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.