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The Benefits of Inflation

When you were growing up and learning about money and watching the news on TV, I am sure one of the many things you saw was the report on inflation. It has always been a word that is spoken with fear because, in its bare essence, it means your money is worth less tomorrow than it is today.

You go out and work hard to earn a paycheck knowing that if you don’t get good returns from your investments, you are losing money just by having your money sit. Understood. It is a scary thought, but maybe, in these tough real estate and economic times, inflation may not be the worst thing to happen to you.

Historically, inflation has averaged 3.5% to 4% per year. That means that $1 today is worth about $0.96 next year. That also means that over a 20 year period, the stuff you buy today will cost about twice as many dollars in 20 years. Is paying more for “stuff” a good thing or a bad thing? Well, from a quick thought, it usually isn’t good, but here is how inflation can work for you…in your biggest investment: Your house.

An Example

Let’s use a hypothetical situation. Today, you pay $200,000 for a house that is 2000 square feet. Not bad. It’s a nice house to raise your family. You get a mortgage for $160,000 and you pay it down.

Well, as you know, if you fix your rate, your mortgage will ALWAYS stay the same, right? The mortgage is calculated based on having the payment stay the same until the house is paid off. So if your mortgage is $1000 per month today, then 20 years from now, it is still $1000 per month.

But what happened with your income? Well, as we said above, as the cost to buy and produce things goes up, so does your income because as a responsible worker and member of society, you are going to be paid an income to help you live in that economy with the costs of that economy. So over time, your income SHOULD increase with inflation.

So today, let’s say you were making $50K per year…in 20 years, with 3.5% inflation, your $50K income is a shade under $100K per year. Yes, most of the stuff you buy has also doubled but your BIGGEST expense, your house, has stayed at $1000 per month. So essentially, your $1000 payment today accounts for 24% of your income but in 20 years, it will only be 12% of your income!

It doesn’t stop there…Remember how the cost to buy stuff went up with inflation? Well, the same goes with real estate. If the cost to buy wood and vinyl siding and to pay the workers to build your same house has doubled, your house has doubled in value as well. Think about it…if it could cost $200K to buy your house in 20 years but the cost to build your house would be $400K, because of inflation, why would you EVER build? Clearly, you would always buy, so that is why the price of your house will go up with the price of goods and labor. So not only has your mortgage stayed the same, but your house value has also gone up with inflation! You have won both ways!

Inflation, Steady and Consistent, Can Reap You Major Profits.

Over the past four years, pretty much every country in the world has tried to stave off a massive depression by having their governments pump money into the economy.  I won’t get too detailed, but this causes inflation because with more money in the economy, it is easier to borrow money and therefore easier to spend it and therefore prices go up because more people have more money they are willing to spend. They are going to demand more and more goods.

So why can this be a good thing!?! Well, think about our example about your house. All of these countries have taken on debt (mortgage) that some have 30 year mortgages (gov’t notes) on and they have to pay them back at a set interest rate.  Yes, interest rates go up and down, but the rate will ALWAYS be what the government created the debt at and as of today, the most stable economy in the world, the U.S., is borrowing money at the rate of 1.5% for 10 years! That’s insanely low.

There is expected to be above average inflation for the next 5-10 years and this will be a good thing for the countries because now they will have their Gross Domestic Product (their income) go up with inflation but their debt will have stayed the same.

They are going to use inflated money down the road to pay for the fixed debt today. So yes, this debt is NOT a good thing, in general, but as long as these countries come to their senses and start to reign back spending and balance their budgets, time will be on their side and they can bring their debt levels back to normal.

As you can see, inflation isn’t always fun because the stuff you love buying goes up in price, but if you’re a steady spender and can stay the course, you will make a lot of money. Just like our countries around the world.

About the Author: Paul Gabrail co-founded Select Investment Group, a real estate investment firm that owns and manages 800 rental unit properties and $60 million in assets. He’s also a partner at MGO, a private wealth management firm with more than $400 million in managed assets.  For more articles and thoughts like this, follow Paul on Twitter @capmanifesto, subscribe to his RSS feed or visit his blog thecapitalistmanifesto.com.

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About the author: This is a guest post. You can read more about the author in the biography above.

{ 43 comments… add one }
  • Beth July 4, 2012, 10:32 am

    An interesting example, but this article is one-sided and don’t look at the big picture. I have to wonder how good the ROI on home ownership actually is when you factor in mortgage interest, insurance, moving costs, maintenance, renovations, taxes, etc. All of these costs go up over time, not to mention the effects of housing bubbles.

