Oliver Foote

Why Are Rentals Affordable All of a Sudden?

As someone who likes to stay on top of what’s happening in Real Estate and the economy. I have noticed something happening that honestly, I’m not sure many people saw coming. Rental prices are dropping in major city centers across Canada, and have been on a slow but steady decline for a good 6-8 months. The main reason for this change simply has to do with a supply and demand problem (on many levels), and it’s all happening at the same time, right now.

Demand:

Let’s talk about demand first. Allow me to tell you a bit of a short story about recent events, namely something called COVID-19. The effects of the pandemic are beginning to show up in so many different aspects of society, and what I’m going to talk about here is another example of how generational of a shift was caused by COVID. Prior to COVID, people knew we had a bit of a housing shortage in Canada, in bigger cities multiple offers were common, but politicians were making some small policy changes to try and address some of the problems. Fair housing plan, first time home buyer tax rebates etc. But these were really drops in the bucket, and I don’t know that any politicians were earnest sitting down and thinking to themselves that there was a real problem here and that things needed to change. Enter the pandemic, low interest rates, followed up quickly by a completely crazy housing market. What COIVD did, was shine the worlds biggest spotlight on housing and made the entire country realize how bad housing could really get if we let things go too far. All of a sudden, every level of government is talking about housing, all of a sudden we’re talking about educating trades workers again and doing something to fill in these gaps in our economy that have been growing for decades leading to the problems that we are now experiencing.

Interest Rates:

So what did the various levels of government do in order to try and reduce this crazy demand in housing that was brought on by COVID? Many things. The Bank of Canada (not technically the government, although still a government entity?), increase interest rates by 4.75% over the course of 1 year, the fastest rate increases in history, which made housing extremely unaffordable at current market prices. Almost instantly, a ton of demand dried up because, financially, it became a horrible deal to purchase a home. Real estate prices move in the downward direction a lot slower than they move in the upward direction, which meant that while the cost of owning a home climbed in lockstep with rate increases, prices did not fall at the same pace. Even with these high interest rates reducing the pool of potential buyers significantly, there’s just so little supply, that some people who really need a home, were still buying homes. We didn’t see a huge flood of inventory (until about a year or two later), because most people who were already in their homes might not have to renew their mortgage for another 3-5 years and don’t need to sell. Rates were a big hit to demand, but everyone was finally beginning to realize the gravity of the situation, and the Bank of Canada made it pretty clear that the high rates would eventually come down once they dealt with inflation. So while the oven was still hot, governments began to put other policies into place.

Foreign Buyers Tax:

In some provinces, mainly the larger ones, foreign investor taxes were put into place in order to reduce speculation on the Canadian housing market as an investment vehicle. Canada is a very stable country, so if you have money from another country that is less stable, why not just park it in a piece of land located in Canada, and as a side benefit watch the investment grow. Makes perfect sense from an outsider point of view. But what this means is that local “middle class” people have to compete with the global rich, who may want to send their children to school in Canada or for whatever other reason have an interest in real estate. There have been arguments made about whether of not the percentage of foreign investment in Canada was actually making a dent at all in the cost of housing and what even counts as foreign investment. But on the whole, if the goal of this policy was to reduce demand, a 25-30% tax on foreign investment is one way to accomplish that.

Foreign Buyers Ban:

Following this policy, but at the federal level, we had a foreign buyer BAN for 2 years starting Jan 1, 2023. Which has been extended for an additional 2 years until Jan 1, 2027, and who knows, maybe it’ll be extended again. What this means is that if you weren’t a citizen, or don’t have Permanent Residency (PR) status in Canada, you CANNOT buy real estate here, at all. So even if you were willing to pay the provincial tax of 25-30%, with the hopes of getting a rebate (within 4 years) once you have your PR, you can’t do that anymore. Again, if the goal of the policy is to reduce demand for housing. This will have likely accomplished that. However, a potential side effect of this policy is driving up rent prices, because there may be a situation where you have a highly skilled worker who comes here and is making really good money or may have the means to purchase a home, but now they are forced to rent. Which means more demand for rental housing from people who are barred from buying, even if they plan to make Canada their home long term. I would consider this a more artificial and temporary reduction in demand, because these skilled workers will probably buy after getting PR.

