Weekend Reading – Hot real estate edition
Welcome to my latest Weekend Reading – the hot real estate edition.
You can find previous editions and popular articles below:
How can you Beat the TSX Index? (Learn how to earn lots of income and growth in the process.)
A reminder about some RRSP guidance and facts and tips you can use as the RRSP contribution deadline for the 2021 tax year closes on March 1, 2022.
Hot real estate edition
Where do we begin??
Unless you’ve been living under a rock for the last few years, you’ll know the detachment between home prices and incomes in Canada is like nothing any other G7 country has really ever seen.
Don’t take my word for it. See the chart below!
To say that home prices in Canada have grown faster than incomes is an understatement of the last decade+.
Here are some other signs and reasons why the real estate market has gone mad:
Million-dollar homes in former budget towns
As Rob Carrick recently pointed out in one of his articles: “Move over, Toronto and Vancouver. The latest real estate numbers show that there are at least seven more cities or regions in the country where the average resale house price is more than $1-million: Oakville, Orangeville, Hamilton, Mississauga, and York and Durham regions (all in Ontario), plus the Fraser Valley in British Columbia.”
Home supply is limited
According to the Canadian Real Estate Association, home prices broke a 21-year record in 2021 as the supply of homes for sale hit an all-time low. In my province, Ontario, prices were up around 30 per cent year over year. This incredible climb was partially driven by the fact that newly listed homes fell in volume about 3% month over month.
You have to wonder if 2022 is the year our Canadian real estate finally becomes totally unhinged – things become very unstable such that our Bank of Canada will finally act on inflation swiftly (I doubt it.)
The signs to act have been there for years, even before the pandemic hit.
Inflation running hotter and rates to nowhere.
Recent price growth in housing seems to have been aided by a confluence of two very unique almost once-in-a-lifetime factors:
- prolonged low interest rates, combined with,
- pandemic lockdowns that have helped some people move into bigger homes as they stockpile cash savings.
I have no idea where we go from here. I’ve never seen home prices rise this much, this fast, as a homeowner. I’m thankful I have a home to live in. We’re almost debt-free (in just over two years) with the mortgage being dead since rates are likely to climb higher (finally) in 2022 and into 2023.
With inflation running hotter, my advice to any would be homebuyers now is to:
- Ensure you can afford your home – including with any rates that are likely to rise. Lock-in any rate now for the coming 3-5 years.
- Start small – you don’t need to own any forever-home right now.
- Consider moving abroad to Canadian towns and cities that continue to offer some affordable housing – given the trend for the gig economy is rising, the ability to work from home is rising, among other economy shifts.
At the end of the day, just be careful how much debt you take on in any hot real estate market or not, since your home should not be considered any sort of retirement lottery. Even though it feels that way today.
How much real estate should you have in your portfolio?
Here is some more reading material before I get to my reader question of the week!
I enjoyed this Morningstar article about retirement planning when “you have enough”. Too often, I read articles from financial advisors and money managers that claim it’s this cookie-cutter index portfolio or nothing.
Flat out wrong.
As the article rightly references: if you have won the investing game, you can quit playing as you wish.
The premise behind this idea is that once you’ve built your portfolio up to a point that it meets your goals – you need not chase additional returns. You can enjoy the cashflow from your portfolio (…a great name for a site, right??) and organize your portfolio in a more income-focused manner without fretting about the hope of capital gains. While any bias to bonds over stocks is not something I would personally do, as the article discusses, I believe looking at your cashflow needs is always the starting point for any retirement planning exercise. Once you figure that out, and include a modest margin of income or cash safety, only then will it be clear how to invest.
Further Reading: Learning to live with stocks.
A great quote for today’s times, from one of my favourite reads every single week:
“The passion for stretching yourself and sticking to it, even (or especially) when it’s not going well, is the hallmark of the growth mindset. This is the mindset that allows people to thrive during some of the most challenging times in their lives.
— Growth and Fixed, Farnam Street Blog
Kudos to investor advocate Ken Kivenko (a fan and contributor to this site) for his work in this open letter: trying to strengthen the complaint handing system for banking customers in Canada.
My partner, Questrade, was once again honoured to have been awarded the 2021 DALBAR Seal of Service Excellence for Telephone Service for the fourth consecutive year.
RRSP contribution deadline tips and reminders
On Cashflows & Portfolios we highlighted 5 big RRSP mistakes to avoid.
We also want to highlight these important posts and case studies:
1. Everything you need to know about RRSPs – Including contributions limits, penalties, deadline and clarity around the RRSP vs TFSA debate! Grab a coffee for this one as it contains a lot of detail!
2. How soon can you retire using just your RRSP? – Check out our analysis in a case study when this millennial couple can retire and with how much! Some investors like to stick with a single retirement account, and the RRSP still remains the most popular (although TFSAs are catching up!). With this case study, using a young couple (age 23) who max out their RRSP every year, we wondered even they can even retire using just their RRSP? They sure can, and earlier than expected! Find out all the details in the post!