    Moreover, unless you lock in the mortgage rate for the life of your mortgage, your mortgage payment is going to go up too! Sorry, but I don’t see these historically low interest rates continuing for the next five years let alone 20 years.

    I would have liked to see an article that was more balanced rather than marketing collateral.

  • SST July 4, 2012, 11:18 am

    Weird.
    My calendar says July 4th but according to this article it is April 1st!

    People will believe anything, I guess.

  • travellingone July 4, 2012, 12:19 pm

    “So today, let’s say you were making $50K per year…in 20 years, with 3.5% inflation, your $50K income is a shade under $100K per year.”

    – This comment is astounding that is being put on this blog, that has always seems to be very conservative in nature and not getting into the nonsense propaganda that FI’s push.

    Most people do not get a 3.5% increase in pay, and fall in line with inflation rates as part of their annual reviews. The comment infers that if you are in a $50k per year position and remain status quo that in 20 years you will be around $100k; that is not accurate. What is accurate, is that with improving skill set, changing jobs, and moving into higher paying positions, yes you can improve in 20 years to that dollar amount, but not if you stay status quo.

    Reality is that if you do not work towards improving your own income position, then you will have less money to spend on the same goods as time passes. Even with working on improving your own skills, there is no guarantee, hence be conscious about your spending habits, and always evaluate wants /needs.

    I don’t typically post even though enjoy these articles, this one really irked me.

  • bob July 4, 2012, 1:48 pm

    Oh, man. What a load of nonsense and poorly thought out assumptions. Given that you own an investment firm and presumably know better, it is bordering on dishonest rather than naive . . .

    As if anyone keeps the same mortgage rate for 20 years.

    As if anyone actually receives pay raises that consistently match inflation.

    As if anyone’s take-home income remains identical even when receiving pay raises — tax rates don’t change, etc.

    As if anyone spends $200000 for a 2000 square foot house.

    As if your house has zero depreciation costs.

    As if your house costs nothing to maintain.

    Puh-leeeze.

  • Paul Gabrail July 4, 2012, 2:11 pm

    Beth, I appreciate your comments. As the writer of this article, I wanted to respond to everyone. You are right, those costs DO go up but as I am sure you have seen in your mortgage or other mortgages, the largest part of any ownership of a home is the mortgage cost. The principal and interest is the vast majority, so even though you are correct that the other costs do go up, I am trying to compare apples to apples by comparing the mortgage cost today to the same house being purchase 20-30 years down the road and your income down the road.

    Please feel free to respond as I enjoy a lively debate.

  • Paul Gabrail July 4, 2012, 2:11 pm

    SST, I appreciate your humorous response but can you please tell me which points you think were comparable to April Fool’s Day comments? Thanks!

  • Paul Gabrail July 4, 2012, 2:13 pm

    Travellingone,

    If you check out income levels historically, you will see that inflation and income levels tend to be pretty close. Please reference websites like Bureau of Labor Statistics or http://www.Economagic.com that just pulls from sites like this.

    I know you may know of some situations where people do NOT get those kind of raises, but over time, incomes will go up with inflation.

    You are correct that incomes will not go up over the long term at 3.5% (20-30 years), but in those cases, I am sure you will have seen a much tamer inflation rate.

    Paul

  • Paul Gabrail July 4, 2012, 2:15 pm

    Bob,

    The point of my article was for people who are going to be conservative and NOT look at their houses as checking accounts. It involves the person who wants to live in their home and own it for a long period of time. Yes, you are right, those may be fewer since the average person lives in a home for 7 years, but that’s part of hte culture that caused our problems today. Jumping and skipping around. I am 31 years of age and I live in a home that I intend to live in for 20-30 years and I took out a 30 year mortgage and I fixed it (because that’s what smart people do) and I am going to wait it out.

    I am sorry you think I am dishonest, but when someone comes at you with facts, responding with insults is probably not the best way to engage a lively and meaningful conversation. If you wish to proceed with fact as opposed to emotion, I’d love to continue the conversation. Please email me directly or respond on here. paul@selectinvestmentgroup.com

  • krantcents July 4, 2012, 2:18 pm

    You can only benefit from inflation if you buy assets that increase in value. Buying cars that increase in price, but depreciate relatively quickly will affect you negatively. Buying houses at this time will guarantee you will have assets that appreciate along or exceed inflation in the future.

