Welcome to my blog on housing, culture and design in Toronto – where I share my insights and experiences on almost every aspect of the Toronto real estate market – and life here in The 6ix.
In this post, I’m going to explore the irony of how costly homeownership really is over and above the acquisition cost and how the Canadian government socially-conscripts Canadians from a young age to desire homeownership, along with its ‘buy-in’ to immigrants as fulfilling the ‘Canadian dream’. Not that I’m against any of the notions of homeownership as a right rather than a privilege – mostly because I’m a product of this same conscription – and, well, I’m a realtor who earns his living helping people buy and sell houses. But that doesn’t mean I’m not forthcoming on what the real costs of buying are, nor with communicating the risks associated with owning. I believe every buyer and seller should be fully informed on every facet of shelter.
Despite high prices, homeownership continues to be a major priority for most Canadians. In fact, did you know 50 per cent of Torontonians own their own homes – and for all of Canada it’s 67 per cent – one of the highest rates of homeownership in the world? Research on housing and identity indicate that owning a home, as part of the Canadian Dream, is seen as a sign of financial and personal success, as well as reflecting one as ‘biographically on schedule’. I wrote about this distinction between ‘shelter’ and ‘home’ in this post called, Chapters Of Life: The Value Of ‘Home’. That said, home ownership in Canada has reached it’s the lowest point in 45 years, according to 2011 and 2016 census data. In fact, just in those 5 years between census collection years, 88 out of 100 of Canada’s largest cities saw their homeownership rate fall. Read more about this in a piece published by researchers at Point2Homes: Homeownership Rates Drop in 88 of Canada’s 100 Largest Cities.
Even though the cost of home ownership is far outpacing incomes in Toronto, why does the dream of homeownership burn so brightly? I think a lot has to do with manipulation from all layers of government in convincing us it’s our destiny.
The Government’s Efforts To Assist With Affordability & Convert You Into Debt-Serfdom
Homebuyer’s hopes have been kept alive to a certain extent with low-interest rates and other Buyer incentive programs, all in an effort by every layer of government to have you swallow the shelter kool-aid. To help make homeownership more affordable, the Government has introduced measures into the market to try to bring prices down, but they also offer ways to try to reduce the costs of purchasing. That said, as I mention below, some of these incentives really don’t provide much benefit in a city like Toronto.
Federally, there is Canada’s RRSP Home Buyer’s Plan, where you can borrow up to $25,000 from your own Registered Retirement Savings Plan (RRSP) to purchase your first home. The catch is that must pay the entire sum back into your RRSP within 15 years ($1,666.66 per year). RRSPs are tools for savings and for tax deferral, so if you don’t repay the required amount under the HBP in the required time, you will eventually have to pay tax on the overage.
And for Buyers who would like to own but don’t have a 20% down payment to secure conventional financing, one can secure high-ratio financing where you pay a sizable ‘mortgage insurance premium’ to CMHC – a Crown Corporation of the Canadian government which doesn’t protect the buyer but the lender in case you – yes you the buyer – defaults. Don’t you find it bizarre that you have to pay a premium to protect the lender and not yourself? In the home buying framework, you’re basically the poorest of all the parties involved and yet you’re paying all the premiums to protect everyone else’s risk? Shouldn’t the risk be theirs and they should pay the premium? For those considering going this route – and paying a mortgage insurance premium – here’s my post Should I Max Out My House Hunting Budget With CMHC Mortgage Loan Insurance?.
First-time buyers also qualify for land transfer tax ‘rebates’. However, this isn’t so much a rebate as much as a reduction in the crushing taxes due on 100% of the acquisition price of your property purchase even though you may only be putting 5% down – snapping up every cent of your savings. For those buying in the City of Toronto, this tax bill is effectively doubled, for one has to pay both the province’s tax and the city’s tax for the privilege of admission. Of course, once you have the key to your castle, your tenure as homeowner assures you significant annual property taxes to maintain civic operations.
To play Devil’s Advocate for a moment, it is important to consider the implications and costs of indebtedness, especially in a high-priced property market, even with these supports to affordability.
Yes, there’s a certain privilege and status that accompanies owning your own ‘castle’, but home ownership also shackles us to a lifetime of debt serfdom, which homebuyers are increasingly seeing as a means to an end. Not only does taking out mortgages feed the money merchants of our capitalist machine, but it also buoys the Government. First, homeownership plays a socio-economic role that figures into Government policy, and secondly – and more importantly – it is a revenue stream. Homeownership has always been encouraged by multiple levels of Government, because it’s a means to line Municipal, Federal, and Provincial coffers alike.
