#84 If You Can't Afford To Buy A House Today What Can You Do?

Y2K was an interesting time when people were fearful of problems arising from the turn of computer clocks into the new century. But here we are 17 years later and Y2K turned out to be a little more than a non-issue.

What really changed in the new century was real estate in Canada. Specifically in Vancouver and Toronto. In 1999 a detached home in Vancouver sold for an average price of $341,000. In 2017, the average price was $1.6 million. That's an average annual growth of 9% every year for the last 18 years.

Toronto meanwhile sold an average detached home for $930,000 in 2017, up from $228,000. That's an average annual growth of 8% every year for the last 18 years.

Are You Entitled To Live In A Detached House?

Whether you feel entitled to it or not, makes no difference when you live in reality. You may want to pay 1999 prices for a house, but no one will sell it to you for 1999 prices.

Living in a big city comes with convenience where many restaurants, shops, and services are within walking distance. Public transportation is usually better and more frequent. But the result of this convenience is that everyone else wants it too, and that's what drives real estate prices up.

The alternative is you can save money by living further away and you may get more space, but you will likely sacrifice some convenience and have to sit in traffic.

It looks like a trade-off between money and time. If I have the money, I would buy time any day of the week. 

Why Do You Even Want To Buy A House?

If you haven't already read #97 The True Cost of Moving, check it out. I reveal the biggest revelation of my life and it is about owning your home.

Real estate is a high-risk investment (because it's the biggest purchase most people make), but also it comes with greater opportunity to make money because you can buy it with other people's money (i.e. the bank's money). As long as you can afford the mortgage payments, you can pay for just 20% of the value of the home, and benefit from the appreciation of 100% of the value of the home. 

For those not mathematically inclined. Let's do a simple example.


If you invest $120,000 into the stock market and you get an 8% return, you will have $129,600 after 1 year. 

If you invest $120,000 into a downpayment on a home worth $600,000 and you get an 8% return, the home will be worth $648,000 after 1 year, but you still owe the bank the same amount, so now your $120,000 turns into $168,000.

You make $38,400 more because of the mortgage. This is a simplified example of the power of leverage. *taxes, interest, and transaction costs make it a bit more complicated, but the essence of the example holds true.


No other investment can take advantage of this kind of leverage. 

And to top it all off, in Canada, you don't pay any tax on the gains when the home is your principal residence (where you live). The same is not true for your stock market investments.

If You Can't Afford To Buy A House Today What Can You Do?

The average person living in a Big City, who cannot afford a house today, will not likely be able to afford a house next year or the year after. This is the reality, because of the rate at which housing prices are rising.

If real estate prices continue to grow at 8-9% a year, this means that the downpayment you think you need today will also grow by 8-9% a year.

Consider the example:


You want to buy a condo/townhouse/semi-detached home listed today for $600,000. That means you need $120,000 today for your down payment.

Let's say you have zero dollars today, if you save 10% of your income ($60,000), that's $6,000 saved. After 20 years you will save $275,000 with investment growth (@8%). But in 20 years, your required down payment will be $518,000. 

You went from being $120,000 short of buying a house to being $243,000 short, and 20 years have passed you by.


Seems hopeless.


Let's instead consider a different strategy where you save aggressively to try and catch up to the market growth.

If you save 20% of your $60,000 income, you can catch up to the real estate market in 18 years. Suddenly something that seemed hopeless is possible, even though it's still a long way out.

Saving 30% gets you there in 9 years. 40% gets you there in 6 years, and 50% gets you there in 4.5 years.


If you do something different than the average then you may have a chance. 

Saving $6,000 a Year and Saving $30,000 a Year is Crazy Different

No doubt.

Solution 1. If you are living on your own in a city like Toronto you are probably paying between $1,000 to $2,000 a month in rent. Cut that in half by sharing a space with a friend/significant other. That's between $6,000 to $12,000 in savings already. 

With this one change, you could go from a hopeless situation to being able to buy a home in 9-18 years.

Solution 2.  Cook at home more often and pack a breakfast and lunch to work. If you are eating out every meal, that could be $30+ a day after tax and tips. You could easily cut this down to under $10 a day if you cooked every meal, but if you eat out more occasionally (2-3 times a week), you may average $15 a day. That's about $6,000 saved a year.

Combine Solutions 1 and 2. You could be saving $12,000 to $18,000 more per year. These are the big changes that can really move the needle. And if you were able to save $6,000 a year before, you are now in the 30-40% savings zone.

You are on your way to home ownership in 6-9 years. 

If you get a raise from work or your significant other can make some money too, then you can pile additional savings into your investments and get there even sooner.


Another option that I don't really recommend but is completely feasible is to buy a home together with a good friend that you know you can live with. This can cut your downpayment requirement in half. There are a lot of potential complications with this method, I wouldn't recommend it because you or your friend might have to sell at an inopportune time.


Save Money Retire Early is written by Jon Lo, a barely 30 something optimist, and personal finance guy. I believe anyone can be rich or poor, it's what you save that makes the difference.

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