  • Paul Gabrail July 4, 2012, 2:20 pm

    Krantcents,

    I think that is an accurate comment. Remember, everything is about how much you pay for an asset. You can make money and lose money in good and bad times.

  • Lyne July 4, 2012, 2:31 pm

    Whoa… Paul, please note that you are guest writing on a Canadian blog and that there is no such thing as a 30 year FIXED mortgage in Canada… whether people are “smart” or not.

  • anotherreadersinceday1 July 4, 2012, 2:53 pm

    hmm, most people in Canada will get their mortgage rate locked for 5 years only, therefore the rate will be adjusted again in 5 years to match whatever the market rate then — chances are mortgage cost will be much higher than using current rate for 30 years as fixed cost .

  • Beth July 4, 2012, 2:56 pm

    @Lyne And in another month or so, they’ll be no such thing as a 30 year mortgage at all :) I think what put me — and perhaps others — off about this article was that it’s American and we’re a Canadian audience. Different regulations, different costs of living, etc.

    @Paul, thanks for the response. “Buy and hold” may make sense for Americans who have already seen housing prices bottom out and can afford to buy a home that will last them for 20-30 years. In Canada, more and more people are struggling to get into the market in the first place — and experts are warning of a bubble burst and not to take on too much debt.

    For someone like me for whom $200K buys a starter home (a small condo), it doesn’t seem to make sense to buy a place knowing I won’t live in it long-term and could be selling it when prices are lower than they are now.

    Or am I missing something? I’m open to ideas!

  • JM July 4, 2012, 3:10 pm

    I think article does have a good point about salary increases and keeping the same mortgage costs. If you’re getting raises and saving that income and don’t increase the cost and size of your house, it’s always a good financial move.

  • SST July 4, 2012, 7:50 pm

    @Paul (#6): “…please tell me which points you think were comparable to April Fool’s Day comments?”

    Sorry, Paul, I’ve all but given up debating with economists et al. You believe the “facts” and figures you need in order to sell your services, and I’ll believe the true facts and figures (eg. inflation and wages).

    Perhaps if you gave a handful of links to studies, reports, essays, independent reviews, etc. which support your claim that inflation can be beneficial to those outside the financial and/or governmental arenas, your story might carry more credence.

    Thanks.

  • Paul Gabrail July 4, 2012, 8:14 pm

    Lyne, I am aware of that and I apologize for mentioning the 30 year mortgage. You are right, a lot of countries are different. Japan even has 100 year mortgages.

  • Paul Gabrail July 4, 2012, 8:17 pm

    @Beth, I think you are right. I know it doesn’t sound attractive, but I am actually a big believer in renting. I think it is actually a very economical option and in a lot of markets (not all) you can rent for less than purchasing and you will not be out a lot of money. My blog has a video about renting being the new American dream. I know this is a site in Canada, but the same principles apply.

    http://thecapitalistmanifesto.com/blog/2011/7/8/should-i-rent-or-buy-my-home.html

  • Paul Gabrail July 4, 2012, 8:19 pm

    @JM – That’s exactly right. Upgrading every time you have a raise is not the best strategy but it is one commonly used by many consumers. Just keep saving and paying down your mortgage and you will be sitting pretty.

  • Paul Gabrail July 4, 2012, 8:22 pm

    @SST – well if you read my blog, I think you would see that I go against the grain with many financiers and economists. I think many DO give self-serving advice, and if you look at my advice above and in my blog, it would take money out of MY pocket because I would be managing less for my clients.

    I know it can be frustrating to debate people, as I have seen on this site, but just throwing your arms up won’t serve anyone any good. Having a healthy cynicism with facts to back yourself up is the best way to get people to listen to you. As you can see from my blog and my information above, I am a big believer in facts.

    Years ago I believed owning a home was the best way to go. I now do not. Years ago, I didn’t like inflation. Now when I see the benefits that it can provide many people, I don’t take it as the death spiral that everyone thinks it is. Just like most things, inflation is great in moderation.

    I would love to have a continued discussion and not just cheap jabs thrown against my career and my thoughts which are clearly backed by fact.

  • Bob July 4, 2012, 8:27 pm

    ” I live in a home that I intend to live in for 20-30 years and I took out a 30 year mortgage and I fixed it (because that’s what smart people do) and I am going to wait it out.”

    That’s what smart people do? Facts? Historically speaking, a 30-year fixed mortgage (which is not even available in Canada) costs WAY more than sequential 5-year terms. Or sequential 1-year terms. Or variable rates.

    You want to debate facts? Then present some with references.

