A Loaf Of Bread For $50?

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A Loaf Of Bread For $50?

When I was a kid, bread was 50c, popsicles were a nickel, and  my first car, brand new, fully loaded was $4,150 including shipping, freight and fuzzy dice hanging from the rear view mirror.

Now, bread is $3, popsicles are 50c, and it costs me $4,150 just to pay for gas and insurance for my car!

And although we notice it, and complain about it from time to time, like when gas went over a dollar, or whenever we are hit with a new tax, we tend not to notice a little thing called inflation, and being Canadians, we shrug our shoulders, and move on.

By my calculation, when my kids are my age, a loaf of bread will be $50. Cars will be $200,000, and the average house will cost $5 Million. And we will pay it.

Of course when that time comes, the average income will be $1M a year for the average family . . .so everything is relative. Prices are irrelevant without taking wages, or income into consideration.

For the last few years, as our real estate market has marched steadily forward, the most common statistic we hear in the media is the “Average Price” of homes or condos. This to me, is irrelevant, unless you also take into consideration incomes, AND, the cost of borrowing, because as we know, most people finance their purchase, and mortgage, on average, 70 – 90% of their purchase.

I bought my first condo in 1989. A 973 sq ft 2 bdrm condo in a new building downtown. At the time, interest rates skyrocketed to a whopping 12%. So after my 25% down payment, including mortgage, maintenance, and taxes, I was paying a whopping $3,200 a month to carry my condo.

At the same time, we had a glut of vacant condos in the city, so average rent for the same size suite was a measly $1,200.

Fast forward to 2012: the same condo can be purchased for about $450,000 today, or roughly twice the original value. If you buy this same condo, today, with 20% down, your total monthly cost ends up being around $2,100. If you want to rent a similiar condo, it will cost you around $2,200 a month to carry.

So it’s actually cheaper to buy this condo TODAY than it was in 1989 in two ways: it’s cheaper to carry than it was, due to interest rates, and it’s actually CHEAPER than renting!

Here’s what I believe is a smarter way to analyze any real estate market is by using what I would call a FAIR PRICE ANALYSIS. This analysis would take into consideration the maximum mortgage allowed by the banks, which is Gross Debt Service (GDS) which takes into consideration your Gross Income, and compare it to the Average Price in various areas.

Fair Price Analysis:   Average Price x GDS Factor x  Average Income
DIVIDED BY  Average Price

For example:        Say the average cost of a 2 bdrm condo in your area is $400,000. Assume that 80% is financed with a mortgage, and assume a maximum GDS of 30 ( 30% of Gross Income):

Mortgage Payment:             $1,398
Maintenance Fees:              $   400
Total:                                      $ 1,798

Income required to qualify, according to CMHC guidelines (GDS of 30) is:    $71,920

The average household income in the GTA in 2010 was $99,991.

So with current pricing for 2 bdrm condos, the Fair Price evaluation is currently at 72% of value.

In other words, the average family, buying the average condo, in that area can afford to carry it.

If we also take that figure of $1,798, and compare it average rents, say $2,000 today for the average 2 bdrm rental, again, it is cheaper to own, than it is to rent.

When it comes right down to it, if we break down the city by neighbourhood, and by property type, and we have, it becomes clear that the market pricing is within reach of the average family, and in fact, HAS TO BE, because the banking, and insurance guidelines simply don’t allow us to buy beyond our means. In fact, over the last couple of years, the financing requirements have gotten tighter and tighter.

I’m preparing myself and my kids for $50 loaves of bread, and $200,000 cars by buying real estate today at what I know is 10 cents on the dollar compared to what it will be in a few short years when my sons grow up. We should all do the same.

There is an old saying . . . . “The best investment on earth . .   .  . . . is earth.”

Always has been. Always will be.

Sources: Toronto Real Estate Board, CMHC, Toronto Region Research Alliance