Canadians are nuts for home ownership, but with real estate prices soaring to unaffordable levels in many areas of the country it has become increasingly difficult to buy a home.
Still, the prevailing narrative around renting vs. buying is that renting is throwing away money and buying is a surefire path to building wealth. That has young Canadians in particular stretching their finances to buy a home, and relying more and more on the bank of mom and dad to help fund the down payment.
Speaking of mom and dad, where do you think this real estate obsession is coming from? Many parents put pressure on their young adult children to buy a home – citing their own anecdotal evidence of price appreciation from the time they bought their first home.
The problem is, we can’t go back in time and buy a house in 1984, or even 2004. Aspiring home owners need to buy at today’s prices, which are exceedingly unaffordable.
Meanwhile, there are approximately 5 million rental households in Canada (representing one-third of Canadians). Are they really throwing money away? Hardly.
PWL Capital’s Benjamin Felix tackled the problem of renting vs. buying in Canada in the latest episode of the Rational Reminder podcast, and then bravely shared the findings in a Globe & Mail article (read the comments if you dare).
“In perfect equilibrium, renting and owning should cost the same because house prices and rents adjust such that the cost of paying for housing is the same either way. But it doesn’t work like that in the real world. A 2012 paper in Real Estate Economics suggests that demand for homeownership, fuelled by perceptions that renting is throwing away money, may make renting even more economically attractive.”
Predictably, criticism included someone who bought a house for $40,000 in 1974 and sold it for $2M. But while the dollar amount sounds impressive, it’s an 8% annualized return before factoring in all the phantom costs that went into owning that home for 50 years (namely maintenance and transaction costs). Meanwhile, the TSX returned 9.36% annualized during that time, and the S&P 500 returned 12.09% per year.
Ok, so I read some of the comments.
I couldn’t get through all of them, but here are some I found interesting.https://t.co/WWkuw5qIWn
— Benjamin Felix (@benjaminwfelix) September 21, 2024
I think one of the major takeaways is to answer the question of whether renting is “throwing money away” and the clear answer is no. Buying then becomes more of a personal lifestyle / happiness decision.
For some, renting provides a sense of freedom and lack of stress. For others, renting is a source of anxiety due to the threat of eviction and lack of control.
Homeowners, on the other hand, often feel a sense of pride and may benefit from the forced savings (mortgage payments). But others feel stress over maintenance and upkeep, and may find the total cost of home ownership leaves little cash flow left over for retirement savings and enjoying life.
Your mileage may vary.
This Week’s Recap:
Last weekend I shared four retirement mistakes to avoid.
The US Federal Reserve slashed its target interest rate by 0.50%, and Canada’s inflation rate for the month of August slid in under target at 1.95%.
The market widely expects similar rate cuts from the Bank of Canada when our central bank makes its next decision October 23rd.
With the inflation dragon slayed (or at least tamed), central banks have turned their attention to employment and will try to stave off a recession. Time to stick this soft landing.
Promo of the Week:
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Weekend Reading:
Mortgage rates are falling fast and furious – including 5-year fixed rates that start with a 3.
Yes, a cottage is an investment property—here’s how to minimize capital gains tax.
Seniors seeking a decumulation strategy may be asking the wrong questions. Start with your spending plan, then model how you’re going to pay for it. Agree 100%.
The CPP death benefit of $2,500 is ripe for broader reform, like an increase or indexation.
Now for something I disagree with – Industry groups call on the feds to reduce or ditch RRIF mandatory withdrawals. Why?!?
Two recent CRA disputes show Canadians still don’t know TFSA contribution rules.
Morningstar’s personal finance expert Christine Benz says retirement is not a math problem:
“People might be surprised to see a book from me that is half nonfinancial — maybe not even half. But I feel like people are overly focused on the financial and not enough on the nonfinancial.”
After being told Freedom 55 was out of reach, this retiree changed his financial trajectory and retired at 51.
Finally, a great post by the Loonie Doctor on CIPF coverage and whether you should use more than one brokerage to mitigate risk.
Have a great weekend, everyone!
