Family Formation & Housing

For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.

Driving until you qualify vs. Condo Living

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By Sean Cooper

Special to the Financial Independence Hub

Are you in the market for a home and finding it tough to afford a decent-sized place? You’re not alone. The new mortgage rules certainly haven’t made it any easier. Homebuyers have seen their purchasing power reduced by about 20 per cent due to the mortgage stress test that came into effect January 1, 2018.

Under the new rules, homebuyers are required to qualify at a mortgage rate 2 per cent higher. If you’re looking to buy a home in big cities like Calgary, Ottawa, Toronto or Vancouver, your options can be quite limited, especially when you’re a first-time homebuyer.

So, you go out into the real estate market, look for the home you’d like to purchase, but can’t afford it. What’s a homebuyer to do? Don’t throw in the towel: there’s still hope! Two popular options are driving until you qualify and condo living. Let’s look at them both now.

Driving Until You Qualify

If you don’t like what you can afford in the big city, your first option is suburban living or what I like to call “driving until you qualify.”

Living in the suburbs does have its advantages. You can typically stretch your home-buying dollar further. Quite often in the suburbs you get more square footage for less than you otherwise would get in the city. Instead of only being able to afford a condo in the city, you might be able to afford a more spacious single-family detached home.

If you’re planning to start a family or have a dog, it’s hard to beat a big yard with a fence. Also, if you’re raising children, the city typically offers better schools. The suburbs also usually have a lower crime rate than the city centre.

Although you probably won’t have shopping at your doorstep, the ‘burbs make shopping easy with big box retailers. If you’re an outdoor enthusiast, you’ll often enjoy the suburbs a lot more. The suburbs usually have a lot more community centres, parks and swimming pools.

But living in the suburbs isn’t without its drawbacks. Perhaps the single biggest downside is the time it takes to commute if you work in the city. You could find yourself travelling for two hours or more a day. Make sure you’re ok with this before buying the property.

A good exercise is to try driving to work in the neighbourhood you’re thinking of buying in on a typical day to make sure the commute is tolerable. If you work from home this won’t be an issue, but don’t forget to factor in the added cost of not only buying a vehicle, but maintaining it as well.

Besides a longer commute, the other big downside is that you’ll be further from downtown. If you’re a millennial and enjoy the nightlife, make sure you’re ok with living further away from most of your friends. If you’re constantly downtown late after work, you may find it a real pain in the neck to commute back to the suburbs.

Condo Living Continue Reading…

Toronto vs Chicago housing: An Arbitrage for being under-weight Canadian bank stocks

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Figure 1: Chicago and Toronto Home Prices
By Jeff Weniger, CFA, WisdomTree

Of the major North American cities that feel most like Toronto, Chicago is clearly the closest fit. It’s Toronto’s sister. Chicago is the third most-populous city in the U.S., behind New York and Los Angeles. According to the U.S. Census Bureau, Chicago proper has a population of 2.7 million, almost exactly the same amount as Toronto.1 Both cities have several million more living in the immediate suburbs. Chicago’s money resides mostly on one side of the city, with most of its poverty found on the city’s south and west sides. Wealthy suburbs span almost to Wisconsin in the city’s “North Shore” suburbs, which consist of some of the wealthiest zip codes in the U.S.

Like Toronto, Chicago is a money centre. It is widely considered to be in that tier of financial hubs that includes Boston and San Francisco, behind the center of it all in New York. Its construction is dense; people take trains and buses to commute into the downtown core. Critically, as far as desirability of property goes, Chicago’s weather is miserable, just like Toronto’s. The two cities are also characterized by left-leaning politics, so there isn’t much of a difference on that front either.

When we engage Torontonians about the U.S. and Chicagoans about Canada, time and again the answer comes back: the city that is most like Toronto is Chicago.

Except in one way.

Chicago homes are one third or half of similar homes in Toronto

There is a major arbitrage just sitting there for anyone who liquidates Toronto property, hops on a 75-minute flight and purchases a mirror-image property for one-third or half the price in Chicago. Yes, Chicago is riddled with violence, but not in the neighbourhoods where someone would spend C$767,818, the average Toronto home price in February.2 In those neighbourhoods, the biggest risk is having a $500 stroller run over your toe.

Just what could C$767,818 get in Chicago?

According to the National Association of Realtors’ (NAR) Illinois chapter:

In the nine-county Chicago Primary Metropolitan Statistical Area (PMSA), home sales (single-family and condominiums) in January 2018 totaled 5,777 homes sold, down 8.0 percent from January 2017 sales of 6,277 homes. The median price in January 2018 was $224,000 in the Chicago PMSA, an increase of 7.2 percent from $209,000 in January 2017.

Converting US$224,000 to Canadian dollars at the January exchange rate of $1.231, that is C$275,856 for the median house in Chicago. Granted, U.S. housing data tends to be measured by the median, whereas the Canadian norm is to take the average, but there is still not much of a comparison; the gap is yawning, and this all started happening only in recent years. Continue Reading…

Generation X feeling the Retirement squeeze

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Generation X, and to a lesser extent the Millennials, are already starting to feel the retirement squeeze, according to a Franklin Templeton-sponsored survey released Thursday.

Details are in my column in Friday’s Financial Post, which you can retrieve by clicking on the highlighted headline here: Generation X is ‘stretched beyond their financial limits’ and struggling to save for Retirement. 

