PURCHASING POWER TODAY
Have you ever chatted with a senior selling his or her home? Have you asked them what they purchased it for? “Well, back in the day we pinched our pennies to buy this beauty for $30,000.” At least 2 or 3 times a year, we chat with someone who has owned their house for 40 years or more. Can you imagine buying an entire detached house today for $30,000?!?
Purchasing Power is a macroeconomic principle—wait! Don’t go to sleep yet, it’s very relevant. Investopedia defines purchasing power as “the amount of goods and services that one unit of money can buy.” Hugely over-simplified, purchasing power depends on a number of factors, but today we are talking about the COST of those goods and services (and houses), and inflation.
So as an investor, let’s say you had $100,000 40 years ago. Well that’s at least 3, maybe 4 houses, free and clear of any mortgage. Now that’s some serious purchasing power! Unless you have a time machine, we can’t go back. Canada doesn’t even have pennies for pinching anymore. Forty years of inflation has brought house prices up, up and away!
But let’s imagine you have $100,000 today to invest. Real estate investors need a minimum of 20% down for a rental property. So your maximum purchasing power all across the country is $500,000, with a mortgage of $400,000 (on a traditional purchase). In some towns in Canada, you can still buy houses for $250,000. Your purchasing power there gets you 2 houses (assuming your bank/mortgage broker approves it all). In Vancouver and Toronto, you would need to search for one condo with your $100,000. These examples are polar opposites, and of course there are many other elements to consider in your choice about where to invest. We simply want to illustrate that your “seed capital” has different purchasing power depending on where you are, and the housing product you choose.
Now let’s consider the cost of financing—because that is an important factor affecting the cost of real estate. In 2020, the cost of borrowing money remains low. Imagine that there might be a time in the future where interest rates rise to 5%, 10%, or even the horrific interest rates seen in the 1980’s. WHEN interest rates eventually rise, purchasing power will drop. Just look at the effects of the stress test on today’s buyers!
Why would we write about purchasing power? Because, like a super hero, you have the ability to save your financial future by taking action today. You can use your super-power of investing while the market is low and house prices have fallen, giving you more purchasing power. You can use your investing powers now while interest rates are luxuriously low. And you can use your capital to invest before inflation continues to raise the costs of goods, services and houses.
As the old saying goes, “don’t wait to buy real estate. Buy real estate and wait.” Your purchasing power today is stronger than you realize, especially in Alberta’s market.
