Tempted

Chris and his family were being evicted from a rental home in Oakville when he first emailed me. “I very much appreciated your guidance at that time,” he tells me. “No good deed goes unpunished, because now I’m coming to pester you again for more wisdom and insight.”

His note today is worth sharing. It’s practical and relatable. In a nation where those who do not currently own real estate may never do so – at least not without considerable sacrifice – these are worthy questions.

How much should you pay in rent?

“I’ve heard the 30% rule for renting, but I’m not positive if that is 30% of your net income or 30% of your gross income,” he says. “Hoping to get a sense of what a reasonable amount to spend on rent is.”

The 30% rule is about 60 years old and originally came out of a formula governments used for social housing. So it’s not a rule anymore, but a relic. And the thirty per cent refers to gross (pre-tax) income. So if the household income is $100,000, the rule says rent should be $2,500.

For context, the average rent in the GTA for a condo is $2,700. Houses average $3,500. In DT Vancouver a two-bedroom condo rents for $3,200. In all these instances it costs less to rent than to own, given downpayments, financing charges, property tax, condo fees, insurance, maintenance and special assessments. But it ain’t cheap. If you can rent for 30% of gross income, you’ve won.

What about buying?

“Are there some general guidelines so that you are truly buying a property you can afford? I recall you mentioning the 90 minus your age rule, regarding net worth and the proportion that real estate should make up. Just curious if there are other metrics to try to adhere to, similar to the 30% rule for renting.”

The Rule of 90 says one should, if possible, have no greater a percentage of total net worth in real estate equity than 90 minus your age. In Timmins, Lloydminster or Saint John, that’s a breeze. In Kits or Oakville, it’s torture.

Lenders use a TDS (total debt service) ratio of 44% to figure out how much mortgage debt you can carry. This includes the home loan, real estate costs and all other debt charges. Of course the prevailing mortgage rate is a huge factor. Property taxes vary obscenely across the country. Insurance premiums are rocketing higher and you have no control over condo/strata charges unless you kidnap the board.

The best rule is the simplest one: buy a house you can afford without gutting your finances or putting your family at risk. Kids need a funded RESP more than a roof that their parents own. You need secure retirement assets. You can always rent a place to live, but you can never rent an income.

“I have a question about the capital gains tax exemption of your principal residence,” Chris adds. “I do agree with your assessment in your latest blog post, that it is quite odd that this is the only asset class which is provided with an essentially unlimited tax exemption – but, with my wife and I now having approximately $350,000 in taxable/unregistered investment accounts, I wonder if it would make sense to take advantage of the principal residence tax sheltering ability (with the understanding that real estate may not appreciate, or not at the same rate as a balanced portfolio of stocks and bonds).”

The PR exemption is a glaringly obvious reason (that politicians are blind to) why houses cost what they do, which is too much. By exempting the gains from this one asset we’ve financialized it. Real estate is no longer a home. It’s an investment strategy. You know it. I know it. Trudeau and Poilievre know it. They’re chicken to change it, and grasp the political consequences if they did. (Just like Mulroney when he brought in the GST and blew up his party. Sometimes ya gotta do what’s best for the nation.)

The tax break, Chris, is only a shelter if your property makes money when you sell. These days recent buyers are just as likely to have losses – which are not deductible. Meanwhile home ownership is a high bar for any family to get over.

If you hollowed out your investments and used $300,000 for a downpayment on the average Oakville home ($2,037,980 in July) the mortgage of $1.7 million (which you’d probably not qualify for) would cost $10,500 a month. With insurance, property tax and utilities, very close to $12,000. The lost investment growth of the downpayment would add $1,500 (at a modest 6% return), for a total of $13,500 in true cost each four weeks – or $162,000 in annual after-tax income. To afford that, the household income should be north of $400,000.

How many make that much?

Few. About 300,000 people out of 41 million. They must all live in Oakville.

“I know you have no shortage of Mandatory Suck Ups, but I will echo them in saying that I truly appreciate the information and advice you dispense, day in and day out, free of charge, for the benefit of Canadians’ financial health,” says Chris, now thoroughly depressed.

Don’t do it, pal. Not there.

About the picture: “We are visiting friends in Kamloops, this is Ozzy enjoying the morning, feel free to use him in the blog. He’s just a knuckleheaded as his namesake and will kiss you to death for walks and treats,” writes Dyland, of Victoria. “Especially toys filled with peanut butter. Thanks again for changing my life, I was in my 20s and had an overvalued house, now I’m liquid, happy, and spending more time with my sons. Your wisdom was part of that decision. Thank you all the FREE advice you provide so many of us, making Canada a little better each day. An admirable quality.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/09/01/tempted-2/