118 – Buyer’s Remorse In Canadian Housing Market

Wayne Kay 00:04
The Canadian housing market. There’s a big topic. Are you having buyers’ remorse? What can you do about it? That’s our topic today on the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from all across Canada.

I’m Wayne Kay and we’re going to talk about buyer’s remorse. Is your house affordable? We’re going to talk about costs of renting versus your mortgages. Are the old ideas of homeownership being an investment still true?

We’re going to talk about that and more with my guest today, Matt Fader from Allan Marshall & Associates Licensed Insolvency Trustee in Nova Scotia with offices in Halifax and Dartmouth. Thanks for being here, Matt.

Matthew Fader 00:47
Thanks for having me, Wayne.

Wayne Kay 00:48
Well, what a big topic today, housing in Canada. It’s terrifying for so many people who have bought in the last many years and the costs. I mean, where do we even start with this topic?

Matthew Fader 01:02
Well, we’ll start with a disclaimer. By no means is this any kind of financial advice or forecasting. A lot of the things that I’ll talk about are just speculation on what’s going to happen. I sincerely hope that I’m wrong, but time will tell, right? Because the market’s nuts.

Wayne Kay 01:24
It is nuts. It’s right across the country. It’s nuts. Now we’re seeing some places that are starting to drop a bit and we’ve got the rates. All these people are going to be renewing and they can’t afford their homes. Now we’re seeing so many Canadians, they’re having a tough time and they’re stressed because maybe they’re paying 2%, 2.5%, and now they’re going to have to resign at 5 or 6%.

And you didn’t have money before so what do you do then?

Matthew Fader 01:53
Yes, and that’s a really critical issue that we’re going to run into as far as the market is concerned. What we saw trending with the housing markets when the pandemic hit and things were shutting down – people were worried about their jobs or their careers or even their lives. Nobody really expected, especially here, Nova Scotia, where I’m at, to see the housing market explode the way.

I had sold my condo about six months before the pandemic, and when it hit, I was like, oh, thank God, I’m glad I got out of this when I did. Not realizing that had I hung on for six months in the pandemic, I probably would have made an extra 70 grand.

So completely unpredictable and a really bizarre market where asking price almost became like a reserve on an auction. And people were going in and it was like, oh, if you want this house, you got to bid 20% or 30% above asking. And that’s just bananas, right?

Wayne Kay 03:03
But then fear takes over. Fear gets into people. They’re like, if I don’t get in now, it’s going to keep going and going and going, right? And we just saw this. People were buying their first house without even inspections. And the amount of money that they could cost by the house being a dud just terrifies me.

Matthew Fader 03:22
Oh yes. some of them, like you said, without inspection. So it’s like I’m buying an 80 year old home with electrical and probably arsenic pipes, if those things exist. You know what I mean – Like asbestos everywhere. It’s just, what have you gotten into as far as remediation costs?

So you have this giant mortgage on a house that you overpaid for potentially, and don’t get me wrong, Wayne, because old houses are great, because if you went out and you bought a new one, it was built in two weeks and it’s going to be falling apart in seven years.

Wayne Kay 04:01
Well, the big thing is, too, the banks. I’m not really happy with the banks. When I went and got my mortgage and what they told me I could spend, as opposed to me being a math money guy looking at it going, if I sign up with what you guys are saying and if I go buy a house that you’re suggesting, how am I going to eat?

But they didn’t care about that, so I’m like, no, and I spent half, thank goodness. But now people can’t. They have to spend a high amount of money. How do you figure out if your house is affordable or not?

Matthew Fader 04:38
Well, a lot of that does boil down to, say, doing sort of that detailed analysis of what money is coming into the household and where it is going. People, first time home buyers or things like that are coming into it, sometimes they make this very general assumption to say, oh, well, the mortgage is going to be cheaper than rent, so therefore I can afford it.

And you’re like, yes, but how do you heat that place? What’s the property tax value?nWhat repairs or maintenance need to be done to the house as far as upkeep? What are all these additional costs that are associated with homeownership that don’t factor down to somebody who’s renting? Because I’m renting right now. And if every window in this apartment breaks, I don’t have to fix them. That’s why I pay rent. These are somebody else’s windows. It is their responsibility to fix them.

If it was my responsibility to fix them, I’d be like, where’s that money going to come from? Because unless I’m actually very cautious and cognizant of what money is going in and where it’s going, and as a result of that, being able to have a bank account, a savings or tax free or whatever – it is that we can pop money into to cover for these types of expenses, unless I can do that, I’m in trouble. I’m forcing myself to fall back into credit, or I’m forcing myself in some ways to borrow, do whatever it is to make this all work.

