Renting is throwing money away. Buy as much house as you can afford. Mortgage debt is good debt.
These are phrases Canadians have heard over and over. But just because we grew up hearing them doesn’t make them true.
And while owning a house might boost your net worth, it doesn’t help you retire. Here’s why.
(Note that when I refer to houses in this article, I’m specifically talking about principal residences. Investment real estate is a whole other animal.)
Houses come with plenty of bills
As any homeowner will tell you, houses aren’t cheap.
But the sticker price of the house, and the monthly mortgage payment, is just the start of your expenses. There are closing costs, such as lawyer fees, title registration fees, and land transfer taxes. In Toronto, this will cost you 2 to 4 per cent of the purchase price.
All that’s before you get the keys. Maintenance costs, like retiling the roof or repaving the driveway, fluctuate year by year, but a good rule of thumb is to set aside 1 per cent of your property price per year to cover these unexpected costs. Property taxes vary by city, but as of today, Toronto charges 0.7 per cent of your property value per year, and that’s considered cheap compared with other Canadian cities. And finally, there’s homeowners association fees for some houses, and condo fees for condominiums, which can surprise you with special assessments worth tens of thousands of dollars at any point.
If all of this seems scary to you, you should be scared. It’s hard enough sticking to a budget, but when you add up these hidden costs, the “renting is throwing money away” mantra starts to ring hollow.
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You might be thinking that I’m treating real estate unfairly because I’m ignoring the capital gains that occur when house prices rise. It’s true that house prices have been on a tear, with the average Toronto house doubling in the past 10 years.
Here’s the problem though: Money is useless if you can’t spend it.
Real estate has a big disadvantage because it’s illiquid. Let’s say your house has appreciated by $100,000, and you want to take some of those gains and take some time off work. Oops! You can’t, because you can’t sell off a portion of your house to harvest that gain. You have to sell your entire house. (And while HELOCs and reverse mortgages are available, these are specialty products that aren’t suitable for most homeowners.)
Even if you decide to sell your place, there’s the cost of packing, moving out, and that massive 5 per cent real estate commission you’d have to pay when you sell. And then you must find a new place to live, and since equivalent houses in your area have also likely increased in value, you may end up no further ahead.
All this is because Canadians see owning real estate as a sign of being an adult while renting is for immature losers. Without this belief, it would be more common to sell houses that have gained in value and go back to renting to cash out your winnings, but when’s the last time you ever heard of a homeowner doing this?
There are better ways to invest in real estate
All this is not to say that real estate can’t be a good investment. But you must own it in a way that allows you access that wealth.
Real Estate Investment Trusts, or REITs, are an excellent example. Have you ever been strolling in your local shopping mall and noticed a logo that looks like a red R? That’s RioCan, one of Canada’s largest REITs. They own and manage buildings such as shopping malls and apartments, collect rent from big chain-store tenants including Shoppers Drug Mart and Canadian Tire, and distribute the profits to their shareholders. They’re also listed on the TSX, so they can be owned as part of a balanced, diversified portfolio using index funds like XRE (iShares Capped REIT Index ETF).
Another way to get exposure to Canadian real estate is to simply invest in our banks. The Big Six Canadian banks collectively own nearly 60 per cent of the mortgages in Canada. Mortgage holders pay the banks, and the banks reward their shareholders in the form of dividends and capital gains. The BMO Equal-Weighted Bank Index ETF (ZEB) is a convenient way to own all six at once. Alternatively, you could simply invest in the TSX using a broad-based index fund like ZCN or VCN (we own ZCN), where financial companies are the largest sector.
Real estate can be a good investment, but many Canadians believe that this means buying the biggest house they can afford, and then working for 25 years to pay it off. There are better ways to profit off our real estate boom, and that’s by owning it in a form that allows you to actually cash out your gains.
Don’t let your wealth be trapped by your house.
Kristy Shen and Bryce Leung retired in their 30s and are authors of the bestselling book Quit Like a Millionaire.
