Real Estate Wealth

Gail Vaz-Oxlade Gets Candid on Home Ownership

People dive into home ownership with eyes half shut. Many do rough budgets and rely on their mortgage providers to tell them what they can afford. But few are prepared for the realities of home ownership.

People step into the housing market with the minimum deposit and the assumption that they’ll soon grow equity. They believe real estate prices always rise, they’ll always have a job and the sun always shines. Few plan for unexpected expenses like leaky roofs and busted appliances. Even fewer plan for unemployment.

Instead, they binge on house porn and the orthodoxy of marble finishes. This sets an extremely high bar for interior design, squeezing the final drops of their borrowing capacity to renovate otherwise perfectly functional living spaces.

All this has worked in the past as house price appreciation created equity that helped people turn their houses into ATMs.

Today, however, incomes have been gutted and about 16% of Canadian mortgages are being deferred.

New buyers entered home ownership with zero bandwidth for financial trouble. Even those who owned for a while, benefiting from the tail-end of a housing boom, have pissed away their gains by keeping up with their friends and neighbours. New cars, travel, outings. Nothing was sacrificed to pay down debts.

The people behind these mortgage deferrals are on financial life support. They effectively can no longer afford their homes and are depending on government handouts and the ‘kindness’ of creditors. While some are victims of bad timing, many of the wounds are self-induced.

Below, in a rare interview (she is retired) money maven Gail Vaz-Oxlade provides her candid, in-depth thoughts on the current housing situation. In it, she discusses with John Pasalis (President of Realosophy Realty) the following and more:

  • Is it time to buy a house?
  • When is the right time to buy a house?
  • How does home ownership change your life?
  • How do you know you’re financially ready for home ownership?


Real Estate

Charts: Real Estate in the Crapper

Businesses are closed or operating at reduced capacity. Millions of people are unemployed. Mortgages are deferred. The need for office space is being questioned.

To put it lightly, both retail and commercial real estate is experiencing one of the most transformative moments in history. While malls and brick-and-mortar retail has been under pressure for years, Covid-19 compressed a decade’s worth of change into a couple months.

The charts below highlight the current state the real estate market.

With the huge surge in unemployment and minuscule savings, Americans are suddenly unable to pay their bills. 32% of Americans missed (either fully or partially) their July mortgage payment.

Delinquency rates vary by property type (overall delinquencies approaching decade highs) but are rising rapidly.

New York is the most stressed area at the moment, likely due to its concentration of people/businesses, real estate valuations and the severity of regional lock-downs.

Toronto-area housing has remained strong through the downturn, with prices actually increasing.

Although Toronto has experienced a resilient housing market, it could face increasing pressure over the next several months as rental supply rises (driving down the price of rent). The decline in condos leased combined with the surge in listings has pushed the condo rental inventory from 1.5 Months of Inventory (MOI) at the end of March to nearly 4 months at the end of April.

How is Canadian real estate holding together? Government handouts. Approximately 20% of the Canadian population is receiving CERB – a $2000/mth support payment from the Federal Government.

If and when CERB benefits are taken away, Canadian real estate will likely face growing pressure. Not only is the supply of rentals growing rapidly, immigration is plummeting. This combination could tip Canadian real estate into negative territory. Of course, there’s always the possibility that immigration once again picks up in the future, but it’s debatable whether this will be enough to absorb the rise in housing supply.

The Coronavirus Economic Depression:

Real Estate

1989-1996 Canadian Housing Collapse Looks Eerily Similar to Today

I recently wrote a couple articles proposing that Canadian real estate might be on a downward spiral. So far it has declined 10% on average since February. Some parts of the GTA have already experienced declines of up to 18%.

Hundreds of thousands of Canadians have deferred their mortgages. While some may have done so fraudulently most were in genuine financial distress, as millions of Canadians suddenly lost their jobs.

Unfortunately, these deferrals simply kick the can down the road – payments are piling up as is the interest on the deferred interest. Many of these mortgages will enter default. Many people who can no longer afford their homes will sell. Overall, the supply-demand dynamic is changing for the worse.

CMHC recently issued a report saying Canadian home prices could decline by up to 25% by the end of 2020. Others researchers have argued for larger declines.

As expected, those with a vested interest have cast the CMHC report as inflammatory. Many Canadians simply are in denial that a significant housing decline could happen.

Very smart people are sometimes unable to see breaks from normality. Remember when Federal Reserve Chairman Ben Bernanke was in denial about the US housing collapse?

