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Paying Extra to Own a Home: Renting Versus Owning

It is well-known that in the long-run it has been proven over hundreds of years that it is more lucrative to own your home than it is to rent it. This is especially the case in Canada given our capital gains exemption on principal residences. However, though this is usually the case an the case in the long-run, it isn’t always the case at specific points in time.

It is more lucrative to rent, rather than own your home when the market is in a bubble and it is about to go through a correction. That is something that hasn’t happened in Toronto for decades.

The belief and desire that home ownership is the best thing to do drove millions of Americans to purchase homes they could not afford leading up to the 2007-2008 liquidity crisis and  housing crash in the United States. This blind desire to own a home, fueled by the media and misunderstanding of the economics of home ownership, contributed to the skyrocketing of real estate prices. What made it worse was the government’s willingness to help families buy homes when it made more financial sense for those families to rent. Yet, the calculation of whether one should buy or rent is very straight forward.

The cost of renting your home usually includes:

  • Monthly rent
  • Utilities used
  • Tenant insurance

The cost of owning our home usually includes:

  • Mortgage payments (principal and interest)
  • Maintenance fees (if a condo unit) or maintenance costs
  • Insurance
  • Property taxes

When you add up the costs if you were to rent or own a specific home there are years when it is cheaper to rent and years when it is cheaper to own. Theoretically, the cost of renting should be equal to the cost of owning a home (less the principal repayment component of the mortgage payments). Leading up to the devastating collapse of the United States real estate market the comparison clearly showed a significant premium in owning a home. In other words, it was about 25% cheaper to rent than to own. So, home prices were over-inflated and out of equilibrium. It was only a matter of time before the market adjusted itself.

In Canada, the situation includes two additional significant factors; 1) the heavy immigration rate driving increasing demand and 2) the capital gains tax exemption on primary residences. These two items work to drive demand and produce a higher financial return on home ownership.  With increasing demand comes increasing prices for rent… and for home prices.

Very simply, the more people that need a place to rent, the more a rental unit will rent for. The more a rental unit rents for, the greater the value of the unit and the property it is located at. Though in Canada, the price of housing increased at a greater pace than rent, due to rent control. After a few years of rising housing prices, the pressure was put on by tenants to offer more rent to secure under-priced rental units.

In Toronto, the housing market continues to be in a state of disequilibrium as demand outpaces supply, which is kept tight by regulations and policies of all levels of government and the development and tax costs forced on developers by those governments.

Though a young professional might be tempted to rent a lower-cost unit in Toronto (if they can find one), the reality is that if they don’t buy their own place, their chances of home ownership might be worse in the future and certainly their accumulation of wealth will be significantly hampered.

To take advantage of the housing market returns, many millenials are renting in Toronto to live and buying in smaller communities where prices are low and they can get a rental income as the property appreciates in value. They can then use the equity in that property to buy their Toronto home down the road.

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B.C. Launches Aggressive Housing Plan Targeting Luxury Homes

The NDP government of British Columbia has introduced an aggressive $6 billion plan targeting luxury homes, foreign buyers and absentee property owners.

In an attempt to make housing in Vancouver more affordable for everyone, the NDP government has launched over 30 measures that include increasing property taxes on homes above $3 million by thousands of dollars a year, increase foreign buyers tax from 15% to 20% (an extra $50,000 in tax for every million dollars). taxing AirBnB rentals and some new taxes as well. The AirBnB should be no surprise as I have posted about it in the past and vlogged about it on my youtube channel.

The idea is to take money from those that have it and buy housing for those that want to live in Vancouver, but can’t afford it. The plan is an extensive one that will require a large degree of complexity and hiring staff in order to implement.  A large portion of taxes raised will end up going to hiring more government employees. What is left will go towards building of rental and affordable housing according to their targets.