Less Immigration:

Wow what a great transition, let’s talk a bit more about PR shall we. Quite recently, the government has been walking back the number of people that can apply for PR and officially immigrate to Canada. This has made the process of becoming a Canadian citizen a lot more competitive, and if you combine this “reduce immigration” policy with the previous policy which only allows citizens or PR holders to purchase homes, you will see a notable reduction in demand for buying housing. There will literally be fewer people who are legally able to purchase homes in the coming years. That’s not technically correct since we’ll be increasing the number of Canadian’s every year while still not building enough. The pace of new entrants will still be outpacing construction. But at least with these new policies things will get worse slower than before.

Fewer Students:

One final thing on the demand front deals with students and rental housing. Students make up quite significant portion of the rental market. Prior to, and just after the pandemic. The government was allowing pretty much anyone who would be accepted by a college or university, to come to Canada and study. Which in theory is an ok idea since we hope those people will stay, get a good job, and contribute positively to the productivity of our economy (not to mention spend money while they are here). But this unregulated environment led to some bad actors taking advantage of the situation. In some cases students were getting scammed by private “career colleges” which sold a promise of a Canadian education, and frequently didn’t deliver even the basics. It was a bad look on Canada, and brutal on students that took a huge risk spending international student tuition to get an education in Canada.

Aside About Higher Ed:

Additionally, at some point down the line, higher education institutions, including the prestigious ones. Began to cater their “services”, to the international student audience. Why? Because international students pay 2-4x the tuition rates of domestic students and universities have been dealing with consistent budget cuts from the provincial government over the course of decades (god forbid we help to pay to educate our future workforce). As an aside, I feel very strongly that higher education should be almost free in Canada for locals (which means more government funding). It’s ok if you disagree, but I would ask that you think about the implications on young people when education leads to debt, we are handicapping them before they even begin working. Additionally, if it’s too expensive, some people end up forgoing education altogether. More highly structured education after high school isn’t always the right answer. But, I think fundamentally we can all agree that continuing to get educated is a good thing and more funding for higher education is a great way to do that.

After years of cuts, universities felt the need to increase international student enrollment in order to make up for the difference, and the funnel was effectively endless. Obviously, this all came to a head and some people began to tell their MPs about these issues, namely scam colleges, and shortly after we see a cap on student visas. What does this means for housing? Likely there will be less rental demand in major metro areas where higher education institutions are located.

Supply:

Ok, I think that wraps up the demand side of the equation. Excuse me while I go and watch the 4 Nations Faceoff Canada vs. USA game (Canada lost, dang). Supply is up next, and this is where things get really fascinating.

Rents at 18 Month Low:

A report from Urbanation, who do really good research on housing in the Greater Toronto Area explained in October 2024 that average rents, especially in large cities across Canada have been dropping. An even more recent report by BNN said that rents across Canada have hit an 18 month low in January declining 4.4 percent to $2100. Rents are still 5.2% higher than 2 years earlier. But this is still a welcome sign for many renters. So what’s going on here?

Flood of New Supply:

We’re in a very interesting moment in time right now. As mentioned in the demand section, we’ve done a pretty good across the board job of slowing demand. At the same time, we have a flood of new condo completions hitting the market, actually a record amount for 2024, 29,800 in the GTA. In a normal year there might be 20,000 completions, which means we saw a 50% increase in inventory hitting the market. Approximately half of these new condos were listed for rent, since many owners are reading the writing on the wall and can see that they won’t be able to sell at a good price. In fact they may not even get the price they paid out of the condo. The pandemic also slowed and delayed condo completions, and 2024 just happened to be the year of reckoning where everything hit the market all at once. Additionally, purpose built rental completions were 5,537 in 2024, which is 86% above the 10 year average. In 2023 completions were 5,779 units.

What This Moment Tell Us:

When you combine the twofold pressures of ton’s of supply for sale, a smaller pool of buyers than usual, more nationalistic policies, higher interest rates than usual, and a “stable” housing market which is moving very slowly in the downward direction. Many new condos and purpose built rentals hitting the market. Leading new condo owners to attempt to rent out their units because they are unable to sell them right now. We have accidentally created an amazing case study that proves the point that politicians, and economists have been shouting from the rooftops. How do we make housing more affordable? We build more. Simple. This moment in time proves that if we build more, and build more variety, and have a constant flow of new housing coming onto the market, it will very likely relieve the pressures that we’ve been seeing on the housing market and make housing more affordable. On top of managing demand, filling gaps in our economy with tradespeople, and building a variety of housing (we don’t need to exclusively build detached low-rise or 60 storey high-rise). If apartments almost become a dime a dozen, a commodity, instead of something you need to be making six figures even to afford a rental. That will put a lot of downward pressure on prices and people will be less feral when trying to bid on a home or a rental.

