Entries from January 2018 ↓

The leap

“Wife and I have a little diaper filler coming up on one year old,” says Peter, 30, who didn’t get the memo about objectifying his spouse, “and it’s getting tight in our one bed apartment here in Vancouver and we need more space.”

You know what’s coming next. Mars vs Venus in YVR.

“We love the neighbourhood we’re in, it allows us to walk to everything, it’s safe for the kid yet close to downtown, my commute is minutes by bike so I spend more time with the family. It’s where we want to be. Problem is the $1500/month we pay needs to double to get us a two-bedroom place.

“To her, $3000 seems like such a huge amount of money to “throw away” on rent so she’s talking about buying. It won’t be around here, as that $3,000 rental went for $1.2M last time I saw a nearby unit up for sale. I’m happy to live a million dollar lifestyle by renting and with our $12,000/month take home we can afford it. However I see what she means by spending such a large chunk of change on rent. Am I kidding myself?

“Is there an amount when renting is too much and we need to either cram into a cheap place or admit we can’t afford our area, suck it up and move to the burbs? Have you ever had to tell a client to not spend so much on a rental that builds no equity?”

Now that it’s likely real estate values could stagnate, if not decline, the rent/buy analysis gets more interesting. After all, if housing’s not appreciating and no longer a slam-dunk investment vehicle, it’s just shelter. There has to be a reason to buy. Especially in a city where prices are insane.

To purchase the average detached ($1.6 million) for 25% down requires $400,000 in cash upon closing with monthly mortgage payments of $5,900. Add in property tax and insurance, plus a wee bit for maintenance, and you get almost $7,000 in overhead. Meanwhile the lost opportunity cost of the downpayment (what that cash could earn if invested at 7%) is $2,300. This brings the true cost of owning the house to $9,300 a month, or $111,600 per year.

For a property like this one:

So, seven grand a month equals almost 60% of your take-home income, Petey. You’d not even qualify for this amount of financing at conventional rates, let alone with the stress test in place. You could increase the deposit to five or six hundred grand, but that would simply be subsidizing the monthly outflow by gobbling up liquid net worth. If the Dippers in power manage to destroy the market, as they clearly wish to do, buying could amount to the worst decision in your lives.

So why would you? To this point you’ve been spending only $1,500 a month, or a paltry 12% of your take-home on shelter. If you double that to three grand, the proportion rises to 25% – which is still a helluva lot better than 60% for an asset that could lose value faster than it gains. In terms of ‘throwing away’ the rent, what does Wife think mortgage interest, property taxes and foregone investment returns are?

It’s useful to remember what the price-to-rent ratio tells us about the cost of shelter, and in what markets tenants are wise to become owners. It’s simple. Divide the market price of a property by the annual rent it commands to determine the ratio. As I have detailed previously on this pathetic, yet gender-sensitive blog, here is the scale:

  • Price-to-rent ratio of 15 or less – buy the sucker. You’ll save money.
  • Price-to-rent ratio of 16 to 20 – you’ll be money ahead renting.
  • Price-to-rent ratio above 21 – your landlord is a benevolent deity. Or an idiot. Or a realtor.

In your hood, Peter, that $1.2 million place which rents for $3,000 has a P/R ratio of 33. So your landlord is subsidizing you each and every month. Given the hefty take-home income, you’d be far wiser to continue renting and shovel your cash into a nice balanced portfolio, ensuring your TFSAs are filled to the gills.

Tell Wife this: the $4,000 a month you will save by renting, invested in a balanced and diversified portfolio, plus the $400,000 not shovelled into a downpayment, will become $1.496 million in ten years. In twenty years – when are just 50 – it becomes $3.7 million. At that point you can retire with an annual, lifetime, tax-efficient investment income of $260,000 and still retain the principal.

Or, you can have the house.

Tough choice. Let us know.

Guys

It was a routine. Read some headlines mid-day in the studio. Pop down to Bay Street with a crew to catch the day’s news. Write and edit a package or two in the afternoon. Go into makeup and head back to the studio for the big supperhour newscast.

For a few years, in another life, I was the on-air, talking head business guy at CTV. As gigs go, it was okay. But it was a routine. And I suck at routine.

During this time I wrote a book or two on money, finance and real estate. Sold a lot of them. Speaking requests started to materialize and financial companies called to hire me. Sweet. Before long I understood there was ten times the income to made hitting the road than sitting in front of the TV lights.

So I hired a well-known business journalist to sub for me when I was traveling (my employer was shocked, but eventually agreed) and went off to give talks in exotic places like Kelowna, Halifax, Van, Calgary, London, Victoria and Etobicoke. Soon it was 200 days a year on the road. No time for routine. So I quit CTV, started a television production company of my own, bought equipment, created a weekly business show and purchased network airtime. The whole thing, including a studio on Bay Street, was financed by the sale of commercial time within the show – which eventually became seven productions (including a dog show, of course).

So I dragged along a few CTV people who wanted adventure and weirdly believed in my vision. One of them was Paul Bliss, an ambitious and talented reporter that I eventually promoted to VP in charge of production. We worked shoulder-to-shoulder in the studio and on-air. Paul came to manage a lot of people and a lot of money. Big trust. Eventually I lost my mind again, got re-elected to Parliament, and sold the enterprise. Bliss drifted back to CTV.

The above is background for last week’s news that he had become one of the latest casualties of the #metoo movement. Bliss was accused by a former CTV staffer of an unwanted sexual advance after he stopped working with me. She wrote a blog 12 years following the event and, within hours, Bliss was suspended as a big shot reporter/bureau chief at the network, which is now owned by Bell Media.

This happened a day after Ontario PC leader Patrick Brown was accused of inappropriate sexual behaviour a decade earlier. Ironically, it was CTV that was about to break the story when he started to fight back. But hours later he relented and quit. I know Patrick Brown, too. Worked with him in Ottawa when we were both MPs. He was certainly a quiet guy in those days.

Without a doubt a lot of the manshaming currently going on is justified. Everyone deserves to be treated with respect, even in lust and love. However the haste with which organizations are dumping people accused, but not proven, of wrongful behaviour is breathtaking. Allegations can come in a Tweet, a blog or a media tip and the consequences are immediate. The accused are sometimes left fighting shadows. A legal defence essentially impossible. Meanwhile, no job, no income, no career.

This is no defence of Bliss or Brown. They may deserve none. Just that I know both these guys, so their stories were of interest when they broke nationally. It makes every man reflect back on the past decades, scouring for memories of being a masher. And I guess that’s the point – to change basic behaviours now that a devastating form of economic punishment has been found outside of the justice system.

Let’s hope it is wielded with common sense. Men are still useful.

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Speaking of respect, on Friday the comment section quickly turned into a referendum on a person who had been banned twice, most recently for trying to post a profane picture. The debate pivoted on the issues of free speech vs censorship plus whether one individual seeking attention should be allowed to dominate discussion. Related was whether we should tolerate ageism (a constant theme of this poster’s words) when we weed out racism and other ugly isms.

This blog is tough to moderate. Anyone can come here, have a dump in the comment section, and meanwhile my name’s on the top. Keeping the nutbars at bay is a daily concern. Many are deleted. A handful of repeat offenders are banned. But everyone deserves common sense. This site should never turn into an echo chamber of conformity.

Short leash. Two comments per day for SCM. Or purgatory.