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The stretch

“Thought you might get a kick out of this Garth,” says Tom, in Toronto. “Condo pre-con at University/Dundas asking for over $1,750/sq.ft.  280 square foot studio closet for $500k. Ha!”

It’s true, believe it or not. You, too, can live in a garden shed-sized concrete box in downtown Toronto for $489,900 plus closing costs, property taxes and monthly condo fees. With 20% down (about $100,000) that little one-soul coffin would carry for roughly $2,800. Add in the opportunity cost of the downpayment, and it comes to $3,300. To afford that, you should earn about $120,000. And be braindead.

Pre-build Toronto condo sells for $1,755/ft

No wonder RBC says condo ownership is a b-a-d idea, at least compared to renting. Thanks to the stress test (plus mortgage rate hikes) the bank echoes what this blog’s been saying for ages – government policies have shoved demand down into ‘cheaper’ real estate, creating a frenzy and jacking prices. “An increasing number of buyers have been shut out of the higher-priced single-family home categories and turned their focus toward lower-priced options—mainly condos. Trouble is, this stronger demand for condos resulted in sharper price gains and affordability erosion.” And, thus, renters are winning.

Real estate in general, the bank’s latest report affirms, is pooched. Yes, the stress test and Dipper taxes in BC have crashed sales and dropped prices, helping make a house slightly more affordable but, sheesh, it’s mostly bad news. In Toronto: “Owning a home – especially a single-family home – is still a huge stretch for many buyers. So don’t expect the market to reverse its two-year, 31% sales decline anytime soon. If the early months of 2019 are any indication, there’s even further downside risk.”

What about Vancouver? “The market is in full-blown correction mode. Home resales have plummeted 58% since the peak in early 2016 with no sign of a turnaround so far in 2019. While various policy measures triggered and sustained the correction, Vancouver’s ongoing affordability crisis explains most its magnitude. The demand-supply balance now favours buyers and prices are falling.”

So, here’s the damage. Below is a city-by-city comparison of the median pre-tax income a family needs to devote to owning a home (mortgages, taxes & utilities) – and that’s after they’ve found enough cash to make a 25% downpayment. You can see the income requirement is 51% for the nation as a whole, and insane for YVR. (By the way, the acceptable GDS ratio in Canada – housing costs as a percentage of income – is just 40%. How is this not a disaster?)

% of pre-tax income needed to carry a house in…

Source: RBC, Pathetic Blog

Note that this is pre-tax. So, obviously, nobody can afford to live in Vancouver unless they’ve been climbing the property ladder with tons of equity, or are Bill-Morneau-style rich. No wonder the BC savings rate is negative.

As for that rent-vs-own question moisters are always posing, the bank says there’s no longer any contest. The premium for owning a condo in Toronto over the past three years has surged 140%. In Vancouver it’s 119% and in sleepy Victoria, 102%. Sure, rents are higher, but there’s no valid financial argument for purchasing. “This means that buying a condo is a bigger step up from renting than it’s ever been in these and other cities,” the bank concludes.

What next?

Mortgage rates will decline a little as conditions cool and central banks recoil. That should bring the stress test limbo bar down at least a quarter point – but still stuck around 5%. Not much help. Meanwhile the economic slowdown is poor news if you’re looking for a raise, a better job or to buy a house with real dirt. So, competition should remain stiff for condos, regardless of what stats the bank or anyone else trots out. Real estate reigns as our national mania, the creator and then destroyer of wealth.

Just pity the kid who walks into outsized debt to buy a 279-foot tiny home in a Toronto tower.

The good news? It makes sense, the banks says, to own in Regina! And Halifax is “hot”. So there ya go. Death by debt in 416. Or boredom in the flatlands and boonies.

Easy choice.