Quebec is Doing It Better:

We have a case study in Canada that we can look to, Montreal and Quebec. In general, Quebec has not seen the same problems with cost of housing that we have. The pandemic did make things worse for them as well. But I was wondering why they don’t seem to be having as severe of a crisis as we do in Ontario and BC. I learned that a few reasons for their ability to managing housing costs a bit better is because they have fewer exclusionary zoning by-laws, aka. They build a larger variety of housing. The home construction market in Montreal is able to adapt much quicker to changes in demand, they also don’t exclusively rely on high-rise condo’s to solve their supply problems. They build a variety of housing types, like 3-4 storey apartment buildings. That are able to be built quicker and meet demand quicker. Our supply is very inelastic in Ontario, which the supply in Quebec and Montreal tends to be more elastic preventing prices from going to crazy. They also prove the point that the fundamental issue surrounding housing is a simply supply and demand issue. We do have to look into all the layers that cause a supply problem, or lead to unusually high demand. But if you boil it down, we need to build a whole lot more, become a lot more creative, and as 2024 proved, the problem can get better. Thanks for reading, hope you found this interesting.

Keep Investing,

-Oliver

The Problem With Youth Unemployment in Canada

Economics: Canada’s GDP, and Employment:

There have been a lot of interesting developments happening in Canada related to employment that I think are worth discussing. I’m going to explain why Canada has one of the highest youth unemployment rates it has ever seen, why Canada’s GDP growth has actually been a negative for citizens, and how politics are influencing this issue and what people in power are starting to do about it.

Toronto and Ontario Lag Behind Canada:

The first topic I wanted to touch on is unemployment in Canada and more specifically in Ontario and Toronto where I now live. The unemployment rate in Toronto in November 2024 was sitting at 8.2% which is higher than Hamilton (6.7%), Kingston (5.8%), Ottawa (6.1%), St. Catherine’s (6.6%), and almost every other major city in Ontario except Windsor (8.5%). Toronto’s unemployment rate is comparable to Northern Ontario where work is notoriously hard to find (8.4%). The overall unemployment rate in Ontario was 7.2% which is higher than the national rate of 6.8%. Why is Ontario doing worse than the country as a whole and why is Toronto doing worse than the rest of the province? Let’s find out.

Overshooting Immigration Targets:

Unemployment is the symptom, not the cause. In order to find the cause we need to understand how unemployment works in the first place, and this is generally just a case of supply and demand. But there are other factors at play, like interest rates, immigration and migration, investment etc. As we have all been made aware by now, Canada overshot it’s immigration and migration numbers by a significant amount in the past couple years and the government is beginning to try and put more restrictions on people coming into the country. Generally speaking, Canada has always been friendly to immigration, especially people who are highly skilled workers and are able to contribute positively or fill needs in our economy. It has been stated many times over that the only way for Canada to maintain it’s pension plans and continue growing GDP and productivity is through immigration. If immigration is such a good thing, why have we decided to cut it down? Well part of the reason is that we have nowhere to put people, housing has become such a large issue and pain point, and renting or buying almost anywhere in the country is becoming extremely unaffordable. People will come here, and expect to find a reasonable home and realize that a huge portion of their paycheque is going towards their rent or mortgage. This doesn’t explain unemployment, but it does help explain some issues we have with our economy as a whole.

Highest Household Debt in G7 Curbs Spending:

Another factor in our problematic economy is that Canada has the highest household debt to income ratio in the G7. Meaning that people in Canada are extremely overleveraged on their homes and rent payments. This affects the economy in ways that people may not understand. Traditionally the people who spend the most money tend to be middle class, and spending money is what stimulates the economy and leads to growth and expansion. What has happened over the past few years with the skyrocketing costs of housing, the expensive mortgages that people are renewing into, and general high inflation. Is that people do not have excess money to spend, and consumer confidence is quite low.

Employers Pull Back Investment:

If people are not spending, there is no reason for companies to make investments in their workforces and R&D new products when there is no demand for those things, and in many cases shrinking demand. We now find ourselves in a situation where our GDP per capita (per person) has actually gone down at the fastest rate in the G7. This is a much more accurate measure of quality-of-life changes, as compared to overall GDP growth. Part of the reason per capita is down is because we’ve let in so many people (over a million in 1 year). The overall GDP has gone up compared to a year ago, but per person has gone down. Without all these extra people boosting our numbers we’d be in a technical recession. The way that falling GDP per capita manifests in people’s real lives is the realization that their money doesn’t go as far as it once did and struggling to afford and adjust to fewer things, fewer luxuries, fewer benefits that come with a growing economy. Life has become more difficult and paying bills has become more challenging in the past couple years for the grand majority of Canadians. The average money that Canada produces, per person in the country, has gone down, there is literally less to go around. But the economic headlines don’t usually focus on GDP per capita, they focus on GDP and proudly promote the fact that our economy is (technically) growing.

