By Tony Wong – Toronto Star
First of all, don’t believe those in the real estate industry who say it’s always a good time to buy. It’s not.
There are times when house prices have peaked, and if you’re buying at the top of the cycle it will take years, and in some cases decades, to see the value of your home return to its inflation-adjusted purchase price. But most studies show that in the very long run, buying can be better than renting.
One of the most comprehensive Canadian rent versus buy studies was completed last year by housing analyst Will Dunning, who looked at prices in the Greater Toronto Area between 1983 and 2008.
That 25-year stretch included plenty of boom years as well as the bursting of the housing bubble in 1989, when prices dropped for the next six years. Despite that bust, the average price of a house in the GTA rose by 5.7 per cent a year during the 25 years. Adjusted for inflation, the real increase was 2.8 per cent a year.
By way of comparison, an investment in a basket of stocks in the same period, represented by the TSE 300 index, averaged 6.9 per cent a year, about 1 percentage point better. After inflation it was about 3.3 points.
According to Dunning, if you had taken the down payment to buy the $76,263 home, estimated at 10 per cent plus closing costs and mortgage insurance premium, or $10,500, and put it all in the stock market, the value of your portfolio after tax would have been $216,000 a quarter century later. And of course, while that nest egg was growing you would also have been paying rent somewhere.
If you had invested the same amount in a home, even after including annual costs such as taxes and maintenance, you would have $284,510, or 31 per cent more than the after-tax value of the tenant’s portfolio.
That’s because when you sell your home, the gain in its value is tax free if it is your primary residence. (You would pay tax on any gain of an investment property or a cottage.) The same gain in an investment in stocks includes paying taxes on the dividends received along the way and any gain on the difference between the purchase price and the selling price – the capital gain.
A home is also a form of insurance for old age. You typically buy during your peak earning years. After 25 years or so you pay off the mortgage and are left with the value of the asset and payments for utilities and taxes.
Inflation has also become your friend over time. It has increased the value of your home while for those on fixed mortgages the payment remained the same. Inflation ate away at the value of debt by eroding it by about 2 per cent or so a year. On the other hand, if you rented, your payments probably rose every year.
There are also other intangible reasons for buying a house. It is not just an investment. Owning your own place comes with value that isn’t an entry on a balance sheet. It offers a chance to put down roots in a neighbourhood you want to live in. That may be because of the schools, parks, shops and other amenities.
A recent Israeli study found that buyers felt a a sense of freedom and independence when buying and also an elevated sense of status. This is perhaps not the best reason for buying a house, but it’s an important consideration for many buyers.
The last thing to remember is that those who argue the rent side of the equation, assume that the renter will put the equivalent of a down payment into investments. To make money in the stock market, or even in a term deposit, you would have to be extremely disciplined and not touch it. That’s tough for many to do.
A mortgage, on the other hand, is a form of forced savings. If you want to keep the house you have to pay the mortgage.
Not everyone needs the threat of homelessness to be disciplined. But buying a home is one way to make sure you have a soft spot to land in your old age. And that’s not such a bad thing.
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Contact the Jeffrey Team for more information - 416-388-1960
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