Excellent analysis. If you include the present value of future decreased capital appreciation, the net value of condo investment is dire.
Furthermore, this analysis applies to single family homes as well, the numbers are hidden because of the high equity portion of each purchase.
If a company has negative cash flow, this is a huge negative, unless there is an expectation of significant future growth. Condos and homes are no different.
Always appreciate your analysis and insights, and almost always find myself in agreement. However in your piece today, I think "shelter inflation" is too narrowly defined. We are just at the beginning of massive upward pressure on the cost of shelter as some 100k households per month renew mortgages now through 2026. Having aligned itself with the federal government from mid-2020 through early 2022 in encouraging Canadians to borrow massively, with an "official promise" of rates remaining lower for longer, the Bank is now facing a catch-22 of its own creation. The lower-for-longer "mis-guidance", combined with other misguided policies (e.g.: the focus on driving the top-line economy through immigration, and over-zealous regulation of residential construction), have resulted in unprecedented upward pressure in the cost of shelter. Annual shelter costs now account for a DOMINANT share of the average household's dispoable income, especially among the front half of the working age population. The Bank's reluctance to reduce the reference rate more quickly is perpetuating the problem. One gets the impression that this reality is in conflict with the Bank's theoretical framework, even as the evidence is abundantly clear, so it is hestiant to do what seems obvious. The BoC is indeed well behind the curve, just as your piece suggests, but it is at least in part because it's conventional inflation-taming tool of higher policy rates is itself causing an ongoing elevated inflation rate due to shelter cost comprising an unconventionally large share of Canadian households' incomes. The only way out of this is of course a dramatic turn-around in the productivity of the overall economy which will remain a pipe-dream as long as Canada's most productive industries are demonized.
Excellent analysis. If you include the present value of future decreased capital appreciation, the net value of condo investment is dire.
Furthermore, this analysis applies to single family homes as well, the numbers are hidden because of the high equity portion of each purchase.
If a company has negative cash flow, this is a huge negative, unless there is an expectation of significant future growth. Condos and homes are no different.
Thanks Steve.
Morning Steve,
Always appreciate your analysis and insights, and almost always find myself in agreement. However in your piece today, I think "shelter inflation" is too narrowly defined. We are just at the beginning of massive upward pressure on the cost of shelter as some 100k households per month renew mortgages now through 2026. Having aligned itself with the federal government from mid-2020 through early 2022 in encouraging Canadians to borrow massively, with an "official promise" of rates remaining lower for longer, the Bank is now facing a catch-22 of its own creation. The lower-for-longer "mis-guidance", combined with other misguided policies (e.g.: the focus on driving the top-line economy through immigration, and over-zealous regulation of residential construction), have resulted in unprecedented upward pressure in the cost of shelter. Annual shelter costs now account for a DOMINANT share of the average household's dispoable income, especially among the front half of the working age population. The Bank's reluctance to reduce the reference rate more quickly is perpetuating the problem. One gets the impression that this reality is in conflict with the Bank's theoretical framework, even as the evidence is abundantly clear, so it is hestiant to do what seems obvious. The BoC is indeed well behind the curve, just as your piece suggests, but it is at least in part because it's conventional inflation-taming tool of higher policy rates is itself causing an ongoing elevated inflation rate due to shelter cost comprising an unconventionally large share of Canadian households' incomes. The only way out of this is of course a dramatic turn-around in the productivity of the overall economy which will remain a pipe-dream as long as Canada's most productive industries are demonized.
Thanks, Gerry