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

Ben Bernanke, February 15 2006.

Bernanke said this (and many other similar quotes suggesting housing market stability) right when the US housing market was collapsing.

Nobody has a crystal ball, but frankly I find it appalling – but not surprising – that people are so quick to dismiss the possibility of a similar significant decline in Canada. Especially given the weak economic and consumer fundamentals. The fact is it is very difficult for people to accept discontinuous breaks in their reality, just as many couldn’t in February when it was clear that Covid-19 was growing into a global pandemic.

None of this is new. Canada experienced a very similar situation 30 years ago when home prices declined between 1989 and 1996, taking 13 years to recover. At that time immigration didn’t help, falling rates didn’t help and reduced housing inventory didn’t help.

Today, I came across a great thread on Twitter by @ExtraGuac4Me. The thread showed that the same denials were happening in 1989 – right before housing fell by 28% on average.

I’ve pasted the thread in its entirety below:

Before dismissing CMHC’s report, consider this: in 1989, pre-recession, Wood Gundy suggested Toronto home prices would drop by 25%. TREB called the report “inflammatory” & OREA stated “a large price decline is unlikely because the real-estate market doesn’t work like that”


Mortgage rates then fell dramatically by over 500bps (5%!!) over the next few years. This was a significant drop in borrowing costs that cannot be understated.

And no, immigration did not fall in 1989. It went from about 191k in 1989 to 256k by 1993. Also, more immigrants chose major city centres in the 1990s compared to the 1980s. Yes, more immigrants came to Canada and even more went to the Toronto area.


In the end, despite increased immigration to Canada with more people moving to the Toronto area and a substantial reduction in interest rates, prices fell 25% with many condos facing 35%+ declines.


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Real Estate Wealth

Canadian Housing Prices Down 10% Since Feb

Canadians aren’t working.

Employment has collapsed, as much of Canada slowly emerges from Covid-19 quarantines. In fact, the number of employed persons in Canada is near a 15 year low (see chart below).

This probably underestimates the problem because it doesn’t include people who are still technically employed but not receiving a paycheque. Many of these people will undoubtedly be added to the unemployment rosters soon.

Canada Employed Persons

It’s no secret that Canadian households are up to their eyeballs in debt. Debt requires money to service, making Canadians highly vulnerable to a negative change to their incomes. The current change is probably the worst we’ve ever seen, putting all forms of household debt at risk of default.

Hundreds of thousands of Canadians suddenly can’t pay their debts and have deferred their mortgages as a result – especially in Quebec, Alberta and Ontario (see chart below). But as I explained in a previous article a mortgage deferral is not a free lunch. The deferred payments are simply adding to what the borrower already owes. (In case you weren’t paying attention, that includes interest on deferred interest.)

All mortgage deferrals do is delay the inevitable. The ability for Canadians to start paying their mortgages again in the future is dependent on employment picking up very quickly. Unfortunately, this doesn’t seem likely. It could take several years for joblessness to shrink back to pre-Covid-19 levels.

The massive volume of mortgage deferrals is a stark warning sign: The Canadian housing market is on the verge of collapse, and with it the Canadian economy.

Simply put, when people can’t pay their mortgages, either they sell and become renters or the bank forecloses and sells the property for them. Either way, a lot more distressed sales enter the market, putting downward pressure on prices. Couple this with a dearth of buyers – due to general economic weakness – and housing inventories rise, again pushing prices down.

It’s only been 3 months and housing prices in Canada area already down 10% across the board. Some parts of Toronto are already down 18%.

While these numbers might not sound huge, they are. A 10-18% change within 3 months is massive! Unless the unemployment situation resolves quickly, by the end of 2020 prices could be down 20-30% across the board.

This isn’t just a housing market issue. The entire Canadian economy is overly dependent on housing and housing-related activity to drive GDP growth. A housing slump will be felt across the entire Canadian economy, with the drag lasting for years.

Ironically, if the housing market declines significantly it will open the door to home ownership to Millennials and Gen Z, which until now were locked out of the market.

Real Estate

11 Signs Canada Housing On Verge of Collapse

A recent Bloomberg article provided a view of the deteriorating condition of the Canadian housing market. It’s dire and in my opinion will get worse because the economy is being pushed to the edge by the Covid-19 coronavirus crisis.

