Author Topic: All-in on stocks or liquidity for a house downpayment?  (Read 3876 times)

Le Dérisoire

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All-in on stocks or liquidity for a house downpayment?
« on: July 27, 2012, 06:50:08 AM »
I'm a long time lurker, first time poster. Please forgive my mistakes since english is only a second language for me (I live in Quebec).

I'm 25 years old and currently renting an appartment with my girlfriend. We're planning on buying a small house within the next year, but we're not in a hurry. I absolutely want to have a 20% downpayment when we do buy, otherwise I have to insure my loan with the CMHC.

Currently, we have about 40K$ in financial assets and no dept (12K$ in stocks and 28K$ in bonds or other short-term funds, all in a tax-free account). There is a 80 % possibility that we get 110K$ in pure cash in the next 6-12 months for some reason, but there is still a 20% possibility that we get absolutely nothing. Because of that, I really don't know what to do with the 40K$ I have right now.

My question is: should I invest the 28K$ i have in bonds and short-term funds in a stock index fund? Right now, the index fund I use is based on the S&P TSX 60 Capped. It has been going down since february 2011 and it's probably at its lowest right now, unless some worldwide bad things happen again (see by yourself: http://finance.yahoo.com/echarts?s=%5ESPTSECP+Interactive#symbol=%5Esptsecp;range=2y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;) I believe that it could be the right time to buy. It might not go up right now, but it will eventually, would it be in 1, 2 or 3 years.

The problem I see with this strategy is that if we finally don't have the 110K$ in cash, we will not have enough liquidity available for the 20% downpayment if the stocks haven't gone up in a year or so. Should I take that risk? I am comfortable with it, unless you tell me it's totally stupid.

Also, if you have any advice on where to invest in Canada other than in an Index fund based on the S&P TSX 60 (unfortunately heavily concentrated in energy and materials), I'd like to know.

sol

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Re: All-in on stocks or liquidity for a house downpayment?
« Reply #1 on: July 27, 2012, 12:35:28 PM »
if we finally don't have the 110K$ in cash, we will not have enough liquidity available for the 20% downpayment if the stocks haven't gone up in a year or so. Should I take that risk? I am comfortable with it, unless you tell me it's totally stupid.

It's not totally stupid, because you're gambling with money you can afford to lose.  If your worst case scenario does come to pass, all that happens is that you have to delay your house purchase.  Big deal.

If you're comfortable with it, that's all that really matters.

smedleyb

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Re: All-in on stocks or liquidity for a house downpayment?
« Reply #2 on: July 27, 2012, 12:56:18 PM »
Do neither:  stocks are richly valued, and there's a property bubble in Canada (MMM swears by this, and so do I).

Keep your 'stache in cash until prices come down, IMO.   




Le Dérisoire

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Re: All-in on stocks or liquidity for a house downpayment?
« Reply #3 on: July 27, 2012, 01:59:24 PM »
Thanks for the replies.

It's probably true that there is a housing bubble in Canada, although it's not that bad in my city (it's still really affordable to buy a house 10 min by car from city center). That's why I'm not buying right now and waiting for it to burst, if it ever happens.Whatever happens, it will never be bad like in 2008 in the US, since people in Canada must have at least 5% downpayment to buy a house and 25 years amortization is the maximum.

As for the richly valued stocks, I'm surprised. All we hear is that the stock market is undervalued in Canada right now, that is to say very good P/E ratio across the board. Maybe that what I heard is wrong... Anyway, for every person that thinks it's time to sell, there's one that think it's time to buy. I guess I'll wait and see.

arebelspy

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Re: All-in on stocks or liquidity for a house downpayment?
« Reply #4 on: July 27, 2012, 03:25:12 PM »
As for the richly valued stocks, I'm surprised. All we hear is that the stock market is undervalued in Canada right now, that is to say very good P/E ratio across the board. Maybe that what I heard is wrong... Anyway, for every person that thinks it's time to sell, there's one that think it's time to buy. I guess I'll wait and see.

I don't know that smedley is talking about Canadian stocks.  He can chime in on that one.

I agree that property there is overvalued now, and I further agree with sol that since you have a flexible time frame that is awhile out, it's more acceptable to take risks with that money.
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smedleyb

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Re: All-in on stocks or liquidity for a house downpayment?
« Reply #5 on: July 27, 2012, 03:59:01 PM »
Thanks for the replies.

It's probably true that there is a housing bubble in Canada, although it's not that bad in my city (it's still really affordable to buy a house 10 min by car from city center). That's why I'm not buying right now and waiting for it to burst, if it ever happens.Whatever happens, it will never be bad like in 2008 in the US, since people in Canada must have at least 5% downpayment to buy a house and 25 years amortization is the maximum.

As for the richly valued stocks, I'm surprised. All we hear is that the stock market is undervalued in Canada right now, that is to say very good P/E ratio across the board. Maybe that what I heard is wrong... Anyway, for every person that thinks it's time to sell, there's one that think it's time to buy. I guess I'll wait and see.

If Canada's real estate market is in a bubble -- and to most rational spectators, its is -- then it follows that a prolonged, intense sell off in real estate would have negative consequences for Canadian stocks.  That dynamic has played out here in the US, it's playing out now in Europe, and it's likely it will play out in Canada when it's bubble goes pop. 

I was just debating this with a friend the other day who sees value in Canada given its resource rich economy.  I agreed and I think Canada is an amazing long term play, but sometimes there's nowhere to hide when a bubble in one part of the economy pops -- at least initially.   [As an aside, we were both fixated on the pretty blatant head and shoulders top we see playing out in the TSX; a convincing break below current levels puts the TSX on a course to revisit it's 2008-2009 lows.  But that's another story for another day].     

Ultimately, I would be more inclined to buy Canadian stocks off a real estate implosion rather than sift through the real estate bargain bin. 

But I still think patience is the right strategy to follow in order to maximize your long term capital gains, regardless which path you choose.   

Just another perspective, and by all means good luck!