So while Government Programs do expand a buyer’s affordability spectrum – and the number of potential buyers who are qualified to become homeowners (albeit harder now than it used to be due to the mortgage stress test) – know that its purpose is to have as large of the population as possible on the property ladder to ensure the Government’s great profit. For example, Canada isn’t immune to ‘fake news’. Did you hear about how the Canadian government used “tax dollars to write and promote articles with marketing-like copy on how to take out a HELOC (Home Equity Line Of Credit), and joining the affordable “condo boom” – as seen in Better Dwelling’s “The Canadian Government Used “Fake News” To Drive Real Estate Borrowing… Seriously.”?
While the interest rate environment continues to be low, relatively speaking, modest increases shrink purchasing power, which home buyers have had to juggle in their pursuit of home ownership. Although additional rate increases may not be in the immediate future if we engage in trade wars, even the modest rate increases this year is impacting the massive cohort of owners who are refinancing this year documented in this November 2017 Better Dwelling piece called “Bank of Canada: Half of Canadian Real Estate Mortgages Will Renew By Next Year.” The landscape of indebtedness has begun to shift.
What this underscores is that homeownership needs to be approached pragmatically, with a budget and goals in mind, as well as fact-based information about the market. The dream of home ownership continues, but I’m the guy who insists your pursuit needs to be grounded in reality.
The Investment Opportunity
One of the main objectives for home ownership is the opportunity to grow wealth. But as with all kinds of investing, market context, net worth, goals, timelines and tolerance to risk should be considered.
Back in 2011, I was interviewed by PropertyWire for an article called, Locks Or Stocks? Which Should I Buy? Although I consider stocks and real estate to be equal opportunity investment vehicles – basically one investment consists of words on a piece of paper while the other is essentially a pile of bricks and mortar – their value is subject to change based on how well they’ve been tended and the market conditions at the time it is traded. The potential for profitability is very much linked to the law of averages, as well as to investor education and experience. In both cases, the ‘buy and hold’ strategy, as well as diversification of investment asset types (like a principal residence plus an investment property portfolio) allows you best to weather any market downturns.
Though I caution your expectation of profit because it’s more likely than not you won’t take into consideration the real costs of homeownership. Here’s my post on all the costs associated with buying a home in Toronto in What Are The Closing Costs For A Property Purchase? even before you take into account the costs of servicing the debt, upgrades, maintenance and repairs, and operating expenses.
To give you a snapshot, if a First-Time Buyer purchases a property for $750,000 and puts the minimum 6.7% down ($50,250), and secures a 3.29% mortgage with a 25 year amortization, were interest rates to never change during that 25 years (highly unlikely), they’d pay a total of $1,065,958 in principal and interest payments, along with on closing the buy $27,990 in mortgage insurance, and $14,475 in city and provincial land transfer taxes (it’s $22,950 in taxes if you’re not a first time buyer) plus all future operating, maintenance, repair, renovation and resale expenses. I’d conservatively say you’ll have easily spent a total of $750,000 to buy + $1,500,000 simply paying interest, costs and maintaining the dwelling at the end of those 25 years, so keep that in mind when we all assume Sellers are making financial ‘windfalls’ given there can still be volatility and uncertainty in our housing market. (For example, here’s my post called, Interest Rates In The 1980s And Now which explores how interest rates really impact housing values). That said, the value-added benefit – even if your profit is modest after the real costs of owning shelter – is that you’ve effectively enjoyed quiet enjoyment, the security of tenure, and ‘free shelter’ in lieu of paying a landlord for accommodation.
Check out this article from the Globe and Mail “Still Thinking Of Home Ownership As An investment? Here’s Proof You’re Wrong”. This article addresses the incorrect assumption that rising housing prices= huge returns on investment. That’s because of the costs of this investment eroding the return. That doesn’t mean that home ownership isn’t a sound investment; it just means that your concept of what constitutes a good return needs to align with the math of the said investment.
I also addressed this in my Dear Urbaneer Series called, How Much Profit Should I Expect Climbing The Property Ladder?. Basically – the short and skinny of it is that your property purchase has to escalate about 7% in value in Toronto simply to break even recovering all your expenses.