Housing crises are slow-motion train wrecks, so don’t expect the pain to be immediately obvious, like in the stock market. While this might seem to make it more manageable, it actually extends the economic pain. If you are unfamiliar with what a housing-led economic implosion looks like, you should brush up on what happened to the US after 2006 and Canada after 1989.

The US housing collapse took years to eventually bottom, resulting in massive economic dislocation, human suffering and a near-collapse of the global financial system. Coming out the other side of the collapse was a long, slow uphill battle for most.

Canada saw the same after its real estate bust in the early 1990s. Years of stagnation and relatively high unemployment.

Of course, in both the US and Canada the real estate bust eventually created massive opportunities for many.

The following key stats from the Bloomberg article illustrate the immediate vulnerability of the Canadian housing market and the overall Canadian economy:

1) Nearly one in three workers have applied for income support.

2) Canadian households are among the world’s most indebted.

3) Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.

4) The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.

5) Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to about C$2.40

6) Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.

7) If only 2% of the housing stock were to be listed for sale, it would trigger the kind of supply shock behind a 1990 crash, according to Veritas. That’s most likely to come from investors, half of whom weren’t generating enough cash to cover the cost of owning their rental properties, Veritas found in a survey last September.

9) 30% of apartment rent due April 1 went uncollected, according to estimates by CIBC Economics.

10) Nearly a third of Canada’s Airbnb hosts — who jointly had 170,000 active listings in late 2019 — need the income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month.

11) Nearly 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, about 12% of the mortgages they hold, as of April 9.

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Real Estate Wealth

What You Must Know Before Deferring Your Mortgage

“No part of the mortgage is forgiven, as many people assume.”

Given massive economic stress on millions of Canadians, Canadian banks are now offering the option to defer your mortgage for up to 6 months. If you’re considering deferring your mortgage payments, there are few key points you need to know.

Mortgage deferral is a fair option for those temporarily in a cash-squeeze as people remain locked-up in their homes. However, no part of the mortgage is forgiven, as many people assume.

The mortgage deferrals simply rearrange financing, potentially leaving you with more debt in the end.

According to the Canadian Mortgage and Housing Corporation (CMHC), which oversees insured mortgages in Canada:

The mortgage deferral agreement does not cancel, erase or eliminate the amount owed on your mortgage. At the end of the agreement, you will have to resume payment according to your regular payment schedule.

NOTE: The interest that hasn’t been paid during the deferral period continues to be added to the outstanding principal of your mortgage. This can affect the total amount you owe in accordance with the original payment schedule.

In other words, you will need to repay the deferred principal amount plus interest on that amount plus interest accrued on the interest.

After the mortgage deferral, you will likely be presented a variety of options by your mortgage lender. The two main options will probably be as follows:

  1. Repay the deferred principal and interest as a lump sum and continue with your regular mortgage payments. This will help you avoid paying interest on the interest, but obviously means you need a big chunk of money.
  2. Add the deferred principal and interest to your mortgage principal, and either increase your monthly payments (to accommodate the higher principal amount) or extend the length of your mortgage amortization. With this option, you will be paying interest on the interest deferred during the deferral period.

For many people there is no other choice but to defer mortgage payments.

If you defer your payments your cash-flow will improve. I suggest putting aside as much money as possible while you have the opportunity. Use this chance so you have more flexibility at the end of the deferral period.

If you must defer, you will need to seriously consider whether your situation will change after the deferral period. Will you be able to pay your mortgage after the deferral period? Consider your options and stay in contact with your mortgage provider if you don’t think the 6 month deferral will be enough.

Deferrals won’t last forever. Use this deferral period wisely.

Real Estate

6 Reasons to be Bullish about Toronto Real Estate

Anyone who knows me and reads this is going to think I’ve lost the plot. Stay with me. I have good reason for writing this article.

Let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.

Before I start, let me first get this out of the way: I (still) think Toronto real estate is outrageously priced. According to Zolo, the average warm pile of bricks in TO sold for $982,189. This is 18.6% higher than last year! The market is tight and homes are on the market for an average of 16 days.

Over the decade ending 2018, the performance of the Canadian housing market was a rarity across the world (chart below). It’s only fair to question whether buying now is a stupid idea.

The market is hot and the current pace of price increases seems unsustainable. Everyone knows how ridiculous TO housing prices are, yet they continue to buy. The market stinks like speculative frenzy. It has for years – but this is the bubble that refuses to pop.

