The Uncatchable Wealth Gap

Published on 14th November 2017

In this week’s article, which I’ve been meaning to write for a few weeks now, I’ll be talking about the wealth gap and what has really happened from a macro level in the last few years to the affordability of a home.

Throughout my real estate career, I’ve worked with a lot of first-time home buyers and it brings me great joy to be able to help them in the process of finding a home. Years ago, the first-time home buyers were all well-paid young professionals looking to enter the market either as a couple or on their own. However, in the last 2 years, certain things have shifted. Most of the first-time home buyers who I’m working with now all have some kind of support for their down payment. The quick and obvious conclusion to this is that the prices of real estate have been growing so fast that saving for a down payment is incredibly hard now.

Let’s take a deeper dive into that previous thought. At present day, to buy a 500 square feet, 1-bedroom condo in downtown Toronto will cost you almost $500,000. That’s a $100,000 down payment at (20%). That’s a lot of money to save up as a first-time home buyer, especially if you have student debt.

Wishing upon a star for affordability – A lot of people who I talk to (in the midst of all of these mixed media messages and government changes) are hoping that we have reached some sort of peak in real estate prices, crossing their fingers and wishing that these prices will fall to the ground and somehow be affordable again. Unfortunately, I’ll have to be bearer of bad news and say that I don’t think property prices will ever be any more affordable than it is right now, purely from an economics perspective.

Average House Price vs Average Income – I’ve spoken about the rent-to-price ratio that economists use to see how affordable it is to live in a city. Last week, I outlined Toronto’s very own proposal to Amazon showcasing how affordable we still are on a global level. Today, I’m going to outline a metric that also measures the affordability of a home based on average income. Below is a chart with an absurd trend that you won’t like (that is, unless you already own a property).

Stats above are courtesy of StatsCan and TREB

Based on the chart above, you can see that back in the 80’s, 3 times your average income allowed you afford you an average house. We’re currently at 13.44 times the average income to afford a home. If we keep going at this rate, just how unaffordable will houses be for the average income earner? Also, don’t forget about mortgage rules that make it even harder to buy. For example, back in 2008, you could buy a 1-bedroom condo in downtown Toronto for $250,000 with 5% down ($12,500). Compare that to present day with the $100,000 down payment required from our example above!

THE BIG PICTURE – I’ve written about each point below separately before but I feel that having it all on one page in aggregate will allow you to see the big picture. The points below are factors that that are preventing many Torontonians from ever owning a piece of real estate in Toronto.

1. Mortgage rule changes: Once the OFSI B-20 rule takes effect on January 1st, 2018 and reduces everybody’s buying power, it will eliminate a lot of the first-time home buyers out of the market forever.

2. Rent Control: Since the implementations, it has psychologically made all renters with favourable non-market rent stay in their spot forever. To all of those in this situation, congratulations. However, good luck and be prepared for a sticker shock when you need more space.

3. Rent Control (ii): This has made the rental supply completely diminish. You can’t solve a demand problem unless you address the supply. I foresee rental rates continuing to go up, which will completely decimate anyone trying to save for a down payment.

4. The Buyer Psychology: There has been an increasing number of millennials who are opting to never own a home That’s going to cause more pressure being placed on the rental market as these non-home owners will be renters for life. On the flip side, that’s great for all of you investors out there!

5. Minimum Wage: With the minimum wage being pushed to $15 per hour, which is an effective 32% increase, we’re going to see a lot of people with minimum wages being able to afford condo rentals. That will put even more pressure and strain on the rental supply, thereby effectively increasing rent. See point #2 again.

6. Immigration: Toronto gets approximately 100,000 quality immigrants with professional education and inter-generational wealth coming every year. This always puts pressure on housing supply and price with that many people entering our city every year (they have to live somewhere!). Remember, Canada selects its immigrants based on how they can “contribute” to the economy, which basically translates to “selecting” high income earners who have money, and in turn, can be taxed more.

Sticker Shock… or Not? As Torontonians, we often get sticker shock when we keep seeing our prices go up while our incomes remain relatively flat. However, here is the unfortunate truth: Toronto, compared to all of the major cities in the world, has a very low ratio of house price to income ratio. Have a look at the chart below that outlines this very statistic.

Toronto was so far down the list in the world that I had to use the “search” function to find it. We’re #136 out of 267 countries – that’s just about half. According to this website’s model, Toronto housing prices are only about 9.09 times the Toronto average income. This is still quite high, but when you compare it to the major cities such as Hong Kong, London, Shanghai, Mumbai, which are all 30 times the average income, Toronto’s statistic is pretty low relatively speaking for our “livability” factor.

When you combine all of these factors together, it’s pretty obvious which way the wealth gap will trend. But in terms of how much and how fast, that we’ll have to see.

All I know is that if you own the asset, do not sell it. Keep it rented out for cash flow, and you’ll be in a great spot. Lastly, if you can afford to, buy more properties now before they become even more out of reach later.

Until next time – Happy Real Estate-ing,
Zhen

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