Podcast Episode 46: Josh Buys a House

In this episode we are stepping back from the deeply deeply technical, and getting into something that’s meaningful for many families in Canada today. We are delving into the current state of the housing market, and what a home purchase may mean for your family given recent changes in the interest rate landscape in Canada.

Episode Transcript

BARENAKED MONEY PODCAST: EPISODE 46

Josh Buys a House | The Lawnmower Hunt Begins

Announcer:
You’re about to get lucky with the Barenaked Money podcast, the show that gives you the naked truth about personal finance with your hosts, Josh Sheluk and Colin White, portfolio managers with WLWP Wealth Planners, iA Private Wealth.

Colin White:
Welcome everybody to the next episode of Barenaked Money. And I’m here with the one, the only, the magnificent: the Josh. Hey, Josh. How you doing?

Josh Sheluk:
I’m a little longer the weather, Colin, so fighting through today. But I’m excited. I’m excited to do this podcast with you.

Colin White:
There you go. No doubt you’re going to bring the heat, buddy, because this next topic is so near and dear to your heart, your soul, your brain. It’s been all consuming for you for, well, quite some time now. We’re going to talk about buying real estate, the home market, first-time home ownership, all that kind of stuff. So we’re going to talk about some of what’s going on out there. We’re going to talk about what the numbers actually mean. We’ll do some calculations for you and maybe give you some tips along the way to help you better plan or execute whatever plan it is you have. So Josh, where do you want us to start from?

Josh Sheluk:
Well, you said near and dear to a lot of things there including my wallet, my pocket book because, as you’re alluding to, I just bought a house. So I have some firsthand experience of how this crazy real estate market is affecting people.

Colin White:
So how does it make you feel, Josh?

Josh Sheluk:
A little apprehensive. A little apprehensive, a little bit like, “Did I do the right thing? Did I do it at the right time?” But as we’ve talked about on this podcast before, if it is a long-term decision and more so for lifestyle than for investment purposes, then maybe you shouldn’t worry too much about whether you bought at the peak or the trough or anywhere in between. So that’s kind of how I’m trying to look at it.

Colin White:
Well, I think it’s important to [inaudible 00:02:02] at start of this podcast because, again, the whole… This is talking about buying a place to live. It’s not talking about buying something that you hope to liquidate in the next 2, 3, 5 years now. You know? I’ve had conversations with clients, whether it be posted somewhere or they’re doing something for a two or three-year period trying to buy a house. And that’s risky. That’s… I’ve got all kinds of hair on it. But we’re going to be talking more about hair, about acquiring the place that you’re going to raise the family and what it takes to go through that exercise. So Josh, did you get involved in a bidding war?

Josh Sheluk:
So on the actual place that we purchased, no, there wasn’t a bidding war for that, fortunately. But we were involved in a couple, I would call them definitely a like a bidding world war just because of how many people were involved with that. Just for some context for everybody, I was looking for a place in the GTA, just a bit outside of Toronto, for a low-rise residential detached neighborhoods, just like you said, somewhere where you would raise a family. And the market here is definitely super hot. And so most of the places that we saw that were attractive had multiple bids on them. We were going in with sort of eyes wide open, trying to stay levelheaded. And so we didn’t get involved in too many bidding wars; ones that we knew were going to go way over our budget, way over our price range. But there were multiple houses where there were dozens, over a dozen, let’s say double digits bids on the places. Any of those places, they’re going to run up the price no matter what.

Colin White:
Well, I’m always reluctant to use GTA as an example of anything because, well, it’s this country onto itself, but my firsthand experience was there’s bidding wars going on in other parts of the country as well. So it’s just something to be aware of. And I think that the real estate organizations and the various incarnations are looking at this and trying to figure out what to do about it because it’s become such a thing. And I don’t know, Josh. Are you aware that they’ve made any conclusions or made any progress on maybe changing the way these run?

Josh Sheluk:
Well, I think what you’re referring to is, and we talked about this bit before, is the blind bidding process. So for anybody who’s bought a house or bid on a house before, they know the process. Hey, you throw in an offer, you can see that there are other offers, but you can’t see how much they are. So it’s not like an open auction where you know exactly what everybody else is bidding. You could be bidding against yourself in a lot of situations. And there’s been some scrutiny, some criticizing of that type of approach recently.