It is quite possible that Toronto real estate experiences a serious correction. It has happened before. There was a moderate correction starting April 2017, with prices recovering since. There was also a deep housing recession in Toronto throughout the 1990s. As you can see in the chart below, Toronto real estate prices took about a decade to break even after 1989. Many people have been waiting years for a ’90s-like correction, missing out on thousands of dollars of upside. Some day, right? Right???

Is a 1990s-style correction imminent?

According to the chart below, mortgage lending standards in Canada are strong. High quality lending standards means fewer defaults, fewer forced sales and less supply. Of course, there is some pro-cyclicality to it all, as economic strength supports incomes – the foundation underpinning lending standards. What happens to lending standards when the economy weakens?

Will there be a correction in the near future, perhaps triggered by a recession? There are smart people on either side of the argument. Let’s put the debate about a near term correction to the side for now. That’s not the point of this article.

The long view

If you’re a 30 year old buyer, maybe you shouldn’t be overly concerned with what happens in 2, 5…even 10 years. After all, a 30 year old buyer is looking to own for the next 30-50+ years. That’s plenty of time to ride out a correction. Even a correction that takes a decade to recover – like during the 1990s – is manageable with a 50 year time horizon, assuming you can keep up with the payments and aren’t forced to sell in a liquidation scenario.

Is Toronto a good place to buy if you have a long-enough time horizon?

For this article, let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.

1) Young(ish) people buy homes as they establish careers and start families. Canada’s demographic trends suggest the home-buying group should grow at a solid rate during the ’20s. This provides a tailwind for Canadian housing demand.

2) Canada remains one of the most attractive destinations for immigrants. Migration coupled with organic population growth makes Canada the fastest growing country in the OECD. New immigrants account for the vast majority of this growth.

This is very supportive to the housing market. Many immigrant populations see home ownership as essential to personal freedom and security. They work hard and do whatever it takes to buy and keep a home. Therefore, Canada’s population growth trend is bullish for real estate.

3) The immigrants coming to Canada are highly educated and ready to work. Most require little government assistance and arrive ready to spend and invest. What’s one of the first things they invest in? A place to raise their families.

4) Everyone that comes to Canada wants to live in Toronto, Montreal or Vancouver. Not all end up in these places – as they discover many opportunities outside of these cities – but the concentration is significant. Toronto in particular contributes almost 20% to Canada’s GDP, so you can see why it is a magnet for immigration. Moreover, Toronto is very ethnically diverse and has built in multi-cultural support..

5) With all this fresh, hungry talent Toronto will soon be second only to San Francisco as a North American technology hub. This trend is self reinforcing, as talent attracts employers and vice versa. Toronto is also Canada’s finance hub. The finance and technology industries will drive Toronto’s economic prospects for decades, supporting Toronto house prices.

6) Finally, although Toronto residents might not see this, the cost to live downtown is still cheaper than many other places around the world. Is Toronto equivalent to London or Hong Kong? Of course not. Not yet. But with ample economic opportunities and solid prospects, comparatively lower cost of living should continue to attract highly educated, workforce ready immigrants from around the world. This again supports Toronto’s real estate market.

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Real Estate

Should You Sell Your Toronto House And Rent?

Say you’re 45 and you have $1 million of equity in a house in Toronto. Could you sell your house, invest the money and pay rent on a house solely using your portfolio?

I ran the numbers.

It costs about 3 grand to rent a house in Toronto. Assume a 6% return on a portfolio.

Here’s the plan:

Sell the house and invest the proceeds. Withdraw from the portfolio to pay your rent.

If you assume your rent increases close to the legally controlled rate (about 2%) the idea seems to work well. Between ages 45 and 90 you spend about $1.8 million on rent. But at the same time, your portfolio grows to $2.9 million. No depletion here…

Looks good, right? Keep reading…

The problem is this makes a big assumption: your rent increases actually stick to about 2% per year.

In reality, market rents in Toronto are actually rising about 10% per year. Many landlords – seeing market rents rising faster than the controlled rate – will find ways to kick out renters to jack up rents. As a renter, this means you’d likely 1) be forced to find a new house to rent every few years, and 2) experience sudden spikes in rent as you’re forced to align with market prices. Indeed, over the long term, the 2% assumption simply isn’t realistic.

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Simply increasing the rent increase assumption to 4% per year fully drains your portfolio by age 84. This is a bit more doable, although you’re f@cked if you live past 84. Also, a 4% rent increase assumption might still be low, given it’s less than half that of market rent increases.

