A colleague and I were discussing real estate the other day. I just bought a new home, and he’s looking at selling his current home and upsizing to a newer, flashier model.
We have two different philosophies on home buying, my colleague and I. You see, I’m a member of the camp that believes you should always buy “less home” than you can afford. With this thinking, you can put up a bigger percentage down payment, get more equity in terms of percentage ownership, and pay down the darn mortgage that much faster. It also gives you the flexibility to save more, prepare for emergencies, and have less stress, in general, when it comes to paying the bills.
My colleague’s camp, however, believes you should buy “as much house as you can possibly afford” and then some. He’s an upper middle class guy, with his heart set on a million-dollar property. This philosophy contends that you have more leverage in your equity in a bigger real estate investment, and you don’t have as many renovations or upgrades to your property over time.
Here in Canada, a report just came out from a real estate service company, Royal LePage, that sales of luxury homes (priced at $1 million and more) are up 40% year over year. In the Toronto area alone, 48% more houses priced at $1.5 million and up have sold in the past year.
I guess I’m in the minority when it comes to home buying. For me, I like knowing that if something were to happen to my husband or me — let’s say we had to stop working to look after a sick or injured family member — we’d still be comfortable with our mortgage payments. I like to know that if one of us were to fall sick, the bills would still be paid, with or without insurance to help us along. I like being able to save money and invest it elsewhere, and I know that my home is going to appreciate in value.
When you buy a million-dollar home in today’s economy, how much higher do you really think that price will go? Do you think it will be worth $2 million a couple of years from now? It’s not very likely, but my more modest home does have the potential to double its price.
Apparently, the luxury lifestyle stretches beyond homes, too. Sales of high-end, brand-name cars, clothes, jewels, wines, furniture, and you name it are soaring:
–Prada (the in-demand Italian fashion designer) reported its sales for the first half of this year are up a whopping 23%.
–Lamborghini is expecting sales to grow by 25% in the next fiscal year.
–Porsche just reported its 11th straight year of profit increases.
–Toll Brothers, the U.S. luxury home builder, announced that its revenue is up 57% year over year.
–European company Richemont, who makes Cartier watches and Lancel handbags, has seen its sales grow by 16%.
–Hermès signature silk scarves have been selling like hotcakes, up 11% this year.
–Tiffany & Co. saw its profits jump up 53% in the second quarter.
So, my question is, all you people out there buying up million- dollar houses, Cartier watches, Lamborghinis, and Prada handbags, do you know something I don’t?
The way I look at the North American, and even the global, economy, it doesn’t seem like now’s the time to be “counting your chickens,” as they say.
I firmly believe that the global economy is going to continue softening in the next few years. I may be prudent in my thinking, but I believe now’s the time to start saving and planning for tighter times ahead, not spending frivolously and paying out the maximum monthly mortgage payments you think you can afford.