3. Can you Have Too Much in Your RRSP? – On the flip side of the above article, it is possible to have “too much in your RRSP”? We have seen RRSP account balances that cover the spectrum in working with clients at Cashflows & Portfolios. With larger RRSP balances, many clients all have a common problem – taxes! While they say that a tax problem is a good problem to have, a large RRSP balance can also impact your OAS benefits, especially if you have a defined benefit pension (DB). Check out our opinion on if you can have too much RRSP!
Via Family Money Saver, here is a great guide to RRSPs.
Other money stuff…
Canadian Budget Binder offered some tips in how to handle money with success.
Dividend Strategy offered some ideas about how to invest during periods of higher inflation, as in now. From his post, a few stocks I happen to own as well:
Million Dollar Journey wrote a monster post about safe withdrawal rates – for any retirement age. Like MDJ, while the “4% rule” basically works; I wouldn’t go all-in on this thinking. Any retirement drawdown must carefully consider:
- The need or want to take on investing risk – see above from Morningstar post.
- Your income needs, including various income sources and the timing of those sources.
- Your timeline.
Otherwise, you might end up not spending any of the money you wanted to enjoy!
Dale Roberts highlighted some ideas in how to prepare for a bear market in his recent Sunday Reads.
Finally, my buddy The Dividend Guy believes dividend investing can be beneficial to younger investors.
Reader question of the week (adapted slight for the site):
I’m very much into personal finance/finance in general but have been intimidated/scared to go the DIY investing route…until now. My husband and I recently sold our cottage and after paying off our consumer debt we want to be smart with the money we have left from the sale and ensure it’s working for us well into our retirement.
We both have TFSA and RRSP accounts that are far from maxed out (lots of room for contribution) and our kids all have TFSA that we max out each year. Based on the research/reading we’ve done, we know we should add as much as we can into the RRSP and TFSAs however, would you recommend putting a lump sum into paying off our mortgage? We have a variable rate that is very low so my gut says to skip putting a big chunk into paying off the mortgage and invest the money instead. Would you agree?
Hypothetically speaking, if you took advantage of the hot real estate market and sold off a property you had what would you do with the money you made if your life situation was what I described above?
(I should mention, any money we’d be putting into our RRSP and TSFAs would be in self-directed accounts (a first for us!)
Thanks in advance!
Thanks for your readership!
I have a few thoughts, most of them are answered in this post below:
The definitive answer to paying down your mortgage or investing
- I encourage all savers, investors, to try and max out TFSA accounts as much as possible for as long as possible as financial priority #1. Essentially, in doing so, you’re building tax-free wealth!
- As soon as your TFSA(s) are maxed out, work on your RRSPs if you can. Why? The ability to defer taxes and grow wealth tax-deferred is almost as good as tax-free!
- Depending on your mortgage rate, I would not bother with lump sum payments right now unless you can do #1 and #2 above. Yes, rates are low and will remain low even with any interest rate hikes in the coming years. That means I believe you should strongly consider investing to the point whereby as long as your investment returns are exceeding your mortgage rate, investing wins.
I can say #1, #2 and #3 above with some confidence and insights because that’s what I did when I sold a rental property many years ago. Steps #1-#3 helped us build a 7-figure portfolio to start semi-retirement with.
The same success can apply to you. Your mileage may vary but that’s my experience and insights!
Best wishes and let me know what you decide 🙂
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Why I invest in low-cost ETFs – along with dozens of articles about ETFs can be found here.
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Have a great weekend!
Thanks for this post.
It would be interesting to compare household debt to income ratios for G7 countries as well to see how streched we are in relation to other countries.
I would think we’re “right up there” for sure JF if not at the very top?
The problem is that residential real-estate is no longer residential. Sure people “live” there but most purchases are done by people who already own multiple homes or by corporations. All in the goal to “rent out for income”.
We’ve commercialized housing. Which is really bad. The reason most people have trouble affording a house now is because the supply is being hogged by people who do not live in them.
I’m with you Jon re: commercialized housing, I don’t think this is good long-term with supply issues. This trend has been exploding for years based on low-rates and leverage by folks that wouldn’t afford buying such property otherwise.
Thanks for your comment.
I recently wrote an article on “winning the real estate lottery,” and you’re right, it’s totally insane. But out here in B.C. it’s also incredibly common, and has been for a while now. Pretty much everyone who bought their (detached) home before 2015 has at least half a million in appreciation. That really does go a long way towards retirement, but if you have kids, the benefit is diminished: now you’re forking over six figure down payments to help get little Johnny into a starter 1 bedroom condo. I’d like to see it fixed. Rates need to rise, and we need to either cut population growth or dramatically increase our capacity to build. We can’t just densify already cramped cities. We need new urban centers, new suburbs, and tax incentives to incentivize working from home and starting businesses in low-population areas.
A half a million bucks (extra) for retirement will do wonders no doubt!!
The challenge is, you have to live somewhere. Whether that’s a $500,000 house in rural Ontario or $3M home in North Vancouver.