The challenges should be familiar to members of any generation (four are mentioned in the survey): it’s never easy saving money when you’re starting out in life with low wages and high expenses. But Franklin Templeton cautions against the  rationalization embraced by younger investors that they simply can  choose to keep on working if they haven’t accumulated enough assets to generate adequate income in retirement.

That may not always be an option, since ill health or corporate downsizing (to mention just two) may prevent this. You can find full details about the fifth annual edition of Franklin Templeton Investments Canada’s 2018 Retirement Income Strategies and Expectations (RISE) survey here.

Stressed GenX resigned to retiring later than hoped

More than half of Gen Xers (aged 37 to 52) are resigned to retiring later than they would want (56% in Canada, 59% in the US). While the online survey included Canadians and Americans across four generations, “this year we felt in particular that Gen X and the stress of preparing for Retirement was the predominant thing coming out of the research,” said Matthew Williams, a Franklin Templeton senior vice president, in an interview.

Continue Reading…

5 common Mortgage mistakes made by first-time Homebuyers

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By Sean Cooper

Special to the Financial Independence Hub

Buying a home is an exciting time for first-time homebuyers. It’s also a busy time. Besides hiring a real estate agent, house hunting and finding time to get all your daily errands done, you’ll also need to find time to shop for a mortgage.

While it can be easy to treat your mortgage like an afterthought, by doing that you’re doing yourself a big disservice. Buying a home is most likely the single biggest financial transaction of your lifetime, so it’s important to give it the attention it deserves: that includes your mortgage.

Many first-time homebuyers shop for a mortgage based solely on the lowest mortgage rate, when there are so many other (more important) factors to consider. That’s just one of the common mistakes first-time homebuyers make. Let’s look at this and four more common mortgage mistakes to avoid.

Mistake #1: Skipping the Mortgage Preapproval

It’s hard to go house hunting if you don’t know how much you can afford to spend on a property. A mortgage preapproval helps you come up with a budget for the property you’d eventually like to buy. By providing your mortgage broker with some basic personal and financial information, such as your income, employment history and how much you’ve saved up towards a down payment, they’ll be able to take that information to the lender and get a mortgage preapproval. A mortgage preapproval tells you the maximum amount you can spend on a home. It also usually comes with a rate hold. You’re typically guaranteed a mortgage rate for between 90 and 120 days. If rates go up during this time, you’re guaranteed the lower rate. If rates go down, you get the lower rate. It’s a win-win situation for homebuyers.

Mistake #2: Shopping based solely on the Mortgage with the lowest rate

Many first-time homebuyers are fixated on getting the lowest mortgage rate:  too fixated. They use mortgage rate comparison websites to find the mortgage rate with the lowest rate, yet forget to consider other, more important factors. As I write in this post, the mortgage with the lowest rate may not be the best mortgage for you: quite often it’s not. It’s important to consider what I like to call the “3 mortgage P’s” – penalties, prepayments and portability. Of course, there are other factors to consider, such as fixed versus variable and standard versus collateral charges. Mortgage brokers know mortgages like the back of their hand since that’s all they deal with. A mortgage broker can help identify the factors that matter most to you and choose the mortgage that’s the best fit.

Mistake #3: Not considering other options besides the 5-Year Fixed Rate Mortgage

As Canadians we are very risk averse. Continue Reading…

52% of Canadians support new Mortgage Rules

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

It has now been four full months since Guideline B-20 – a slew of new mortgage qualification requirements – hit Canada’s borrowers in the wallet.

Under the new regulations, those applying for a new mortgage, and who are paying at least 20 per cent down on their home purchase, must qualify at either the Bank of Canada’s benchmark rate (currently 5.14 per cent), or their mortgage contract rate plus 2 per cent, whichever is higher. While the mortgage payments will be made at the borrower’s actual rate, this is the government’s way of shock-proofing lending, ensuring borrowers can still make their payments should rates rise exponentially.

Experts have stated that Guideline B-20 would slash the average home buying budget by 20 per cent, and knock as many as 10 per cent of buyers out of the market altogether. Market conditions have proven softer in the months following the new rule, with national prices falling 10.4 per cent in March, and an exodus from more expensive home types to the lower end of the market, such as condos for sale in Toronto.

But have they truly dissuaded Canadian home buyers from entering the real estate market?

To find out, Zoocasa polled just over 1,400 Canadians from all provinces, as part of the second-annual Housing Trends Survey. Respondents were asked for their sentiments and experiences as a result of B-20, and the overall rising interest rate environment.

Majority not impacted by Stress Test

According to the data, the majority of recent home buyers have withstood the introduction of Guideline B-20 unscathed; of those who purchased a home between October 2017 (when the new rules were first announced) and March 2018, 48 per cent say there was no change whatsoever to their buying timeline.

However, 27 per cent reported they rushed their purchase as a result, while 6 per cent delayed buying. An additional 19 per cent who bought homes weren’t actually aware of the new mortgage rules at all.

Also, the impact has been more significant on those who have no yet purchased their home: while 40 per cent stated B-20 hasn’t changed their mind about buying, 15 per cent will delay their home purchase, and a full 15 per cent now feel homeownership is out of reach altogether. Continue Reading…