In article , (Warren X) wrote:
Good day,

A friend and I had the following debate when I said that I would one
day like to buy an $800K house, upgrading from my current $200K
condominium apartment, and I would like to hear more opinions on the
matter.

I said that we planned to stay in the condo as long as possible,
putting extra money down on the mortgage.

Sounds like a wise plan to me.


My friend said that we should move to an intermediate house of, say,
$400K, as it would provide more "financial leverage" that would be
required for the big house.

Doesn't make sense to me.In essence, he's arguing that, say, $150K equity in a
$200K house provides less "leverage" than $150K equity in a $400K house. Ask
him to explain his reasoning. I think he has it backward. Which home will be
easier to sell when you decide to buy the palace, the $200K one or the $400K
one? Which one will you have more equity in?

Seems to me that a paid-for $200K house, and a big chunk of money in the bank,
should be all the leverage you need. Maybe things are different in Canada, but
here in the U.S. it's more or less the standard to make a down payment of at
least twenty percent when buying a home. If you have that $200K house paid
for, that's a 25% down payment on an $800K house -- plus you would have
additional funds saved that you did *not* spend on the $400K house while
waiting to buy the $800K house.

I argued that selling a home costs a lot of money in real-estate agent
commissions, legal fees, moving fees, renovation costs, etc.

He argued that the value of the houses increases at a rate that more
than compensates for these charges.

Sometimes it does, sometimes it doesn't. If anyone could reliably predict the
future, he'd be a billionaire many times over.


This is a possibility, but the market is at a high right now (area:
Toronto, Canada), and could conceivably "correct" in the next few
years once the glut of new homes are bought-up.

There is an inherent contradiction in what you say here. If there is a glut of
new homes, then supply exceeds demand. If supply exceeds demand, the market
cannot be at a high.

If it *is* at a high right now, you're best off to keep your current home, or
sell it and buy a *less* expensive one. Trading up when prices are high will
cost you dearly.

I also mentioned that a larger (intermediate) house begets larger P&I
payments, and larger interest payments mean a greater waste of money
that could otherwise have gone towards principal on my current
mortgage.

That is correct.

He then mentioned that the increase in value of property is
proportional to the size of the property (i.e., greater absolute
capital gain on a larger property than on a smaller one), to which I
must agree.

The pool of potential buyers for $800K houses is necessarily much smaller than
the pool of potential buyers for $400K or $200K houses. This makes the price
of the expensive houses more sensitive to changing economic conditions. They
are likely to increase in value faster during good times -- but they also lose
value faster during bad times.

Consider also the jeopardy in which you place your financial security by
living above your means, if indeed an $800K house would be above your means;
even after converting to US$ -- around a half million -- it's certainly above
*mine* :-(, and conversely, conisder the benefits to your financial security
from living below your means.

You might want to visit the library or a bookstore, and get a copy of "The
Millionaire Next Door". It's an analysis of typical American millionaires, how
they got that way and how they *stay* that way. I'm sure the same principles
apply in Canada :-). Seems the typical millionaire in the U.S. drives a Buick
or a Ford F-150 that's a few years old, has been married 30-some years or more
to his first wife, has never spent more than a few hundred dollars on a
suit, and lives in a $200-300K (U.S.) house in a middle-class neighborhood.
Bottom line is, part of how they got to be millionaires is by not spending
money needlessly.

One of the more interesting parts of the book, IMO, is the comparison of the
spending habits of millionaires and high-income non-millionaires. I suspect
your friend may fall into the latter group.

Can anyone offer any thoughts on this?

It obviously costs less money to buy a $200K house than a $400K or $800K
house. I think your friend has not thought this through as well as you have.


Thanks
A. Huahua

--
Regards,
Doug Miller (alphageek-at-milmac-dot-com)

Save the baby humans - stop partial-birth abortion NOW