindlers and shady people to unload their dumps on confused people. Add to that the super-low interest rates that are compelling people to buy and we have a recipe for disaster. For me, a home is worth what is worth, no matter what someone bought it for last week. I also anticipate rates will go higher so I price that in as well. You have to look at all the variables when making the largest purchase of your life and not feel forced to do anything. Ask an expert that has your back for help.
“We tend to focus on assets and forget about debts. Financial security requires facing up to the big picture: assets minus debts.” – Suze Orman
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at budgetboss.ca.