Author: Oliver Foote

Why Owners are 28x Wealthier Than Renters

I wanted to talk about the ever popular debate on renting vs. owning with a focus on how the finances pencil out at this moment in time, and which option makes more sense from a Return on Investment (ROI) perspective. Toronto is a notoriously expensive housing market, especially when to comes to ownership, and renting often times appears more affordable at a glance. For the same space in Toronto it is often much cheaper to rent than it is to own (although this gap has narrowed with increasing rents and a temporarily stable housing market), and this is true across many major cities in Canada. On the face of it most people would think, “I’m getting better bang for my buck renting! Why would I ever bother purchasing?” This is somewhat shortsighted in my view and I think many people do not run the numbers on why homeownership over the long term is a more beneficial route financially (plus having the freedom to do with the property as you wish and not having a landlord). There are many very important factors that people forget to include in their renting equation which I am going to be calling the 4 horsemen of real estate ownership.

There are a few reasons why people might be biased towards viewing renting as the better option in the short term. Firstly, it can be difficult to predict prices and appreciation in the short term. For example, if you purchased a home in 1990, it would have taken about 10 years for your home price to recover from the housing market lull. If you purchased a home in early 2022, the value of your home in the current market (February 2024) is likely below what it was in 2022 and may be for another 2-3 years until those prices come back. This is partly why if you look up renting vs. owning you will often notice that ownership becomes more beneficial the more long-term you plan to hold onto the real estate. Often times if you plan to stay somewhere short-term it may actually be more beneficial to rent. I always lean towards the side of ownership when possible because there are ways to own and manage property even if you are out of province or out of country. In many cities you also have various options whether that is renting your property short-term or long-term. If you can afford to stomach a month or two of rental vacancies, you will almost always come out ahead in a high demand real estate market.

I would encourage any young person to try to enter the property ladder as soon as possible, and I’m not just saying this because I have my real estate license. I have held this belief well before I had my license. Allow me explain why I think home ownership is so benificial with some data you may find interesting. According to Statistics Canada, in 2019 the average renter had a net worth of $24,000. You might be saying, “well that makes sense, it could be a demographics thing where younger people tend to rent and some people just can’t afford to save for a home.” According to the same study, the average homeowner, on the other hand, had a net worth of $685,400, or 28 times higher. There may be some truth to the demographics of younger renters and older owners, but I believe it’s more of an education and discipline problem. So allow me to explain why this gap is so massive.

The first reason deals somewhat with human nature, most people are not savers by habit, and our 6% national savings rate proves this, in the US it’s even worse at 3.7%. For people who are not the pro-active and disciplined type, “spending” money on a mortgage can actually turn into “investing” money into real estate. Paying down a mortgage becomes a “forced savings plan” for the average person. Furthermore, many people will lack the discipline it takes to budget and save 20% or more over a number of years for a down payment. It takes a different kind of mentality and work ethic compared to simply paying rent and neglecting to find ways to save some extra money. You might have to find a place that is not as nice and therefore cheaper, you might need a second job to squirrel away all the extra cash, and you may have to skip out on a few vacations. Many people are not willing to sacrifice in order to save a down payment or they make poor financial decisions taking on debt they should not have before they even think about saving.

Luckily, not everyone is a financial mess. For people who are savers they may just prefer renting for one reason or another, or have never been shown the numbers in order to pull the trigger on home ownership. So for these people let me begin by stating that the returns on real estate (can) surpass the stock market due to a combination of reasons. Being a home owner has almost a quadruple benefit compared to renting or simply investing the equivalent which I will explain next.

Firstly, as a homeowner you get to feel the joy (or pain) of paying your own mortgage rather than paying your landlords mortgage. From a selfish point of view, it’s nice to know you’re paying into something you own rather than something someone else owns. Down the line maybe you get a tenant of your own and have them help out with your mortgage, that is known in the business as Cash Flow. Often times even if a home is “negatively cash flowing” (i.e. costs you money every month to “operate”), the other three benefits can hugely outweigh this.

Secondly, every month a portion of your mortgage payment goes to interest and a portion goes to principal (i.e. the original loan amount). The part of each payment which goes towards principal is known as principal pay down, which becomes “equity” in your home. For example, if you purchased a $1 million home with a 20% down payment, immediately out of the gate you have approximately $200,000 of home equity and the other 80% is a loan. Lets say your mortgage rate in present day (February 2024) is 5.29% fixed for 5 years, with a 25-year amortization. By 2029, or the end of the first 5 year term, you will have paid down approximately $88,755 in principal and $198,392 in interest. In this case you now have approximately $288,775 in home equity, before factoring in appreciation. You might look at this and say, “hey! I just paid $200,000 in interest! That’s crazy, what a waste of money!” This is often where people forget that homes tend to appreciate in value over the long term. The value of your $1,000,000 asset likely increased to beyond $1,000,000. Therefore the equity in the home has increased, but the loan value DECREASES at the same time thanks to your principal pay down. Over a long time horizon these two lines diverge and what’s left in the middle is (often significant) home equity.

