What are the Benefits of Homeownership?
The cost of buying a home is uncomfortably high, with average housing prices in major cities like Toronto topping a million dollars. If you are considering homeownership, it’s crucial to look at both the benefits and risks of this six-figure decision – financially and otherwise.
As a homeowner myself, something I’ve always been passionate about is the financial side of buying and maintaining a property. You need to do everything possible to stay afloat once you sign a mortgage, making the pressure to be financially secure that much stronger. But does this translate into more financial security and overall better health? Are homeowners happy?
This curiosity is prompting me to learn more about the psychology behind homeownership. Over the next few months, I hope to find answers to this and other questions regarding the psychology behind homeownership.
But first, it’s essential to take a more in-depth look into the statistical benefits of homeownership and data that supports our emotional decisions behind buying property — starting with the benefits of homeownership. After all, the psychological side of our desire to own a home exists, and we should acknowledge how those thoughts impact our choices as buyers.
How does homeownership impact our financial life?
A thorough financial review is one of the most critical considerations when it comes to buying a home. You should be able to afford a mortgage payment and other housing costs (like property tax) alongside your regular monthly bills. You also need to come up with a significant down payment of at least 5% for your first home, and enough to cover closing costs.
Like any investment, it’s essential to consider any uncertainties, and of course, buying a home is no different. There are both benefits and risks associated with homeownership and our financial lives.
The benefits are seeing the home appreciate, receiving tax deductions and building home equity as you begin to pay down your mortgage. Some of the risks include the costly upfront expense, a potential that your home could decrease in value and having most of your net worth locked up in a house rather than cash.
One of the first questions I asked myself before buying was whether or not renting is more affordable than owning? In Canada, most financial experts will tell you that renting is cheaper. The argument is that the additional costs of owning, such as annual maintenance, inflates the day-to-day and overall cost of homeownership. With renting, the added financial stress of maintaining the land falls on the landlord rather than the tenant. When you own, it’s your responsibility.
The second reason financial experts often favour renting is that average rental costs and average mortgage costs show big disparities. For example, a 2019 report found that rent for a two-bedroom condo in Toronto was between $2,200 and $2,400. The average mortgage for a two-bedroom condo was between $2,600 and $2,800 — and then there’s the maintenance, monthly condo fees and all other expenses associated with owning property. According to the experts, a renter could invest that extra $200 to $400 each month and earn a much higher return, over time.
But, would you see the same return as buying a home? In the past 10 years, the stock market has seen a return of around 7% annually after being adjusted for inflation. The housing market has seen a slightly more significant increase of 7.25% over the past 10 years. Given recent history, it appears that buying and renting and investing is on par. So, how can you determine what option is best for you financially? First, you need to consider that housing over the last 10 or so years has seen abnormally high appreciation rates. Next, you need to research the comparison between housing prices and rental prices in your city.
A good rule of thumb when determining how much mortgage or rent you can afford is to keep your housing costs to less than 30% of your monthly earnings. For example, if your monthly income is $4,000, you should aim to spend around $1,200 on a mortgage or rent each month.
Is money the most important factor when it comes to buying?
The age-old question of whether or not you should rent or own is not as simple as it used to be. Before the 2008 housing crisis, when credit was too easily accessible, and a sharp increase in housing prices created a speculative bubble, it was common for people to jump into real estate without a second thought. Now, people are a lot more logical with their process surrounding the financial challenges of owning a home.
Bridget Casey, founder of Money After Graduation, has always been a renter. For her, you cannot beat the flexibility. After moving multiple times for significant milestones, like university or job opportunities, she says that she has saved thousands of dollars on the transactional costs associated with real estate buying and selling.
What does she mean? When you sell a home, you will typically spend 3% to 7% on commission fees for the two real estate agents (the agent that helps you sell and the buyer’s agent who brought the client). Keep in mind the range on this is flexible and depends on: where you live, the sale price of the home and what you negotiated with your agent. You will also need to pay legal fees, which range between $800 and $2,500 (the lower end reflects simple transactions or those involving condos and the higher end reflects more complex transactions and single-family homes). Some sellers may choose to stage their home, at a potential added cost of a few thousand dollars. Lastly, you may have to pay mortgage discharge fees or penalties if you are exiting the mortgage before it matures. These fees vary depending on the type of mortgage you have.
