- A traditional middle class lifestyle assumes: (1) two spouses and a child and the ability to finance that child’s education; (2) home and vehicle ownership; (3) the ability to save for retirement.
- In Toronto, the aforementioned lifestyle would require an after-tax income of $124,624 per year.
- This middle class lifestyle was common and available to many people 30 years ago. Today it’s only available to the top 10% economic class.
What are the hallmarks of a middle class lifestyle? And how much does a household residing in Toronto have to earn to be considered middle class?
First, let’s define “Toronto”. “Toronto” means the City of Toronto. I’m not including the satellite cities in the Greater Toronto Area such as Mississauga, Oakville, Brampton, etc. This is for the sake of simplicity in discussing the subject at hand. Also, when people arrive in the GTA from other parts of Canada or internationally, they aspire to actually live in Toronto itself.
Second, let’s define “household”. For ease of exposition, we’re going to define this as two spouses and one child.
With this in mind, let’s identify the traditional hallmarks of a middle class lifestyle and the cost of attaining it in Toronto.
THE COST OF HOME OWNERSHIP IN TORONTO
Home ownership is of course the lynchpin of a middle class lifestyle, and every household that aspires to become part of the middle class will put a priority on achieving it.
According to the website www.toronto.listing.ca, here were the average prices of homes by housing type as of April 2021:
Table 1Average price by housing type (April 2021)
|Housing Type||Average Price|
These are of course only averages. Certain types of housing in more desirable neighbourhoods (like Trinity-Bellwoods for town homes, Lawrence Park for detached homes, and the Bay Street corridor for condominiums) will fetch premiums well above these averages.
Currently, $647,306 for a condominium apartment in Toronto won’t purchase anything larger than a one bedroom plus den and perhaps one parking space. A household of at least three people (i.e., parents and a child) won’t be able to live comfortably in a one-bedroom apartment.
So for the remainder of this section, I’m going to focus on the price and carrying costs of town homes and detached homes. Now for the sake of simplicity, let’s assume that our average household can: (1) come up with the 20 percent down payment necessary to obtain a non-CMHC mortgage; and (2) obtain a mortgage at 3.00% per annum amortized over 25 years. The last column of Table 2 shows the monthly mortgage payment based on housing type.
Table 2Mortgage payment by housing type (April, 2021)
|Housing type||Average price||Mortgage - Note 1||Payment - Note 2|
Note 1: Amount based on a 20% down payment. Ignores closing costs such as land transfer tax.
Note 2: Assumes a 25 year amortization period at 3% per annum
And let’s not forget Toronto’s property tax:
Table 3Total carrying costs by property type (April 2021)
|Housing type||Property tax - Note 1||Mortgage payment||Total|
Note 1: Calculated using Calculated using https://www.toronto.ca/services-payments/property-taxes-utilities/property-tax/property-tax-calculator/property-tax-calculator/
In reference to Table 3, I realize that there are non-recurring costs such as home repairs and renovations, but for the sake of simplicity, I’ve focused on monthly recurring costs.
THE COST OF VEHICLE OWNERSHIP IN TORONTO
If Toronto actually had a world-class public transportation system (like New York or London), this entry wouldn’t even be necessary. But unfortunately, the TTC is sorely lacking in this department. Therefore, practically speaking, most families will need to own at least one vehicle if they want freedom of mobility within the city.
A household with children will need a vehicle of at least the size of an SUV. Let’s assume that the household is sensible and wants to purchase a reliable vehicle at a reasonable price. This rules out American vehicles (they’re too unreliable). It also rules out European made vehicles (they’re too expensive).
So that leaves us with Asian manufactured vehicles. Let’s focus on a Subaru Forester which has an impeccable reputation for reliability and is reasonably priced starting at $28,995 (plus HST, PDI & freight). You can currently obtain financing from Subaru at an annul interest rate of 2.49% over 5 years. That works out to a monthly vehicle loan payment of about $515 per month. Vehicle insurance would be about $200 per month (assuming you have a G License and no recent history of accidents). Let’s add another $200 per month for gasoline.
