What’s better for your career: renting or buying a home?
As a real estate analyst and managing director of institutional equity research for CIBC, people often ask Alex Avery for his advice on purchasing a home. In those conversations — which have become regular occurrences since Avery began analyzing publicly traded real estate companies 12 years ago — he noticed a number of clichés and misconceptions that were constantly being repeated.
“I just started writing them down, not really thinking too much about them,” said Avery. “About five or six years ago I got to the point where I had about 25,000 words and thought ‘wouldn’t it be funny if this turns into a book?”
That book, The Wealthy Renter: How to Choose Housing That Will Make You Rich hit store shelves in September, and seeks to dispel some common misconceptions about Canada’s housing market and the value of home ownership.
But first, Avery explains why Canadians have so many misconceptions about home ownership in the first place.
The big pro-ownership conspiracy machine
There are a few main pushers of the home-ownership drug, according to Avery. The list includes your bank, your realtor, your parents, and even your government, and while some seem entirely harmless each party has something to gain by convincing you to buy a home (yes, even your parents).
“The great thing about home ownership from a parent’s perspective is that there’s a forced savings program imbedded in a mortgage,” said Avery. “You have to pay this mortgage for 25 years, and at the end of 25 years you’ll end up owning your house, so even if you’re completely reckless with all your other finances you’ll have something left.”
Are you saying my parents are wrong?!
While the thought of a guaranteed savings fund may seem appealing to parents they often fail to realize how much the housing market has changed over the course of a generation, says Avery.
“The Canadian housing market today is more expensive than it’s ever been, on a price-to-income basis,” he said, adding that the average housing price-to-income ratio in Canada is about seven times, though it has historically been closer to four. “On that basis housing is about 75% more expensive than it has been historically.”
The well-intentioned advice of parents may be dated but they’re far from the biggest culprit in convincing Canadians to invest in the housing market. “The government is probably the biggest promoter of home ownership,” said Avery. For example, Canadians can use their RRSP funds to purchase their first home, capital gains taxes are waived on property investments and first time home buyers get a break on land transfer taxes. “The CMHC [Canada Mortgage and Housing Corporation] is a $250 billion organization dedicated to promoting home ownership and reducing the cost of home ownership by subsidizing interest rates.”
Why does the government want me to buy a home?
There are a lot of benefits for a government whose population owns instead of rents, which explains why they provide so many tax breaks and incentives to buyers. “The pro’s for a government to have a high home ownership rate are quite strong,” said Avery. For one thing homeowners tend to work harder, take less sick days and have a stronger commitment to their local community. “They’re also statistically less likely to commit crimes,” adds Avery.
But isn’t housing always a good investment anyway?
Though housing remains a good investment option for those in the right circumstances, it has been far from the strongest place for Canadians to put their money over the past 25 years. In fact, over that time period the compounded average return on housing has been about 3.7%, while the TSX has compounded at 8%, after fees. “While people are wary and fearful of the stock markets, the broadest index of the stock market has absolutely trounced housing as an investment over the last 25 years,” said Avery.
So who should buy a home?
Canadians shouldn’t dismiss the idea of home ownership entirely, says Avery. Instead they should consider whether they’re making the right decision for their unique circumstances.
“The ideal home owner is someone who has a very stable life situation— in terms of family size, employment, etc. — and very long-term visibility on what their life is going to look like five, 10, 15 years down the road,” he said. “You probably also want to factor into that, beyond the considerations of the individual, whether or not it appears to be a reasonable investment.”
Why shouldn’t the rest of us buy a home?
Avery believes that far too many Canadians blindly prioritize home ownership without considering the far-reaching implications of their investment.
“It really touches everything,” he said. “From where you work to how long you work, when you can retire, who you hang out with, where your kids go to school, who they hang out with; there’s really no aspect of your life that doesn’t get impacted by your housing decisions.”
How could owning property limit my career opportunities?
Making the large capital commitment required for home ownership ties the buyer down to a specific geography and a specific minimum required income level for the foreseeable future. In other words, career moves that may require a pay cut in exchange for long-term benefits or require relocation become infinitely more complicated and expensive following the purchase of a home.
“Even within an existing job, you may not do your job as well as you would otherwise,” said Avery. “If you’re absolutely tied to your job because it’s the only way to afford your house, you’re not likely to speak up when you see something wrong with the way the business is being managed.”
So what’s a better use for all that money I’ve been saving?
If, after conducting the necessary research, you conclude that your situation is not ideal for home ownership, there are a number of alternative financial tools that Avery recommends; particularly those that include forced savings.
“It is important to establish a forced savings program, because left up to our own willpower savings often fall by the wayside,” said Avery. “While a mortgage is a forced savings program there are many others available to Canadians.”
These investments, says Avery, may prove more financially sound than a mortgage in the long run.
“Companies will loan money to employees to buy stock in the company, you’ve got government programs where you can sign up for a subscription to purchase government of Canada bonds, there’s dividend reinvestment programs for stocks that you already own, there are lots of alternatives,” he said.
Overall, Avery encourages Canadians to do their research before making what is likely to be the single largest investment of their lives. “The important part is that you don’t take the advice that people are giving you without questioning it,” he said. “Make sure you know as much as you can before making any decisions.”
The Wealthy Renter: How to Choose Housing That Will Make You Rich is now available on Dundurn Press.
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