If I have to listen to one more Canadian tell me that their home is, “The best investment I ever made,” I may lose my mi… well, let’s not be hyperbolic – I’ll probably just continue to internally shake my head at this statement.

Yes, in this age of ever-escalating Canadian home values the roof over your head has likely substantially increased in value since you bought it.  This does not make it a good investment for two reasons.

1) If you intend to continue living in the house you own for the foreseeable future your house is not an investment – it’s a shelter that you’ll need for the long-term.

2) Despite what your Realtor has told you there is very little chance our housing market will not realize a significant deflation at some point.  Even the experts calling for a soft landing claim 15-20% is reasonable.  If you look at our income-to-home price ratios across the country it becomes undeniable that this rise in home prices is based on a historical anomaly of sustained low interest rates and speculation on the fact home values will continue to increase.  The spread of rents vs home prices is another great indicator to look at.

Your Home Was a Great Purchase – NOT a Great Investment

How Home Equity Actually Works
If you got into the housing market before it started going up – awesome!  You got a great product at a decent price and you can now enjoy the fruits of that purchase.  You can build equity in the form of mortgage payments and hope that the demand for your house continues to increase.  However, if you never intend to sell the house does it matter if demand increases or not?  If downsizing and moving isn’t a part of your retirement plan then what does it matter what other houses go for?

As far as an investment goes, I’ll let this passage from a recent Rob Carrick article at the Globe and Mail illustrate the point for me:

Home-buying or investing – which will make you richer?

Gen Y, this could be the defining question of your financial life. Don’t make the mistake of passively accepting the line that housing is a great investment.

Houses are a lovely place to live and raise a family, and they’ve solidly appreciated in price over the past several years. But stocks, even after the mega-crash of five years ago, have been the better long-term investment.

National price data from the Canadian Real Estate Association shows an average annual gain of 5.4 per cent nationally from 2004 through 2013 for resale homes. The comparable average return from stocks was just under 8 per cent. If we go back 20 years, we get an 8.3 per cent gain from Canadian stocks and an increase of 4.5 per cent in the average national house price. Over 30 years, stocks made 8.5 per cent and houses 5.5 per cent.

Stocks, or at least the benchmark for the Canadian market win. Case closed.

Related: How Much Home Can I Afford?

Home Equity Only Builds If You Don’t Borrow It Back Again

Taking out a Home Equity Line of Credit (HELOC) in order to fulfill your HGTV-driven fantasies and putting a master chef-recommended kitchen in your house does not count as an investment!  Do not buy into this theory that investing $70,000 somehow adds $120,000 worth of value to your house.  I don’t care what the beautiful person that has their own show and says they work in construction says.  Study after study shows that most renovations do not add value to a house above what they cost.  In fact, if you can recoup even two-thirds of the cost in a valuation raise then it is considered above average from what I’ve read.  Once again, we also come back to a familiar point – the value of your house that features a kitchen worthy of a reality TV show is irrelevant if you don’t plan to sell it!

Taking out a loan to fund these “renovation investments” or to join the great quest to collect consumer goods means that even as you pay your mortgage you’re not actually paying down your debt.  You’re just moving debt from the mortgage column of your balance sheet to the HELOC column of your net worth – the number is still on the wrong side of the accounting ledger.  It’s not a huge deal right now as you can pay the interest on your loan by turning in last weekend’s empties, but as those interest rates inevitably rise people will be crippled, and we’ll all be treated to a raft of ridiculous media about how no one saw this coming etc.

Here’s a radical idea, if you want granite counter tops and you feel they will truly improve your standard of living (a good purchase – not a good investment) then save up the money until you can buy them outright.  Then move on to the next luxury good you want.

Related: Why Deflation and Falling Home Prices are a Big Deal

Meet Johnny and Jane – Average Canadian Gen Yers

More and more Canadians are at risk of seeing their net worth plummet if they continue to borrow based on the current value of their home, only to see that value evaporate.  Here’s an example of what I’m talking about:

Johnny and Jane are 29, have good jobs, and bought their house four years ago.  Their parents helped them with a down payment (which is good because with their student loan payments, car payments, credit card payments etc., they wouldn’t have been able to do it on their own) and are now so proud of the great upstanding homeowners that their children have grown up to be.  When they get together for family dinners they often talk about how housing prices are rising so rapidly around their neighbourhood and gee – who can afford these prices?  Thank God Johnny and Jane got in before it was too late.

When the happy couple signed their offer to purchase they were able to put down a 20% down payment on their $500,000 new home.  This resulted in a mortgage of $400,000.  These days similar houses on the same street are selling for $580,000.  After 48 months of mortgage payments the bank phones to tell Johnny and Jane that if they want to pay off some of that other nagging debt they have – plus a little more just to treat themselves (after all, they’ve been told they deserve it) – they can do so with a loan at a super low rate of interest.  The product the bank is promoting is called a HELOC and the reason it sounds cool is obviously because it is.  With the mortgage payments and the rise in value their house is now worth $580,000 and has a mortgage of $370,000.  This means they are eligible to take out a HELOC of about $94,000 (80% of the maximum loan-to-value ratio, minus the leftover mortgage).  There’s “no risk” because they have over $200,000 of equity in their house.

Johnny and Jane just have a few little things they want to hire someone to do around the house, plus those pesky credit cards need to be cleaned up once and for all (eventually they’ll get around to changing the spending habits that led to the balances in the first place).  Before they know it Johnny and Jane have some beautiful new cupboards, a kitchen island straight out of a magazine, and a new boat for those priceless summer long weekends.  Sure they have $80,000 or so on their HELOC, but the interest rate is so good and like the guy on TV said – “Money is cheap right now”, so why not enjoy success a little right?

Three years later Johnny and Jane still keep the HELOC around “in case of emergencies” and reason that there is no rush to pay it down, after all, it is a way lower interest rate than the ones on their credit cards that somehow have a balance again.  The housing market cooled because people from China decided that Canadian property values might stop going up soon, interest rates rose back to historically average levels, and people realize the longer they waited in this new housing market the cheaper houses will get.  With some of the new interest building on the HELOC loan, it’s now around $85,000, and while Johnny and Jane have made some progress paying down their mortgage that sits at $350,0000, houses in their neighbourhood are now selling around the $480,000 mark.  Johnny and Jane are now quick to tell everyone that it doesn’t really matter what the value of their house is since they’re going to live there forever and some guy on the internet said their house shouldn’t be considered an investment anyway.

Taking a step back from this plausible and quite likely scenario, Johnny and Jane now own an asset worth $480,000 (or so they believe), have a mortgage of $350,000 and a HELOC of $85.000.  This means they have roughly $45,000 worth of equity – or under half of their initial down payment!  And that’s after making seven years’ worth of mortgage payments.

My point here is not to say never buy a home or never use a HELOC, the main idea is that it is so easy to fool ourselves when it comes to thinking about debt, and how wealthy the “value” of our homes makes us feel.  If you’re using a HELOC to fund a true investment (such as in the Smith Manoeuvre) that’s a whole other conversation – leveraged investing can be a good idea if researched thoroughly and executed correctly – but the general use of HELOCs across Canada combined with the irrationally-viewed incentives driven by a housing bubble (either large or moderate depending on who you listen to) are convincing Canadians to do some pretty crazy things.  Don’t fall into thinking about home equity as an ATM, while at the same time telling yourself that your mortgage payment is basically an investment every month.  Ignore the noise and focus on the basics of personal finance – spend less than you make and invest the rest using easy-to-understand investment products.

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