THE COST OF A UNIVERSITY EDUCATION IN TORONTO
Most middle class parents aspire to have their children attend university. Also, in many cases the ideal is that the parents are going to pay the full cost (i.e., the child doesn’t take on any debt and won’t be working while studying — this is in fact the norm in many immigrant households).
According to an article dated April 2021 at TopUniversities.com, , the average annual cost of tuition in a Canadian university if you’re a Canadian citizen is $6,463. Therefore, assuming just one child in the household, a four-year bachelor would cost a household an average of $25,852 today. This figure doesn’t include the cost of textbooks, nor food and lodging if your child attends school away from home.
Now what if you are planning to have children or currently have a toddler? What will the cost of an education be in 18 years? If you were to fund your child’s education through an investment vehicle like an RESP, how much would you have to contribute?
Luckily, there are a number of online calculators that can provide you with some guidance. Here is a RESP calculator by Sun Life that can help you develop a savings plan to reach your goal of funding your child’s education costs.
Here are the numbers I inputted into the Sun Life RESP calculator:
1. Number of years before child starts school = 18 years
2. Number of years at school = 4 years
3. Current annual tuition cost = $6,463
4. Current annual room & board cost = $10,000
5. Anticipated average annual return on education fund = 8%
Based on these inputs, the calculator estimated a total education cost of $96,912 for a 4-year program in 18 years (the year 2039). And that’s just for one child.
Assuming an annualized return of 8% over 18 years, you’d need to contribute about $168 per month to reach this goal of $96,912. Of course, if you have more than one child, this will increase your contribution requirement.
SAVING FOR RETIREMENT IN TORONTO
The days of private sector pension plans are long gone. And unless you work for the civil service, you will need to rely on yourself to finance your retirement fund.
How much you’ll need to save for retirement will depend on: (1) the number of working years you have left to contribute to your retirement fund; (2) your fund’s average annualized return during your remaining working years; and (3) the amount of money you’ll need to live on when you retire from the workforce.
Points 2 and 3 are the most uncertain factors. Will there be financial crash that decimates your retirement portfolio between now and your scheduled retirement date? Will you have been diligent enough to pay off your mortgage by the time you retire? Will your children be financially self-sufficient when they reach adulthood or will they be screw-ups that require your financial assistance? These are just a few of the things you need to ponder when planning your financial future.
For the sake of simplicity, let’s assume that you’ll have paid off your mortgage by the time you’ve retired. And if you own a vehicle, you own it free and clear without any loans against it. Let’s also assume that your kid successfully completes university and has a successful career leading to her own financial independence.
Now that you’ve paid off the big items — your mortgage and your child’s education, your living costs during your retirement years should be significantly lower than during your working years. Under this scenario, your annual living costs would most likely consist of groceries, household utilities, food & entertainment, annual vacations, property taxes on your home and maintenance and repair costs for your vehicle.
So let’s suppose that:
- You and your spouse need an annual household income of $40,000 in today’s dollars to live on during retirement.
- You’re both currently 30 years of age and plan to retire at age 65. You therefore have 35 working years left.
- During these 35 years, your retirement fund will earn an average annualized return of 10% per year and the annualized average inflation rate will be 2%.
- Finally, let’s assume that both of you will live until 100 years of age. Not an unreasonable assumption given recent advances in medical technology.
With an annualized inflation rate of 2% over the next 35 years you would need approximately $80,000 in the year 2056 to have the same purchasing power of $40,000 in the year 2021. Therefore, if you live for another 35 years after you retire at age 65, you’ll need a retirement fund of about $2,800,000 to live on until your death at age 100 years (i.e., $80,000 x 35 years).
Given the above variables, you would need to invest $861 per month into your retirement fund for the next 35 years. If that retirement fund provides an average annualized return of 10%, then that’s how you’ll get your $2,800,000.
