A Sage Investors Mea Culpa

When I work with people to help them make better investment decisions, one of the core values I try to espouse is looking for investment opportunities that are selling at a discount and carry a modest level of costs. I wouldn't say I'm frugal (I like nice things that I can pay for without ideally going into debt) but I always made sure that  I invested my hard earned savings into products and services that were within my budget. I've always tried to practice and use these values as a foundation and I feel it has served me immensely well in my personal finance and investment journey. In the last 6 months though I have undertaken a personal finance journey that has taken me to a bizarro vortex that has challenged this value system.

I bought a house in Toronto.

We ended up paying 10 percent over the asking price. We had to endure several bidding wars. Our debt position has now ramped up significantly. We saw houses that we liked  that had been on the market for a few hours and literally when we went home, we would be told that somebody put a bully offer of $200,000 over asking price. Everything you read about the Toronto housing market, we were experiencing in real-time. Rational thinking was not to be found. It was a very unsettling experience in that it forced us to tear up the script with respect to what I believe in when making an investment decision. Time will tell whether this was sound thinking.

Why did I do this? Why did I subject myself and my family to this emotional and financial roller coaster?

Our World is Getting Smaller

I grew up in the suburbs and since I finished university in my mid 20's, I've been living in an apartment for almost 20 years and exclusively in the downtown core of Toronto and Ottawa, either as a bachelor or in the last 7 years as a husband, and now for the last 3 years as a father of 2 boys, (three and one). I initially rented but when I got married, my wife and I bought a condo in the depths of the financial crisis. The size of the apartments I've been living in has been in the 900 to 1100 square feet range which for downtown Toronto is pretty roomy. It's been a great, however as the kids entered the picture we found our world becoming smaller as the kids annex entire swaths of space either for cribs, toys, strollers, tricycles, diaper genies, and change tables. My ankles and knees contain historical remnants of bloddy scabs and scratches from bumping into miscellaneous items lying around our home.  Living downtown also has made me edgier in that taking the kids to various activities in gridlock has become a beat down. I suddenly found myself feeling a bit nostalgic for my "wonder years" and yearning for open space. I'm pretty sure I'm not the first to experience this.

Logistics of living in the sky grow tedious

I've never had an issue living in a building. It's pretty easy to get in and out. There's always nice facilities available. You can throw out as much garbage as you want and all your packages that you order are set aside nicely for you. At the same time, getting into a full elevator with a stroller, and carrying groceries and kids to the parking garage that feel miles away can be literally a handful. It's just much more exhausting to do what were once simple functions. Again finally it's about space. Watching my baby boy over the last year having to crawl over boxes and objects that really should be stored away but can't because there is no storage left made me feel bad. Kids need to roam and graze. Don't we all?

So in the end my decision to seek land with a small building on it was driven by space. I'm simply tired of living in cramped quarters and I need to breathe again. I realize that there are more and more families that are choosing to live and raise families in apartments and in the downtown core and I respect that. I've done that and personally I'm emotionally and physically done with the narrative.

It's not about us anymore

My 3 year old is approaching the age of starting to go to school, and of course we want our kids to have as good an education as possible. At this point the decision isn't about my wife and I. It becomes even more about the kids. We started doing some research and came to the conclusion that the schools in our area did not have stellar reputations. So the logical solution is to move to areas that have good schools. The reality is that you have to pay a premium and most of the bidding wars you hear about in Toronto occur in school districts that are rated very high by independent organizations such as the Fraser Institute. 

The home that we finally ended up buying was located in the northern part of the 416 area of Toronto. It's not a huge or luxurious place but it was an upgrade from where were in terms of space. It had a legitimate back yard, and a swing set/tree house for the kids. The public and elementary schools are decent to above average. The high school was average at best, but my kids are 12-14 years away from that so it's not a short term show stopper.  It was close to the city but far enough that we aren't subjected to the gridlock. We paid a premium for this and it will put a significant dent in our budget. 

Whenever I read any articles on the Toronto real estate market insanity, I always skip to the comments to see people internet-shout the sky is falling and how insane people are for buying a house in Toronto when every think tank, economist, and central bank has shouted that real estate prices in the Toronto and Vancouver area are up to 30 percent overpriced. I admit I have a hard time disagreeing with most of them. There seem to be a few common themes in these sentiments and I'll save people from typing the comments and respond to them below

The Toronto real estate market is going to crash. Anyone who buys a house now is insane.