Newcomer Credentials Not Recognized:

Because of all these factors: high interest rates, high levels of household debt, low business investment, declining GDP per capita, and millions of people coming to Canada, we are suffering an unemployment problem that is getting progressively worse. These problems are also making it even more challenging for all the people and students who come here. I don’t believe that people should expect handouts, but by the same token I’m not sure that it’s fair that we are telling people to come here, and then they’re met with the reality that there’s just no work for them or their credentials aren’t recognized or a million other hurdles are put in their way to succeed. Work is becoming harder and harder to find due to the above, this leads to strains on public services, food banks, and more. By allowing the sheer number of people to come into the country that we did, we are effectively draining our own resources at breakneck speed. Stack on top of this our housing construction issue which is a whole other topic for a whole other blog, and we’re just squeezing people for everything they have. High cost of housing, poor employment, the picture is bleak. A lot of the economic factors I’ve mentioned are leading to the cost of home construction to become un-feasible for builders, and this will lead to a renewed shortage of housing about 3-5 years from now, which is really not what we need added to the pile of problems.

Historically High Youth Unemployment:

Let’s discuss youth unemployment, I’ve been reading some scary things about the 15-24 age group. The core age group 25-54 is currently experiencing above long run average employment levels, the youth age group is not faring nearly as well. As of last year, employment was at somewhat normal levels for Ontario youth, hovering around 11%. But in the latter half of 2024 it has jumped to around 17% and is getting worse. This is problematic because getting a job is important to development for a lot of young people. Your first crappy customer service job motivates you to find a better job, internships lead to future full time roles, and you learn important life skills and how to work with others. These employment numbers getting worse are not only bad right now, but will be bad for the future workforce, youth unemployment is a crisis. France has declared youth unemployment a national crisis, and their numbers are better than ours, what does that say about us? These numbers are also directly impacting a lot of university graduates because it points to the fact that companies are hiring fewer and fewer new grads in an already extremely challenging environment to find work.

University Graduates Struggling to Find Work, Hiring Freezes:

This data backs up what I’ve been hearing anecdotally. I graduated from Engineering in 2023 and I’ve been talking to others who graduated from school around the same time I did. I’ve heard stories of people searching for work for over 7 months to a year and a half AFTER graduation to find work (many still looking). A client of mine that I spoke to a month ago who works for a materials engineering company is currently in a hiring freeze and knows of many other companies who are doing the same. This is as of November 2024. Every engineering graduate I’ve recently spoken to agrees with me when I make the comment, “I wasn’t aware when I started school, that part of the gig would be moving to the US.” Not just to find a job that pays well, but to find any job AT ALL! You suffer through years of engineering just to continue to suffer for another year or more to find a Canadian engineering job, it’s extremely disheartening and I don’t blame people for feeling disenfranchised with Canada or their expensive educations because of it. I can think of a greater number of people from my engineering cohort who are working in the US than those who are working in Canada. The ones who are working in Canada are only doing so because they are international students and have no other choice (or worked their butts off applying), but would much prefer work in the US, and likely will once they are Canadian citizens. I don’t know how else to say this, but we simply don’t have enough jobs in Canada and Ontario to keep people from leaving, and the US benefits from all these people we’ve spent (partial) taxpayer money educating.

Employers Hiring for Experience:

Another relevant point here is that as companies are cutting costs, tightening their belts, and possibly laying off highly qualified workers, why bother hiring a new grad you have to train from scratch where there is a pool of much more experienced, more qualified people for you to choose from. This contributes to the bleak outlook for youth employment. The numbers back this up because employment of core workers is steady and rising, while it is falling for youth. Diverging a bit from the data again, I read recently a comment from a Canadian online forum that you used to be able to just walk into pretty much any retail store and ask for a job and you’d be hired in a jiffy. But even these basic jobs are much harder to come by and staffed frequently by overqualified workers, or workers who aren’t getting paid properly and are becoming harder to find.