Buying a home also comes with costs, even if you don’t have to pay commission to a Realtor. Depending on the province you live in, you’ll need to pay land transfer tax. (Some cities, like Toronto, charge their own land transfer tax, which means you are taxed twice on the same property purchase.) Then there’s the reimbursement of costs the seller prepaid, such as property taxes; these are known as “adjustment costs” and can quickly add up. You will also spend money on lawyer fees which range from $500 to $1,500.
As we know, however, buying a home rarely boils down to purely financial reasons. Even if the math doesn’t make complete sense that doesn’t mean buying a home is a poor decision. To understand why you need to consider the emotional side of buying.
Is homeownership better than renting?
According to data in the recent Financial Literacy vs. Financial Sufficiency report, Canadians don’t feel renting or buying would put them in a better financial place, at this time. The same can’t be said when asked about their future. According to the data, 70% of Canadians feel homeownership would put them in a better financial position, in the future, than renting.
This sentiment appears to be supported by additional research. According to a 2020 Genworth survey, homeowners continue to be in better financial shape than non-owners, with 42% of those who buy their home in the next two years being more likely to say their financial situation has improved.
Casey isn’t convinced. “Owning a home is a forced savings plan, for sure,” she says, but homeownership — and the ability make your mortgage payments — doesn’t automatically translate into better money habits. Getting into the habit of putting money into a savings account is important regardless of your living situation.
This doesn’t mean Casey is against homeownership. “Owning property does give you access to better money tools,” she explains.
On the whole, being a homeowner is generally better for your credit score, and once you have equity in your home, you can access a home equity line of credit, giving you access to debt at a lower interest rate.
“Owning a home does give you a leg up,” says Casey. “But I don’t think homeownership is a determinant of success.” Although we put a lot of weight on owning a home, you can still gain a lot of financial success as a renter by maintaining similar money habits. If you invest and save money consistently, you will see growth with your finances.
In fact, in an updated version of the same survey, shared three months after the start of the pandemic in Canada, you could see that regardless of homeownership, some still struggle to make ends meet. Since COVID-19, 55% of renters report concerns about making ends meet, and 64% of first-time homebuyers reported the same trouble. Prior to the pandemic, only 46% of first-time homebuyers were concerned about making ends meet.
What are the emotional benefits of homeownership?
Although Casey has run the numbers and found it’s better financially to rent rather than buy in any major city in Alberta, the idea of ownership isn’t entirely out of the equation.
“Buying a home is often such an emotional investment,” says Casey. “Many people aren’t always doing it for financial reasons, and I’m included in that.” Casey says she often thinks that she’ll one day buy because she likes the idea of a permanent home for her and her daughter.
That’s how I became a homeowner. Our monthly budget went up 75% when we bought our first home just last year. But I’d still choose to own over rent any day of the week. Why? The financial side of buying a home was less of a deciding factor than the psychological benefits of owning.
If you only consider housing as overpriced or overrated, you could miss out on the psychological benefits of homeownership. But, if you are a numbers person like me, you might feel like you need some solid evidence to back up the emotional perks of homeownership.
One of those statistics is that homeowners move less than renters, and as someone who moved 9 times in 10 years before buying a home, I can easily say that my stress levels are much lower with the added stability of a permanent residence. On top of that, the National Association of REALTORS® (NAR) also found that homeownership boosts the educational performance of children, induces higher participation in the civic and volunteering activity, improves health care outcomes, lowers crime rates and lessens welfare dependency.
For Leif Kristjansen, founder of Five Year FIRE Escape and owner of eight properties (seven rentals) in Canada, the two main benefits aside from financial perks are privacy and the overall pride of ownership. “Having your own house allows you to turn it into a home, decorate, renovate and change it to your liking,” says Kristjansen.
How do you decide to buy or rent?
My partner and I are equally passionate about owning property as Kristjansen – but on a much smaller scale. For us, buying one forever home was always swayed by the emotional rationale. After having my daughter in 2018, there was nothing more important than finding a safe neighbourhood that held enough permanence to make us feel secure in our financial future.
The day we met our neighbour from three doors down at a nearby park with a son the same age as our daughter, we knew our decision was the best we’d ever made.
We often look at the benefits of homeownership by numbers only, but each perspective behind the why makes the decision much more straightforward for most buyers. After all, if we were all buying real estate for the sole purpose of earning money, our world would look a lot different than it does, without established communities and neighbourhoods that raise their families together.