I think it is going to crash. It is a big reason why I sold my condo downtown. The level of behaviour and posturing we witnessed just to SEE a property was ridiculous and the amount of cash people were willing to drop on what I considered to be border line dumps was surreal. Emotions were driving the decision making. I wanted to maximize the large capital gain we got on the property and the only way we could make the numbers work to buy a house was to have a solid downpayment and selling the condo put us in that situation. My wife and I made a decision that if we didn't find a place after we sold the condo that we would rent and wait it out until things calm down. We know the market is going to pull back, but unfortunately we don't know when. It becomes a game of musical chairs with emotion driving the action. We have also approached this journey with a mindset that it is very possible for the value of the house we bought to go down meaningfully in the short term. We're OK with it because we know we've committed ourselves to staying in the property for the long term (i.e. at least 5 years). This move for us was more about buying to live instead of buying to flip. You might say from an investment perspective that we were taking a passive approach.

In our case, I think our emotions were definitely challenged. We also felt the pressure to buy something...anything especially after selling the condo and knowing we had a deadline on our heads to move out. We started considering units like townhouses that had no backyards and cramped space that were not consistent with our requirements. We put some offers that were at the high end of our budget range and lost. We resisted putting any offers at all on some properties only to see them sell for way more than our budget range. At the end we were able to resist the temptation to put that extra counter-offer that would have shaken our finances. We moved out of our condo and into a short-term rental unit. By doing so,  I think it helped us stay more disciplined although I'll admit it wasn't an easy move. There were a lot of frayed nerves shared between my wife and I.

If you want to buy a house, why don't you just move out of the city? You can get a house in the suburbs for significantly less?

We did consider and did look at properties in the 905 region. The prices were cheaper but not ridiculously cheaper. From a space perspective, it's in full abundance especially if you've been living downtown for almost 20 years. The natural flow of a bubble market is that people will look for substitutions and in the case of real estate, people appear to be giving up looking for a house in the 416 area and exploring other alternatives further out of the city. I was personally OK with moving further north but for my wife who works downtown the commute would have been pretty tough and with 2 young kids the coordination for picking them up for school would be rough. Time is a valuable commodity for us.  It's at this point that the comment section would respond that we are being selfish and should change jobs or careers or make some other life adjustment to get ourselves closer to cheaper housing. Easier said than done folks. For some people it is possible. For others it is more difficult. Life is like that. 

Lessons learned

Sometimes very questionable decisions we make can provide us with interesting insights into our behaviour that we can help us in future decisions we will face. This whole experience of buying a house in an overpriced market provided me with some solid takeaways that I feel can apply to my investment coaching work. 

Priorities change as life gets in the way

Our decision to buy a house was driven more by family goals and objectives (i.e. more space for kids, access to better education etc). The financials and planning behind served as the under pinning to give us focus on getting to our goals. Despite the real estate market being insane, we had reached a point in our lives where personal circumstances dictated we needed to make some changes in our life. Could we have timed this better? I'm not sure because we don't know when the market will correct. As ridiculous as the housing market has been, we really had to pinch our noses, put our elbows up and fight through it. In a way this sentiment is no different than what I've been feeling about the stocks being overvalued. I think stocks are overpriced, but I have still been buying them albeit carefully, making sure that they are consistent with my ideology and long term financial planning. 

Be prepared to tear up the script

Sometimes you have to tear up the script. When we started house hunting, we thought we would be able to find a house at a much lower price point in Toronto. As we embarked on the search, it became obvious that we would not find much of anything in that range. The same can be said for stocks. Some of the best quality stocks will trade a higher valuation than what we would normally pay for. In those cases, it may be prudent to pay the premium. As Warren Buffet said, “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” Sometimes you just have to take a deep breadth and dive in.

When in a firestorm, make sure you have a plan...and stick to it as best as you can

Before we embarked on even considering buying a house, we did some hard core number crunching to determine how much we could afford. We set a drop-dead extreme price that would stretch our finances but were comfortable with. It's all good to have a plan and parameters but the success of executing the plan is staying within those parameters and not straying. We saw some houses that we really liked but were just slightly over our budget. We were incredibly tempted to extend that budget, but at the end we retained enough discipline to refrain from putting an offer (Go figure that most of the time the house sold for an even higher amount. A sign of the times). Eventhough we paid over asking price, we still stayed within a defined budget. We knew our limit and retained the discipline to stay under that minimum. We were approved for a higher mortgage and could have paid more but we decided to stay under.

I wanted to share my experience with you because as an investment coach, I try to develop people to practice principles of financial and emotional discipline when they make investment decisions. Most of the time, with support we can stay within those parameters, but there will be times where personal circumstance will challenge those financial and investment decisions to the point where we may have to abandon them temporarily in order to fulfill our personal goals. These challenges are just as much faced by financial planners, professionals, and coaches alike and I believe as an investment coach it is important to model the behaviours that I am encouraging my protégés to develop. I'm sure there will be people who will still think that we were insane for buying a house at this point and that's fine. It's easy to develop a plan, but as I've learned, when life gets in the way, you sometimes have to call an audible and zag instead of zig.