I like owning a house. I’ve become very accustomed to the freedom and autonomy that come from not having a landlord. But I can’t pretend that owning my house is the best move from a purely financial point of view any more.
My current home would sell for about 2.5 times what I paid for it. Even factoring in inflation, its value has gone up over 70% in real terms. So homeownership has worked out well for me. But that’s in the past. What about the future?
I don’t know what will happen to house prices, but if we look at the likely range of possibilities, the future looks very unlikely to match the past couple of decades. Interest rates are at historic lows and Canadians are deep in debt. I’d have to be delusional to think that my home is likely to increase another 70% above inflation. It’s not impossible, but hardly likely.
I have little doubt that I’d be better off financially to sell my house and rent. So far my wife and I have decided to leave this money on the table and continue to own. However, how should I advise my sons?
My sons have grown up in a world where they and most of their friends grew up in homes owned by their parents. To some extent, it seems like failing to have to rent instead of own.
When we think of owning vs. renting, we tend to imagine a spacious house with room for a family vs. a cramped apartment. It doesn’t have to be this way. It’s possible to rent a nice house. The rent might seem high, but it will compare favourably to the combination of property taxes, mortgage payment, and house maintenance costs. The comparison looks even better for renting when you factor in the possibility of interest rate increases.
For anyone who buys into the idea that renting isn’t failing, the next step is to actually save the money you’re not spending on a home. I tell my sons that once they get full-time work, they should put 20% of their take-home pay into long-term savings. By “long-term,” I don’t mean “until you want to go on vacation or buy a car.” You need additional savings for these purposes. Long-term means you have no planned use for the money. You may keep it all the way to retirement, or use it to fund a career change in 20 years, or some other far off purpose.
If a young person can’t sock away 20% of take-home pay, then there is a problem. Either make more money or spend less. Perhaps renting a nice big house isn’t in the cards yet. Rent an apartment or share a place with a friend.
My main point here is that it is possible to live a financially prudent life while renting. In fact, while house prices remain so high relative to incomes, renting along with prudent saving may be the preferred route for young people today. I have no problem with people who choose to own a home, but renting a home can be for winners, not just failures.