Part-Time Work Replacing Full-Time Work:

Another concerning fact is that we are losing full-time jobs almost at the same rate that we are gaining part-time jobs. Our employment situation is actually much worse than the numbers make it seem, full-time jobs are being replaced by part time-jobs and gig work. This is a problem and underscores that quality of life has likely declined for a significant portion of the population. Full-time stable employment is becoming a thing of the past for many people and they are replacing it with one or more part-time jobs. Along the same vein is underemployment, Canada is notorious for this. Everyone has a story of when they discovered that their Uber driver was a doctor in their home country. I don’t have any issue with doctors having to go through recertification and a couple years of training to get up to speed on how we do things here. But there are no spots available for them in residency programs and yet we have a huge shortage of family doctors! What are we doing here?

“98% of Graduates Are Employed”… at McDonalds:

I feel similarly when I learn a recent university graduate is working at McDonalds just like they were in high school. The only difference is that they have a 4-year university degree and are $30,000 more in debt. The situation here is quite frankly bizarre. This reminds of an ad that I would often see in Hamilton that made me laugh while I was on the bus to and from McMaster University. Brock University was advertising that “98% of [it’s] graduates were employed within 2 years of graduation.” No mention of whether those graduates were employed in their field or a related field or if they were using their degree at all for that employment. So I would always joke “yeah and 50% of them are working at McDonalds or underemployed.” It’s not impressive at all that after 2 years out from school you might finally decide to move out of your parents basement and start working literally any job to pay your students loans back. I knew it was bad 5 years ago, and it’s only gotten worse thanks to all these knock on effects of the pandemic and other world events.

Why Toronto is the Epicenter:

So back to the question I posed at the top. Why is the employment rate worse in Ontario and Toronto than the rest of the country? The answer lies mainly in the number of people that choose to come to the province. Ontario is the largest province, has the most schools, and brings in the most people. But we also don’t have as diverse of an economy as the US. We are not the profit center of Canada, that honour goes to our silicon valley, Alberta and their oil. We don’t have the most profitable enterprises in the country, yet we see the most people coming here. Demand to live and work in Ontario and Toronto is much higher than supply, therefore we see the phenomenon’s I have illustrated. This supply-demand imbalance is also somewhat of a contributing factor to all the issues I posed above related to youth unemployment, people leaving Canada, and our false GDP problem, it also underscores the importance of the governments of Toronto and Ontario taking these issues seriously and trying to identify solutions to all these problems. Much of the problem does still lie with the Federal government’s regulations and Bank of Canada policy. But employment, especially for youth, is something I believe needs to be addressed by all levels of government on top of what they’re already doing with housing and population.

Keep working hard,

-Oliver

Investing $100,000 in Stocks vs. Real Estate 25 Years Ago

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

This thought experiment has been floating around in my big ol’ brain for a little while now, and I was curious what the results would be. So this post is going to be a bit of a back-test of investing in stocks (index fund) vs. real estate (homeownership as an investment). I’m going to have to make a few assumptions, but I’m going to try and make them as realistic as possible for the sake of this post. Before jumping into the thought experiment I want to point out and outline a principle that is sometimes lost in the numbers when people are comparing real estate to other investments like stocks.

Real estate is an insanely leveraged investment. Why? What does that mean? I didn’t know we’d be talking about Physics? Allow me to explain. Leverage in it’s most basic form is borrowing money from one person, to then turn around and invest. For example you might leverage 2x the money you have available to you. In stock terms this means that if your investment goes up 100% (doubles), you’ve made a 300% return (2x leverage + 2x return – 1x original investment). Let’s use real numbers to make this make more sense. Let’s say you have $100,000, you then go to the bank and say “hey, I have a great investment idea, my credit is great, will you lend me $100,000?” They say, “sure, no problem, but we’ll charge you interest.” So you take your now $200,000 and invest it (really it’s just $100,000 + $100,000 loaned against that). Your investment doubles. You now have $400,000 in a bank account. If you had only invested your $100,000, unleveraged, and your investment doubled, you’d have $200,000. Instead you used leverage and now you’ve made $200,000 instead of $100,000 by using 2 to 1 leverage (minus fees and interest). Let’s say for the sake of argument your fees and interest came out to $50,000 over the course of the investment, you pay back $150,000 to the bank. You still come out ahead with $150,000 profit + your original $100,000. More than double the initial amount, that’s the power of leverage.