Josh Sheluk:
And from what I’ve seen, the sort of real estate agents boards have really pushed back and said, “Well, if you’re selling the house, you should be able to sell it however you want.” And then on the other hand, it seems to be some more government lobbyists are saying, “Well, we’re going to end this blind bidding thing because it’s in the buyer’s best interest or will help moderate the price increases.” And I don’t really know if that’s true or not. I was talking to a friend not too long ago and saying, “Is there any evidence that blind bidding drives prices up?” I don’t know. Have you heard anything?

Colin White:
No, I haven’t. But I just think for me, my mind always goes laterally. I’m thinking, “Well, what if the stock market worked on a blind bidding process?” That probably wouldn’t be all that palatable to people. So on the premise of active price discovery, which I think is in the best interest of all market participants, the blind bidding process probably obvious gets that. And I can see how the real estate agents would come down on the sign in favor of it because, well, their client is the one who’s selling the house and they get paid a commission based on that. So the bigger, the better.

Colin White:
But no, I think the… And again, it is not a fair comparison perhaps, but price discovery’s important in an asset class, and especially, I think, now that this particular asset class has gotten so frothy, that accurate price discovery. Yeah. That’s probably something that the regulators will eventually get involved in if this persists long enough. I mean, the thing about bureaucracy is it takes them a while to make changes and consult all the stakeholders and not mess it up in some unintended way. So there’s those aspects of things as well.

Josh Sheluk:
Yeah. When I was talking about this with [James 00:06:29], James was the guy we were having a beer together about it, and he said, and I guess this is, this is a good point, “More transparency is rarely a bad thing when it comes to financial markets in general.” So yeah, I guess it would be interesting to see how that would actually change things. It would be a great sort of case study on the bidding process and then to see what that does. But I did have one example firsthand when I was going through this process. [Heather 00:06:57] and I had offered on a place, and we thought that we were actually competitive on this one. And yeah, it was funny because some, you’re like, “Oh, this would be a great place,” and you maybe put it offer in, but you know you’re not going to get it.

Josh Sheluk:
But this one, we thought we were actively competitive on it. And there were three offers initially, but they narrowed it down to two of the two most competitive offers, one of which was ours. And so we ended up staying pat at our price because we thought it was a fair price. And the winning offer was $130,000 more than we put in. So that tells you where the issues can lie with the blind bidding process, is they effectively paid $130,000 more than they needed to pay to get this place. And I’m sure the seller was really happy.

Colin White:
Yeah. As were the real estate agents. No, I think, like anything else, stress brings out new things in the system that maybe weren’t all that apparent before. Little inefficiencies become bigger issues. So I think it’s the kind of thing that you’re going to see get ironed out a little bit over the coming months and couple years. But, Josh, in your estimation has the market slowed down?

Josh Sheluk:
It’s hard for me to say. Just anecdotally and from my firsthand experience, I would say yes. So just to give everybody a bit more perspective on what my process was, and when we were looking for places, we started in around September, October, 2021. And we’re patient all the way through. Fortunately, we weren’t under the gun or under any time constraints or anything like that. And we ended up finally agreeing to buy a place in April of 2022. So it was about, let’s call it, a seven-month process. So it was lengthy and we saw quite a few places along the way.

Josh Sheluk:
Towards the end, you could kind of feel like maybe there weren’t quite as many interested parties. The pricing seemed to be a little bit different. Whereas early on, it was very much about, “Well, we’re going to list the place on a Wednesday. We’ll show it all the way through the weekend. And then we’ll take offers on the following Tuesday, and you’ll have this massive bidding war, and then we’ll accept whatever the best offer is.”

Josh Sheluk:
We started to see a little bit fewer offers on places or that the house that we actually bought, as I said, we were the only offer on it. So there wasn’t a bidding war at all. So again, firsthand, anecdotally, it seemed like it was cooling off a bit. And I think a big part of that is interest rates started to come up quite substantially. So you had people kind of rushing in sort of February, try to get in, trying to lock their mortgage in before interest rates increased, which I think was a big factor in maybe driving prices up early this year, and then a bit of a slow down after that fact.

Colin White:
Well, it was interesting. When people push forward their demand, they typically are willing to pay more. So part and parcel if they may have ended up in a bidding more that they didn’t need to be in and ended up paying effectively more for the property that might have been more than the offset from the interest rate.

