I was watching my boy Preet Banerjee on Global News the other day and wasn’t surprised to hear him bring his usual brand of high-intensity charisma and sound advice to the broadcast. What I was surprised by was the sentiments of the people hosting the segment. They just seemed shocked that anyone would advocate the idea that renting might make more sense than buying a place to live right now. This is a good indication of just how widespread the obsession with owning your living quarters has gotten in Canada, as well as one of the chief reasons why housing prices continue to blow through ceilings across the country.
I’m certainly not the first guy to come up the idea that in many cases renting is better than owning in today’s overheated Canadian housing market. I think it bears reiterating though just why this is so obviously the case for young people in Canada’s urban centers (unlike us country folk who can still buy homes for under 200K).
1) You Can Move to Where the Jobs Are
I’ve heard several people use the rule of thumb that if you don’t think you will be in a house for at least 10 years then it doesn’t make sense to buy. This line of thought revolves around the idea that closing costs and the pain in the ass factor associated with buying and selling a home just aren’t worth it unless you are going to put down roots. If you’re looking at it from an investment point of view, the thousands of dollars you’ll pay in closing costs every time you buy and sell your home will often negate a large part of the equity gains your house has made.
More importantly than the raw arithmetic associated with buying and selling a house though, is the fact that owning a home radically affects the mindset of a young person who should be open to pursuing all the career opportunities that are available in today’s economy. Gone are the days where everyone was guaranteed a job in their backyard due to a rapidly expanding businesses across Canada. The reality that has supplanted that employment utopia revolves around you moving to where the jobs are as opposed to waiting until they come to you. This often means spending some time in a place you would not otherwise have considered. By purchasing a home you are severely limiting your geographical options.
2) Properly Invested Stock Returns Trump House Wealth
Despite what the past decade might have you think, real estate has far underperformed stocks when it comes to long-term returns for each asset class. If you’re looking at comparing a rental property versus stocks the math gets a little more interesting, but if you’re comparing making a large mortgage payment on a principal residence with making a smaller lease payment and investing the difference, the stock market returns are going to win almost all of the time and under almost under any circumstances. This is especially true if you have room to invest within your TFSA or RRSP like most people do.
The advantage stocks have as an asset class is enhanced by the fact that as a young person in your 20s you have the luxury of an ultra-long investment horizon. Because you won’t need to tap your retirement savings any time soon you can afford to take a pretty high amount of risk and allocate 80-100% of your savings towards stocks.
Some people claim that they will downsize when they are older and use that strategy to tap into the pile of cash they have sitting there in their home. There are a few huge assumptions that I would caution against in that line of thinking, but a final consideration should be that stocks (especially the broad index ETFs that I prefer) are much more liquid than an investment in your house would be. For another detailed look at this comparison, check out Preet’s article about why he recently sold his house and began renting. Of course this stock investing strategy only works if you actually invest the money you save with renting and don’t spend it on consumer goods like most people do (as opposed to the forced savings program that is an automatic mortgage payment).
3) Housing Costs = Black Hole
If you’re like me you never really considered the costs of owning a home as you grew up. The house was always there, mom and dad made sure it didn’t collapse, and it had little to do with money stuff. Sometimes the realities of adulthood kind of suck. Many young people fail to take into consideration stuff like mortgage insurance, property taxes, and the inevitable repair costs that come with buying a first house (especially since most first-time homebuyers are buying houses that will require their fair share of maintenance because they are not new).
Related: How to Use the Home Buyers Plan
These housing costs can escalate quickly, and if you are already stretched to the limit because of a large mortgage and the other costs that come with being a young adult, then you’re probably going to rely on a steady diet of credit to cover these bills in the short term. This can quickly spiral and is basically the reason why a lot of young peeps with good jobs still consider themselves “house poor”. Make sure you go into a commitment like homeownership with your eyes (and wallets) wide open.
The Best Investment You’ll Never Make?
With the IMF and other financial organizations all saying Canada’s housing market is overpriced by any measure (The Canadian Real Estate Association said the average existing home sold for $391,085 in October, a 9.8% increase from a year ago), it should come as no surprise that that in housing-to-rent comparisons we top the G20. This doesn’t change the fact that if your parents are like most Canadians they probably told you that, “My house is the best investment I ever made.” The problem there is that is likely the only investment many Canadians have ever made – and it’s not really an investment if you never plan to sell it. If you buy a house in order to rent part of it out and have an eventual plan to sell it as you downsize later in life, you might be able to convince me it’s some sort of an investment. This doesn’t fit most peoples’ mindset however. You also might want to consider that while this sentiment is popular today, after a prolonged period of stagnancy in the housing market, looking at your local paper and seeing the “For Sale” section isn’t quite as uplifting or alluring as during these good times.
There are benefits to having the forced savings of a mortgage payment when you’re in your twenties, but you can easily duplicate this strategy by having money taken off of your cheque through easy-to-implement online banking strategies. There’s really no excuse for not saving a part of your income anymore (if there ever was).
Before you scramble for your share of the Canadian middle-class dream, think long and hard about the sacrifices you’re making in return for a house or condo. You just might have to work about 10-20 years as a result!