And then that’s just a perpetuating cycle of saying, well, it’s now costing me more and more and more. And as you alluded to, what’s going to happen in five years time when these Covid mortgages come up for renewal? I entered into them at 2% when it was affordable.

Five years later, I’ve made very little headway on the principal because you haven’t. Because guess what? Paying 2% on a mortgage on a $600,000 house, you’re not going to make a whole lot of headway on that. When it comes up to renewal. If you owe $570,000 on it, even if you’ve knocked out $3,0000 and that renewal comes in at 5%, you’re underwater because you say, I can’t afford to have my mortgage rate double. And we’ve seen that.

One of the numbers that I don’t think is captured quite as well are the people who during the pandemic took advantage. They didn’t sell, they didn’t buy, but because the market was hot and property values were so high, they went in and they got HELOCs, which are home equity lines of credit, against this new purported equity, against the house.

So prior to the pandemic, hey, my house is worth $250,000. But then because of all of this rush and everything that came in, I could go into the bank and I could tell that, go to the bank and say, look, I could easily sell this house for $450,000. The bank says, great, we’ll pick that as our appraisal. We’re going to give you a line of credit of $100,000  or whatever it is, and you can use that to pay off your credit card, pay off your line of credit, pay all these expenses and you’re like, that’s great, perfect, right?

Secured line of credit against my house, I can pay off all this unsecured debt, low interest rate, everything’s wonderful. But as we spoke about before in the past, without an adjustment to my spending, that becomes a slippery slope. And more importantly, with a lot of these home equity lines, it’s a line of credit. So it’s a variable rate. It’s not a fixed rate. It’s not being re-amortized or resigned every five years. It’s a variable rate.

So, yes, if I’m paying prime plus three when the rate is 2% on $100,000, okay, I can do that. But when prime jumps up to five and I’m now paying 8% on that same $100,000, the balance still isn’t going anywhere because I’m just making the interest only payment. But my payments almost tripled.

Wayne Kay 08:52
Yes, I’m getting stressed out. But this is how people live, though. People are living under this kind of stress. And the whole housing thing, I actually did see something once on wealth, and they said, when you rent, that’s your maximum.

When you buy your mortgage is your minimum. That’s the lowest payment you have. And then you have the taxes and the heating and all the other stuff on top.

Matthew Fader 09:19
Yes, and we have a lot of sorts of conceptions that we need to rethink. You and I have spoken before about how we’ll never get a chance to retire, because that’s an old concept.

The idea of, I’m going to buy a house and this house is an investment, or I’m going to use it as my retirement fund. When I turn around and sell it, it just doesn’t really work anymore.

it worked when you paid 20 grand for your house in the 70s or 80s and you sold it for 300, because you say, wow, I got a really good return on investment in having that for 40 years. And it was, it was a great return on investment. But when I buy that house for $400,000 in 40 years time, I’m not going to be selling it for 5 million.

Wayne Kay 10:19
Can’t we hope?

Matthew Fader 10:20
Well, yes. Oh, fingers crossed. Look, like I said, I hope I’m wrong with a lot of this stuff. I hope it just goes up and up and up. But we have to say, well, how much money is out there to be able to afford that?

Wayne Kay 10:31
Yeah, exactly. But it seems like there’s a lot of money because there’s all these people, and maybe you already explained where they’re getting it from, where you go. Okay, well, they work a similar job to me. I’m sure they’re in the same kind of tax bracket as me, but why are they driving the brand new big truck? And all of a sudden they got that big boat there as well. And, oh, jeez, they just did all the renovations.

What’s going on? I don’t know mathematically how a lot of things worked.

Matthew Fader 11:00
I do that constantly as I walk down the halls of the building that I live in. And I say, I do, okay, what are these other people doing out there? Or you drive down the road? I don’t have any kids. I don’t have a spouse. I don’t have to pay support. I have a fairly good income.

I’m looking at these houses that are giant houses with two cars in the driveway, and I know the kids are in hockey and soccer or whatever it is, and I’m thinking, how do you do this? And then those people come into my office and they say, oh, I know how you do it, because you’re just in debt up to your eyeballs.

Wayne Kay 11:46
Yeah. And that’s a problem. That’s how we’re living. So what do we do for the people who are going to be renewing that mortgage and they can’t afford it? What do you do?

Matthew Fader 12:00
Well, you can be a little proactive. And, I mean, I really don’t make it as a suggestion, but we know that this is coming. Like, this is predictable to say, if I bought a house or I reentered my mortgage three years ago, that if I tied in for five years, that in two years I’m going to have to resign, and if there’s going to be a hit, and I can see that coming. I should start bracing for that hit now rather than trying to react to it when it’s sitting there in front of me.