Now, you’re probably wondering — “What about my CPP and Old Age Security benefits? Won’t they be waiting for me when I retire?”. My answer would be this: unless you’re going to be claiming these benefits within the next 20 years, do not assume that these programs will still be there when you retire.
THE COST OF LIVING IN TORONTO — THE CASE OF SID & NANCY
So let’s put all these numbers together and see what the annual cost of living in Toronto will be for our “average middle class” family:
Sid, Nancy and their 6 month old daughter Harmony recently moved to Toronto from the United Kingdom. Sid and Nancy are both 30 years of age and are IT professionals. Although they’re not currently working, their skills are in extremely high demand in Toronto’s technology start-up sector.
They’d like to know the cost of living in Toronto so they can use this information in their salary negotiations with prospective employers.
They are currently residing with Sid’s relative, Aunt Judy, on a temporary basis.
They currently have $230,443 in savings towards a down payment for a town home. They’ve had their eyes on a town home in the Kingsway neighbourhood in Etobicoke that’s selling for $1,152,215. Once they start working, they’re confident that they’ll be approved for a $921,772 mortgage to finance the balance of the purchase price. The mortgage would be at a rate of 3.00% per year amortized over 25 years. This works out to a monthly mortgage payment of $4,371. Property taxes per month would be $587. Based on the square footage of the town home, utilities such as water, hydro, cellphones and internet would cost an additional $500 per month. Therefore, total carrying costs for the home would be $5,458 per month.
They’ve been told by Aunt Judy how unreliable the Toronto subway system is, so they purchased a 2021 Subaru Forester, financed at 2.49% over 5 years with monthly payments of $515 per month. Vehicle insurance will be $200 per month and gas will be about $200 per month. Therefore, total monthly vehicle costs would be $915 per month.
They’ve also recently set up an RESP for Harmony. In order to meet their financing goals for Harmony’s university education, they are contributing $168 per month to her RESP.
Finally, Sid and Nancy want to retire comfortably at the age of 65 years. Based on their current age of 30 years and their expected living costs in 35 years’ time (the year 2056), their financial adviser suggested that they contribute to an investment fund that’s had an average return of 10% for the past 20 years. Sid and Nancy’s adviser calculated a monthly contribution to their retirement fund of $861 to enable them to meet their retirement goals.
They’ll both be working, so they will need to put Harmony in a daycare. They’ve done their research and average monthly daycare costs in Toronto are about $2,000 per month. They’ll also need to spend about $2,000 per year on clothing for the family, and in particular for Harmony, who is a growing little girl.
Sid and Nancy plan to take annual vacations back to the U.K. to visit family and also visit Europe. Their annual vacation budget is $5,000 per year.
Finally, Sid and Nancy are frugal — they entertain themselves at home by watching movies on the internet and eat at home. They also plan to brown bag their lunches to work. So they spend $400 per month on groceries at their local Costco.
As you can see below, Sid and Nancy will require an annual after-tax income of $124,624 to live what is defined as a middle class lifestyle in Toronto. And this is if they live frugally by not dining out and brown-bagging lunches to work. Moreover, this budget does not include sundry items like grooming, gym memberships, etc.
Table 4Annual cost of a middle class life in Toronto (May 2021)
So how much would Sid and Nancy have to earn in order to net $124,624 per year? This depends:
- At one extreme, if Sid is the only one working, he would need to earn a gross income of about $195,000 per year. This would net him $123,982 after CPP, EI and income taxes. However, if Nancy stays home full-time, they won’t have to incur child care costs of $2,000 per month.
- On the other hand, if both Sid and Nancy are working and assuming they both have the same level of experience and skill, they’d have to each earn $84,000 gross. This would net them each $62,522 after deductions for a net household income of $125,044.
- So in summary, Sid and Nancy’s gross annual household income would have to range between approximately $168,000 to $195,000, depending on whether they are both working or only one of them is working.
CAVEAT AND CONCLUSION
This was an extremely simplified scenario for ease of exposition and reading. For example, what if Sid and Nancy didn’t have the ability to finance a 20% down payment for a non-CMHC mortgage?
