It still makes sense to own your home in big cities like Toronto. You just have to be smart about it.
Does it make better financial sense to rent or own your home? The high cost of real estate has many Canadians second guessing the dream of homeownership (I address the never-ending renting versus owning debate in my book, Burn Your Mortgage).
You may be surprised to hear this coming from me, but for some people it makes more sense to rent instead of own. If you’re working on contract or relocating for a job promotion, you’re better off renting instead of owning in the interim. But with 70% of Canadians choosing to own their home, there must be something to it. Here are three common excuses for not buying a home and why homeownership still makes sense in most cases for Canadians.
Excuse #1: Waiting for a Housing Bubble to Happen and for Home Prices to Fall
Every year going back to the financial crisis in 2008, I read that a housing bubble is finally going to happen. The thing is, the so-called experts have been wrong so far. Home prices in cities in Toronto and Vancouver continue to rise faster than wages, leaving some homebuyers in danger of being “priced out of the market”. (In case you’re not familiar with this term, it means no longer being able to afford a home in your desired location because real estate prices have gone up faster than you can save.)
Potential homebuyers in seller’s markets know the feeling all too well—here, you can lose out on your dream home simply by sitting on the sidelines. The shortage of listings is leading to buyer gridlock. Entry-level homeowners are choosing to stay put and renovate their homes instead of upsizing to a bigger home. And starter homes are in short supply, pushing prices even higher.
Let’s say you wanted to buy a home for $500,000 (a nice round number). If home prices go up 10% in the next year (which is quite possible in big cities like Toronto), the home that once cost $500,000 now costs $550,000. That’s a $50,000 price increase in a year—yikes! If you weren’t able to save at least $50,000, your home-buying power would fall. In a couple of years, instead of being able to afford a spacious three-bedroom house, you might only be able to afford a cramped two-bedroom house. If prices keep going up at this pace, you might only be able to afford a one-bedroom condo. This isn’t a fun situation to be in.
Real estate is a long-term investment. Everyone needs a place to live. When you’re financially ready to buy, start housing hunting, while you can still afford a decent place.
Excuse #2: There Aren’t Any affordable Housing Options Left in Big Cities
A stat I keep hearing in the media is that the average detached house in Toronto and Vancouver costs over $1 million. That’s pretty intimidating, especially if you’re a first-time homebuyer. But the thing is, not every home in Toronto or Vancouver costs over a million bucks and not every property sells in a frenzied bidding war. There are still affordable options. You just have to willing to find them.
It’s all about setting realistic expectations and being willing to compromise. If you have your heart set on a detached house in downtown Toronto, I hate to break it to you, but unless you’re a dentist or lawyer, it’s most likely out of reach, but that doesn’t mean you can’t own a home. You can compromise on property type or location. For example, if you enjoy the nightlife and want to live downtown, why not buy a modest condo and start building up equity? If the condo lifestyle isn’t for you, by moving a bit further from the downtown core, you may be able to afford a more spacious townhome. If you’re dead set on owning a detached home, if you don’t mind the longer commute, by moving out to the suburbs, you’ll get more bang for your housing buck (just don’t forget to factor in the higher transportation costs and longer commute).
Excuse #3: It Makes More Sense to Rent and Invest
A third common excuse for not buying is that the real estate market is overvalued. It makes more sense to rent than own. With the average detached house costing about 12 times the median family income in Toronto, it’s hard to dispute that housing is expensive. But why is real estate so expensive? There are many factors: a limited supply of detached homes, 100,000 new residents coming to Toronto each year, the fact that Toronto is the economic centre of Canada and becoming a world-class city, and the list goes on.
Unfortunately, it’s not cheap to rent either. In downtown Toronto, a popular destination for millennials, the average rent is a $2,134 per month, according to Urbanation. That’s more than the mortgage payments of some homeowners – yikes! With rents like this, wouldn’t you rather be paying your own mortgage instead of your landlord’s mortgage? (Chances are you won’t have much money left over to invest after paying rent.) A little thing called human behaviour gets in the way of that. When you choose to rent and invest, if you decide to skip investing because you’d rather go out to nice restaurant or go on a fancy vacation, there are no immediate consequences. They won’t be felt until years down the line when you’ve rented for 30 years and have little to no savings to show.
If you have the financial discipline, then by all means consider renting, but for many people, they’re better off with the forced savings of homeownership. There’s a pretty good incentive for paying it: if you stop paying your mortgage, you’ll no longer have a roof over your head. If that’s not a good reason to keep paying it, I don’t know what is!
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.