Of course, you could leverage and invest while borrowing against your home but that could be dangerous if done at the extreme IMO.
Rates absolutely need to rise and should have been higher 3-4 years ago.
I’m against urban sprawl. It’s terrible for our planet. We need tax incentives for sustainable living and low-cost housing to help others. Hell, we need clean drinking water for Indigenous Peoples first. Don’t get me started 🙂
Have a great weekend Loonie.
Mark excellent timing for this article! we’re selling one of our two rental condos here in Vancouver closing date is March 8 so we’re excited to offload one of them because we were debating for years now if we’re putting all our eggs into one basket which is real estate .
Prices have gone insane Mark this condo we’re selling now two years ago we would’ve sold it for 250k less then what we did now and we sold it with no effort the first open house we got few offers with one overbid offer which we accepted it and we did we were in shock for few days 🙂 because I would never pay for something over the asking price real estate or whatever.
we’re closing in about a week and after paying off a small line of credit that we have we’re planing on maxing both of our TFSA’s and the kids take a trip because we need it after two years of covid restrictions and we’re going to end up with a good chunk of money that I’m waiting to talk to my accountant about it if it makes any sense to put in our RRSP or not, personaly I’m leaning toward opening a non registered account and invest the proceeds in it but we’ll see what the professional will say.
That’s what we did Gus when we sold our condo years ago – a rental. We maxed out RRSP (no big TFSA contribution room at the time) and put the remainding condo sale proceeds into our taxable account. With purchases over the years, that taxable now churns out over $10,000 per year in taxable/tax-efficient dividends and more every single year with dividend raises.
You know the usual names 🙂
Congrats on the sale, I think that’s smart to have some diversification away from real estate personally and take advantage of some gains in real estate to date.
Keep me posted on what the professional says. Stocks that pay no dividends in a taxable account are also VERY tax efficient of course but I like getting paid!
Congrats on the sale. I am not professional but here is my two cents anyways. As you sold a rental, I figure you will face a significant tax bill next year due to the huge capital gain? You marginal tax rate probably will go to the highest range? If you have RRSP room, I would think it would be good that you max out RRSP account first so that you can write off lots of tax for next year.
Thank you May,
deep inside I know this is what my accountant’s answer is going to be but I’ll wait and see , my fear is when retirement comes my tax bracket would be the same as now when we add our other rental property and my wife’s DB pension and investments and all that but on the positive side like Mark always says it’s a good problem to have 🙂
Maybe your tax bracket will be the same as your normal years before your retirement. But next year is specific with your capital gain, right? Your mtr will be much higher.
I think even the tax rate is the same, RRSP still wins. Only when tax rate is higher, RRSP is not good. Let’s say you have $10K, and mtr 50%, and the investment doubles in 10 years. With RRSP, you will have $20K 10 years later and after tax you have $10K. Without RRSP, you will have only $5K invested, and you will have $10K in ten years, and you still need to pay tax on the $5K gain. Assume it’s all capital gain, you have only $7.5K instead of $10K. RRSP wins without a doubt. Of course this is a very simplified case.
Sorry, wrong calculation. Actually taxable will have $8.75K with 50% inclusion rate, still significantly less than RRSP.
Yes, if RRSP room for sure, to offset some gains May but I recall Gus might have his RRSP maxed out. (?)
I know I was in the same position when I sold my condo, so taxable it was since the TFSA was just in the early days.
Mark , still have about 18k in room for RRSP much more for my wife but what I wanted to know if we would be better off paying taxes now rather then paying it later once we start withdrawing from RRSP. still have about ~ 14 years to retirement so the way I’m thinking about it is the option to retire few years early and start withdrawing rrsp along with my other income property rental income .
To be honest Mark I know any answer I get from my accountant I’ll be happy with is as long as we’ve got one less strata issue to deal with and having the money on autopilot collecting dividend almost headache free is a no brainer for us anyways.
That’s what we’ve seen at Cashflows & Portfolios when “running the math” for clients. The best solution is usually the ability to meet your income needs and smooth out taxes over time vs. a major tax hit in any one given year.
Love the idea of having money on autopilot. Looking forward to sharing my next dividend income update! 🙂
Mark I’ve got about 18k in room for my RRSP and a bit more for my wife , it’s just that we wanted to know if it makes more sense to pay the taxes now or put the money in RRSP to offset the taxes,so I’m kind of anxious to know once I see my accountant in couple of weeks.
I hear a lot about people in retirement with a big chunk of rrsp paying a lot of taxes so I want to try to avoid this specially if we keep our second rental property.
The ease and the simplicity of investing in dividend growth stocks is getting to me 🙂 although I’m not complaining at all about the real estate apreaciation but I think putting your money on autopilot and collecting dividends is the way to go for sure.
Yes, again, we find the RRSP/RRIF is outstanding for wealth-building but at the end of the day, it’s also important to get your $$ out of that account to enjoy too! With rental income + RRSP/RRIF + TFSAs + taxable dividends, you sound like you’ll be in great shape Gus for multiple, secure income streams in retirement.