Is buying a home in Canada even worth it or should you just rent?
To rent or to buy a home in Canada? If you’re a millennial living in this country, that may be the big question in your life right now.
With the Bank of Canada recently cutting its key interest rate for the third time, and housing prices in some major cities forecasted to decrease sharply by the end of the year, you may be weighing your options.
Despite the softening housing market, the cost-of-living crisis persists. So, is it really worth buying a home in Canada, or are there benefits to being a renter?
Daily Hive spoke with Thuy Lam, a certified financial planner and money coach based in Toronto. She offers advice-only financial planning, which means that she can remain completely objective because she’s not selling any financial products.
“If you are the CEO of your family finances, think of us as your chief financial officer,” explained Lam. “You have the ability to plug into our expertise to help guide your financial decision-making that aligns with your personal values and your personal financial goals.”
Flexibility vs. stability
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Lam said the dilemma between renting and owning a home is a topic that has been raised by many of her clients recently. One of the factors she considers is whether her client values stability or flexibility.
A significant advantage of buying a home in Canada is the sense of stability it provides, which she says many young families typically seek.
“You don’t risk having a landlord that might just end up selling the property in a few years,” explained Lam. “When you’ve got kids, and you’ve decided this is the best neighbourhood for their schooling… You just don’t want to risk having to find another place.”
On the other hand, those who choose to rent may value the flexibility that comes with being a renter, especially when leases are typically one year long, and some landlords even offer month-to-month agreements upfront.
The financial planner said she has a lot of clients who work in the tech industry, which is very competitive and usually comes with a remote and nomadic lifestyle.
“So, those types of individuals or families or couples might value flexibility and the ease of being able to move either cities and/or countries,” she explained.
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Financial costs
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When it comes to buying a home, footing the bill is definitely a heavy financial lift. Lam said there are more upfront and ongoing costs that come with owning a home.
High upfront costs include a down payment, land transfer taxes, legal fees, home inspection fees, and realtor fees.
“Those are some of the costs that sometimes people forget to factor in,” noted Lam.
Ongoing costs can include property taxes, home insurance, condo fees, strata fees, and maintenance costs. She added that many homeowners also forget to factor in the cost of home renovations or upgrades when trying to increase the value of their home.
“It’s a lifestyle choice when people make huge $100,000 or $200,000 renovations to their homes,” said Lam.
Many first-time homebuyers often end the process with less disposable income, which could prevent them from investing in their retirement, for example.
“In some cases, homeowners may find themselves ‘house poor’ – meaning a big part of their income goes toward the costs of homeownership, leaving little left over to pay for other needs and wants,” B.C.-based real estate agent Rory Clipsham wrote in a blog post.
Lam said this is where renters can come out ahead because they don’t have a high upfront cost, with predictable rent on an ongoing basis.
“Instead of that down payment going towards a home, they invest it,” she explained. “When they’re disciplined at savings and investing, that’s when it would kind of tilt in favour of renting.”
However, she stressed that renting is only a pro financially if the person is incredibly disciplined with their saving strategies. Otherwise, renters aren’t building equity like homeowners do, with their monthly rent cheque going towards someone else’s mortgage. They’re also at the mercy of their landlord, who can increase rent according to local laws.
While building equity is touted as a benefit of homeownership, some Canadians aren’t impressed with how long it takes to fully pay off a mortgage and truly own a home.
Last year, the Canadian government extended amortization periods to 30 years for insured mortgages on newly built homes purchased by first-time homebuyers. There were mixed reactions online, with some people seeing it as a quicker path to homeownership, while others argued that it would leave people in debt for “even longer than their lifespan.”
Still, Clipsham noted that owning a home in Canada is generally a good investment.
“Homes usually go up in value, so if you buy a home within your budget, the payoff can be plenty down the line,” he wrote. “The general rule is holding a property for five years or longer to capture the increase in the home’s value (meaning you could stand to make more money if you chose to sell it in the future).”
What to consider when renting or buying a home in Canada
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Lam said that when she sits down with a client to help them decide whether to rent or buy a home in Canada, she starts by doing a cost affordability assessment.
“Let’s say they are in a circumstance where they really value being a homeowner, and they want to buy. I would say that the biggest factor driving the decision to move forward, and what I encourage people to do, is just sit down and run what I call a cash flow analysis,” she said.
This involves assessing your current financial position and making projections, taking into account the price of a home and all the upfront and ongoing costs you’ll need to pay, and comparing that to the ongoing costs of renting.
Lam said this includes a reserve fund for irregular home maintenance costs and possible future renovations.
“See how your cash flow looks because in the end, you need to be able to handle the extra expenses in all ‘what if’ scenarios. What if one loses their job? What if one gets sick for an extended period of time?” she explained.
This means factoring in whether you have disability coverage, life insurance, and more before owning a home in Canada.
So, is one better than the other?
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In Canada, you may have been raised to believe that owning your own place is the be-all and end-all. It’s common to hear people say that renting is just throwing your money away.
Lam calls this a “money belief,” or a system that has been ingrained in Canadian culture. She argued that this isn’t necessarily true all the time and shows that people haven’t actually done the math.
“Anyone who tells you that has not sat down, looked at a particular property, and done the analysis,” she explained. “Financial logic alone has disproven those sorts of money stories we continue to share throughout the decades and generations.”
Lam added that pure financial logic suggests that renting can be better than buying a home in Canada if you are a disciplined investor with the risk tolerance to invest in equities.
“Historically, equities have outperformed, over a long, long run, average Canadian real estate growth,” she said.
However, she acknowledged that that is pure financial logic, and it is never the full story when she’s sitting down with a client.
Ultimately, she said there’s no right answer, especially in today’s economy.
“You could be financially successful either way. It really is about getting in tune with your numbers, knowing that you’ve made a choice to either own or rent, while at the same time, giving room for establishing financial resilience,” she said.