20 Years of Renting vs. Buying a Home in Canada (2005 to 2024)

Summary

This video script provides a detailed analysis of the financial comparison between renting and owning a home in Canada. It covers key factors like home value appreciation, maintenance costs, mortgage financing, transaction costs, and investment behavior. The script highlights how assumptions, such as mortgage terms, maintenance, and investment fees, impact the decision-making process. The analysis suggests that homeownership might be easier for individuals with lower financial literacy compared to disciplined investing. Ultimately, the video presents insights into the complexities of the rent vs. own decision and offers professional financial guidance.

Takeaways

• 😀 Homeownership can have an average annual contribution to home values of 3.3%, but this comes with costs like maintenance and depreciation.
• 🏠 A typical combined maintenance and depreciation cost for homeowners is 2.66%, based on academic research and Statistics Canada data.
• 🛠 DIY home repairs can seem cost-effective but might be more expensive in the long run, as fixing DIY mistakes often incurs additional costs.
• ⏳ Time spent on DIY projects has an implicit opportunity cost, as it could have been spent on other potentially more valuable tasks.
• 💸 A 25-year mortgage model is used, with mortgages renewed every 5 years at prevailing interest rates, impacting overall homeownership costs.
• 🏙 Property tax rates are based on historical data from each city, collected from municipal websites or direct contact with municipalities.
• 💵 Transaction costs for buying and selling a home are significant: 2% when purchasing and 6% when selling, covering fees like real estate commissions and legal costs.
• 📈 Changing assumptions, such as increasing investment fees or modifying the savings rate, can drastically alter the wealth ratio between renters and owners.
• 🧑‍💼 Many Canadians invest in high-fee actively managed funds, which can negatively affect their wealth compared to investing in low-cost index funds.
• 🏡 Owning a home might be easier for many people than managing disciplined savings and investments, making it a preferable financial decision for some.
• 👨‍🏫 The video stresses that people with low financial literacy or those struggling with saving may benefit from owning a home over renting and investing.

Q & A

What is the average annual contribution to home values for homeowners across the 12 cities in the model?

The average annual contribution to home values is 3.3%, as per the data presented in the script.

What is the combined maintenance and depreciation assumption used in the analysis, and how does it compare to academic research and Statistics Canada data?

The combined maintenance and depreciation assumption is 2.66%, which aligns with both academic research and Statistics Canada data.

Why does Ben Felix argue that DIY home repairs can sometimes be more costly than hiring professionals?

Ben Felix points out that while DIY repairs may seem cost-effective, they can often lead to higher costs due to improper work, which professionals may have to undo. This adds more difficulty and expense in the long run.

What is the mortgage structure assumed in the model, and how is it renewed?

The model assumes a 25-year mortgage with a 5-year fixed term. After each 5-year term, the mortgage is renewed at the prevailing mortgage rates.

How do transaction costs factor into the financial model for homeownership, and what do they include?

Transaction costs are assumed to be 2% of the property value at purchase and 6% at sale. These costs cover real estate commissions, legal fees, staging costs, and other related expenses.

What is the impact of increasing investment fees from 0.25% to 1% in the model?

Increasing investment fees from 0.25% (for an index fund) to 1% (common for actively managed funds) causes the average renter-to-owner wealth ratio to drop to 1.02 at the end of the sample.

How does the renter's behavior in saving cash flow impact the results of the financial model?

If the renter saves 80% of the cash flow cost difference between renting and owning, instead of 100%, the average wealth ratio drops to 0.93. This shows the importance of the renter's saving habits.

What effect do high-fee investment funds or individual stocks have on the renter vs. owner financial comparison?

Investing in high-fee funds or individual stocks could worsen the financial situation for renters, especially if they buy stocks when prices are high and sell when they are low. This could reduce their wealth accumulation compared to homeownership.

Why does Ben Felix suggest homeownership might make sense for many people despite the financial modeling?

Ben Felix suggests that homeownership may be simpler for many people because it's easier to make mortgage payments than to save, build a diversified investment portfolio, and stay disciplined through market fluctuations.

What role does financial literacy play in the decision between renting and owning a home in Canada?

Ben Felix highlights that many Canadians lack financial literacy, often investing in high-fee actively managed mutual funds or individual stocks. This lack of knowledge could make homeownership a more straightforward option for many people, as it's easier to manage compared to the discipline required for saving and investing.