Home Ownership – Canadian Dream or Financial Nightmare

For decades we’ve heard people go on about Home Ownership as being one of the foundations of the Canadian Dream, but there’s been increasing doubt as to whether that actually is the case or not. People have argued back and forth on home ownership vs renting, but sometimes, the numbers just don’t lie.

When deciding whether to buy or rent, there are so many different pieces of the puzzle to account for, that it can be a fairly strenuous task. A lot of the costs associated with owning a property are variable, which makes it a little challenging to get an exact number of the total cost of owning a home over a lifetime. That being said, we can get a fairly reasonable ‘ball park’ number by using averages over the last few decades, which should give people a good idea of the costs associated with owning a home vs renting a home.

This post is to give perspective from a purely numbers point of view and does not take into account the ‘psychological’ aspect of any individual/family. The reality is, whether home ownership is more or less expensive as compared to renting over a lifetime, many people still like the idea of ‘owning’ a home, as opposed to renting someone else’s property.

Now let’s get into it.

First, let’s look at the average home prices in Canada. The prices obviously vary from city to city, and province to province, but the average overall cost for a house in Canada is $437,135[i] (Average cost of a home in the GTA is $596,193; Average cost of a home in the Greater Vancouver area is just above $1 Million[ii]). That’s not pocket change! In the last decade or so, the cost of buying a house in almost all major cities across Canada has been rising far beyond historical averages (which average about 5.5% growth over the last 30 years[iii]). Whether we see a slowdown or perhaps even a downturn in prices over the next few years is still to be seen, but we can assume that prices will continue to increase at a normal rate.

Down Payment:

Most lenders will require a minimum down payment of 5-10%, but ideally the higher the down payment, the better. Especially since anything below 20% down payment is subject to CMHC fees (up to 3.35% of the Mortgage[iv], depending how much down payment you put down). So, if we take 20% of the average house cost in Canada, we get a number of $87,427. For many people, this might be 2 or 3 times their annual net take home (net/after tax) salary. Needless to say, it can take several years to save for that down payment.

Mortgage:

Next, once you’ve decided to buy the house and put up the down payment, likely you would have to get a mortgage. Now, not all people will be able to put 20% down – some will only have enough savings to put 5 or 10% down and would mortgage the remainder – but for illustration purposes, let’s assume that 20% is the down payment, which means the remainder of $349,708 ($437,135 – $87,427) is borrowed as a Mortgage. Borrowing money also requires you to pay interest on the amount of money borrowed. If we look at historical posted Interest Rates for a 5 Year Fixed Mortgage, the average rate between 1973 and 2015 is 7.61%[v]. Now, that might seem high in today’s economic landscape, since rates are at historical lows, but remember, it wasn’t that long ago that we were at 6 or 7%. We know that rates will go up and down over time, but since we are using averages for everything, let’s keep it consistent. If we assume 7.61% interest rate on a mortgage of $349,708 (over a 30 year period), the monthly payment (principal + interest) comes to about $2,472 ($29,664 annually).

Cost of Borrowing:

This is essentially showing you how much it would ‘cost’ you (in interest) over a 30 year amortization to borrow that $349,708. If we take that 7.61% as an average over 30 years, it would have ‘cost you’ about $540,070 in interest to have that Mortgage. As you can see, this is more than the value of that home that was purchased in the first place. Interest costs are almost always overlooked when doing a calculation on whether a home purchase is a good thing for you or not, but the numbers tell us that it definitely should play into the equation. Also, we should note that most people put LESS than 20% down as a down payment, so this means the mortgage amount would be higher, thus making the cost of borrowing higher. Remember, the interest is compounding over and over until the full value of the mortgage is paid off.

Home Repairs:

Approximately 40% of Canadians do some sort of renovation to their homes annually, and the average cost of renovations is about $15,300[vi]. This is a good chunk of money, considering it can come up every year. Even if it’s every 2-3 years, the costs still add up. If we were to even assume that everybody will do some sort of renovations every 3 years, over a 30 year period, it would have cost you approximately $153,000 ([30 years / 3] x $15,300) over that period to keep your home renovated/up to date (that would be about $5100/year based off the above example). Now, not everybody will renovate their homes that frequently or spend that much money, but again, let’s stick to averages to give us a general idea of some of the numbers.

Property Tax:

We know that living in Canada, we’re all guaranteed 2 things: Death and Taxes. Owning a home is no different. Property taxes are paid to the municipality that you are living on, based on the “Assessed Value” of your home by that municipality. Now, the reality is, the ACTUAL value of the home is likely much more than that, but let’s stick to the average home price number to get a general idea. The average property tax in Canada as of 2013 was $9.01 per every $1000 in assessment[vii] – the numbers range drastically from city to city with a low of $3.79 in Vancouver to $14.10 in Winnipeg. If we take that $9.01 per $1000 and multiply that by the average home price of $437,135, we get an average property tax bill of $3939/year per home ([$437,135 / $1000] x $9.01). Over a 30 year period, that would be approximately $118,170 paid towards property taxes.

