This post has neither graphs nor stats not any other useful information on the Victoria market. It’s purely my own musings based on some recent life changes. If you’re here for the real estate information, head down to the comments where the real action happens.
We live in a society where leverage is king and debt is a way of life. If you buy a car with cash the salesman looks at you funny. A car is not something you acquire or ever finish paying for, it’s a monthly payment that you periodically trade in for a different monthly payment. A $900,000 house at 2.5% and 10% down (thanks mom and dad!) is only $3500/month which is no problem for any respectable DINK. Never mind that you’re going to have to earn a cool million just to pay off the roof over your head. This is good debt, and the more of a good thing you have, the gooder it is. As any interior decorator will tell you, the more you leverage the more you can profit from the appreciation in the Victoria market.
And you know what? They’re right. People who have borrowed their brains out to acquire real estate have done well for themselves in Victoria. In Vancouver every home owner just won the lottery. You could argue it makes no sense to buy a car with cash when the interest rate is 0%, or pay off the mortgage when you can make double in the markets. And again, you would almost certainly be correct.
So this post is here to argue for the irrational. A counterpoint to the norm of chasing maximum return. An exploration of the power of not over leveraging.
A couple weeks ago I quit my job. I had nothing else lined up, we have two young children, a mortgage, and my wife is on maternity leave with reduced salary. I was paid reasonably well and while stressful at times, I enjoyed my work overall. However various frustrations had built up, and after almost a decade at the company it was time for a change. I crunched some numbers and to my surprise saw that my income was more or less superfluous. So I quit.
This didn’t happen by accident. For a while now I’ve been following Mr. Money Moustache, and while we are far away from financial independence, we do live quite frugally. Both my wife and I commute to work by bike, our vacations tend to be of the camping variety, and we’ve put only 30,000 km on the car in the 5 years we’ve owned it. Most importantly, when we rented, we rented cheap 60’s apartments, and when we bought, we bought a house for significantly less than we could have. Then – aside from funding various four letter government supported savings vehicles – we paid down the mortgage.
When I called up the bank to ask about what the minimum payment would be, the answer turned out to be $1300/month (thanks 30 year amortization!). That combined with our low expenses made me realize I didn’t need to wait for some giant number in a savings account; I could make a radical change now. It would have been so easy to trade in the Hyundai for a Hummer, and bike camping at Island View for mojitos on the Big Island. Even easier would have been to buy a bigger or nicer house. But those things would have come at the cost of my freedom.
I realize a lot of this freedom is due to a structural privilege. We have two decent incomes and we were able to buy before the market turned insane. Lots of people will not have this kind of luck, and the point of this post is not to boast about our good fortune. If we were buying in the current market insanity, I would try to compromise on the quality of the house or the location to stick to a budget that didn’t require huge leverage. I would look to the less loved, to the houses that need work, to the funky lots, to the less prestigious neighbourhoods. I would consider how much space we really need (is a 5 bike garage really necessary?).
Maximum leverage will amplify the market’s gains and risk takers will be justly rewarded. Just don’t forget what those future gains might cost you in the meantime. What’s next? Stay tuned, it might be related to the topic at hand…