Thirdly, the GTA over the last 40 years has appreciated at approximately 6.7% per year (in the 10 years prior to 2020 it was closer to 10% appreciation due to continually decreasing interest rates, we likely won’t see that same type of growth again). Factoring this 6.7% appreciation into the equation, in 5 years the $1,000,000 home might now be worth $1,383,000. That’s an ADDITIONAL $383,000 of home equity. Combining the original $200,000 down, the $88,775 principal pay-down, AND the $383,000 appreciation, you now have $671,775 in home equity! If we take the TOTAL return on investment between principal pay down and appreciation, in just 5 years the initial $200,000 has grown by 235%! Even if you subtract the interest you paid over the loan term you are still sitting at a new net value of around $471,000, which is still over 100% ROI in 5 years. If you took that initial $200,000 and put it in the stock market at an average 8% return every year you would have $293,865 in 5 years. Which is not even 50% of the total home equity (i.e. $671,775).

Finally, you also have the ability to create “forced appreciation” by doing some simple improvements to the property, or dividing a property into 2 or more rental units to add value from an income generation perspective. There are a few well known improvements that can significantly increase the value of your property on the open market, and if you DIY it on the cheap you can add a ton of value while saving a good portion of the labour cost. That being said PLEASE hire someone if you’re not construction savvy, a hack job could actually cost you money in materials and hurt the value of your property. If done right, by not overspending or doing a poor job, this fourth horseman of real estate ownership can help send your return on investment even higher than I outlined above.

All of the reasons listed here prove why real estate ownership can be so powerful as a wealth building tool and why the average home owner has a net worth more than 28 times higher than a renter. Many people do not take the time to do the math on real estate ownership, or might not be aware of all the ways that owning real estate provides an amazing return on their investment. Naysayers might argue that the return is not guaranteed, well, neither is the stock market or pretty much anything else you invest in. However, real estate has the benefit of being a hard tangible asset compared to an intangible piece of paper (stock certificate). There is risk to any investment, your home could theoretically blow away or burn down. But you can mitigate this with insurance. Overall, you can make a good amount of money in real estate when you purchase at the right price. If you take the example about further you might also be able to see how owning multiple real estate investments can compound your wealth even faster, and it explains why many people who are well-off have a significant stake in real estate. Even if your home appreciates at a much slower rate than the one I present here, you are likely to come out ahead of the average stock market investor and well ahead of the average renter. I hope that after reading this you think about breaking into the real estate market sooner than later and begin to benefit from the 4 horsemen of real estate ownership.

All the best,

Oliver

P.S. When you sell a primary residence your capital gains are tax free, in Canada. Also, you can deduct mortgage interest from your taxes on an investment property and you can benefit from depreciation around 4% per year. I’ll cover these tips and more in later articles. The benefits to real estate as a tool for investment and tax deferral and wealth building is bar none in my opinion.

Post Communism in The Soviet Union and Economic Growth of The Open Market:

If you have read some economic history on the Soviet Union, you’ll know that once the Iron Curtain fell and the market became open, it created a lot of prosperity for those who were in the right positions and had the right connections. Since almost all means of production in Russia were state owned at the time, when the Soviet Union fell there was no clear ownership over the state assets anymore, and the people we now know as Oligarchs were able to make deals with state officials and get some once in a lifetime deals on state assets, obviously laden with corruption of all sorts. The Russian story gets quite detailed with people falling in and out of favour with the government, suspicious deaths of Oligarchs and eventually with Vladimir Putin seizing power. I would recommend reading the Wikipedia page on Russian oligarchs if you’re curious.

While the Russia story is fascinating, I wanted to use this post to talk about some smaller scale success stories that occurred as a result of the transition to a free market in some of the Soviet Union satellite countries. Since I have family in Poland and an uncle who runs a small furniture factory out of an old barn, I thought his story and the story of a few entrepreneurs in this small village of 2000 people would make a great example. After the fall of communism in Poland in 1989 and the privatization of the market, it opened opportunities for many people, even small business owners to ride the wave of economic growth that would come. As an example let’s take the story of one family in the village where my mother grew up. The business owner has a very well known story in the village and it is a story of right place right time in his case.

