What is the “middle class”, anyway? It has something to do with financial self-sufficiency, which is why it’s important to senior governments. They can’t support all of us, and have grown accustomed to having a “middle class” that represents about 70% of their constituents. Those who are financially secure and self-supporting, so government financial assistance can be concentrated on the other 30%.
Wealth Disparity
Over recent decades, and not only in Canada but internationally, the wealthy class seems to have gotten wealthier, and the middle class is shrinking. A greater portion of wealth is held among a smaller portion of the ultra-wealthy. Wealth disparity has never sat well with the idealism of youth, and it’s definitely not acceptable to most of our younger generations. And lately we’ve woken up to the uglier truth: that wealth disparity correlates to racial and ethnic distinctions, too.
What Can You Do?
A certain amount of hand-wringing is appropriate, here – blaming it on government and capitalism (as we know it), and demanding change. But at some point one has to ask: “What should I do about it?”
In Canada, we have an income tax policy and a real estate market that puts an answer to that question right in front of us: “Get into home ownership”. That’s the ideal real estate investment for the middle class, and given the tax treatment in Canada, it’s a primary investment for the middle class.
It’s pretty well known that most people’s financial security has a lot to do with being a home owner. It’s the primary refuge of net worth for most of us.
Growing Your Net Worth in Canada
A scant 154 years into our confederation and we are the envy of the world, with people and money coming from every nation and ethnicity to join the Canadian way of life. And we welcome them with liberal policies toward immigration, driven by concerns for sustaining and growing the economy. Our way of life is attracting the world and we’ll never supply enough new housing to stay ahead of the demand for it, so the values and prices keep rising.
Against that backdrop, around 77% of Canadian families have been fortunate to own their homes and see the housing market keep adding tens of thousands of dollars each year to their net worth – untaxed, if they live in the home as their “principal residence”. I know a high school principal who told me that for over 30 years, he consistently made more money from his home than he could earn from his work.
Acting Like the Uber-Rich
It may seem accidental and unearned, when the homeowner scores such wealth growth, but not through careful investing – more like, through luck. But if you look at the investment fundamentals, you can see that it’s the family of modest income than can be doing this, and they are actually acting like the uber-rich. It’s very simple: they are using leveraged financing to buy a tax advantaged asset with appreciating value. With an 80% mortgage, their leverage is 5-to-1. They can own five times the value of their down payment, with an equity investment of only 20%. Whatever degree to which the asset grows in value will be multiplied by 5, in relation to their equity. And that part of their earnings is tax free. This is how the wealthy have done it for millennia, and usually with a heavy emphasis on real estate holdings.
While we can and should look at wealth disparity and seek to create more equitable opportunity for all, we’d be wise to notice the equitable opportunity we already make available in Canada. Home ownership has always been encouraged, and perhaps should continue to be, if we’re to maintain a ratio of at least 70% of us who are financially secure without government assistance.