Over the years, Canadian real estate has become the place for foreigners, especially those from China, Russia, India, Middle East to park their money. For whatever reason, these individuals feel that it is safer to put their money in Canada, away from the legal, political and economic uncertainty in their home countries. In the process, they have driven up Canadian real estate prices beyond the reach of the average hard working Canadian. Well-educated and willing youth, many with fairly decent jobs, and unable to purchase their own home are seeing unemployed foreign youth living in multi-million dollar homes and driving luxury or even exotic sports cars.

The message is clear, in order to appease the cries of the general population for affordable housing, politicians looking to get elected have yielded the battle cry of affordable housing. Unable to address the fundamental underlying issue they have turned to smoke and mirrors to address the concerns of the population. Unfortunately, this is not going to end here as those underlying issues remain unaddressed.

There is a reason why foreigners are able to buy homes when Canadians cannot afford it. There is a reason why well-educated Canadians can not get jobs and foreigners are living luxurious lifestyles without employment. Rather than address those issues, the NDP government of B.C. is simply taking money from those that it sees having a lot of it and giving it to those that don’t have enough of it.

It is probably that the prices of the $3 million plus homes will be cooled. It is also probable that some of those home owners may now liquidate their $3 million home, but will a homeless person buy it? No, that homeless person will still be homeless. But, those foreigners may not be visiting Vancouver, spending their money at restaurants, transportation, buyer cars, furniture, etc. If that happens the impact on average local jobs could be negative, which means less tax revenues. In turn, this could make it even harder for individuals to afford homes at all levels of prices.

The NDP government’s message is clear, Vancouver belongs to British Columbians, so speculate on real estate somewhere else!

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Real Estate Vlog by Baldo – How To Build Wealth

This episode of Real Estate Vlog by Baldo (May 29, 2017) addresses how to build wealth, especially for millenials. It discusses the gap between our lifestyle and legacy institutions. A 4 step plan is outlined by which you can build wealth without having a full-time job.

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The Dead Donkey Story as told by John R. Ing

Yesterday evening at the National Club on Bay Street I had the pleasure of meeting John R. Ing, President and CEO of Maison Placements Canada Inc., a leading independent Canadian research-based institutional investment dealer. Established in 1955, Maison is a participating organization of the Toronto Stock Exchange, the Montreal Exchange, and a member of the Investment Dealers’ Association and CIPF.

Ing was addressing the Canadian Institute of Mining (CIM) members and guests, speaking about gold, inflation and the American dollar.

Among his well researched and value packed presentation was a story that very well sums up much of what the United States is presently experiencing and how it has gotten to where it is today.

The story as told by John R. Ing is that there was a farmer who was selling his donkey to another farmer for $100.  Upon shaking hands he collected his $100 for delivery the next day.  The following day the farmer shows up in his truck with the donkey in the back.  After a brief greeting the second farmer asks him where his donkey is.  The first farmer informs  him that there is a slight problem in that the donkey has died.  After a moment of contemplation the second farmer asks for his $100 back at which time the first farmer replies that he can’t return the money because he’s already spent it.

Upon further contemplation the second farmer replies, okay unload the donkey in the barn.  The first farmer looks at him and asks what he’s going to do with the dead donkey.  The seond farmer replies I’m going to auction it off.  The first farmer is puzzled but does as requested.

The next week the first farmer comes across the second farmer and asks him how the auction is going.  The second farmer replies that he made a profit of $890 on the auction.  The first farmer asked how he did that.  The second farmer replies, “I sold 100 tickets at $10 each and raised $1000”.  The first farmer asks, “But, weren’t the people angry”.  The second farmer replies, “Only the winner and when he complained I gave him his $10 back.

Does this resonate with you?

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Was This The Same Baltimore As Last Friday?