Because if it’s sitting there in front of me and I’m not prepared for it. Look, Wayne, a lot of things can happen. You buy a house five years later, it’s not just did the interest rate go up, it’s, am I still married? Do I have an extra child? Has my job changed?

There are so many variables that can come in to say, where was I at five years ago when I bought it to where am I at this five years where I’m renewing the mortgage? And we always have to have that in the back of our mind to say if we really want to hang on to our properties, and a lot of people do, they’re willing to die to hang on to their house which I don’t quite understand because they don’t own the only one. If you own the only house in the world, then I can understand your attachment to it.

But it’s kind of like when you drive down the road, you’re going to see a few more of them out there. So you could probably get another one if you’re smart about it. But the thing is that if you’re saying it’s going to be tough in the future, then we need to start looking at saying, how do I soften that blow now? So if I’m hemorrhaging cash to debt payment now, do I take advantage of any kind of restructuring? Do I do any kind of consultation with somebody?

You know what I mean? Just figure out a way to manage my debt now rather than using the ostrich approach, which is, of course, I’ll just stick my head in the sand and hope nobody kicks me in the butt. But both are coming, right? Your head’s in the sand. You’re not going to see somebody kicking you in the butt, but it’s going to happen if you’re not prepared for it.

So it’s a lot of harsh reality in saying if you don’t know what the problem is, you can’t fix it. So let’s identify the problem so we can get creative in fixing it now rather than reacting later. You have a lot more options before it becomes a full blown problem.

Wayne Kay 14:36
So you’re telling me that if things are really looking, you know, you can’t afford it. You’re saying that you can sell your house?

Matthew Fader 14:46
Absolutely.

Wayne Kay 14:47
And you’ll be okay?

Matthew Fader 14:49
Yes, if the market remains high enough that you say there’s enough there for me to pay out the mortgage and I’m being realistic, and I say this is an option for me to dump the house, then of course it’s a good option for you.

It’s not anything anybody wants to do. And I unfortunately have to have this conversation with people lots and lots of times because I say, look, I know you don’t want to do it, but you don’t have a choice. You can’t afford where you’re at. And if you stay in there, and this is, again, one of these perceptions as far as this is an investment now, Wayne,

I don’t know a lot about investing, but I know if I have a house and I live in a house and I say this house is my investment, but yet I can’t afford to fix the roof or I can’t afford to replace the windows or the siding. Or anything like that, then my investment then falls into disrepair. And if my investment then falls into disrepair, it starts to devalue. So the fact that I can’t afford to maintain it is detrimental to me hanging on to that value that I’m trying to preserve.

So it takes a very honest and brutal look at where you’re at to say, what is the proper move for you to fix this problem? Sometimes it is – sell now, because right now you can still take advantage of the market while it is softening. You can still get that sold. You still might be able to walk out with a bit of money.

But if you wait and it turns into a fact, if you say, I can’t afford to keep this house anymore, and it’s not just you, but thousands of other people that all bought houses at the same time at the top of that bubble.

Then you say, I might not be able to sell it to get enough out there to pay the mortgage. And then what happens? Right, what happens when you sell a house and you can’t because you owe $500,000 on a house that you can only get $300,000 for?

Wayne Kay 16:53
Well, that’s when they’re going to be coming into your office and looking at some serious options. So I think this is wonderful that we took the time to really dive into what this is looking like and just for people to start looking into 2024, making some adjustments, planning now, super important. Final words of advice from you regarding this topic?

Matthew Fader 17:15
Yes, look, information is never worthless. Somebody calls my office if we’re just chatting, if we’re just going over and I’m sharing information with them, they’re getting informed. So then they learn a little bit more. There’s no commitment when you end up speaking to somebody like me. It is very much preparing and saying what is available to me.

And like I said, I would rather have conversations with people when they have multiple options available to them rather than getting them when they’re seven months behind on their mortgage. And they say, I want to keep my house.Well, you kind of can’t because the bank’s already taken their action. You should have come and saw me a year ago so we could have fixed this problem then.

So I’d rather see people in action rather than reaction that allows us to help the most amount of people. And talking is free. It doesn’t cost you anything, and you’ll walk away with a better insight.

Wayne Kay 18:20
I love it. Matt, thank you so much for always coming to the show and answering all these questions for us. We sure appreciate your time.

Matthew Fader 18:27
Happy to be here, Wayne.

Wayne Kay 18:28
My guest today, Matt Fader. And if you want to learn more, schedule that free consultation with Allan Marshall & Associates. You can go to the website wecanhelp.ca. And of course, they’re Licensed Insolvency Trustee.

That’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.