Why a House is NOT an investment

July 13th, 2009 by A Licensed Insolvency Trustee

Is owning a home in Canada a good investment? Conventional wisdom in Canada is that yes, owning your home is the best investment you can make.  Instead of paying rent to a landlord and having nothing to show for it, you may make mortgage payments, and over time you build up your equity.

Here’s something that may shock you: A house is NOT an investment.  It is a consumer good, just like a toothbrush.  You use it, you throw it away, and then you replace it.

I know that many of you will strongly disagree with that statement, but think about it: if you own your home for the next forty years, it is likely that you have to:

  • Replace the roof
  • Replace the furnace and air conditioning system, and all appliances
  • Repair the plumbing
  • Paint the walls
  • Replace the carpet
  • And do whatever exterior painting and landscaping is required.

My point is that you may not “throw out” your house all at once like you do with your toothbrush, but you do replace, piece by piece, over many years.  An investment, like a savings bond, does not need repairs, maintenance and replacing, so a house is not an investment.

Here’s a challenge for you: do the math.  Add up what you have spent, or will spend over the next five years on your house (see the list above).  Then take that number and average it over the number of months between repairs.  If you need to replace the furnace and air conditioning system every 20 years (that’s every 240 months), and it will cost $12,000 to do it, that’s a replacement cost of $50 every month.  Add in the cost of every other item on the list, and you will quickly see that the replacement cost of a house is somewhere between $200 and $500 per month (and a lot more if you have an old house).

Now add to that replacement cost the monthly cost for your mortgage, property taxes, and routine maintenance each month.  That’s the true cost of owning a house.

Home owners often tell me that owning a home is cheaper than renting.  “My mortgage payment is only $1,200 per month” they tell me.  In truth, when you add in property taxes and repairs and maintenance and extra utilities due to the size of your house, the cost may be closer to $2,000 per month.  If rent would cost you $2,000 per month than you are correct; renting and owning cost the same.  But if you could rent a nice apartment or townhouse for $1,000 per month, it’s clear that in the short term renting is much cheaper than owning.

But wait, you say: “House prices go up, so even if I am paying more each month for my house, in the long run I’ll make money.”  Maybe, but only if, in my example, your house is increasing in value by over $1,000 per month.  A few years ago when the real estate market in Canada was booming, that was possible.  For the last two years the residential real estate market has declined in Canada, so your house has actually lost value each month, which increases its cost.

So what’s my point?  Am I saying you should never own a house?

No, that’s not what I’m saying.  I’m saying you should view your house as a place to live, not as an investment.  If your repair costs are low and you buy and sell at the right time the value of your house may increase.  But it is also possible that it will not go up in value, so do the math before blindly assuming that your house is an investment.

Over the last year I have filed a large number of bankruptcies for people who bought a house two years ago, at the peak of the market, with no money down, and now their incomes are reduced and they want to sell, but if they do they will lose a huge amount of money.  They can’t afford the loss, and combined with their other debts they have little choice but to file bankruptcy in Canada.

I want to spread the word that you don’t need to be house poor.  Ask your home owning friends what it really costs to own a home, look at your own numbers, determine what it costs to rent, and only then can you make an informed financial decision about whether or not you should own or rent your house.

A Licensed Insolvency Trustee

7 Responses to “Why a House is NOT an investment”



December 02, 2009 at 10:29 am, Anonymous said:

finally someone sees it like me. $500mth rent is much less than $1200 mort + tax + increased utility cost for a full house. I can’t get around the interest you pay say $15000 yr mortgage and all but a few thousand is interest.
wouldn’t you be better off investing the $800-1000 month that you would have spent on the mortgage.



December 17, 2010 at 6:28 pm, steve said:

Bravo,

Finally we found an honest trsutee, since you seems a good person, wish you best for your carrier



April 16, 2011 at 12:10 am, Laura said:

Yup! This article needs to be read by all kids in their early 20’s. Renting in today’s economy is the smart thing to do, specially if you can’t save a lot of money each month. Owning is so much more unpredictable and you need to have money stashed away for those unexpected expenses. Stay at home with the parents for as long as you can, then rent. If you are able to save at least 10-20 percent for a downpayment and still have an 8th month emergency fund, then consider buying. But Buyer Beware!!



April 19, 2011 at 9:55 am, Anonymous said:

This is a great article. Everyone wants to call themselves home owners. The idea of being a renter makes people few like they are less successful.

If there is a price drop of 15 to 30%, I definitely want to buy too!



November 20, 2011 at 2:10 am, Theo - Calgary nee Barrie said:

Well..I must say that in my case I would mildly disagree but only to a point.

Why rent when you can own…??? Well, yes it takes some work…and if you DO want to own a home, you had better be able to handle everything but the most dire emergencies. In other words you DO need to be handy, have a basic understanding of electrical home wiring, plumbing and heating. If not..then even in todays economy, hiring trades to come in and do the work becomes very costly with little garantee it is done right so depending on your taker home income…ya learn quick.!

owned my frist home in Cornwall Ontario..60 yrs old, sandstone basement, laff and plaster walls, no insulation in the walls….yep, I learned quick. Renovated and in the end sold it for what I paid 3 yrs prior. But that was Cornwall. 3 homes later … things are quite different in Calgary – Nov 2011. so far it is still worth buying in this province and in this city. Mainly cause there is excellent paying work here – ressource based…and no manufacturing decline like in Ontario…other issue is as well – political. Ontario was stupid enuff to re-elect moron mcguinty for the 3rd time. CHRIST…I couldnt believe it. well own a home there…my advice would be sell and get outa dodge…asap. No PST here, tons of High PAYING work for decades to come .

Home / Car Insurance is near 50% less
Property Tax is less than half of what I paid in Barrie
Annual Salary went from 70k to 125k

yea owning a home is not as bad as buddy makes it out to be.

cheers,

stk



June 14, 2012 at 8:09 pm, Adam said:

While renting is not as bad as people think, there is a key error the author is making.
As time and property values go up, so does rent. Rent will not stay at $1000 /month for long.
Also, in order to rent for a successful retirement one must be wise enough to save the difference in expense including would be repairs. And who has that willpower in the day of the Polaris Rzr?



September 06, 2012 at 10:12 pm, Benny said:

I couldn’t agree more, this is a very good article. One more thing you forgot to mention is that owning a house cause a lot of stress. Most of my friends who owns a house always have financial trouble and lacks peace of mind. To me that is unacceptable.

Please post a follow up comment below:

(Note: comments are reviewed by moderators and then posted after approval. In addition, due to high volume some of the comments might not be posted.)