Around the time when the market was opening up and becoming more privatized Greg took out some business loans from multiple banks to purchase land and equipment for his furniture business. Since they were only beginning to regulate open market banking you could shop around at various banks and get each one to lend you a chunk of money for your business. During communism inflation was consistently hitting double digits every month to the point where it hit 1200% in 1990. These two factors set him up for great success with respect to timing. If you have a means of production to make current income at sell goods at current market prices, but your loans were taken out while hyperinflation is happening, you can pay down those loans for pennies on the dollar in a few short months (or groszy on the złoty for my Poles). I’m not entirely sure who would be lending money in an economy with hyperinflation, but I would imagine the lenders tried to protect themselves with very high interest rates or maybe only lend money pegged to a more stable currency. But even interest rates might not be a great defence depending on the severity of the inflation. When there is hyperinflation it’s a very bad time to be a lender and a very good time to be a borrower. So Greg and a few others in the village became significant land owners and business owners and paid next to nothing for it. Now he owns a small shopping mall in the town of Krosno nearby and a vacation home in Spain, so he’s done well for himself. Timing isn’t everything, building a business is not an easy endeavour, but it can help speed things up a bit.

As another example from the same village let’s take my uncle. He was just getting out of school when communism fell. So him and a friend decided to try and start up their own furniture businesses and they worked together to learn all the tricks of the trade required to set up shop. I don’t think he ever expected his business to do as well as it has. At the time he was just trying to find a way to work and make some money. While he didn’t get the very lucky timing of taking out loans while hyperinflation was hitting, he was able to ride a different wave of prosperity. Poland joined the European Union in 2004. This meant free trade and the goal to bring up countries like Poland to higher standards of living. With the free market, the free trade of the EU and the direct financial assistance given to Poland, their economy began to grow. All the while my uncle was selling his furniture to dealers in larger cities and building a network of connections and people who wanted to buy his product. He expanded and bought new equipment and now runs a very sustainable small business. 

Poland is now quite “westernized” in it’s standard of living, there is opportunity if you want it, and the big cities are doing quite well and you can find some very well paying jobs in Warsawa. This more advanced stage also introduces multinational corporations who now see a business case to open up stores in the country, for example IKEA. When I had this realization that IKEA might come in and steal all the business from the small furniture manufacturers, I was somewhat concerned for my uncle. But funny enough I actually think something even more interesting has happened. IKEA isn’t exactly known for having top quality materials or amazing variety. What I think has happened is by introducing this new player in the market is it actually elevates my uncles product to a more premium level. 

The people who may buy from IKEA to outfit their small apartment in the big city, aren’t necessarily the same people who are staying long term in Poland and are looking for something that is better quality and can be built to order. They serve two completely different markets, and there is space for both of them. Also reflecting back on one of my later blogs about how zoning bylaws in North America don’t encourage small business, the design of a European country is simply more friendly to a wider variety of commerce and smaller businesses in my opinion. Overall, I think there is a more local attitude that still prevails in Europe while in North America we tend to prioritize huge multinational corporations and big box stores. 

It is possible that over time things will change, and my uncle will have to find a different way to sell his products. But for now I think his business will continue to grow and serve his market. From a purely economic perspective I find it fascinating how many similar stories there are to his in the soviet satellite countries and Russia itself. Even just within my family’s small village in Poland there are numerous well known entrepreneurs who set up shop around the fall of communism and have expanded their reach to supply stores across the country. 

Every once in a while the economy presents a great opportunity to start up a business and in the moment you might not even realize it’s happening. As a recent example, investing in the stock market during COVID. The only thing I wish I did differently was borrow more money to invest with. Hindsight is 20-20 in these situations at there is always risk to borrowing money and you can never really predict what will happen in the future. Our present economy has becoming challenging for a lot of people and if you read the news, there has been news of thousands of tech layoffs in the US. However, many of these employees turn around and start their own companies once they get let go and are finding great success doing so. There is a lot of opportunity available even now, and great sustainable businesses are often built during challenging times. Understanding the past can give you insights into what economic forces were in effect during that moment in time and help improve your radar for understanding when and where the next opportunity might present itself. Communism and COVID are just two of many different examples around the world of global economic shifts that can present great opportunities for people who are ready and able to capitalize on them. 

All the best,

Oliver Foote

Why Are People Leaving Ontario for Other Provinces?

