Articles

The High Cost of Owning a Home in Canada

1 Comment

A recent TVO agenda program claims that there is a strong “case against home ownership”. When examined from a purely financial perspective, there is a high cost of home ownership in Canada. Case after case shows it could be cheaper to rent for many than to try to own their own houses.

Here is an example.

A Toronto property is up for either sale or rent. The listing is for $680,000 and the rental is at $2,700.  At these rates (and considering you take a mortgage), the annual rent is only 4.8% of the sale price. If you attempted for home ownership, this amount would easily be taken up by property tax, insurance, mortgage interest (or opportunity cost), maintenance etc.

The TVO Agenda program, A Case against Home Ownership, discussed this issue amongst a panel of distinguished guests. Here is the full video below, as well as highlights from the show:

Some highlights include:

  • Historical rates of return on investments in housing versus equity markets clearly favour not owning a home. As stated by the economist Professor Shiller, “If there are no other considerations, you want to own a diversified portfolio of stocks and bonds and then rent and you’re putting yourself into assets that have historically done very well in contrast to housing”.
  • Home ownership rates in Canada have climbed steadily since 1970 to a current 68% ownership. This is very much in line with the US rate, currently at 67%. This is however in stark contrast to Switzerland for example that is only around 33%.
  • Society and consumer psychology has evolved to home ownership as the definition of the nuclear family. Given the huge number of single parents, renting a home could become the new trend instead, allowing people to be more mobile.
  • The business of America through government intervention became “housing”, which resulted in much of the recent collapse in many US residential markets.
  • Demographic trends dictate that Baby-boomers will be dumping their houses in exchange for town houses, condo’s and seniors homes

We generally believe that much depends on your life stage, but that the staggering rise of house prices in Canada over the last few years suggests that if you don’t own, it’s probably a good idea to keep renting for a while.

Critics like Professor Milevsky of the Schulich School of Business still point out that the argument for or against home ownership is too financially focused.  “It’s (the debate) lost the qualitative lifestyle aspect that should drive the decision.”

If you liked this article, read the 5 reasons why it may be better for you to rent instead of own your cottage.

Deferred Sales Charge (DSC) on Mutual Funds

0 Comments

For mutual funds investors, deferred sales charges (also known as “back-end fees”) can cause a lot of headache when investors come to realize that their investments are essentially locked-in by deferred sales charge (DSC).

The following information is based on what I wrote as an original article for the Globe and Mail.

What is a Deferred Sales Charge (DSC)?

The DSC is a fee that gets charged to a client (5-6% in year 1, declining to 0% in years 6-7) if they sell a mutual fund without transferring it to another mutual fund from the same company.

How DSCs started

Canadian mutual fund executives pay stock brokers or mutual fund salespersons and their companies a 5% up-front fee. The problem is if a client decides to move the assets out of the fund family, the mutual fund company needs to recover this commission already paid out.

It does this by having the client pay the DSC commission fee, which can be large if they leave the fund in the first few years. In many cases, clients keep their money invested with the same fund family solely to avoid paying this fee.

Mutual fund sellers claim that these fees are supposed to encourage people to “buy and hold” for a longer time. However, if somebody is not getting the level of return they would like, this just traps people to stay with the same fund company. Investors might be interested in “buying and holding” but with a different fund; the DSC fee effectively prevents this.

Investor solution

As a consumer, the solution is simple: watch out for DSC fees. If you want to invest in mutual funds, learn about the different mutual fund fees first and consider your options (including low-load or no-load funds that do not have DSC fees).

Mutual-Fund-Back-End-Fees

 

Industry solution

There are many steps that regulators could take. The best would be to make the adviser pay the DSC if a client leaves early. By putting the adviser on the hook, you can be certain that far fewer of them would sell funds on a DSC basis.

Regulators can make all of the requirements for full disclosure and signatures that they want – and they should – but until you make the adviser pay, there will still be a strong incentive for stock brokers and mutual fund salespeople to sell mutual funds with a DSC.

An alternative to mutual fund investments can be segregated funds. Read this short, informative post about the benefits of investing in segregated funds.

At TriDelta Financial we help our clients to invest intelligently, tax efficiently and never with DSCs. If you want to learn more about how we can help, contact me at 1-888-816-8927 x221 or email me at tedr@tridelta.ca

Ted Rechtshaffen MBA, CFP
TriDelta Financial

↓