HOWEVER, if your investment falls by 50%, you lose everything. How? Well you need to have a way to repay the bank, so the money you have is collateral for their loan. If your investment in stocks drops by 50% you’ll have $100,000 in your account, which is exactly enough to repay the bank. So you’ll get “margin called” which is when the bank sells stocks on your behalf and will pay back their loan. Just like that you go from $100,000 to nothing. So leverage has 2 sides, and the downside risk can be quite large and scary which is why most people should never play with leverage. Yes you can make astronomical returns, but you can go broke just as quickly. So… Real Estate, the thing we all live in, is leveraged 5 to 1… Let’s talk about it.

After what I’ve just told you about how leverage can destroy you’re investment, you’re probably thinking to yourself, “surely, no bank would be crazy enough to lend more than 2x or 3x to a VERY smart investor,” well do I have news for you. Every day, people are going out there, going to their banks and being provided a loan for 5x-20x the money they plan to spend on their home. How does that make any sense? Well, apparently, we’ve all decided that the most stable asset in existence is land, and homes. Every bank and government has decided collectively that homeownership is a right of sorts and it has resulting in lending policies that allow for this type of leverage. If you get into “low down payment” mortgages it gets even more crazy.

So lets take a look at an example. You have $100,000 that you want to spend on a home. About $10,000 of that will go to land transfer tax, lawyer fees, home inspections etc. So your investment after cost of doing business is closer to $90,000. Lets create 2 scenarios, both will factor in a renter investing in stocks vs. equivalent homeowner. I’ll try to provide actual examples of houses and rents too. A point that I think is important to make here is that past performance is never an indicator of future results, that goes for stocks and the housing market and there are a lot of things that influence both these markets in a big way, this is a historical example, and may not pan out exactly the same way in the future. But I hope it is illustrative.

Scenario 1: 20% Down Payment (5 to 1 leverage)

In 1999 $90,000 as a 20% down payment means that you can buy $450,000 worth of home. What does that get you?

In one of Mississauga’s nicer neighborhoods Lorne Park, that would get you a 4 bed, 3-4 bath, 2000-2500 sq. ft. home, 2 car garage, possibly with a pool.

A 5-year fixed mortgage rate would have been around 7.5% at the time.

Your monthly mortgage payment would be approximately $2600 per month, add in your other home expenses and let’s say $3000 per month.

Now, how much would a similar home cost to rent at the time?

I’m seeing around $2300-2500/month, so let’s call it $2500 after expenses again.

$500 less per month to rent.

Now that the stage is set, let’s do some math shall we.

Let’s assume the renter family’s put their initial $100,000 into an S&P 500 index fund and the $500 per month in savings goes into this same fund, so $6000 per year extra. Meanwhile, the other family’s savings gets dumped completely into home and mortgage we’ll also say that both families start in January of 1999 and the extra $6000 is added at the start of each year. We’ll just say that both families succumb to lifestyle inflation with the extra income over the years so their numbers don’t change. What happens?

Renter family:

Year	S&P 500 ROI	Added dollars ($)	Portfolio Value ($)
1999	19.53%	6,000	126,701
2000	-10.14%	6,000	119,245
2001	-13.04%	6,000	108,913
2002	-23.37%	6,000	88,058
2003	26.38%	6,000	118,871
2004	8.99%	6,000	136,096
2005	3.00%	6,000	146,359
2006	13.62%	6,000	173,111
2007	3.53%	6,000	185,433
2008	-38.49%	6,000	117,750
2009	23.45%	6,000	152,770
2010	12.78%	6,000	179,061
2011	0.00%	6,000	185,061
2012	13.41%	6,000	216,682
2013	29.60%	6,000	288,596
2014	11.39%	6,000	328,151
2015	-0.37%	6,000	332,915
2016	9.54%	6,000	371,247
2017	19.42%	6,000	450,509
2018	-6.24%	6,000	428,023
2019	28.88%	6,000	559,368
2020	16.62%	6,000	659,333
2021	26.89%	6,000	844,241
2022	-19.44%	6,000	684,954
2023	24.23%	6,000	858,372

Owner family by 2023: Home value $1,650,000-$1,750,000, mortgage paid off.

The average housing price growth in this time period was around 10% per year for detached homes. I tried to find actual houses on the market that have recently sold as a more true indicator of value rather than just computing the average. As you can see, due to the leverage that mortgages allowed you are now twice as wealthy as the person who invested in stocks, you own the home rent free, and you can accelerate your own savings on top of owning this now expensive home and outpace the stock investor even more. Meanwhile, the other family’s rent and expenses will have gone up and they may have had to move a few times because of owners selling homes. Stability is not quite the same, and while $800,000 is an impressive sum of money, it’s still half as much as the homeowner, even with historically higher growth in stocks than average.