  • Bob July 4, 2012, 8:34 pm

    In addition, it looks like you are setting up a straw man argument. Nobody denies that a little bit of inflation is a good thing. Nobody.

    In fact, in Canada our monetary policy explicitly targets a 2% inflation rate (unlike the US policy which has no targets).

    I’m also confused why you would use a house (depreciating asset) as your case-study when, as you later admit, you no longer believe that home ownership “is the way to go”.

    The “facts” you claim to present are really just calculations based on faulty assumptions.

  • Paul Gabrail July 4, 2012, 8:43 pm

    Bob: The current 30 year mortgage average is definitely higher, but as you know, when you are borrowing in the 3% range on either mortgage, then it is NOT a good financial decision to pay down as quick as possible. You may want to pay down your mortgage faster for personal or emotional reasons, but on a financial basis, it is NOT the smart thing to do. That is a fact. You can invest money on a 20-30 year basis and get a much larger return than 3%. Fact. Done.

    As for house being a depreciating asset? I am sorry. I have no time for gibberish. I will just let you look up:

    http://cuer.sauder.ubc.ca/cma/index.html#

    Example of Montreal: http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-montreal.pdf

    If you read that link showing the major areas of Canada and their historical nominal AND real house values, you will realize how childish and ridiculous you are being. Fact. Done. Depreciation means an asset LOSES value, which is NOT what is happening to Canadian real estate values.

  • SST July 4, 2012, 11:01 pm

    @Paul: “…inflation is great in moderation.”

    I rest my case for the absolutely absurd.

    Any of your peers (or any other person for that matter) agree with you on this matter? If so, is there literature etc. to which you can direct us so we too may become pro-inflation?

    p.s. — thanks for pushing your blog in a most unobtrusive manner. Great when you get free advertising, isn’t it?

    p.p.s. — an open request to the Lord of the Manor, FT: please, no more articles from this person.

  • Kevin July 5, 2012, 9:44 am

    I, for one, enjoy a lively debate, and thanks to Paul for replying. Whether you agree with his point or not, it’s important to listen to opposing views. If you only want one side of the story, go listen to Fox.

  • SST July 5, 2012, 11:56 am

    @Kevin: Sure, listen to the opposing view, but if that view carries zero merit then carry on. For a “professional” economist to tout inflation as being a good thing — albeit in only ONE sector (?!) — reveals his limited understanding of the matter.

  • Goldberg July 5, 2012, 1:20 pm

    Poor writing skills.

    Confusing ideas such as “smart people get 30-yr fixed mortgages” and later smart people rent (post #19).

    Fact is inflation is a hidden tax paid by the middle class. Rather than raise taxes or decrease social spending… and lose an election. From your example, if inflation raise house price, that 200k to 400k is still worth only 200k in real terms (purchasing power). Which is what matters. Demographics (i.e. demand) is what can produce real profit.

    If you are in the middle class, overall, you will get burn by inflation. Every time.

    As Bob stated in post #21, moderate inflation is necessary for the economy. No one is debating against that.

    But as a middle-class person (upper, lower, whatever), you should not like inflation or huge gov deficits. Both are signs of bad governance.

  • JP July 6, 2012, 1:00 am

    This post is an embarrassment to be included on a personal finance blog of normally high quality. It concludes by saying inflation isn’t so bad because debtors (Countries) are able to pay back fixed loans with less valuable money in the future. We now find ourselves in the position where savers are forced to endure negative real rates of return on government bonds because of this “Good” inflation. What a joke.

  • Beth July 6, 2012, 9:58 am

    @Goldberg, most executives and subject matter experts write exactly like they talk — which is why so many have very good editors, ghost writers and communications experts to help them with published work.

    I used to work in a department where the writers “fine tuned” everything that a VIP put out in print. They’re experts on their topics, but we’re experts on how to communicate. How well you express your ideas affects your credibility. Simple as that.

  • Renee July 7, 2012, 12:48 am

    This is one reason why my husband and I recently choose to buy our first house even though everyone around us is saying that we are buying at the top of the bubble.

    We don’t live in Toronto or Vancouver first of all. Our housing here has gone up but not as drastically as most areas.

    We had been renting for the past 7 years. In 5 years our rent increased from $750 a month to $900 a month and even with rent controls the landlords could increase it to $1200 a month if they wanted.

    Now we have a mortgage for $950 a month that we at least know will be stable until our term is up. Our interest only comes to about $450 a month. Yes there may be extra costs to owning a home but inflation was really starting to have a big effect on our rent increases.

