Home Ownership - A Canadian Dream or a 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. This subject has gotten a lot more traction, especially within the last 10 years or so, as house prices have seen a significant rise. People have argued back and forth for either side, 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, preferences or overall situation 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 according to the Canadian Real Estate Association (CREA), the average benchmark price for a home in Canada is $709,200. The numbers vary widely from city to city, however. For example, the benchmark price of a home is $1,073,900 in Toronto, $1,224,858 in Vancouver, $612,838 in Calgary, $658,300 in Ottawa, and so on. 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). Although we’ve seen a pullback in prices in the last couple of years, we can assume that prices will continue to increase over the medium to long term.

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, depending how much down payment you put down). For simplicity, we will use 20% down payment for our calculations, making an up front down payment required of $141,840 ($709,200 x 20%). For many people, this might be 3 or 4+ times their annual net take home 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. After the 20% down payment, the remainder of the $567,360 will be borrowed as a Mortgage. Borrowing money also requires you to pay interest on the amount of money borrowed. We know that rates will go up and down over the years, but if we average it out, we can reasonably assume about 5.50% as a long term average, for a 5 year Fixed Rate Mortgage. Remember, most people will have their amortization between 25 and 30 years, so that’s the timeline we will have to work with. Based on this information, we can calculate that the monthly mortgage payment (over a 30 year period) will be $3,199.38. ($38,392.56)

Cost of Borrowing:

This is essentially showing you how much it would ‘cost’ you (in interest) over a 30 year amortization to borrow that $567,360. If we take that 5.50% as an average over 30 years, it would have ‘cost you’ about $584,416 in interest to have that Mortgage. We get this number by tallying up the total mortgage payments made over the 30 years ($1,151,776), and subtracting the original mortgage balance. As you can see, this is more than the value of the original mortgage at the time the home was purchased! 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. Remember, the interest is compounding over and over until the full value of the mortgage is paid off.

Home Repairs:

Nearly half of Canadians do some sort of renovation to their homes annually, and the average cost of renovations is about $19,000. 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 $190,000 [(30 years / 3) x $19,000) over that period to keep your home renovated/up to date (that would be about $6333.33/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 2021 was $9.15 per every $1000 in assessed value by the municipality, with numbers ranging from city to city. It’s also important to remember that the assessed value is often 10-20% of what the ‘market value’ is, which is actually a good thing in terms of property taxes (i.e. the lower the assessed value, the less you pay in property taxes). This means even though the average property value is $709,200, we would discount that by say 15%, getting a value of $602,820. If we take that $9.15 per $1000 and multiply it by that $602,820, we get an average property tax bill of $5,515.80/year per home [($602,820 / $1000) x $9.15). Over a 30 year period, that would be approximately $165,474 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 – average $20,000 (legal fees, land transfer tax, appraisal costs, inspection, etc..)

Real Estate Fees - $709,200 x 3.5% = $24,822 – On purchase (and sale) of the home

Home Insurance - average $100/month ($1200/year) - Annually

Utilities - average $450/month ($5400/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 $56,841.69 (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 $44,822. Over a 30 year period, the total cost of owning that home would be $1,891,912.70 [(Annual costs x 30) + up-front costs + down payment].

Average home price increase over 30 year period is 6.3%, but let’s be a little conservative and use 5.5%. If we assume a home purchased for $709,200, over 30 years, the house value would have climbed to $3,534,618.25. This would give you a net positive of $1,642,705.55 (home value after 30 years – total cost of owning a home over 30 years), assuming of course the home was sold at that point - remember, by this time the home is fully paid off and the full amount (less closing/realtor costs) would be profit.

Opportunity Cost:

There is one more cost that needs to be analyzed before you can decide whether or not owning a home is in your best interest. The “opportunity cost” is something that needs to be calculated. This is the ‘cost’ of using your money for the home, rather than 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 ($141,840 + $44,822 = $186,662), 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, as well as based on the type of property — rents can range from $1200/month to $5500+/month. If we were to use a townhouse as our base example (3 or 4 bedroom), we can reasonably assume about $3000+/month for rent. With renting, in most cases, utilities are included, however not always. If we were to assume that the tenant would be responsible for half of the utilities, we would add that to the cost, making the total monthly expenses of $3225 ($3000 + $225). 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 $38,700 – a difference of $18,141.69/year ($56,841.69 - $38,700) or $1511.81/month.

The next step is to calculate what that initial cost of $186,662 (down payment + up-front costs) plus a monthly investment of $1,511.81 would have grown to over a 30 year period. Even though the 30 year stock market average is close to 10%, let’s assume a little more moderate investment return of 6.5%. The number is pretty staggering – we get a total investment value of $2,848,486 after 30 years. If we were to use investment return of 8%, that number would be $4,008,889. We can safely assume that the actual value would be somewhere between about $2.85 Million and about $4 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 ~$2.85 Million and ~$4 Million in savings. That is $1.2-$3.35M more than the net positive amount of owning a home.

The Result:

If we compare that overall net positive of owning a home to the $2.85+ Million you could have got by investing your money, you could be at least $1.2+ Million ahead by renting. 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 or other factors have not been addressed. That being said, from a purely numbers perspective, renting (and investing the difference) could 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 a qualified Financial Professional would help you effectively analyze the situation for you 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 working with a Financial Professional would help to crunch all the numbers and help you figure out what is the best scenario for you.

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