I like owning a house. I’ve become very accustomed to the freedom and autonomy that come from not having a landlord. But I can’t pretend that owning my house is the best move from a purely financial point of view any more.
My current home would sell for about 2.5 times what I paid for it. Even factoring in inflation, its value has gone up over 70% in real terms. So homeownership has worked out well for me. But that’s in the past. What about the future?
I don’t know what will happen to house prices, but if we look at the likely range of possibilities, the future looks very unlikely to match the past couple of decades. Interest rates are at historic lows and Canadians are deep in debt. I’d have to be delusional to think that my home is likely to increase another 70% above inflation. It’s not impossible, but hardly likely.
I have little doubt that I’d be better off financially to sell my house and rent. So far my wife and I have decided to leave this money on the table and continue to own. However, how should I advise my sons?
My sons have grown up in a world where they and most of their friends grew up in homes owned by their parents. To some extent, having to rent instead of own seems like failing.
When we think of owning vs. renting, we tend to imagine a spacious house with room for a family vs. a cramped apartment. It doesn’t have to be this way. It’s possible to rent a nice house. The rent might seem high, but it will compare favourably to the combination of property taxes, mortgage payment, and house maintenance costs. The comparison looks even better for renting when you factor in the possibility of interest rate increases.
For anyone who buys into the idea that renting isn’t failing, the next step is to actually save the money you’re not spending on a home. I tell my sons that once they get full-time work, they should put 20% of their take-home pay into long-term savings. By “long-term,” I don’t mean “until you want to go on vacation or buy a car.” You need additional savings for these purposes. Long-term means you have no planned use for the money. You may keep it all the way to retirement, or use it to fund a career change in 20 years, or some other far off purpose.
If a young person can’t sock away 20% of take-home pay, then there is a problem. Either make more money or spend less. Perhaps renting a nice big house isn’t in the cards yet. Rent an apartment or share a place with a friend.
My main point here is that it is possible to live a financially prudent life while renting. In fact, while house prices remain so high relative to incomes, renting along with prudent saving may be the preferred route for young people today. I have no problem with people who choose to own a home, but renting a home can be for winners, not just failures.
Michael, I am very surprised with your subdued considerations regarding renting vs owning. Financially, buying a house is just an investment. As such, it makes investment portfolio very inclined towards real estate for majority of Canadians. What makes it even worse is that this particular investment is highly leveraged. Would you recommend to borrow a tremendous amount of money to invest into one security, which comes with very high MER (maintenance, repairs, taxes, car ownership and driving)? I somehow doubt it :)
ReplyDeleteHouse ownership is an installed social fashion and a lousy investment move, imho.
@AnatoliN: Owning a house is a combination of an investment and a lifestyle. As I said, the investment side looks poor right now. So people need to decide how much they're willing to pay for the lifestyle. My main point is that you can capture at least some of the desired lifestyle by renting a nice house and investing the saved cash flow.
DeleteGood point, renting is the smarter thing to do these days especially if you are young. I recommend saving the same amount as paid in federal/provincial tax. Thats around 20% up to $50k/year or so, then goes up. Kind of an automatic way to enforce discipline and limit lifestyle creep.
ReplyDeleteThe following comment from Greg seemed to get lost:
ReplyDelete"Good point, renting is the smarter thing to do these days especially if you are young. I recommend saving the same amount as paid in federal/provincial tax. Thats around 20% up to $50k/year or so, then goes up. Kind of an automatic way to enforce discipline and limit lifestyle creep. "
Matching savings to taxes is an interesting idea. By the time you get near the top tax brackets (near 50%), you get almost no additional money to spend from a raise.
Another new development may be influencing this: the common effect that's known as "extended adolescence". When many people in their 20s and even 30s have so few external signs of having successfully become independent, they may feel that buying a house is a way to show that they can do it since that is a traditional step to adulthood. Never mind that they didn't save up a 25% down payment, pay an interest rate over 15%, or pay off their mortgage in 5 years like people once expected to do!
ReplyDeleteJust like leasing a BMW or paying for frequent vacations on a credit card, the reality may not be anywhere near the image. That large gap could be an incentive for people to make a decision they can barely afford so they get less pressure to do other things. I've certainly gotten some predictable reactions at times since I do the opposite. Ironically it takes a strong sense of independence to ignore those comments and questions and carry on with my plan to increase long-term wealth.
@Richard: That's an interesting observation. My older son is definitely in a hurry to grow up. I'd hate to think that he'd saddle himself with an enormous mortgage just to feel more grown up.
DeleteI'm not sure what could make the alternatives look convincing. Maybe the best way is to explain the long-term benefits of investing in the same way that Andrew Hallam outlined: http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/index-investing/a-three-step-plan-for-turning-your-child-into-a-saver/article16117603/. Although many people just aren't interested in saving I could see his arguments being very effective.
Delete@Richard: I saw Hallam's article. I like it a lot. I intend to see if my sons find it convincing. Any return above inflation is free money.
DeleteI'm always so happy to see an article that doesn't glorify home ownership. I think owning a house can be a great thing, but it isn't always.
ReplyDeleteFor me, renting has always made more sense financially. I'm single, I now have an elderly parent living with me. The two bedroom apartment is cheaper, and when I need to move to a more accessible place, it's as easy as giving a month's notice. No renovations, no selling an old house to afford a new one. I can just move. If I lose my job, I can move to a cheaper apartment. In an economy where you can become unemployed at any time, that freedom is priceless.
(I save 45% of my salary, lest you think I am young and slacking ;) )
@Anonymous: 45% is an impressive saving rate. Even if you weren't single, you might choose to rent a house instead of buying one. Of course, the higher rent would mean that you'd probably save only 30% of your salary :-)
DeleteGood information.
ReplyDelete