  • SST July 7, 2012, 12:12 pm

    @Renee: “Yes there may be extra costs to owning a home but inflation was really starting to have a big effect on our rent increases.”

    Yes, there WILL be extra costs to owning your house.

    You are already now having to pay $50 more a month plus property tax, perhaps $2,000 a year?
    Your cost to try to beat inflation just rose ~18% a year.

    Inflation will have just a big of an effect on those costs as it did on your previous rent.

  • Paul Gabrail July 7, 2012, 12:21 pm

    Renee, you are correct. As inflation rises, your rent will go up at similar leveks but on a mortgage, your principal and interest stays the same.

    I dont know of any mortgages that go up with inflation. Remember a mortgage is principal and interest. You can lump insurance and taxes with your mortgage but they are not your mortgage payment.

  • SST July 7, 2012, 1:15 pm

    @Paul: “As inflation rises, your rent will go up at similar leveks but on a mortgage, your principal and interest stays the same. I dont know of any mortgages that go up with inflation.”

    FALSE.

    Why? You forget that the landlord also (maybe) holds a mortgage on the rental property. Thus, if his mortgage payments do not rise with inflation then he has no need to raise rents except to cover the rise in costs in other areas (eg. maintenance, repairs, etc.).

    At any rate, according to research on the matter, the cost of a mortgage has averaged 3% higher per year over the last 20+ years versus the cost of rent — all inflation accounted.

    No wonder the financial industry is a complete farce (and fraud) with representatives such as this.

  • Paul Gabrail July 7, 2012, 1:40 pm

    SST: as a landlord my goal is to raise rents as much as possible. So even though my mortgage stays the same I am still in this to make as much as I can.

    This has been bad for those on here who have become disrespectful. Please do not waste the time of those trying to learn.

  • SST July 7, 2012, 1:53 pm

    Thanks, Paul, for stating that increases in rent are a function of profit seeking and NOT of inflation.

    Yes, this thread has become worse (bad right from the start).
    Please refrain from posting garbage “information” for those trying to learn.

  • Bob July 8, 2012, 10:46 pm

    Bob: The current 30 year mortgage average is definitely higher, but as you know, when you are borrowing in the 3% range on either mortgage, then it is NOT a good financial decision to pay down as quick as possible. You may want to pay down your mortgage faster for personal or emotional reasons, but on a financial basis, it is NOT the smart thing to do. That is a fact. You can invest money on a 20-30 year basis and get a much larger return than 3%. Fact. Done.

    Uhhh. Again, nonsense. A mortgage at 3% is identical to a GUARANTEED AFTER TAX investment of . . . wait for it . . . 3%. But to get an identical return to this on the market, which is PRE-TAX, you must get a return of 5% or more. Show me where you can get a guaranteed investment at 5% today, and I’ll show you a snake oil salesman.

  • SST July 9, 2012, 4:43 am

    Oh, Bob!
    Don’t you know by now that if you put all your money into the stock market for 20-30 years you’ll reap a GUARANTEED 10% yearly average return!

    At least that’s what the text books say.

    :)

  • Bob July 9, 2012, 10:14 am

    This is my last post, because this is really a waste of time.

    Example of Montreal: http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-montreal.pdf

    If you read that link showing the major areas of Canada and their historical nominal AND real house values, you will realize how childish and ridiculous you are being. Fact. Done. Depreciation means an asset LOSES value, which is NOT what is happening to Canadian real estate values.

    Paul: this response cracks me up. In the chart you provided, look at the 20 year period from 1988 to 2008. Essentially no appreciation in REAL Value to the home at all, plus a gut-wrenching period in between in which you are stuck with negative equity. And this, of course, assumes that over that 20-year period your neighbourhood remains jut as desirable and that your home hasn’t aged by 20-years. Again, playing with averages is ridiculous — you need to consider individual houses.

    Look at the chart from Edmonton:
    http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-edmonton.pdf

    From the peak in 1980, it took 25 years to creep back to the same level (again, REAL values), followed by a massive and ridiculous spike. Hardly a track record that demonstrates that housing is a reliably appreciating asset.

    Are you really so familiar with the Canadian Real Estate market to say that we are currently in a trough, not a peak. If so, you are decidedly against the grain when it comes to real estate observers, most of which are suggesting that most cities in Canada are dangerously close to a bubble.

    Look, once again, nobody in the world denies that a little bit of inflation is a good thing. But your case studies (real estate), mixed statements (“buy a house”, “no rent instead”), US-focussed details (30-year fixed mortgages), betray a lack of understanding of the situation in Canada.

