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Home ownership in Canada’s worthwhileness is doubted by Canadian blogger Kyle Prevost

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Home ownership is the be all and end all for many Canadians, but is it all that? Whilst the pride and satisfaction of owning your own home is up to the individual, there are increasing arguments against the assumed benefits of ‘getting on the ladder’ as early as possible.

We can see why choosing not to buy a home is heresy when prices are soaring. Month on month, Canadian real estate prices rise, and if not for the potential capital gains you can realize, it’s the fear of missing out before they become too expensive. 

Furthermore, it’s the fear of being at the mercy of landlords – knowing they can raise rents and your family home is completely out of your control. But according to Canadian blogger, Kyle Prevost, buying a house in Canada isn’t worth it in 2021 – and he has a point.

Home ownership
Home ownership is the be all and end all for many Canadians, but is it all that?

Earnings

One of the reasons why people claim owning a home is preferable is because it brings in cash. Whether it’s the price of the house rising, being able to rent it out, or letting a single room out on AirBnB. However, we shouldn’t be too quick to disregard the benefits of renting when it comes to income.

One of the best ways to increase career earnings is by changing jobs. IT is a great example, in which those who hang around longer than a couple of years at a single job are hindering their earnings – you can often perform the same role somewhere else for more, or gain promotion faster by switching companies. 

Switching jobs can rapidly increase your pay, but being able to change location opens up this possibility a lot more. Being open to the entire Canadian job market – or global job market – gives you the best possible chance of increasing income. These extra career earnings desperately need to be factored into the opportunity cost of owning a home.

Costs

The cost of owning a home can be compared to the cost of renting if we choose to use the 5% rule, as explained in Kyle’s blog, though we can attribute the origins of the 5% rule to Benjamin Felix. The 5% rule claims that if you can rent for under 5% of the cost of the house price you would hypothetically buy, then renting is financially a better decision.

The costs of owning a house (that aren’t beared when renting) are broken down into 3 categories:

Maintenance and tax costs

Property taxes and maintenance costs make up the majority of one-off costs, along with moving costs. Without going into too much detail, many estimate house maintenance (i.e. new boiler, HVAC, painting etc) to be 1% of the house price, annually. 

Annual property tax, like in Ottawa, is often around 1% annually too. The specifics can be adjusted, of course, as the 5% rule is purely a rough estimation.

Cost of Debt

Secondly, there is a cost of debt when owning a home, providing you’re using a mortgage. A fair estimate of mortgage interest is around 3%. This may be slightly less for new mortgages, for a fixed period, but they often settle at around 3%. This also factors in the small risk of interest rates rising, too. 

So, if a house was 100% funded through debt, we would already have our 5% – taxes (1%), maintenance (1%), and debt (3%). If renting was less than this amount (i.e. 5% of a $600,000 home is $30,000 per year in rent), then renting would be financially preferable.

Cost of Equity

Finally, there is a cost of capital that comes with home ownership. For the amount you’re not funding your house through debt (i.e. deposit, equity), there is an opportunity cost. This money could have been placed into a Vanguard Fund, earning the average stock market returns of 7% (5% when adjusted to inflation).

Generally, 4% annual return is expected for real estate (2% when adjusted for inflation). Many claim their market is growing faster than this, but this isn’t evidence of future growth – plus, a lot of this growth was driven by declining interest rates, which has finally settled (and will possibly rise)

So, the cost of owning the house through equity and not debt is also 3% (5% fund growth minus 2% house price growth = 3% opportunity cost). Thus, no matter what mix of debt/equity there is, the 5% rule remains. 

Remote living

If you love Ontario, for example, and cannot find rent for cheaper than 5% than the respective house price, then perhaps buying a home is the right choice. But, it’s important to consider the implications of remote working, too. Since the pandemic, many of us are WFH, and those who aren’t can easily become so if they change jobs. 

Thus, we have the opportunity to actually rent cheaply by moving to counties or countries with lower costs of living; something that’s much harder when buying, selling, and moving home. This also highlights the benefits of liquid money, of which owning a home is one of the least liquid forms of investing. If you make a mistake by leaving town and want to move back, there’s little sunk costs.

The non-financial benefits

Finally, it’s not all about investing and numbers, it’s about living in a home you love with your family. This argument can go one of two ways, though. Some claim that renting is simply living in the darkness, never knowing when your landlord will throw you out or raise your rent. 

Whilst Canada has improving rights for tenants, they’re still behind some countries in which kicking out a tenant is almost impossible for a landlord. In this sense, it’s up to the individual how comfortable they are with the idea of possibly having to move home regularly.

However, renting comes with it’s mental benefits too. Having your HVAC break down during winter can be extremely stressful for a homeowner, who will have to fix these issues with their time and savings.

Renters, on the other hand, need no such housing savings and can simply keep investing their money into liquid funds. There’s no worry about breakdowns or fixing things yourself, especially as someone that’s bad with DIY, as your landlord (in theory…) takes care of such matters. The risk of this theory not manifesting into reality may actually be the deciding vote, as some of us have a lower risk tolerance than others.

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