“Looking back my biggest money mistake was waiting too long to buy a house. I also bought Nortel stock and lost money, but missing out on long-term housing price gains was far more costly. The irony is that at the time, in my 20s, I was an economist at the federal housing agency CMHC specializing in analyzing the housing market. You would think I would have taken quick advantage of home ownership. But in my years following graduation from the University of British Columbia, I was more interested in spending than saving and since buying a house requires a down payment, it seemed a large hurdle. Spending was easier since making the minimum payment to the credit card company was all that was required to keep the debt at bay. Eventually I saw the light, paid off my credit card and car loan and began to save for a down payment. Eventually I bought a semi-detached condominium in downtown Vancouver for $200,000 and the benefits were immediate.
Here are three reasons why buying a house is a good idea:
1. You build equity
The amount you owe declines with each mortgage payment.
The difference between what you paid and what you owe is your equity and it is one of the most valuable assets most family’s have. The sooner you start, the faster your equity grows.
2. It is an appreciating asset
Home prices decline when the economy turns down, but the long-term trend has been and will continue to be rising prices. The reason is supply and demand. As someone once remarked – “Buy land. They ain’t making any more of the stuff.” Land supply constraints for residential development exist in most markets.
3. Demographics trends are favourable.
Meanwhile, there is population growth it producing demand. Canada has 34 million people now. In 1961 it was about 18 million.
These three trends underpin the long-term upward trend in housing prices.
Another benefit when you consider buying a house is that it is a levered investment generating a rate of return much higher than simple price appreciation. That 5 or 10 per cent down payment yields an overall rate of return well above the return from stock or bond markets.
The costs of homeownership are substantial and ongoing. The monthly interest payments, property taxes, utilities, and repairs and maintenance add up to the largest expense for a household.
But if you are renting, you are paying these costs indirectly without the benefit of capital appreciation, principal repayment, and the non-financial benefits of homeownership such as control over your physical surroundings.
Also, paying off your mortgage is a form of forced savings and much better than paying off the landlord’s mortgage.
Over time housing prices appreciate and are a good hedge against inflation. In 1961, the average house price was about $12,000 and today it is around $360,000, a 2,900 per cent increase or a 7 per cent compound annual rate of return. Since it is a levered investment, the rate of return on the initial investment is closer to 10 per cent or 6 per cent inflation adjusted.
How does this compare to other investments? The Toronto Stock Exchange index rose about 1,900 per cent or 6.2 per cent compounded annually in the same period, including dividends the total annual return was about 8 to 10 per cent. The risk-free long-term Government of Canada bond yield averaged about 7.7 per cent or 4 per cent inflation adjusted
I am not suggesting the next 50 years will witness a similar large appreciation in house prices since the pace of population growth and development will probably be lower than in the past 50 years.
Indeed, some commentators point to record high price-to-income ratios as a sign of over-valuation and warn the housing market is near a tipping point and the price bubble will burst.
Yes, it will become increasingly difficult for first-time buyers to achieve homeownership since affordability will decline in the long term. Fundamental housing supply-demand forces will drive higher prices while incomes lag. But this should not discourage potential buyers from their goal, but they need to adapt to those circumstances and be smarter with their money than I was.
I feel fortunate to have become a homeowner many years ago when the price-to-income ratio was considerably lower. The adage it is better late than never always applies to home buying.”
- Helmut Pastrick, Chief Economist with Central 1 Credit Union, in “This housing expert waited too long to buy”, moneyville.ca, 9 Jun 2011
“They aren’t making any more land; housing only goes up; leverage is good; it’s never too late to get in.”
Almost unbelievable. – vreaa