[This post is targeted towards people in their late 20s and early 30s living in Toronto who don’t own property. While much of this will apply to other contexts, some of it may not.]
Seemingly, everyone in my peer group in Toronto is talking about buying property.
This makes sense for a number of reasons including but not limited to:
- Buying property is incredibly exciting and provides direction. Many white collar professionals in their late 20s/early 30s have been at their jobs long enough it’s no longer exciting, and haven’t had many big events since their graduation/travel/first job experience. More importantly, they likely have a surplus of funds in their bank account, lacking purpose. Buying property instantly makes life more exciting.
- We just experienced arguably the hottest property market in the city’s history, and seemingly everyone who owns property, no matter the circumstance, generated hundreds of thousands of dollars over a few short years.
- To signal something; that you’re a high earner, financially responsible, and/or sufficiently mature.
While buying a house can be a great purchase, the conversation often seems intellectually skewed. It’s like hearing a vegetarian tell you abstaining from meat is not only morally right, good for the environment, but also healthier and tastier too.
Just as a vegetarian should have the intellectual humility to admit eating meat may be tastier, a prospective homeowner should be able to admit buying property is not always a great investment.
Many of my peers point to the following as to why they want to buy property:
- Real estate always goes up
- You’re paying your own mortgage instead of your landlords; when you rent, you are throwing away your money.
The historic rate of growth for the real estate market is approximately the rate of inflation. While the housing market over the past decade increase much faster; the recent trend is an anomaly. Going forward, you should expect the housing market to increase at its historical growth rate, 2-3% (inflation is forecasted at approximately 2%).
While it is true you are throwing your money out by renting, the comparison between rent and mortgage payments is faulty. Comparing rent to ownership assumes the cost of rent = a mortgage payment, when in fact the cost of home ownership is drastically higher than the cost of rent.
When you rent, you pay for the cost of rent and that’s it. When you own property, you pay:
- Interest on mortgage payments (keep in mind, mortgage payments are at a historical low and are almost certainly going to markedly increase)
- Transaction costs for buying the property (the median duration of home ownership is 8.7 years – the cost of the land transfer tax, staging, legal fees, real estate commission should be averaged over 8.7 years to see the expected cost per home).
- Condo fees (if applicable)
- Property taxes
- Fixtures like bathtubs, air conditioning systems etc.
When you add all of these costs together, the true cost of home ownership becomes much greater.
This is only part of the equation.
As mentioned above, the historical rate of growth for the real estate market is approximately 2%. In contrast, the stock market has a historical growth rate of approximately 7%. Going forward, one should expect any property they buy to grow in value at approximately 2-3% per year, while their stock portfolio should increase at approximately 6%-7%.
This is to say- any dollar you put into the stock market is expected to increase two to three times as fast as any dollar you put into real estate.
Investing in the stock market also offers greater diversity than owning real estate. Owning one home, in one neighbourhood, in one city, in one country carries much more risk than owning shares in thousands of companies in Canada, the USA and abroad. Worse, property markets are highly correlated to local labour market conditions. Imagine Toronto faces an economic down turn causing you to be laid off – only for the value of your only asset, your home, to lose 30% of its value due to the same economic downturn.
New property owners are often cash poor. In addition to the above, owning vs renting isn’t just a question of owning or renting, but owning and having to say: I can’t afford that vacation, fancy meal, or new dress because my mortgage payments are inflexible. The lack of liquidity makes emergency expenses, or short term opportunities, even harder to fund (ie if your car breaks down and you need to buy a new one, or you want to invest in your uncles new restaurant).
Owning property will also restrict your personal flexibility.
What if you want to live in Vancouver for a few years; what about just a different part of the Toronto? If you own a home, your likelihood of making any short term move becomes negligible.
What about if you don’t like your job and want to find a new opportunity? The likelihood of quitting is much greater without the commitment of a fixed mortgage payment every month. What if your dream job becomes available, but with a 30% pay cut; would you accept the job, even if it meant you could no longer afford your mortgage?
When you buy property, you need to commit for the long term without knowing what it’s like to actually live there. What if the commute is worse than you thought, or you don’t like the neighbourhood, or you miss having a backyard? If you rent, no problem, you just move; if you own, you’ll likely stick with your property and be forced to suck it up.
We’ve hit a perfect storm in Toronto over the last decade with historically low interest rates and historically high increases in the residential real estate market.
Here’s what you need to consider: imagine a scenario where housing growth becomes stagnant (or negative) and mortgage rates go up. What are you going to do when the Bank of Canada increases interest rates and simultaneously. your property loses $200,000 in value and your mortgage increase $1000 per month.
After reading all of the above, if you’re thinking, well, buying property may not be a great financial investment, but it will make me happy; I have bad news. Unfortunately, studies show buying property doesn’t increase self assessed well being, nor does moving to bigger homes. In contrast, increased debt is correlated with mental health problems.
Despite the above, there are many good reasons to buy property.
- The type of home/neighbourhood you’re looking for is not available as a rental
- You love decorating/improving homes and won’t be happy unless you do it
- You know you are not likely to save/invest your money unless you are bound by your mortgage payments
- Your income is very high and finances are not a concern
- You have sufficient reason to believe you are different than the majority people who think they will be in their new home for 30+ years, and you will really be in your new home for 30+ years.
While one takeaway from this is that buying property is not the panacea our society makes it out to be, I think the more important takeaway is that renting is a much better bargain than most people appreciate.