Obviously, the story gets worse the faster rent increases. At a 10% annual increase, you’re eating cat food in your senior years. In this scenario your portfolio runs dry by age 65 – just in time for retirement!

In conclusion:

With a long-enough time horizon a $1 million portfolio isn’t enough to cover rent for the rest of your life.

Real Estate

Toronto Homes: Not Best Investment 2008-2018

I know many people considering real estate as an investment. It is a standard ‘go to’ idea for anyone looking to build wealth.

While you can definitely create wealth with real estate, it certainly isn’t the sure thing many people think. Indeed, real estate investing is high risk (high leverage and high concentration) and a huge pain in the ass (3am clogged toilets, destructive tenants).

To gain perspective, investors need to consider real estate against other investing options.

Toronto real estate is in a bubble. Over the past decade, houses in Toronto have appreciated by over 120%. Many people therefore conclude that a house in Toronto would have been a fantastic – if not the best – investing choice over the past decade.

They are wrong.

The following chart shows 10 year returns for Toronto real estate, stocks, REITs and real estate equities. As you can see, housing price increases lagged.

So how do real estate investors get rich? Leverage. But if you applied the same leverage across the comparison, the relative performance differential would remain.

To be fair, the return for houses was calculated on a price returns basis whereas the other indices are showing total returns. Total returns include the income earned by holding the asset – dividends for stocks and rent for real property. Incorporating rental income would definitely improve the comprison. But would rent have tripled the return to match that of REITs? Probably not. Especially after considering risk, maintenance expenses, taxes and property management costs.

(Note: in an ideal world, I’d incorporate a $ rent assumption to recalculate Toronto real estate returns as a total return. Unfortunately, I don’t have the base data to recompose the returns.)

Despite the wonky comparison, the chart still disproves the incorrect assumption that owning a home was the easy, low risk way to build wealth – even during the biggest real estate bubble in Canadian history.

During the next decade, it’s not reasonable to expect the pace of Toronto real estate returns to continue at the same pace. A more conservative returns estimate would put Toronto real estate at a further disadvantage to other assets.

Moral of the story: do the math, compare against alternatives and factor in all risks before investing in anything.

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Real Estate

Is It Worth Buying a Condo to Rent Out in Toronto?

Once in a while I get the urge to buy a condo in Toronto to rent out. Everyone seems to be doing it, right? So it must be a money maker? Right? Wrong! Let’s look at the numbers.

The following is an approximation that leaves out a few minor details for simplicity’s sake. Please feel free to point out things you’d change or add in the comments below.

The Property

Today I’m looking at a 1 bedroom plus den at the luxury condo called “Sky Tower at Eau Du Soleil”, located at 30 Shore Breeze Drive & 2183 Lake Shore Blvd W, Etobicoke.

This is a gorgeous location with AMAZING amenities, including a indoor salt-water pool, hot tub, fitness centre, rooftop deck, media room, meeting room, yoga studio, squash court, rec room, outdoor patio, tennis court, visitor lounge and more. You get the picture. This is luxury living.

Currently, several units are for sale. A 643 square foot 1+1 including parking is listed at $749,000 with a $449 monthly maintenance fee. A couple others are also listed at a similar price.

With a 20% deposit ($149,800) and 25yr mortgage at 2.79%, this property could be yours for $3,221 per month all-in.

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So Would this Make a Good Investment Property?

A similar sized condo on the same floor rents for $2,200 per month. That’s an instant monthly loss of $1,021 per month, or $12,252 per year. Not only that, you’ve suddenly tied up $149,800 in liquid assets and are now $599,200 in debt. Sounds like a shitty place to be. Especially considering you could have been EARNING $7,490 a year from the $149,800 deposit (assuming a reasonable 5% annual return).

But instead of sitting back and watching your portfolio grow, you’re chasing people for rent and fixing toilets at 3am. And basically paying $1,021 a month for the privilege. But some of that monthly all-in payment is going towards building equity in the house, right? Well, because of the monthly negative cash flow you’d only accumulate $27,954‬ in equity over five years. Alternatively, you’d have earned $37,450 on the investment portfolio.

‬To make up the gap you’d have to depend on the condo price to appreciate . Unfortunately, Toronto real estate is in the midst of a massive bubble and it could burst any time. I’d say it’s pretty ballsy to bet your future on the forecast that prices will keep rising.

And that – ladies and gentlemen – is how I eliminate the urge to buy a condo in Toronto to rent out.