Winnipeg Free Press - PRINT EDITION

New addresses costly; move only if needed

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Moving can be ruinous to your financial health. One of my good friend's parents used to move house every three years like clockwork. It's hard to imagine doing anything more foolish, but that's what they did, throwing away thousands of dollars in the process.

I asked my pal's dad why he did it, and he said it was because he was a shrewd homebuyer and could make a good return by "flipping" houses this way. But no matter how hard I tried to crunch the numbers, I couldn't make it work. I think he must have failed math, although, naturally, I didn't say that.

Here's how I saw it: You buy a $400,000 house. Legal and moving fees are, let's say, $10,000. Then there are the ancillary costs of moving: painting, cleaning and adding those pieces of furniture. Call that another $10,000. Now you're in for $420,000. Let's say prices rise five per cent a year -- that's a lot historically, but over the past 10 or 15 years it's possible. So by the end of Year 3, the home is worth $463,000.

An agent is going to charge you, say, $18,000 to sell the house. That leaves $445,000, or $25,000 in profits. And because the sale of a primary residence doesn't trigger any capital gains tax, that profit is clear.

That might seem like a lot, but consider a couple of caveats. First, we've assumed he paid cash. Had he borrowed the money, he'd have paid interest, lowering his profits. Second, although $25,000 sounds like a lot of money, it's not a very good return on a $420,000 investment. Over three years, it works out to about six per cent, or less than two per cent a year. A bond would have earned the same with no hassle or risk.

Finally, and this is most important, my friend's father would have had to buy a new house, which would also have gone up by roughly the same. In other words, any house he bought subsequently would be more expensive than it had been three years earlier. You may think you have an extra $25,000 to spend on a house, but that's a pure illusion because the same inflation that put that money in your pocket has affected what you have to buy to replace it. (If you're a professional flipper who moves into a home and lives there while fixing it up and then selling it, this doesn't necessarily apply.)

The fact is that you're far better off staying put. If you were to flip your house every three years, according to the arithmetic above, you'd have a home worth about $550,000 in 15 years. If you bought a house and stuck with it for 15 years you'd have a house worth $830,000.

This might seem like an extreme example, and it is, but not by much, according to statistics. The Canadian Association of Accredited Mortgage Professional estimates the average Canadian will own five homes in their lifetime. You'd save a lot of money by owning just two.

Obviously, changing circumstances are the biggest reason for moving -- divorce, growing family, moving for work. There's not much you can do about that. But other studies find people do move out of boredom, or to try to lock in money from the real estate market. It's a mistake that will only cost you money.

Fabrice Taylor is an award-winning financial journalist and analyst, and author of the President's Club Investment Letter. Email him at:

fabrice.taylor@gmail.com

Republished from the Winnipeg Free Press print edition March 10, 2012 B9

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