Tuesday, February 06, 2007

Stocks vs. Real Estate -- a stream of consciousness post

More and more, I find myself warming up to the idea of buying a condo in the near future, which means I've been spending a lot of free time thinking about the benefits of investing in the stock market vs. investing in real estate. It's an interesting internal debate for my conscience to be having with itself, since it appears to have brought two fundamental impulses of mine to the forefront -- and in many ways they seem diametrically opposed to each other.

I'm naturally debt-averse. This means that all things being equal, I don't like owing money to anyone -- ever. It's the reason I pay my VISA bill on time every month, it's why I'd never even consider buying stocks on margin, and it's the reason why my natural instinct, when presented with a mortgage balance of around $200,000, is to pay it off as fast as humanly possible. I suppose deep down that shows I'm a natural pessimist, convinced that my financial world is going to come crumbling down at any moment, so I cling for any solid ground I can find to stand on when bad stuff happens. It's odd because I'd consider myself to have a fairly optimistic outlook on life in general, but I can't deny I have a "sky is falling" attitude a lot of the time when it comes to financial matters. My hatred of debt is clearly a powerful force in my finances. But on the flip side…

I don't like putting all my eggs in one basket. I suppose as an extension of that pessimism, I like feeling the safety of having a lot of little piles of money, spread out across numerous sectors, bank accounts, and investments. That way, when any given one happens upon some sort of calamity, I don't get totally wiped out.

At the end of the day, these two impulses could be considered complementary, rather than contradictory. But within the context of the Canada Revenue Agency's Home-Buyer's Plan, which allows you to withdraw up to $20,000 from an RRSP towards the purchase of your first home, I'm having trouble reconciling them.

On the one hand, being able to cash out my nearly $12,000 in RRSP would allow me to make a bigger downpayment, which would mean my mortgage is smaller to begin with, which means I'm able to pay it off sooner. This makes GIV #1 happy. But I like the make-up of of my RRSP at the moment, and think it's well-situated to perform well both in the short and long term. So GIV #2, the spread-your-wealth-around part of me, wants to keep those equity investments, both because they'll give me exposure to better-than-real-estate growth potential, but also because they'll be separate from my home equity. Again, if things were to go sour in real estate for me, I'll feel better having those couple of grand in equities to fall back on down the line.

If I'm honest with myself, I suppose I don't actually want a condo, in and of itself. I have the same domestic instincts as most people. I'd like a back yard, a little patio: a well-used barbecue I can call my very own. All things being equal I'd probably prefer a little house for myself, but in Toronto, where I'm currently living, the housing market is so expensive that an above-average imcome can't really do it anymore. Which is why the city has talked itself into the concept of cube-style condo living. Ads like this just scream 'It's affordable! It's hip! It's urban! It's incredibly claustrophobic and hermetically sealed!' to me. So really, the only reason I'd buy a condo would be for the financial benefit of building some equity. A lot of things we buy we do so for emotional reasons, like a new car, new clothes, or a vacation. But for me, at this stage in my life, the urge to own is strictly a financial impulse. Too much personal finance blog-reading, I guess...

I guess where that urge to own comes from is people's general acceptance of the belief that real estate is inherently "safer" than other investing, because it's tactile, and long-term. We can touch it, we can see it, ergo, it's worth something. It's a concept one commenter in this MoneySense investing forum hit squarely on the head:

…With real estate most investors are very comfortable holding it for long periods of time, if they have to (or flipping it quick if they get lucky, usually less common). In the stock market, after a couple of statements of declining values, most new investors run for the exits, petrified that they will be left with valueless assets and an incredably huge debt. It won't happen, but the fear is real all the same and stock market investments can be sold at the click of a mouse. No listing, no staging, just one click and your out...

In other words, if I own a home and I see the real estate market crumbling around me, the last thing most people do is sell out of panic. Most think the opposite -- why sell now at a loss? I'll just wait a few years and get out then, but I'm in no hurry. I can live in this thing in the meantime. But with stocks, we see that statement lose 10-20% and we have to fight the urge to log on to our online brokerage and sell for whatever we can get, sometimes unsuccessfully. I definitely see a lot of myself in that.

I don't expect to come to any sort of decision on this subject any time soon, since I'm nowhere near buying because I haven't built up the 25% downpayment I mentally need before taking the plunge. But there are certainly some interesting big-picture thoughts swimming around my head at the moment.

A $200,000 rectangle of concrete on the 40th floor of a Toronto skyscraper isn't the kind of thing I'd want to be getting into blindly.

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