Minimum Wages Increasing to $15/hr and Rental Affordability Urban Sprawl!

I tend not to watch the news – in fact we don’t even have Cable at home anymore.  It is usually lots of doom and gloom, and headlines created mostly to entertain.  I prefer to read the news and gain various perspectives on the topic at hand, so I am able to make my own decision about the validity of the facts.

A few weeks ago the headlines were all discussing the Wynne government’s latest announcement about a minimum wage increase.

The Office of the Premiere Announced, “Ontario is proposing the largest increase to the minimum wage in the province’s history, raising it to $15 per hour, as part of a plan to create better jobs and fair workplaces. This will give more than a quarter of employees in the province a pay increase and will help ensure that more workers are benefiting from Ontario’s economic growth.”

This has been a hotly debated topic from two different perspectives.

There is the argument that this is a much needed boost for almost $1.5 million Ontario workers who currently earn less than $15/hr.  This will allow them to enjoy a higher standard of living and of course, have more money to spend boosting our economy.

The other side of the coin is warning about the impact of a sharp increase like this, especially for small business owner’s who are integral to the Ontario economy.

“We are shocked and appalled that the government is broadsiding small business owners with a 32-per-cent increase in the minimum wage within only one-and-a-half years,” said Canadian Federation of Independent Businesses director Julie Kwiecinski. “Small businesses, who don’t share the larger profit margins of big business, will be forced to make difficult choices.” – CTV News

Farmers are also warning of the increase in the cost of local food with the proposed changes.  Gervais, of Barrie Hill Farms, said wages are the largest cost in fruit and vegetable production. Certain crops like asparagus, strawberries and raspberries must be hand-picked.

It is an interesting conversation to be had, and I think a more in depth economic impact study would need to be done before such drastic measures are implemented.  It often seems straight forward (increased wages = increased standard of living) but it is not always black and white.  Economics is a complicated field (one that I don’t claim to be an expert on) and it is difficult to understand the short and long term implications of a decision such as this one.

On the other hand, there is an ongoing discussion about the affordability of the real estate market. Lots of people I know are worried about whether their children will be able to purchase a home with the rapidly increasing prices of homes.

What I think is even more interesting is the ever increasing price of rents.  Toronto is not only becoming increasingly unaffordable from a home purchasing perspective, but also from a rentability perspective (of course the two go hand in hand – increased property prices = increased rent).

The following chart extracted from PadMapper – which tracks rents in Canadian cities – shows the median rents in various cities nation wide for one and two bedroom apartments and the year over year increase.

You can see that Toronto shows a whopping $1750 in median rents for a 1 bedroom apartment.  This isn’t going to change anytime soon, with an increase in immigration and no real increase in purpose built rental apartments in the City.

The obvious implication of this is that renters, too, are forced to move outside the City, causing an increase in demand in cities like Barrie, which is #5 on this list (and also saw a 15% increase in rent prices).

Interesting stuff.

I get questions about the market and the security of real estate investing.  I have even been told that I should liquidate NOW – and that the market is going to take a significant hit.

But here’s the thing – I am in the business of renting. Good homes, in good areas with good tenants is the formula.

And these statistics show that there is a huge demand for these good homes in good areas, and that it is likely not going to change any time soon.

So why would I change my business model or be worried in the least.

However, I have taken some time to ‘stress test’ my portfolio just incase.  What would happen if rents did not increase (they have never been known to decrease) and what would happen if mortgage rates increased (definitely a probability at some point considering how low our current rates are).

If you have taken these types of considerations into account, fluctuations in the market don’t matter.

Because we are in the renting business.  And for now, the outlook seems promising.  Our customers are in need of our product (good quality rentals in good areas) and so we keep on moving forward.

Don’t listen to the fear mongering naysayers.  Look at the numbers, the economic fundamentals and the basis of the business model.

So until next time, happy Canadian Real Estate Investing.

Jose Jafferji, REIA