The Canadian Housing Market in Layman's Terms - Part 3 - The Millennial Dilemma
"May your choices reflect your hopes and not your fears." - Nelson Mandela
You know that feeling of relief that comes over you when you finally sleep in your own bed after you've been away on a trip? That one corner in your humble abode where you've always curled up with a good book? The one floor board you know to avoid because it creaks loudly?
There's no place like home.
Your house is what puts a roof over your head and provides you shelter, but your home is where you nest: the hub from which all your daily experiences extend.
Your home is where you make it, and in return your home makes you too. And thus a pile of lumber, stone and dirt becomes valuable.
I know that, you know that, everyone knows that.
But don't confuse a house for a home. When you buy a house, you buy an assembled pile of lumber, stone and dirt: it's a business transaction. Unless your mortgage payments, taxes, insurance and maintenance add up to less than rent for an equivalent house, you are throwing money away.
"The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy." Sun Tzu, The Art of War.
There is a neat, little known concept in finance called mean reversion. All it says is that inflated/deflated prices always return to their long-term average. For our purposes it suggests that house prices will eventually come down from their current overvalued levels to the long-term average, unless something fundamentally has changed. You'll never know how or when, but return to the long-term average they will.
People can only confuse a house for a home for so long.
Nothing has fundamentally changed about housing, so whatever lunacy has been propping up this confusion will come to an end someday.
The strong demand that has driven up house prices in the GTA and Metro Vancouver area is a result of many factors: strong regional economy, low unemployment, low interest rates. and net migration. Basically, these are happening places where people want to live.
But another component rarely talked about is constrained housing supply. Houses aren't as readily available as they once were and that makes them a rarer, more precious asset.
When booms go bust, the supply-demand dynamic reverses. For our purposes, when mean reversion occurs in the housing market, we will see supply increase. You just never know how or when.
And so we arrive at the millennial dilemma: buy a house in a booming market and stick out the eventual bust, or wait it out until the eventual bust to buy?
The answer isn't clear, but it is easy.
If you're buying a house to turn into a home for the long-term, it doesn't matter when you buy. You just have to make sure you have your finances in order so you can afford it. But if you aren't in this camp, it's best to buy when prices are closer to or below their long-term average. Save money by spending less than you earn, and invest wisely to be ready to buy when the time is right. Things tend to work out when you do things for the right reasons, when your choices reflect your hopes instead of your fears.