People leaving Ontario for other provinces was a headline that really took off during the pandemic. Everyone was forced to work remotely and it opened up opportunities for mobility. It made good financial sense that you could keep your big city salary and move to a lower cost of living area to make your money go further. This led to a spike in inter-provincial migration numbers and local rural properties becoming more expensive as people left larger cities to find more space. However, for some people the choice to move may have backfired. I am aware of more than one person who moved out from Toronto with the expectation that they would be able to work from home for the rest of time and they ended up moving back in 2022 or 2023.

Migration out of Ontario has been quite variable over the years, from 2003-2015 there was net out-migration to other provinces, from 2016-2019 there was net in-migration, then largely due to the pandemic and skyrocketing housing costs Ontario saw out-migration from 2020-2022. However, Ontario is far from the worst. People have been leaving Quebec, Saskatchewan, and Manitoba every year since 2015 for other provinces. Alberta only recently saw more people come in than leave, as of 2021. Most of the Maritime provinces saw significant proportional spikes during the pandemic.

I could go on and on listing different datapoints, and really it wouldn’t matter all that much since the numbers of total migration between provinces barely tops 100,000 people per year in most years. When we’re bringing in 1,000,000 new residents to Canada in one year we have a larger issue at hand. The more important trends would be to see where people immigrate to, and as you might imagine people will immigrate to where they have the largest networks, or where the most jobs are which tend to be the larger cities. This means that the supply crunch in the Greater Toronto Area is not likely to see relief because people are unlikely to choose to immigrate or migrate in large numbers to other provinces where they don’t have a support network and fewer job opportunities. People want to be where things are happening, and the largest city in Canada, tends to be a solid go to choice.

If you have taken a trip on the TTC at some point in the past 2 years you would have likely seen at least one advertisement encouraging you to move to Alberta. The campaign Alberta’s provincial government came up with is called “Alberta is Calling” and they are pitching Alberta as “affordable, friendly, and rich in opportunity.” I’ve only been to Alberta once for a wedding in Banff, and from that experience I can say that it does have a lot of natural beauty. But from the news this past week, I can also say that it’s cold. -40° C cold. The -10° C in Toronto today feels downright balmy compared to that. Like most of Canada the cold doesn’t last forever and it does eventually just become part of your life, but I can’t help but point out the weather conditions as someone who prefers it to be a bit warmer.

I also want to touch on an article that I came across recently regarding Alberta’s immigration + migration capacity. As mentioned earlier, the whole of Canada is having a bit of a problem handling the number of people that immigrate here every year. Alberta’s campaign worked so well that there is a concern that they will not be able to meet the higher demands on their services like healthcare and education. They had 194,000 people come to the province last year which is a 4.3% increase in population. With the way things are going in Alberta and across the country. The investments and preparation to provide these types of services to a population influx has to take place years or months in advance. There is some concern that Alberta will not be able to just flip the switch to meet this new found demand. Eventually this problem will improve itself with the increased tax revenue from these new residents. But it will be reactionary, as most big moves in politics tend to be. Planning ahead seems to be verboten.

I do completely understand why some people might want to move to cheaper provinces with the current housing prices in Ontario and British Columbia. But comparing and contrasting Ontario with British Columbia shows an interesting trend. In 2020 Ontario saw net out-migration of -18,405, in 2021 it was -47,212. Surprisingly, or maybe unsurprisingly, British Columbia saw net in-migration throughout the pandemic. In the last 50 years BC has only seen 12 years where more people left the province than moved to it. Clearly, even with the highest costs of housing in the country, it is a place that people will sacrifice a lot, in order to have the pleasure of living there. If Alberta’s push to get people to move continues to be successful it is likely that a large number of the migrants into the province will come from British Columbia simply due to proximity, and of course high housing costs. As someone who has never been to BC but has dreamed of going there more than a few times, the pull of BC is quite strong.

The moral of all these inter-provincial migration numbers is that housing is still a crisis. People are not just contemplating moving to less expensive provinces, but are actually doing it. I believe this trend will continue for the foreseeable future, even with the historical investments in housing from all levels of government. Our economies have become so centralized, data is so accessible, and financial systems have enabled us to borrow huge amounts of money to purchase homes. We’ve underinvested in trades, have high numbers of immigration, and anticipate lower interest rates coming over the next decade. All of these factors combine to create a housing supply shortage and a financial system that will both work together to keep prices going up. We’re in a situation now that if prices do fall significantly it likely means there are much bigger problems in Canada than just housing. I want to be hopeful that this problem can be solved by a combination of investing in trades and housing. But I’m not sure that will be enough. It will be interesting to keep an eye on the migration trends in the coming years and I do wonder if at some point we will see emigration out of Canada, or if BC’s natural beauty will be enough to make people want to stay.