Math? Nobody told me there’d be math!

Shut it, italics man. We don’t have time for your shenanigans today.

Rant time. I’m sick of seeing people (including those of us who should damn well know better) consistently justifying buying too much house.

We’ve seen all the same arguments. Moving is expensive. I want my dream home. We’ll grow into it. All that matters is I can easily afford the mortgage. Hey, I need a sex dungeon in my basement.

Okay, maybe not that last one.

Most people can’t afford extra space. It comes down to that. Think about the average home buyer. They take out a fat mortgage which takes them 20 or 25 years to pay. If they do save any money, it’s 10-15% of their income. A lot of them are a few weeks without a paycheque away from being screwed.

Low rates have also pushed our expectations through the roof. People regularly pay 3x or 4x their gross income for property, justifying it by saying “hey, at least I didn’t pay 6x!” It’s the low-tar cigarette argument.

Extra space doesn’t even make economic sense (unless you monetize it, of course). If the average house costs $200 per square foot to put up (which is way too low, btw), a 12×12 spare bedroom costs $28,800 just to build in the first place, never mind furnish, heat, or finance. That spare bedroom that you use five times a year could end up costing $50,000 over the life of a house. It would be way the hell cheaper to foot the bill for your mother-in-law to just stay in a hotel five times a year.

The too much house equation

I’m strictly opposed to people who can’t afford it buying too much house. When I am GOD (and I will be one day, mostly likely on Tuesday), I will forbid it from happening.

How can we determine if someone has too much house? I made up a formula. Don’t worry, Italics Man, there’s hardly any math at all.

It goes like this: if your mortgage is greater than your liquid net worth (which excludes your principal residence), you can’t have too much house. It’s that simple.

The condensed form of the formula is: LNW > Mortgage

I don’t care how much you tell me you’re going to grow into the house. Or that it’s your dream home. Or that you can afford it. The answer is still no if you couldn’t conceivably sell off everything that you own and pay for the place.

(That’s a bad idea, of course, but it does nicely guard against people buying too much house)

People tend to forget that real estate you live in is a pretty crummy investment. You have to spend money each year to maintain it. The government taxes it. You can’t deduct any associated expenses. And it tends to only slightly outperform inflation over time.

And then, people make this investment even worse by buying too much house. It truly boggles the mind.

Buying a house isn’t an investment. It’s nothing more than a big-ass consumer purchase. It’s a big purchase that makes sense in certain markets at certain times, while not making sense other times. Like in Toronto or Vancouver today.

This is the end

We constantly rag on people who buy too many video games or finance vacations, but we cheer people who make a similar mistake with their houses. The fact is the easiest way for the average person with only a small net worth to save more is to cut their fixed expenses, starting with housing.

You might think my too much house formula is too strict. Fine. Loosen it a bit, see if I care. The point is we’re all collectively buying too much house, and it’s killing our ability to save.

Tell everyone, yo!