  • Steve July 9, 2012, 10:26 am

    Hi Paul,

    Thanks for posting an article here. The fact it sparked a lively interaction means it was a good contribution.

    A couple honest tips for future articles. Most MDJ readers will pounce on anyone working in the real estate business, or anyone who is involved in financial services.

    That said, you need to be very careful with assumptions. The biggest mistake was the 30 year fixed rate mortgage which do not exist here. I’d say this little failing to do your homework set the tone for most readers responses.

    Also, most readers here tend to be dividend oriented investors, who typically don’t like real estate for investing. Regardless of who is right and who is wrong, be prepared for the mindset of your audience!

    Best of luck.

  • SST July 9, 2012, 11:49 am

    Steve — wrong assumption. Readers will not pounce on anyone simply because of their career choice. What they will pounce on is garbage information touted as being correct and/or valuable. Just so happens that a lot of that kind of material emerges from the financial sector.

    This was most definitely not a “good contribution”.
    See FT’s current thread for an example of that.

  • Steve July 10, 2012, 10:24 am

    @SST:

    If FT didn’t think it had any conversation value he wouldn’t have posted it.

    The point of the article was the relationship between fixed debt and inflation. This is a worthwhile topic to discuss. The author made some mistakes which pulled attention away from the purpose of the article.

    I’m glad you’re not representative of the typical reader here. While most pounce on the industries I previously mentioned, you pounce on just about anything it seems.

  • SST July 11, 2012, 3:31 am

    Sorry, I was unaware the purpose of this website was not information, but “conversation”. My mistake.
    I’ll attempt to be much more polite and “in line” from now on.

    I’m wholly glad Paul is not representative of the typical reader here.
    Perhaps he is representative of the typical financial “expert” there.

    I’ll be sure to pounce on that 25-year fixed mortgage ASAP.

    Good luck to anyone following this advice. :)

  • Bill February 2, 2014, 3:19 pm

    For the most part salaries do keep up with inflation and mortgage payments are fixed so mortgage payments as a percentage of income decline over time, leaving more money for the homeowner to invest or spend,

    As inflation rises, mortgage providers will demand higher rates but most salaried workers will also see their income also rise. Mortgage rates move up or down over time but most salary gains are usually maintained. House values also tend to keep up with inflation.

    For a significant portion of the last 10 years, housing has appreciated at a rate greater than interest costs, so that is also a factor leveraging homeowners’ equity.

    If you have a $500,000 house with a $400,000 mortgage at 3%, a 5% appreciation is going to put $13,000 in your pocket after paying interest.

    Of course this leverage can work in reverse if the appreciation is less than interest but given that there is a base level of rent one would have to pay regardless, housing is a pretty good leveraged investment for most middle class people.

  • SST February 3, 2014, 9:33 pm

    re: “…housing is a pretty good leveraged investment for most middle class people.”

    Facts tell a different story.

    In 1980 the median family income was ~$26,000; the average house price was ~$75,000 = 3x income.

    Currently the median family income is ~$80,000; the average house price is ~$400,000 = 5x income.

    (Even if the market does correct 10-20% as the banks and IMF predict, that’s still 4x the median income.)

    “If you have a $500,000 house with a $400,000 mortgage at 3%, a 5% appreciation…”

    In the above example, 1980-current, interest rates have done nothing but drop for those 30+ years, thus explaining part, or most of, the appreciation.
    House prices rose @~5%, interest rates declined @~5%.

    Thus, for the “middle class people” — that is the median income household — buying a house is not a good investment if they are to remain fiscally responsible. It becomes an even worse “leveraged investment” — up to 11x income or more — depending on region.

    Not only that, but on the average house a 20% non-insured downpayment is $80,000.
    With an average savings rate of ~4% (I’ll give ’em 5%), it would take the median household 20 years to save up a fiscally responsible downpayment. All the while prices creep higher…

    With mortgage rates on the rise, reasonable housing costs will continue to be out of the question for “most middle class people”.
    (And just watch the REIT yields when bonds/bills really get going!)

    Perhaps if every new homebuyer chose to live in Manitoba or the Maritime provinces, it might possibly make sense. Pretty sure the glory days and “easy money” are gone.

    (I used only ‘household’ data as ‘median single person income’ is even lower –$30,000 — thus there is no reason to continue the exercise. Understood that comparing ‘average’ and ‘median’ gives a somewhat false result, but you get the idea.)

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