Colin White:
So it’s those kinds of things are always difficult to figure out what the right thing was to do. But interest rates have moved, Josh, but they’re still not… I think we’re just coming off emergency lows is basically what we’re coming off of. We’re not… I don’t think historically we could say that the current rates being quoted are egregious or high or even average really, but they have moved and that has been a material difference in the affordability housing. See as how you were in the game for seven months, you have a sense of how the interest rates changed and what that would’ve done to your… Or wait. Am I going to trigger you, Josh? Is this going to cause you to get really upset or something? Or are you willing to share this trauma?

Josh Sheluk:
No, I’ll share the trauma. I’ll share the trauma because it’s financial trauma. It’s instructive for everybody. So yeah, we initially we got a preapproved for a mortgage when we were first starting to look in September, October of 2021. And the rates at the time, mostly we were focused on getting a 5-year fixed rate. The rates at the time were around the 2.2% range. And there were some rumors maybe we could get something as low as 2%. Somewhere around there would be awesome, but I think realistically we were probably looking at about 2.2% in September of 2021.

Josh Sheluk:
Fast forward seven months to April after we purchased the place. And the quote that we were provided was for about 3.3%. So we’ve gone up more than a 1%. And you’re right. Still not high from historical standards, but I crunched some numbers before the podcast just to show how this could affect payments that people have. So going from a 2.2% to a 3.3% fixed over that, call it, six month or so period of time, on a $250,000 mortgage, your monthly payments would go up by about $150 bucks a month. Okay. Maybe tight, but maybe not a deal breaker. On a $500,000 mortgage, you’re looking at closer to $300 per month. And on a million dollar mortgage, which certainly isn’t out of the realm of possibility for somebody looking in the GTA, you’re looking at closer to a $550 increase just from that 1.1% interest rate increase over that six month period of time.

Josh Sheluk:
And I don’t know if we’re going to get 3.3%. We haven’t locked in our mortgage yet. So we could very well be looking at something higher than that because interest rates have continued to come up over the past few weeks. So when you’re talking about $300, $400, $500 per month more in expenses, if you’ve previously bid a little bit tight, that could put you over the edge. And that is, I think, the big concern that’s out there just with not only real estate but with finances in general. And as we both know, the debt levels here in our country is extremely high, higher than it was in the US, for example, at any point during their financial crisis. And that’s got to at least lead to a little bit of worry.

Colin White:
Well, you’re looking at a 10% increase in mortgage payment, which mortgage payments are a bigger part of most people’s budgets. So that is a significant increase. And it’s also a time when you’re making a whole bunch of decisions in a row. You know? The bank has pre-qualified you for a number and you’ve been in a competitive marketplace and you’re trying to go to the edge of that. And you have to buy a lawn mower, and you got to buy drapes, and you got to buy furniture. And then, “Oh, well I got to paint this room.” So the tighter everything gets, it all adds up in a hurry.

Colin White:
So again, just be aware of what these changes in interest rates are going to do to your monthly. And you may have to make some hard decisions that you just can’t afford to do and what you thought you were going to do. And always leave room for lawn mowers because you’re going to need stuff like that. You can’t move into a house and expect that there’s going to be no expenses as you move in. I can’t imagine a situation where that would ever be the case.

Josh Sheluk:
Yeah.

Colin White:
Yeah. Yeah.

Josh Sheluk:
And I do need a lawn mower. I do need a lawn mower.

Colin White:
Just putting that out there. If anybody has a lawnmower to offer Josh, send us a note.

Josh Sheluk:
Yeah.

Colin White:
Well, listen, Josh. The other thing that I guess we can comment on here is there’s a lot of work being done by a lot of different organizations to make housing more affordable. And so there’s some hope that housing’s going to become more affordable. That might not be true.

Josh Sheluk:
Well, we were going to do a podcast on the federal budget, but we decided against that because we would just be talking about a bunch of poor housing policy. So here we are.

Colin White:
And to put a bit more light on Josh’s a proclamation there, the problem with making housing more affordable is that the government is seeking to basically increase demand. They’re trying to make it easier for people to buy houses. So basic economic theory, prices are established based on supply and demand. And if there’s a shortage of supply, you can’t make that better by increasing demand. That’s not going to work.