What about the future of housing?

People are predicting that the next decade will not see the same returns on housing as the last two decades, but having a home even as an investment rather than leaving money in stocks can mean that while a tenant is paying down your mortgage for you, there will be money left over for you to continue investing in stocks, rinse and repeat, buy more homes get more tenants. Yes it is somewhat clinical, but the more people you have building your home equity, the more “streams” of income you will eventually have when all those homes are paid off, or you just sell them for a ton of money. Every home is a vehicle to 5x or more leverage, you’re controlling a $450,000 asset in our example with only $90,000. Yes you do have to pay interest and you’re “burning” a lot of money in interest every year, but even after all those fees, you’ve done well! I’m again stressing that past does not equal future. Who knows what the future holds! But historically, real estate has been the way to go, and every wealthy person I’ve ever met has some amount of holdings in real estate or land. Because they aren’t making any more of it!

Now there are a million ways to invest in real estate and make a return on investment much quicker than this believe it or not. One of those ways would be purchasing a home in need of some repair and then selling it, what people call “sweat equity” or “forced appreciation”, making it worth more to the market. This is more risk, but in theory more reward. But I’m more of a believer in the long game and just trying to acquire as many beans as possible so my pile of beans can be huge.

Let’s move onto scenario 2.

Scenario 2: 5% Down Payment (20 to 1 leverage)

Here’s a bit of a history lesson for you. The 5% down payment rule came into effect around 1995, and we proceeded to see two decades of the highest appreciation rates in the history of the GTA Real Estate Market. I’m not going to talk too much about government policies and what could have been different, maybe some other time, for now we’ll just accept this as it is. So in the grand year of 1999 before the dot com bubble, we can now leverage our money 20x! Woohoo! (probably).

The rules at the time were 5% up to 500,000 then 10% down up to $1 million. So if you buy a $999,999 house, your down payment is 7.5%, so not quite 20x leverage. Let’s say that you buy a $999,999 house in this scenario with 7.5% down, or $74,999 and you burn the other $25,000 on fees and mortgage insurance.

This budget, allows us to buy a home under $1,000,000 on the prestigious Mississauga Rd. north of the QEW. 4-5 Bed 8 Bath, over 5000 sq ft. Probably what we’d call a McMansion nowadays. In 2023 this caliber of home sold for $3.8 Million to $4.0 Million. Your monthly mortgage payments on this at 7.5% interest would be around $7,000 a month with property tax and everything else lets call it $9,000 a month. From what I can see online to rent a similar property would have been around $5000 a month call it $6000 after other expenses. Which is $3000 savings per month, or $36,000 per year. So lets take a look at this $100,000 stock investment, this time with $36,000 getting added per year.

Year	S&P 500 ROI	Added dollars ($)	Portfolio Value ($)
1999	19.53%	36,000	162,560
2000	-10.14%	36,000	178,426
2001	-13.04%	36,000	186,465
2002	-23.37%	36,000	170,475
2003	26.38%	36,000	260,943
2004	8.99%	36,000	323,638
2005	3.00%	36,000	370,427
2006	13.62%	36,000	461,783
2007	3.53%	36,000	515,355
2008	-38.49%	36,000	339,138
2009	23.45%	36,000	463,108
2010	12.78%	36,000	562,894
2011	0.00%	36,000	598,894
2012	13.41%	36,000	720,033
2013	29.60%	36,000	979,819
2014	11.39%	36,000	1,131,521
2015	-0.37%	36,000	1,163,202
2016	9.54%	36,000	1,313,605
2017	19.42%	36,000	1,611,699
2018	-6.24%	36,000	1,544,882
2019	28.88%	36,000	2,037,441
2020	16.62%	36,000	2,418,047
2021	26.89%	36,000	3,113,941
2022	-19.44%	36,000	2,537,592
2023	24.23%	36,000	3,197,174

Decided to use excel this time. In this second scenario, because you’re dumping so much money per year into stocks you end up within about $600,000 of the purchasing couple, but they STILL end up ahead. Another reminder that this time frame saw the most appreciation in stocks and real estate in known history. But again, even with the higher interest rate and extra mortgage insurance fees, the purchasing couple still ended up ahead of the renter couple, even with their prudent savings and investing plan. Many people also don’t know how to buy and hold when it comes to stocks and most retail investors underperform the market, as well as many professional investors, so this is an extremely optimistic ROI in the stock portfolio. Meanwhile getting someone to move their home is a much more arduous process and a more illiquid asset, but this is a benefit in a way because it means that you give the asset the proper amount of time it needs to appreciate in value.