Perhaps owning your own home should more aptly be described as a ‘forced savings account’ rather than an investment. And the reward at the end when it comes time to sell is we Canadian homeowners are exonerated by not having to pay capital gains on the sale of our principal residence. Plus, as long as we perceive owning our own home is both a status marker and ‘secure shelter’, your real estate investment will have an inherent appeal to a target market that is genetically wired to buy real estate which makes it, in my opinion, a wise investment. For this reason, along with the fundamentals of a strong post-industrial economy and employment profile, continuing immigration, the role of demographics, the desirability for a pro-urban lifestyle, our propensity to remain single for longer periods of time (in condominiums), and the severe lack of rental options (much which is summarized in 7 Reasons Why Toronto Real Estate Prices Have Skyrocketed Over The Past Decade), there will always be Buyers for property in the City of Toronto. The desire by most to own their home is a pre-determined market, so barring a gross mismatch between the earning power of the local market and property values – or the costs associated with housing (like interest rates which to me is probably the most critical factor on where prices go) suggests that there is plenty of demand to keep prices afloat and moving upwards.
We tend to forget that real estate, although an investment, is highly leveraged (i.e. maxed out mortgages anyone?). Values of real estate aren’t the only variable that can erode your investment. High debt load, coupled with rising interest rates also present potential barriers to accumulating wealth. Higher interest rates increase your carrying costs and extend your timeline before you can grow the gap between what you own and what you owe of your home.
The Undeniable Emotional Lure of Homeownership
From a balance sheet perspective, with high housing prices, it may not make sense financially to own a home for many in Toronto. However, money is only one factor and isn’t necessarily the strongest. What are the other motivations and influences?
We all need and understand the value of shelter, as a fulfilment of a basic human need. In Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers, I explored how, for many, home ownership is the foundation to anchor, and nurture, our physical, emotional, mental and spiritual needs. So unlike stock, owning bricks and mortar satisfies both a necessity of life and offers you the opportunity to profit. You can’t underestimate the emotional value of driving the decision to own a home, which can contribute to sensitization to debt and “the Fear of Missing out”.
Owning bricks and mortar communicates stability that we all covet. While renting a property fulfils shelter needs, owning a home provides the opportunity for roots with more permanency, which describes some of the motivation for Millennials to forge ahead with homeownership, despite the risks of overleveraging with debt, as described in this story “Home Ownership Remains A Millennial Measure Of Success: Don Pittis”. There is also the perception (rightly or wrongly) that owned homes are “nicer” than rented homes. While this may be in the eye of the beholder, home ownership does allow homeowners to put their personal stamp on their homes, permitting self-expression in a way that renting does not. This story “Despite Sky-High Property Prices, Millennials Still Driven To Own Homes” refers to a study that shows how home ownership overwhelmingly remains a goal for young Canadians. The motivation here is about timing, with the respondents in the story feeling that they need (not want) to get into the market while they can; the time is also right for them as their lifestyles are morphing into the family-friendly years that have traditionally gone hand-in-hand with homeownership.
** Addendum – Sept 16th, 2018 – In The Globe And Mail this piece ‘Bless This House: Why Canadians Put So Much Faith In The Housing Market‘ John Rapley, a Canadian academic, journalist and author based in London whose most recent book “Twilight of the Money Gods: Economics as a Religion and How It All Went Wrong’ offers more insights in how Canadians embrace housing with extreme further and faith. It’s worth checking out. **
While it is my sincere delight and privilege to help steer Buyers along in their journey towards purchasing a home, I believe most firmly in prudence and pragmatism as the ultimate guide when househunting. That means understanding the costs, the potential lifestyle sacrifices measured against the potential upside(s) with a home for sale. Weighing all of these, it may mean walking away. It may mean looking at alternatives. Or it may tick all the boxes supplied by your head and your heart. It’s my job (and my team here at Urbaneer) to help you distinguish to recognize the influences around your purchasing decisions. We’re here to help!
Did you enjoy this post? Here are some of the other relevant blogs that I consider essential reading:
The Psychology Of Real Estate, Housing & Home
The Four Values Of Real Estate
Gentrification, Densification, And The History Of Toronto Real Estate
Want to learn more about what other factors are shaping today’s market and fuelling the dream of home ownership? Here are the links to Part One and Part Two of Urbaneer’s Spring/Summer 2018 Toronto Real Estate Forecast!
Thanks for reading!
~ Steve & The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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Celebrating Twenty-Five Years As A Top-Producing Toronto Realtor
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*Love Canadian Housing? Check out Steve’s Student Mentorship site called Houseporn.ca which focuses on architecture, landscape, design, product and real estate in Canada!