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Jonathan Saveriano

A Comparison of the Real Estate Market and the TSX

The theoretical principles of real estate investments and market-traded financial assets are extremely similar, yet they seem to attract fundamentally different investors. Real estate arguably attracts a pragmatic and entrepreneurial investor, while stock market investors seem to be more theoretical and managerial. Having received a formal education in Finance, I was once a believer in the almighty stock market; I am now somewhat of an apostate.My general skepticism of investments in the stock market has been ridiculed by friends in the financial industry. I am called neurotic because I find it difficult to invest my hard-earned money in assets which are sometimes intangible, complex and managed by people I don’t know - and a simpleton for preferring plain ol’ real estate to any sophisticated Wall Street concoction. However, as will be demonstrated in the following comparison of the Toronto Stock Exchange and the Montreal real estate market, there is something to be said for this simple yet timeless investment. Comparing real estate returns with market returns poses certain challenges. Total returns of a financial asset are comprised of capital gains and dividends, but the latter is difficult to estimate in the real estate market. Dividends of a stock are analogous to the Net Operating Income (NOI) of a property (after reserves). Unfortunately, the rental market is quite opaque and the average “dividend rates” of residential real estate have not been recorded throughout the years. Drawing from my experience as a real estate broker and erring on the side of caution, I will estimate the average annual dividend rate to have been a constant 3% during the years of comparison. This is to say that the average $300,000 single-family home would have an NOI of about $9000 per year – perhaps being rented for $1100/month (heating and electricity excluded), with other expenses… Read More

High-rises, low returns

A simultaneous fit of euphoria and vertigo weakens your knees as you gaze out the living room window of a brand new 22nd floor luxury penthouse. “This is the chance of a lifetime’’ your real estate broker declares cogently. Your significant other turns to you and grins approvingly; “I love it, honey”. Amidst the flood of emotions and peer pressures, you manage to clear your head and ask yourself one sobering question – is this a good long-term investment? Well, considering that homeowners usually depend on large capital gains to grow their nest-eggs, maybe not. In my educated opinion, this particular type of property, a high-rise, is less likely to produce these desired results. More specifically, a building with fewer storeys may be a better choice if long term appreciation is sought.In order to proceed, certain elements of real estate appraisal must be explained. Fundamentally, there are two components of real estate property: land and the building erected thereon. Imbedded in basic real estate appraisal theory is the humble assumption that while land can either increase or decrease in value over time, buildings will invariably depreciate. Lay people tend to have a difficult time grasping this abstraction, but think of it this way: buildings become dated, they require repairs and renovations, their layout becomes less compatible with modern life, and eventually you may have spent just as much keeping it up to date as it would cost to build a new property. The accretive effect of these deteriorations is expressed as an annual percentage of the original building value – the depreciation rate. These principles of real estate appraisal imply that capital gains on real estate should be primarily the result of increases in land value.My qualm with high-rise condominium projects is that only a small fraction of the sale… Read More

No Students

“No students!” the listing broker snarled bitterly and unapologetically. Bamboozled, I stammered out a few interrogatory pronouns and adverbs before I could regain my professional composure. I plead my case; “...but they are three responsible young women who have been renting next door from your client’s rental for over a year. They have been the ideal tenants, ask their landlord!”. “Even if they were to pay twice the rent asked, my client would not rent to students”, she responded dismissively.I looked down at the incomplete Promise to Lease – a disappointed client, a commission lost, but one heck of a revelation.In retrospect, as unpleasant as this experience may have been, it compelled me to begin my informal investigation into the rights of student tenants in the surrounding areas of McGill University. It has been over three years since this occurrence, and, after extracting the salient points of many casual interviews with students, I can now claim with confidence that students face profound injustices. In this article, I intend to educate the public on the common illegal and unfair practices of which I have become aware.The Finder’s FeeFor those of you who have never been a tenant in the McGill ghetto, you have probably never heard of a “Finder’s Fee” with regards to an apartment lease. Despite my knowledge of real estate law, I had never heard of such a fee either until three years ago. It seems that some landlords in the McGill ghetto have the gall to ask students to pay an arbitrary fee (i.e. $500) at the beginning of their lease. Sometimes they will cite reasons of high demand for the rental, and the fee is required to secure the rental for the prospective lessee. Other times, the “Finder’s Fee” is disguised, as students are forced to purchase… Read More

Canada’s new mortgage regulations

Last month, Canada’s economic watchdog, Jim Flaherty, announced that the government will once again be tightening the restrictions on residential mortgages. In introducing these new regulations, the finance minister hopes to cool down a dangerously hot housing market, particularly in Toronto and Vancouver. The government fears that without these new restrictions, a housing bubble could burst suddenly and a crisis similar to that endured by Americans in 2008 would ensue. They include three significant changes: the maximum allowable amortization will be reduced from 30 years to 25 years, refinancing has been limited to 80% of the property’s value (previously 85%), and homebuyers purchasing a property over $1,000,000 will now have to put down at least 20% as they can no longer have their mortgages insured by the Canadian Mortgage and Housing Corporation (CMHC).These regulations, particularly the reduction in maximum allowable amortization, may have a significant effect on the Canadian real estate market. In my opinion, they are more likely to cause stagnation in overpriced markets than a decrease in prices. For real estate prices to significantly decrease in cities such as Vancouver and Toronto, there would need to be some kind of catalyst (i.e. rising interest rates or rising unemployment). Without such a catalyst, even though buyers may not be able to afford the high property prices, most sellers would not need to sell urgently. In addition to affordability issues, buyers are more reluctant to buy into markets which are supposedly overvalued; the media has bombarded the public with apocalyptic predictions and frightening (and sometimes misleading) statistics.  As buyers lack confidence in the real estate market and sellers lack incentive to sell, a gridlock could result, increasing demand for rentals. If I were buying a Condo in Toronto or Vancouver, I would make sure that the home owner’s association does not… Read More

Modern Society and Real Estate

Whether for the better or worse, it is evident that almost every facet of Canadian society has changed dramatically over the last half-century and continues to do so. We don’t think like our parents, and our children will certainly not think like us. Sometimes, the tension arising from this incongruence in values, beliefs and desires between different generations is palpable. It’s as if there is nothing the different generations can agree on – not even something as seemingly uncontroversial as real estate. As a consequence, even the real estate market will change along with this societal metamorphosis. More specifically, neighbourhoods will fall in and out of favour depending on their degree of compatibility with the modern lifestyle. I have identified four factors which I believe to be influential in the neighbourhood desirability shifts that will occur in the coming years. These four factors are: architectural character, accessibility to public transit, size/divisibility of dwellings, and proximity to the city centre. I contend that if homebuyers analyze neighbourhoods based on these factors prior to purchasing, they will be more likely to make sound long-term real estate investments.Architectural Character: Neighbourhoods with true architectural character can never be reproduced. For example, consider the grey-stone Victorian townhouses on the tree-lined streets of the “flat” in Westmount, Quebec. The meticulous attention to detail and the exquisite quality of the materials used make these properties prohibitively expensive to tastefully replicate. The quaint, narrow, winding streets would never be designed for new neighbourhoods for reasons of practicality. Finally, the rich history of these neighbourhoods, which contributes to their allure, takes hundreds of years to develop.All this is to emphasize that there is a limited amount of these properties in any given city, and even fewer as more old buildings kiss the wrecking ball. Assuming the population of our… Read More