“You’d be an idiot to buy a house!” Kevin O’Leary

Kevin O’Leary…Some call him the Don Cherry of Canadian investment, and he certainly knows how to make waves when it comes to making money. Now he’s poo-poo’ing the future for potential capital appreciation in housing given the inflated Canadian housing market. He asks: How far can it really go from here, realistically? Could this be a boon for renovations?

“I’m not a bull on housing in terms of capital appreciation as an asset class or real estate or commercial real estate or buying premium office towers….”

O’Leary does not see the massive price correction that others are predicting for Canada, however, he is very cautionary.

“I’m completely against the purchase of a house because I don’t think 5 years from now it will be worth a dime more than it is today. You have to pay real estate taxes, transfer taxes, you have to pay the brokers their percent… the closing and transaction costs in Canada make it the most expensive asset class you can trade.  It’s going to cost you 8% to 12% to trade the asset. In my world, and this is a personal opinion, the chance of getting a 12% appreciation in a home over five years is zero. So you’d be an idiot to buy a house. You’re way better off to rent and keep that …20% or 25% deposit and buy bonds. At least you get 4% a year. Housing is a crappy asset to purchase. We’ve had a 17 and a half year bull market! Give it a rest! At the very best it will go flat, in my view.”
BBN interview

Numbers on his side
O’Leary does have some solid numbers on his side. Home sales in Toronto climbed 14% in November year-over-year, according to the Toronto Real Estate Board, topping the 2007 all-time monthly number of sales. And we all remember what happened in investment the next year, don’t we!

With the average detached home in Toronto at over $1 million and similar price inflation in Vancouver, Montreal and Ottawa, investment watchers like giant U.S. pension manager Pimco feel that Toronto and Vancouver in particular will see a correction. In a BBN article, Pimco’s Ed Devlin said “What we’re watching very closely in the Vancouver market is some of the reforms going on in China in terms of clamping down on capital flight and corruption,” he said. “I think for Toronto, it’s simply a sense of valuation getting a little bit too frothy.”

Money cheap, but out of reach?
For many millennials, homeownership is fast rising beyond reach in many areas of the country. The amount required for a first home deposit due to a combination of CMHC and bank mortgage policy changes means young people have to seriously tap mom and dad for any hope of ownership or just give up. And after purchase, funding renovations of these homes is also problematic, despite low borrowing costs.

What this might mean for the home renovation industry is an increased demand for renovations from existing homeowners . Perhaps it will be wiser and more affordable to re-feather the nest one lives in now than attempt to ‘trade up’ in order to gain needed living space or comfort.