This Friday I went to dinner with a friend.  We had searched on the internet for a restaurant where we could enjoy some good food and maybe make some friends.  I had clearly remembered passing this area the Saturday before and it was very much like an inner city nightmare, a place where I wouldn’t stop, let alone eat.  I scratched my head and wondered if this was really the same place.  So, off we were to Fells Point on the waterfront, but a funny thing happened along the way.  Why driving along E. Biddle Street we suddenly realized that the people were professionally dressed, walked in a straight line and seemed to be in a generally happy and sociable mood.  So we parked our car (lucky to find a free parking space on the street) and ended up at ‘Thai Landing’ restaurant near N. Charles Street and E. Biddle Street and while listening to my friend lament about how Vancouver is such a better city to live in than Toronto I enjoyed a wonderfully prepared cuisine by an attentive (but not overly so) staff.  I knew this would be a good restaurant when I entered the front door and saw a dozen awards from various magazines and associations placing it among the best places to eat in Baltimore.  Yet, the price was very affordable.

After finishing my dinner and taking in all my well-educated (Ph.d molecular biology) and athletic (certified personal trainer) friend had to say about Vancouver I put my urban planner hat and pointed out a few things that she had not achnowledged about Toronto, as well as some negatives about Vancouver that she was ignoring.  You see what triggered all this discussion was the question that my friend posed to me – “Do you think Toronto is a good place to live?”.  My answer was “I’ve travelled to hundreds of cities around the world and lived in most of them from between a few days to several weeks.  For me, I would rather live in Toronto than any other city all else being equal (such as career, family, etc.).  There are however some smaller communities that I would consider living, especially for raising a family in the early years.”  Apparently, this reply didn’t sit well with my friend and I found myself listening to someone with a mission to change my viewpoint.  Of course, she didn’t change my viewpoint because you see in my travels I not only looked at the cities I visited as a tourist, resident, and business traveller, but also an entrepreneur, sociologist, immigrant and urban planner.  I also find comfort in that Toronto has been successfully ranked by independent international organizations as a top world city.  Yet, I also agree that the quality of life in Toronto during the reign of the present mayor for whatever reason has significantly decreased.

Well, back to what happened on Friday.  We crossed the street to Sammy’s Trattoria.  There we waited for 10 minutes for a place at the bar.  The place was very busy.  My friend turns to me and asks, “What do you notice about this place”.  “Lots of things what do you mean?” I reply.  My friend clarifies, “What do you notice about the people?”  I look around and notice that for the upscale decor they tend to be more casually dressed than Torontonians would, but a good mix of age groups, some university students, some in their sixties.  “There aren’t any Afro-Americans in here” she points out.  I look around and notice one Afro-American waitress, but everyone was caucasion with the exception of one oriental man.  Come to think of it Thai Landing also didn’t have many Afro-Americans there.  I think to myself is this the same Baltimore?

Two spaces open up at the bar and we finally get to order our Tiramisu dessert and coffee.  Before our order is even taken the couple next to us strikes up a conversation.  That was a real pleasure and the first time that someone in Baltimore that I hadn’t met tried to strike up a conversation with me without asking me for a hand out.

Turns out that Karin is a business lawyer and Greg is an Oracle database programmer.  And they have lived in both El Paso and Washington D.C. previously and therefore were able to speak intelligently about Baltimore.  I received quite an education about what has happened in the last few decades in Baltimore, as well as about the nightlife, where to eat and the neighbourhoods to check out.

Turns out that the property tax rate in Baltimore is 2.2%, compared to Toronto’s 1.25%, but they are not as stringent on updating the property assessment as Toronto is.  The second significant thing I found out is that the reason there are so many boarded up (and I mean homes sealed with brick, block and wood sealed) in the city is because the government has taken back the properties due to unpaid property taxes.  This in turn has increasing caused the tax base of the city to decrease.  But, combined with the increasing crime rate within the core, which was addressed in a band-aid fashion by putting more strongmen police officers on the street as well as thousands of videocams on the street, has resulted in huge budget requirements.  In order to meet these increased requirements, the city had to raise its property taxes.  It’s all in the numbers, higher expenditures lower revenues, spells disaster.  A lesson that many uneducated poticians throughout North America don’t seem to be able to learn.  And yes, this also applies to politicians in Toronto.

So, as I’m preparing for sleep that evening I think to myself was that the same Baltimore as last Friday?

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