 

Wedding or bust

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RYAN  By Guest Blogger Ryan Lewenza

I recently attended the wedding of a close work colleague at the historic Casa Loma castle in Toronto. Following the wedding ceremony we made our way to the outside terrace overlooking the city. As I marveled at the beauty of the Toronto skyline below, and the libations started to take effect, I wondered to myself, “what the heck is this costing the newlyweds and the family”? Well it wasn’t cheap, and it stoked my curiosity over the costs of a typical wedding and whether it’s really all worth it.

Switching gears from our normal topics on the economy and financial markets, this week’s blog focuses on the escalating costs of weddings, and whether there could be a better use for this money. At the end of the day it’s just a one-day party that often results in a maxed-out credit card and a nasty hangover. Maybe there’s another option.

Our research around this topic started with a simple Google search for the average cost of a Canadian wedding. Our query came up with a few surveys from the Bank of Montreal and Weddingbells magazine which estimate that the average cost of a Canadian wedding ranges from $20,000 to $32,500. Having gone through this exercise myself, and hearing other anecdotal wedding stories, I’m assuming the $32,500 figure is a more accurate estimate. So, given I’m a financial geek, I ran a few numbers to see what the long-term opportunity cost was of having an “average” wedding.

In my analysis I ran two scenarios. The first is that an “unconventional” couple decides to forgo the big fancy wedding and elope, saving the entire $32,500. This parsimonious couple instead invests the money in a TSFA and in a balanced portfolio earning 6% over the long-run. Assuming they are 30 and remain invested until retirement at 65; the couple would see their $32,500 grow to $250,000. And because it’s in a TSFA it grows tax free and when they pull it out it’s not recorded as income like an RSP or RIF. Great!

More realistically, I ran a second scenario where a “thrifty” couple had their wedding but at half the cost of the average, spending a more reasonable $16,250. This thrifty couple then contributed the difference of $16,250 into their TSFA, and invested in the balanced portfolio earning 6% over the same 35 year period. At retirement this couple would have $125,000, a nice chunk of change to start one’s retirement with some good vacations, dinners out or maybe catch a Blue Jays playoff game (let’s go Blue Jays!).

Amount at Retirement from Wedding Savings

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Source: Weddingbells, Turner Investments

Now this analysis only speaks to the long-term opportunity costs of holding an expensive wedding and doesn’t account for wedding gifts from family and friends. Despite this, the reality is that most couples will be covering the bulk of the wedding expenses, and in fact, many couples will go into debt to pay for their wedding. According to the BMO survey, on average, couples will use their credit card for 13% of the overall wedding costs, which based on the average wedding cost of $32,500, equates to $4,300 going on the credit card.

What does this work out to?

If you just pay the minimum on the balance with a credit card rate of 18%, it will take this newlywed couple 11 years to pay off the $4,300 while racking up $2,500 in interest, resulting in a total cost of $6,800. If the couple is more aggressive and pay $250 per month, then the $4,300 credit card balance would be paid off in just under 2 years but still result in over $700 in interest expenses.

While we recognize this is an incredibly important moment for any couple, we wonder if all the costs (real and opportunity) and potential for a large credit card bill is really worth it. And not to be too cynical here, but there’s a decent chance that it may not all be sunshine and roses. According to one study, there are roughly 70,000 divorces per year in Canada, with 33% of first marriages ending in divorce. And according to Statistics Canada, currently 2.5 million Canadians are currently recorded as legally divorced, which represents 7.2% of all Canadians.

There’s a good business idea. Combine the services of a wedding planner with a divorce attorney a few years later.

Canadian Divorce Statistics

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Source: Statistics Canada, Turner Investments

We hope we haven’t ruined anyone’s Saturday with these grim statistics on wedding costs and divorce rates. But we believe that some Canadian couples may be going too far to try to put on that perfect night. Instead, we suggest that couples consider cutting some superfluous expenses from their wedding budget. A few ideas on that front is cutting out the fat like fancy wedding cakes that few people actually eat, or unnecessary wedding favours like scented candles that nobody’s ever going to use. Pass on the stretch limo, custom designed wedding dress, and videographer. Just focus on what’s important – great food, good music, and free flowing drinks.

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.