Colin White:
So for those who are sitting back thinking that all of these wonderful policy announcements are going to cure this problem or make it easier, I think you might be a little bit optimistic, and until we can see our way clear to make it a simpler task to build housing, and I’m not talking about subsidizing and actually removing the barriers to building houses, that this could persist. So I don’t think that we’re one government policy away or one announcement away from all of a sudden housing being part of the Canadian dream again. I think we’re likely to have some version of this tightness persist for a period of time, unless Josh disagrees with me. But he’s not [crosstalk 00:15:57] a lot.

Josh Sheluk:
Well, it’s interesting because I think there’s been a lot of the housing cost and price increases blamed on supply or lack of supply. And we’ve seen some research from our trusted BCA research that suggests that a big part of the housing price increases have actually been driven by low interest rates. And that makes total sense because we’re going through the mortgage numbers here. And as mortgages get cheaper, as your interest rates get cheaper, then you can afford a bigger house and vice versa.

Josh Sheluk:
So it’s interesting because right now you have all this new policy coming out on the housing front that is, like you said, they’re effectively giving some handouts or bonuses or making it easier for people to find money to put on their down payment, which it just increases demand, which in theory just increases the price. But at the same time, they’re increasing interest rates. And increasing interest rates might have the complete opposite effect. So I think we’re a couple years away from the government claiming that all of their wonderful policies have had a tremendous effect on it when in reality, maybe just the fact that interest rates have been going up is going to abate this rise in house prices.

Colin White:
Well, in defense of the governments, we’re going to blame them if it goes the wrong way even if they’re not their doing. So I guess they get to get credit for things that aren’t their doing. So I guess that’s just part of the trade off. And we have to have the same government in play two years from now as we do today. But no, I just wanted to maybe manage expectations or give a comment on what these forces are telling us over the next little bit. But again, this, to Josh’s point, interest rates are going to drive the availability money, which is going to absolutely influence the highest the markets spend. But all that counts right now is Josh has a place. That’s all that really counts. So congratulations, Josh, and good luck when the lawnmower hunt.

Josh Sheluk:
Well, the lovely thing about bidding for a place these days is you have to go in without any conditions. So I don’t have a place yet. If I don’t get a mortgage, I might be homeless. So that’s something to look forward to.

Colin White:
Hey, so we could have a podcast from homelessness next. All right. Fair enough. We do feature our own personal lives a little bit in this podcast. So maybe that’ll be a thing next.

Josh Sheluk:
I can always sleep at the office.

Colin White:
We appreciate that about you, Josh. Thanks everybody for tuning in. As always, if you have any suggestions for us, we’d love to hear it. And if you find this or any of the other podcasts useful, please forward them around to your friends and neighbors and we’ll take questions from those people as well.

Announcer:
This information has been prepared by y White LeBlanc Wealth Planners, who is a portfolio manager for iA Private Wealth, Inc. Opinions expressed in this podcast are those of the portfolio manager only, and do not necessarily reflect those of iA Private Wealth, Inc. iA Private Wealth, Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth, Inc. operates.

Colin White:
We’ve noticed something. It seems there are a lot of people who would rather try to figure out their lives with an online calculator than air your finances to a human. Stop doing that. You need to talk to someone who can help direct you, tell you where to start with what you’ve got to make the biggest impact on your future. You can’t figure that out at doihaveenoughcash.com, but you can figure it out by chatting with us. Call us. It’ll be okay. You’ll see.

Announcer:
The content of this presentation including facts, views, opinions, recommendations, descriptions of, or references to products or securities is not to be used or construed as investment advice, as an offer to sell, or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavor to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. This should not be construed to be legal or tax advice as every client’s situation is different.

Announcer:
This podcast has been prepared for information purposes only. The tax information provided in this podcast is general in nature, and each client should consult with their own tax advisor, accountant, and lawyer before pursuing any strategy described herein as each client’s individual’s circumstances are unique. We’ve endeavored to ensure the accuracy of the information provided at the time that it was written. However, should the information in this podcast be incorrect or incomplete, or should the law or its interpretation change after the date of this document, the advice provided may be incorrect or inappropriate. There should be no expectation that the information will be updated, supplemented, or revised, whether as a result of new information, changing circumstances, future events, or otherwise.

Announcer:
We are not responsible for errors contained in this podcast or to anyone who relies on the information contained in this podcast. Please consult your own legal and tax advisor.