Miscellaneous Costs:

There are usually several other costs that, whether one time or annually, also add up over time. Let’s take a look at a few:

Closing Costs – $7,000 – On purchase (and sale) of the home

Real Estate Fees – $431,812 x 3.5% = $15,113.42 – On purchase (and sale) of the home

Home Insurance – $65/month ($780/year) – Annually

Utilities – $400/month ($4800/year) – Annually

Based off the above analysis, we can see that the costs are adding up more and more:

Annually, to maintain living in a home would cost you about $44,283 (Includes mortgage payments, renovations, property tax, home insurance and utilities). Also, the up-front costs associated with the purchase of the home would be another $22,113.42. Over a 30 year period, the total cost of owning that home would be $1,438,030 ([Annual costs x 30] + up-front costs + down payment).

Average home price increase over 30 year period is 5.5%. If we assume a home purchased for $437,135, over 30 years, the house value would have climbed to $2,178,660. This would give you a net positive of $740,630 (home value after 30 years [$2,178,660] – total cost of owning a home over 30 years [$1,438,030]).

Opportunity Cost:

There is one more cost that needs to be analyzed before you can decide whether owning a home is in your best interest or not. The “opportunity cost” is something that needs to be calculated. This is the ‘cost’ of using your money for the home as opposed to if you were to take that money and invest it. One way (and maybe the simplest way) to calculate this would be to use initial costs (down payment + up-front costs ) as the initial lump sum investment ($87,427 + $22,113 = $109,540), and then the difference between the monthly costs of owning vs renting, as the regular monthly investment that could have been made had you continued to rent.

Just like buying, rental costs vary from city to city, from $1200/month to $2500/month (based on a 3 bedroom apartment)[viii], but let’s use an average about $2000/month. With renting, the renter is not always responsible for paying utilities, but sometimes they are. If we were to add half of the average home utility costs ($200) to the rental budget, that would put the total monthly cost of renting to $2200/month. Remember, the renter is not responsible for property tax, mortgage interest, renovations or any of the other costs associated with owning a home. This puts the total annual rental cost to $26,400 – a difference of $17,883/year ($44,283 – $26,400) or $1490.25/month.

The next step is to calculate what that initial cost of $109,540 (down payment + up-front costs) plus a monthly investment of $1490 would have grown to over a 30 year period. Even though the 30 year stock market average is approximately 8.5% return, let’s assume a little more moderate investment return of 6.5%. The number is pretty staggering – we get a total investment value of $2,323,295 after 30 years. If we were to use the actual market return of 8.5%, that number would be $3,589,306. We can safely assume that the actual value would be somewhere between the $2.32 Million and the $3.59 Million.

What this essentially means is that if you invested that money rather than using it towards a home purchase, after 30 years, you would have between $2.32 Million and $3.59 Million in savings. That is 3-5 times the net positive amount of owning a home.

Taxes on Investment:

In order to have accurate NET result, we need to look at is the tax consequences of the investment made. The reality is, the Principal Residence does not create a taxable capital gain, so that essentially won’t be a worry when calculating the end result. However, depending on what investment vehicle is used (whether registered/non-registered/TFSA – or a combination of all), the overall NET (after tax) outcome will be different. If we were to assume that the entire investment was made in a non-registered investment, and an average Marginal Tax Rate of 30% (Majority of Canadians will fall close to here), the NET after-tax value of the investment over 30 years is $1,543,397, which is still over double the Net Positive amount of owning a home.

The Result:

If we compare the overall net positive of owning a home to the net after-tax $1.54 Million you could have got by investing your money, at the very minimum, you would be $802,767 ($1,543,397 – $740,630) ahead by renting – this number could be drastically higher up to $1.58 Million ($2,323,295 – $740,630), depending on which investment vehicles were used. This is an astounding difference between renting and owning, and would likely catch many people off guard. Now, as mentioned before, the assumptions used above are just ‘average’ numbers across the country, so they can be higher or lower depending on where you live or want to live. However, this should still give you a good understanding of a lot of the costs associated with home ownership and the potential difference in overall end value as compared to renting a home.

As mentioned, this post is looking at things from a purely numbers perspective, and psychology has not been discussed. That being said, from a purely numbers perspective, renting (and investing the difference) would generally put you drastically ahead financially, as opposed to buying a house.

Going through this entire process really opens up a person’s eyes and changes their perspective. The assistance of an Elite level Financial Advisor would help you effectively analyse the situation for yourself and is always recommended. There is no one size fits all solution and there definitely might be some situations where owning is a mathematically better option. However, the point remains that an Elite level Financial Advisor would be able to crunch all the numbers and help you figure out what is the best scenario for you.