Did you grow up with the impression that owning a home was the best investment you could make for your future? That owning a home somehow meant you had made it as a successful adult?
Hopefully, you haven’t felt pressure to own a home, but the unfortunate reality is, most of us have.
Over the past year, the housing market in Canada has experienced incredible growth in both home prices and sales activity, making it extremely hard for many people to buy. According to WOWA.ca for example, March 2021 saw record highs for home prices, with the Canadian average sale price reaching $716,828, a 32% increase year-over-year.
These prices may have you rethinking if purchasing a home is the right move for you and your family.
Or, more generally, as Economist Armine Yalnizyan shared in this CBC Radio: The Current article, the continued soar in housing prices is creating a pivot in how we view and value homeownership in Canada.
“We’ve been living under the ethos of homeownership as the best thing…[which has] led to the view that not being able to buy a home is “somehow failing in being an adult,” especially for young people…but adulting doesn’t require homeownership to be successful.”
So, rent or buy?
In my opinion, both are great options depending on your circumstances and your longer-term goals.
What’s important isn’t whether you rent or buy, but knowing what your numbers are and what makes sense for you! This gives you control over your money, ensuring it’s working for you and not the other way around.
An overview of home ownership
Buying might be a good option for you if you know where you want to settle down, plan on staying in the same place long-term, and have enough money (with minimal debt) for a substantial down payment.
Other reasons to buy might include that you want to live in a specific area and rentals aren’t available or feasible for you and your family, you want to do home renovations that aren’t allowed in a rental, or you simply want the pride that comes with home ownership.
As well, depending on the house and repayment options, mortgage payments might be cheaper than monthly rent. However, housing costs add up. In addition to a mortgage you have:
- Property taxes
- Condo fees (if applicable)
- Home insurance
- Home security
- Regular maintenance and repair
- Home gardening
- Snow removal
The cost of owning a home adds up, and might be alarming!
In terms of buying a home as an investment, over time yes, your house might increase in value — especially if you happen to sell during a housing boom like the one we’re currently in.
But, there are a variety of factors that come into play when we look at home value, and the reality is when you look at your total spend for the property, the chances of you making enough money back to offset all of your costs are small.
On the other hand, having a home can be beneficial for those that need a “forced” type of savings to keep them on track. Making monthly payments on a mortgage and having your money locked into something relatively static means you’re putting money into an asset that you’ll be able to sell later.
An overview of renting
Renting offers flexibility if you aren’t sure where you want to live, requires less of a down payment (generally just the first and last month’s rent), and can be cheaper when you consider homeownership costs.
Additionally, if you begin long-term investments with the money you save by renting, it’s likely to grow in value, (read about the Rule of 72) and therefore you will not “lose out” on the investment opportunity.
In fact, because there’s less maintenance costs associated with that investment, you’ll likely end up with more money in the long run.
However, renting does mean having to abide by a landlord’s rules and regulations and/or not being able to make the home renovations you want to.
Renting also might include other costs beyond rent like:
- Hydro and/or water
- Home insurance
- Damage costs upon moving out (if applicable)
- Possible payment for a storage unit
Plus, unless you’re diligent about investing any saved money, you might end up spending more unintentionally and end up with nothing to show for it down the road (again, not having that “forced” savings that comes from making mandatory payments towards something like a mortgage).
Now that we have an overview of some of the pros and cons of renting and buying, let’s chat numbers. We all know that having a balanced budget is important. This means knowing where your money is going and ensuring you’re not spending more than you’re bringing in.
When we look at housing, you generally want your costs to be around 35% of your net income. If your total housing costs add up to more than 40% of your net income, you’re likely going to have to cut back on something else in your life, whether that’s eating out, leisure activities, or something similar.
Ensure that the decision you make is aligned with all of these areas!
For example, just because a rental is $1500/ month and a mortgage is $1300/month, it doesn’t mean the house is automatically cheaper! Take into account all of the additional costs of home ownership and renting before making your decision.
If you end up buying a house that is above what you can afford, you will end up relying on credit to supplement your income and support other areas of your life. Not only will you not be able to put enough in savings for your future retirement, but reliance on credit in this way will send you in huge debt over time.
And, if you rent for your entire life without putting aside that saved money into another form of investment, you’ll likely struggle to plan for retirement.
The bottom line
Ensure you’re aware of your own financial standing, and know what both renting and buying would look like for you.
What’s right for you might not be right for someone else, so give yourself time to weigh these options!
Recognize that both home ownership and renting are valid options, so take any pressure to live a certain way off of yourself.
What are your thoughts on the home ownership vs. renting debate? I’d love to know!
If you need help crunching the numbers to determine which of these is the most financially savvy option for you, please don’t hesitate to reach out to me.