I get this question a lot, and there’s no short answer. If the question is coming from someone from an older generation (mom, grandma), or from someone who lives outside of Toronto (let’s say, in another province, or a small town), then the answer has to be qualified with, “it doesn’t, necessarily, unless you’re living in Toronto in 2013.”
Home ownership is great, but it has changed drastically in the last twenty years, and it isn’t always the smartest thing to do with your money anymore.
Here is my best attempt at understanding it, blogged out for your benefit and my own, as a record of something probably too complicated to remember (HAH!):
Unaccounted for costs of owning a home:
– you pay yearly property taxes which are approximately .75% of the value of your home
– condo fees, should you buy a condo
Unaccounted for benefits of renting:
– any savings you have can be invested and make money, upwards of 4-8% a year if you put it in ETFs. You can make money on your money, because it isn’t tied down in a house
– your money is “liquid” when it’s sitting in investments you can quickly sell off (as opposed to “illiquid”, when your money is locked into your house), so if you have a big bill to pay for some reason, you can afford it. You’d have to sell your entire house to see any of the money that is “invested” there. (This is how people get “house poor:” they have lots of money, but not for anything other than their house).
– maintenance is looked after by your landlord. $5000 furnace? $100 toilet? $10,000 roof? New oven? New fridge? Your landlord will pay for these things. You do, however, have to pay for lightbulbs, and fuses (if your place is that old). (And of course, there’s always the risk of a douchebag landlord – I’ve had 3 in my lifetime, and they’ve all been fair-excellent)
Case in point: Renting a House in Don Mills
Let me say this straight up: it costs more to buy than to rent here. However, the neighbourhood is great. You’re close to parks, highways, and downtown. TTC runs everywhere around here, but it’s about 45-hour commute by bus downtown. 15min-30min commute by car (which is why the housing prices have skyrocketed recently).
You have some savings. Let’s say you’re going to put 10% down on your house. Some people only put 5% down. But let’s say you’ve got some money saved and want to put 10% down. The cost of a 3 bedroom, “single-family” home in my neighbourhood is about $750,000 – $800,000.
Here is what $774k will buy you:
Cute, eh? Oh, and here’s the kitchen:
It’s on the market for $775, but for math’s sake, let’s round down to THREE QUARTERS OF A MILLION DOLLARS for this house with parquet floors (at this point I will mention my apartment has parquet floors). In order to have a downpayment of 10% on this house, you will need to have saved roughly $75,000.
And then you give all your savings to the bank.
The bank will then charge you ABOUT 6% interest for the money you’re borrowing in order to afford this house.
$750k house – $75K downpayment = $675K mortgage
x 0.06% interest/year
= $40, 500/year on interest alone
In other words, if you paid $3,375/month to the bank, you’d be paying off the interest. Not even touching the amount owed on the house. You’d be paying to rent the money you borrowed, and not even decrease the amount owed.
Ok, screw this house. It’s way too expensive. Conveniently located to good schools and downtown, but too expensive.
What about a condo? A 2 bedroom in Don Mills seems to start around $324K.
10% down is 32.4K, and yearly interest costs (324-32.4)x0.06= $17.5 thousand. Doesn’t sound too bad. 17.5/12 months=$1458 month in interest and anything you can afford on top of that goes toward pay off the mortgage. Let’s make it an even sweeter deal. Put down $75k and now it’s (324-75×0.06=14,950/year, or) only $1,245/month!
Oh, but wait.
That’s right. You own a condo now. Along with any plumbing or electrical work done in your unit, you also have to pay monthly condo fees, which generally increase yearly, and can run about $700/month. Ouch. And property taxes (0.75% of what the unit is worth = $2,498.68) making your yearly costs:
$1,245/month in interest or $14,940/year
monthly condo fees: $700 x 12 = $8,400/year
plus, whatever you can afford on top of that to pay down your mortgage
plus, property taxes of $2,498
= at least $37,838/year or $3,153/month
Or you could rent a house. Here’s one in Don Mills that costs around $1,950/month:
Hey, do you still have that $75,000 you would’ve spent on a downpayment?
Great! Let’s invest it at 4%/year in ETFs. Now you have an income of $3000.
You’ll spend $1950/month on rent.
-$23,400/year (+$3000 income from investments) = $20,400/year to live here.
this math stuff is tiring. Most people who assume owning a house is worth it, assume they will make money on their house once they sell it.
But that means that your house would have to increase in value more than what you’d end up paying in interest, and what you’d have made investing your downpayment. So, you know, do the math on THAT.