In this case, they wouldn’t qualify for a CMHC insured mortgage if the purchase price of their home exceeds $1,000,000. Since many freehold properties in Toronto exceed $1,000,000, they would have to look at alternatives such as a condominium townhome or apartment.
Moreover, homes sold over $500,000 can no longer be purchased with a 5% down payment. The new minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000. Therefore, given current real estate prices in Toronto, Sid and Nancy would practically have to save up a downpayment of at least 10% of the purchase price.
Moreover, the scenario outlined above assumed that Sid and Nancy were frugal and financially responsible. But of course, in real life nobody is perfect; people will sometimes make poor financial decisions and have bad spending habits.
For example, if Sid and Nancy were spendthrifts dining out every day and going for vacations 4 times per year, the cost of maintaining their idea of a middle class lifestyle would cost significantly more than the $124,624 per year calculated above.
So there you have it — if you live (or want to live) in Toronto and want to achieve the middle class dream, it ain’t gonna be cheap.You’re going to have to work hard, make the most of your career opportunities and pray for a little luck on your side.
EPILOGUE: THE REAL REASON WHY HOUSING HAS BECOME SO EXPENSIVE AND WHAT IT MEANS TO YOU
The traditional middle class lifestyle discussed above that was common place 30 years ago is now only available to the upper-middle class, that is, the top 10%.
Conversely, today’s middle class – i.e., employed but with no assets or savings, would have been classified as “working poor” 30 years ago.
How did this happen? Two words: “money-printing”, euphemistically referred to as “Quantitative Easing”.
To explain, here’s an excerpt from an article I wrote in October 2019 entitled “Preparing for the Next Recession: A Guide For the Canadian Middle Class“:
What is QE? It’s a euphemism for money printing. The U.S. Federal Reserve increased the supply of U.S. dollars (the global reserve currency) by $4 trillion starting in late 2008 in the hopes that it would get Americans to start spending.
While it did just that, it also created massive inflation. But wait – isn’t inflation at historical lows? That’s what economists and the mainstream media keep telling you, right?
Well no, not really:
Yes, consumer goods are still relatively inexpensive, but that’s because almost all consumer goods are manufactured in China, which can crank up its manufacturing base on a dime and produce an almost infinite quantity of consumer goods. Hence, the quantity of consumer goods bought and sold globally can keep up with the expansion in the U.S. money supply, which I remind you, is the global currency used to pay for goods internationally. Hence, no inflation in consumer goods.
Not so with real estate: do you really think that Vancouver and Toronto are the only real estate markets with insane housing prices and rents? Check out Amsterdam. Take a look at Berlin. They have insane housing prices as well. Unlike consumer goods made in China, there’s a limited amount of land available upon which to build real estate but a seemingly unlimited demand for it, particularly from China’s burgeoning middle class of 400 million. The result is asset inflation in the global housing market, both in sales prices and rent, due to all these US dollars chasing a limited supply of real estate around the world.
If you were one of the Fortunate Few (let’s say “The 10%”) who owned real estate and financial assets during the last decade, then you probably made out like a Bandit. Your net worth probably likely increased significantly.
However, if you were one of the Less Fortunate Many (let’s say “The 90%”) who didn’t own real estate or financial assets and didn’t see a significant rise in your income during this past decade, then you probably feel like you got robbed by the Bandits in The 10%. Your net worth likely hasn’t changed or may have even gotten worse; since your income hasn’t increased, you probably took on more debt just to meet your basic living expenses.
Home ownership has been the traditional economic lynchpin of the traditional middle class lifestyle. And since 2009, this lifestyle has become increasingly out of reach for the vast majority of people in Canada and most of the Western world.
And with the onset of Covid-19 in March 2020, the response of the U.S. Federal Reserve has been to reintroduce Quantitative Easing in the magnitude of trillions of dollars in order to rescue the global economy (as it did 10 years ago). This will only accelerate the rise of housing costs and exacerbate economic inequality.