Competitor: This article comes from Tom of www.CanadianFinanceBlog.com.
Entry Category: PF Olympics Finals
A few years ago, the home was seen as an investment. Buy a home, and you have a place to live, and an appreciating asset. No one really thought that residential real estate would crash so spectacularly.
Actually, in Canada, residential real estate hasn’t had that huge of a crash. Though we did have a short drop in prices, our economy was much more insulated from the effects of the financial crisis than the economy of our neighbors to the south. Home values are still rising (especially in markets like Toronto and Vancouver), which is one of the big reasons that Canadian household net worth has surpassed American household net worth. However, if we Canadians don’t learn lessons from what happened in the financial crisis, we could see a devastating real estate crash of our own.
One of those lessons is that we can’t view a primary home as a financial investment. Since the financial crisis, many Americans are coming to that realization, and we need to see the writing on the wall in Canada. While owning rental property can provide a decent income when properly executed, your primary home is not a financial investment.
Your Mortgage is a Liability
Prior to the financial crisis, the mortgage was seen as a ticket to purchase a huge home that would rise in value every year. However, the new reality is that a mortgage is a liability. You are paying someone interest each and every month. And what are you getting in return? There are a number of additional costs that have to be considered when buying a home:
- Property taxes
- PMI costs in the United States or CMHC costs in Canada, if you don’t put 20% down
When you think about it, the home you live in is kind of a money pit. I ran the numbers on a $190,000 loan at 3.75% for 30 years, including an estimate for mortgage insurance and property tax. The mortgage calculator I used told me that, if I kept the mortgage for the full term, I would end up paying $391,771.06 total. And that doesn’t include maintenance, repairs, and other miscellaneous expenses!
If the home were worth $200,000 when I bought it (with a $10,000 down payment), my home would have to more than double in value over that time period just for me to break even, with all the expenses that I’d sink into it, on top of payments. There are those who like to say that homes appreciate in value by 4% to 5% a year. Even at 5%, though, that $200,000 home will only be worth an estimated $325,778, according to another handy calculator.
How is a primary home a financial investment? It only turns out close to a financial investment if you can sell the home at a profit quickly, before what you pay over time adds up too much.
Recognizing the Reality: Your Primary Home is an Emotional Investment
It took a financial crisis for many to recognize the reality. When home values plummeted, all of sudden the realization sunk in: A primary home can lose in value; it’s not always a great financial investment.
More and more people are realizing that a primary home is an emotional investment. It represents stability, freedom to alter it as you wish, and a place to build memories. The financial crisis, and its aftermath, has impressed this on many people’s minds. If you’re going to buy a home, you have to realize that it might not be a financial investment.
You have to buy for reasons beyond making money, because the chances are that you won’t make any on your primary home.
Tom Drake is the owner and head writer at Canadian Finance Blog, covering everything from universal topics like budgeting and investing to Canadian topics like RRSPs and the TFSA.