So now we’ve seen both scenarios, and both point to the fact that purchasing a home has been the better way to build wealth in Canada in the past 2 decades. Will this be the same in the future? As mentioned many economist are predicting that the real estate market will not see the same returns as the past. But I still believe that due to the ability to leverage your money so highly, with the asset class being relatively stable (for now), makes it a great way to build wealth, and the ability to repeat the process with multiple properties provides growth that you simply won’t be able to duplicate in the stock market. You’re fundamentally limited by one income, but by being a landlord you are dumping many incomes into this investment idea.

Now there is an amount of stress to having that much leverage on your shoulders, if your home value drops 20% and you need to sell you won’t be able to get your down payment out. But just writing those words down unless you buy at the absolute peak and overextend yourself like crazy and lose your job at the same time, a 20% drop is an EXTREMELY uncommon occurrence in our real estate market, in stocks however, there were multiple 20% drops in that 25 year time frame, again psychologically, can be a hard time to sit there and watch your returns on paper take a nosedive. But no one really knows the day to day value of their house and even if the markets having a bad year most people aren’t going to jump to the conclusion that they need to sell.

There is one small dent in this math, and that’s condominiums. Condos have seen much more muted appreciation over the past 25 years compared to freehold housing types, the shift has been very pronounced in the post-covid years with a condo oversupply on the market and a lot of new condo inventory coming online at this moment in time. The price recovery in condos is going to be much slower than freehold but they did still appreciate at about 5-6% per year. So if we assumed a condo buyer vs. a condo renter, the numbers might be somewhat different. But if a condo is solely an investment property for you, it’s still likely that you’ll see good returns in the long run.

Newsletter #26: Thought Experiment of Real Estate Investing vs. Stocks, US Market News

This Weeks Blog Post:

Investing $100,000 in stocks vs. Real Estate 25 years ago:

This post is a discussion about leverage and how real estate is a somewhat unmatched way to leverage your money.
Two scenarios leveraging money to purchase real estate vs. stocks
Remember, past performance doesn’t predict future results

Read the full article here: https://oliverfoote.ca/investing-100000-in-stocks-vs-real-estate-25-years-ago/

Market Talk:

In case you missed it and wanted to hear my discussion with mortgage broker Deren Hasip I would highly recommend watching the video or listening to the podcast. We discuss the upcoming mortgage rule changes on Dec 15, 2024. How the US election may effect Canada. Some professional tips and tricks with mortgages. Examples of new rule changes on purchasing power for first time buyers.
YouTube: https://youtu.be/8XyHEV1c7R4
Spotify: https://open.spotify.com/episode/4vzu7YYs4SUBTTg1dILL22

The Canadian Dollar has been suffering a bit thanks to comments that Trump has made about tariffs on Canada. If that does happen there is the possibility that the Bank of Canada will be hesitant to drop mortgage rates and we may see inflation return. These are worst case scenarios and we can hope that not everything will come to pass from the new administration, but one this is for sure that there will be changes, likely economically.

Stock Market Performance as of Tuesday Nov 26, 2024:

S&P 500: 6,013.13 (+26.79% YTD)
NASDAQ: 19,136.73 (+29.60% YTD)
S&P/TSX Composite: 25,383.73 (+21.62% YTD)

Macroeconomics Statistics:

Canada’s CPI Inflation Sep 2024: 2.0% (0.4% Increase from Sept 2024)
Current BoC Benchmark Interest Rate: 3.75% (0.5% Decrease on Oct 23, 2024)
Unemployment Rate October 2024: 6.5% (0.1% Decrease from Sept 2024)

Greater Toronto Area (GTA) Real Estate Stats – October 2024:

YTD Average Selling Price: $1,121,871
YTD % Change in Average Selling Price: -1.0%
Y-o-Y (comparing Octobers) % Change in Average Selling Price: +1.1%

YTD Number of MLS Sales: 58,435
YTD % Change in MLS Sales: +0.1%

Y-o-Y (comparing Octobers) % Change in MLS Sales: +44.4%
Number of MLS Sales in October: 6,658
Y-o-Y (comparing Octobers) % Change in Active Listings: +25.3%
Number of Active Listings in October: 24,481

Inventory Available: 3.5 Months (Decrease from 5.0 Months in Sept 2024)

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