A recent article came my way that was titled “Self-made millionaire: Not buying a home is the single biggest millennial mistake“. This is supposed to make the Millennials rush out the door and buy a home. Make no mistake the author of the article makes very good points. If you’re renting you’re just throwing money down the drain, especially if you’re renting in Toronto or Vancouver and paying $2,500 a month just to live paycheck to paycheck. All those arguments make a lot of sense, but the article is very vague about the terms and details of how this person became a so called self-made millionaire. First off the article clearly originates from the United States. There’s mention of San Francisco and New York City so quite obviously the arguments are directed towards Americans. So why is it so much more advantageous for Americans to buy home than Canadians? Let’s find out.
Prices Are Much Lower
Home prices in Canada on average are much higher than prices in America. Ever since the housing crash in 2008, Americans haven’t embraced home ownership as much as Canadians. In fact, housing prices have gone significantly higher in Canada especially in more developed cities like Toronto and Vancouver.
The average price of a home in Canada was $455,000 as recorded by CREA in January 2019. Zillow recorded the median price for US home prices to be $225,300 USD or $299,649 CAD. Now median and mean are not the same, but in general the homes being sold in the United States are not high end.
Real estate is local and all about location. In most urban areas, especially the world class cities, prices are highly inflated and much more. Even with expensive urban centers, that doesn’t mean there aren’t affordable places outside the big cities. However, in general Canada is more expensive than its American counterpart.
The Price Matters
Total cost is important and I’ve written about why it’s more favourable to buy a house with a lower total cost than buying one with a higher cost. With a lower overall cost to own, it makes more sense for Americans to buy their homes.
This doesn’t mean that Canadians shouldn’t buy. There are plenty of cities where owning makes perfectly good sense because prices are low and incomes can support it. Places like Halifax come to mind. People trying to buy in expensive cities like New York City and Toronto can probably pass.
The key thing to remember is that what worked for the boomers who bought their homes in the 70’s and 80’s is not going to work the same for the current generation. Back then homes were around $30-50K and they lived through a glorious period of rapid inflation. That meant that when they took their loans prices just took off along with salaries. Now that central banks around the world are keeping inflation in check we can’t expect that phenomenon to happen.
Gone are the days where big loans from the past are erased with cheaper money in the future. You can see why buying a home for $300,000 makes a lot of sense a couple decades back because now salaries are inflated to $80,000 which makes it so much easier to pay off that home. That’s only a 3-4 times annual income. Nowadays homes are closer to $1.2M to $1.5M in popular cities. The likelihood that many of us will make $500,000 a year to pay off those houses in 20 years is going to be slim.
Longer Term Mortgages
What many Canadians don’t know that’s a secret to affordable home ownership in America is that many Americans can get cheap long term mortgages spanning up to 30 years amortization. Imagine if you can lock in a mortgage for 30 years and never see an interest rate increase. Well that’s what Americans get.
Canadians generally do a 5 year fixed rate mortgage. We’re the most conservative folks on the planet. We want to know exactly what we’re paying for and we want to get the lowest possible interest rates we can. That’s why many Canadians opt for the 5 year fixed rate mortgage.
Americans don’t do that. They go for the full on 25 year mortgage term at the measely low rates of 2% to 3%. Yes, poor fellow Canadians, Americans can lock their mortgage in for life basically at dirt cheap mortgage rates! There are no surprises like Canadians get when they go to renew their mortgage.
Many Canadians are finally finding out about the truth about buying a home because many people are renewing their large mortgages from 2013 and 2014 into higher mortgage rates. Where once these Canadians were paying 2% mortgages, they are now paying 3.0% mortgages. Ouch!
Americans that bought homes 5 years ago don’t even worry about that. That’s because they had the ability to lock in their 2% mortgages for the lifetime of their mortgage. The full 25 or maybe even 30 years! Talk about getting cheap money for life. Sign me up!
Deducting Interest From Income
While Canadians have to pay for their mortgages using after tax income, Americans can reap the benefits of deducting mortgage interest from their normal income. This makes a huge difference because it means that Americans can pay the mortgage interest part of their house using before tax income.
In general this can be a huge boon. For example, a Canadian living in Ontario with greater than $50,000 in income is already in the middle income bracket with a marginal tax rate of 30%. Now imagine having a mortgage of $450,000 buying a condo in Toronto and making payments of $2,100 a month. $1,100 of that $2,100 a month is just interest to the bank. By the end of the year a Canadian living in Toronto would have paid $13,200 in interest.
If a Canadian could claim the interest on their tax returns, this would net back $3,960 in taxes as a refund. That’s quite substantial. Getting back $330 a month is the equivalent of getting a 1.5% 5 year fix rate vs a 3% 5 year fixed rate on a $450,000 mortgage. Or it can be the equivalent of having only a $380,000 mortgage instead of $450,000.
That’s a huge difference in cost savings for any home owner. The benefits are tremendous to owning in America. The interest can be deductible for loans up to $750,000 on primary and secondary mortgages and HELOCs. That means even when borrowing money from your home, the interest can be deducted. That’s ridiculous!
When it comes to real estate, I’m with Trump. Buy in America! This is especially true if you’re a real estate investor in America. Why would you buy in Canada with it’s ridiculous mortgage rules? It’s much better to just buy in hot markets like San Francisco or New York if you’re into speculating. At least in America you get the benefits listed above.
For Canadians, the choice to buy real estate in expensive cities can’t really be justified as much. Due to extreme housing unaffordability, high taxes, and mortgage rules that go against the buyer, things would have to change drastically to really say that Toronto and Vancouver are good markets to buy in. Perhaps we should ask Mr. Trudeau to enact some of the policies above for Canadians.
That said, real estate is regional. In places like Calgary, Halifax and Edmonton prices are still quite affordable in relation to incomes in those cities. The only question is do you really feel like buying into a falling market? Remember buy low sell high right? Generally that doesn’t work with home buyers…