Garry Marr, Financial Post
It’s become the new retirement savings plan — owning a home.
What else is one to make of a country where about half of Canadians said they didn’t make a contribution to a registered retirement savings plan this year but close to 70% of households now own their home.
Your money grows tax free . . . Even in your RRSP, there are forced withdrawals and it’s fully taxable [when taken out]
“Your money grows tax free,” says Jason Heath, a fee-based certified financial planner with Objective Financial Partners Inc. “Even in your RRSP, there are forced withdrawals and it’s fully taxable [when taken out].”
The main advantage of home ownership is the forced savings it generates. The real estate industry has its tired lines like “you can’t live in your investment” or “you have to live somewhere” but it’s the discipline of payments a mortgage forces that makes it a decent investment for most Canadians.
It’s hardly a rational argument for housing but it’s a practical one. Renting regularly beats out housing for cost but that savings ends up burning a hole in many pockets rather than being socked into an RRSP.
“The age old argument that renting is throwing away money is not valid or consistent if you are away for a year or two for work on temporary assignment, going to school or because you are just retired and want to try living somewhere else,” says Mr. Heath.
Housing makes no sense if you are on the move, which is probably why the nomadic among us choose to rent. With real estate commissions about 5% of the sale price, transaction costs can easily be close to 10% in a jurisdiction like Toronto with two land transfer taxes. Imagine a mutual fund with that type of trailer fee.
The other problem with housing as an investment is there’s not much liquidity. We’ve gotten used to homes selling in a couple of days or a week but that’s not the norm. It’s usually more difficult to get out of a housing investment but Mr. Heath says that’s another thing that saves us from ourselves. “It’s a lot easier to take something out of an investment savings account,” he says.
You also can’t ignore the tax benefits that come from home ownership because of the exemption you get from any gains on your principal residence. Put in sweat equity by fixing your house to raise the value and that’s about the only legal way not to pay tax in this country.
Then there’s the leverage. Nobody will let you leverage any other investment with 95% debt to 5% equity. If you are borrowing money at 3% and your investment is going up 5% every year, you can’t lose. What happens if prices reverse?
Phil Soper, chief executive of Royal LePage Real Estate Services, said periods of non-price appreciation on a national level have been very short. Prior to 2008-2009, it was 15 years before prices dropped.
“In a typical price appreciating environment you get the leverage effect on borrowed money which works best when the interest costs are low which is what it is today,” says Mr. Soper.
The divide has widened between renting and owning but he adds many families end up turning to buying because they can’t find what they are looking for in the rental market.
But at some point the gap has to grow so large that one has to really take a second look at the home ownership option. A survey from RateSupermarket.ca found average Canadian will have save 12 years to afford the 5% down payment on home which would rise to $553,008 by 2020 based on a 4.9% annual price increase.
“There are a lot more people considering renting for a longer period of time as prices increase and we’ll see if the market flattens,” says Kelvin Mangaroo, president of the RateSupermarket.ca.
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