True or False: You must own your home to become financially secure

For this week’s Reality Cheque column, we’re comparing renting versus owning a home and the costs associated with these living situations. 

By Ian Portsmouth

Despite sky-high real-estate prices and the ongoing costs of owning a home, many Canadians still chase the dream of home ownership. It’s easy to see why. 

When you own a house or condo, there’s no landlord deciding how it’s decorated, when it’s renovated or how many cats can live with you. It can be a status symbol or simply a sign to yourself that you’ve “made it.” Perhaps most important of all, home ownership is a well-beaten and reliable path to a secure financial future.

But it’s not the only path.

“For a lot of people, there’s this fear of missing out,” says Jason Heath, a certified financial planner and managing partner of Objective Financial Partners Inc. in Markham, Ont. “They think owning real estate is the only way to get wealthy, so if they don’t buy now, they’ll never be able to afford the ever-increasing prices.”

If buying your first home—or staying in one you can’t really afford—feels less like a dream and more like a financial nightmare, take a pause. In fact, home ownership is not a prerequisite for financial security. With a disciplined approach to saving and investing, you can achieve some ambitious financial goals as a renter.

How did homes in Canada become must haves?

From 2002 through 2022, Canada experienced an unprecedented boom in residential real estate values. You can see how much the value of a typical home rose on an apples-to-apples basis in the MLS Home Price Index, which eliminates irregularities in sales data to produce a national benchmark home price. That price rose from $243,800 in 2005 (when the index was launched) to $779,600 in 2022, for a compound annual growth rate of 7.1%. In six of those 17 years, the benchmark price climbed by more than 10%, including one year (2021) in which it soared by 25%. Meanwhile, the average weekly wage in Canada grew by less than 2.7 % per year. “That math doesn’t work,” says Heath. “Real estate prices can’t continue to go up by 10% a year while incomes are growing by 3% a year.” Indeed, the benchmark price dropped nearly 8% in 2023 and another 2% in 2024.

The recent downturn is sure to be a relief for people seeking their first home. From a wealth-generation perspective, it also benefits renters in the rent-versus-buy debate.

The home owner’s advantage

One of the primary advantages of using your home as an investment vehicle is “forced savings.” When you make a mortgage payment, you’re paying interest and paying down principal,” says Heath. “When you’re paying down principal, you’re building equity.” So, when your mortgage is finally paid off after 25 years, you not only own the property outright, but it’s also almost certain to have appreciated in value—free of capital gains tax. What does the renter have to show for 25 years of rent payments? Nothing.

With merely those facts, you might conclude that renters are financial fools. But renters typically enjoy substantially lower housing costs than their home-owning counterparts, which allows them to build home owner-like wealth if they take a disciplined approach to spending and investing.

The real costs of home ownership

Consider these factors in the cost of housing. As a renter, you’ll pay the monthly rent and a nominal amount for tenant insurance (anywhere from $15 to $50 a month). As a home owner, you’ll be on the hook for mortgage payments, property taxes, home insurance and home maintenance, including replacement of the roof, windows and major appliances (easily in the tens of thousands). 

There are closing costs as well, which typically include land transfer tax when you buy or realtor commissions (plus GST/HST) when you sell (both potentially in the tens of thousands), and legal fees for each transaction. Finally, there’s the down payment on the home, which is at least 5% of the purchase price.

Now, the math. We’ll use a 2024 benchmark home price of $718,400 and the average monthly rent for a unit with at least three bedrooms, which is $1,608. Assuming a mortgage with a 25-year amortization period, a 5.04% annual interest rate and a 20% down payment, the monthly mortgage cost would be $3,356.

We’ll peg home owner’s insurance at $125 a month, tenant’s insurance at $25 a month, and apply popular rules of thumb to annual home maintenance costs (1% of the home’s purchase price) and closing costs (2%).

Finally, let’s estimate the annual property tax rate at 1% of the home’s market value. (Utilities are excluded from this analysis because they apply to both renters and owners, although an owner’s utility bills are likely to be more than a renter’s due to larger average home size.)

Given those numbers, your first-year rental costs would be almost $195,000 less than a home owner’s first-year costs: $41,772 in recurring payments, plus the down payment on the home ($143,680), closing costs ($14,368), maintenance ($7,184) and property taxes ($7,184). There are, of course, a lot of assumptions in those calculations, but the bottom line is: in the first year, a renter tends to pay a lot less than a home owner. 

Why buy when you can rent, right? Not so fast…

How renters can keep up with home owners’ investment value

Of course, those savings won’t contribute to your financial security if you turn around and spend them all. While the home owner cobbles together a down payment and closing fees, you need to invest the same amounts. 

Same goes for your savings on recurring home ownership costs, every month for 25 years. This is how you counteract the home owner’s advantages of forced savings and tax-free appreciation of their home’s value. (Remember, proceeds of the sale of a primary residence generally aren’t subject to income or capital gains taxes.)

Heath recommends plugging as much money as the Canada Revenue Agency allows into a registered retirement savings plan (RRSP) and tax-free savings account (TFSA). Which one has priority depends on your taxable income and the income tax rate in your province. But generally, says Heath, if your income is below $60,000, you can lean toward TFSA contributions, and if it’s above $60,000, you could lean toward RRSP contributions.  

During every year of our hypothetical scenario, the renter can make the maximum allowable contribution to their TFSA, where any gains will be tax-free, and plug the rest of their savings into an RRSP, thus deferring the associated taxes till age 71 at the latest.

Proof you can bank millions as a renter

Here’s the big reveal. We’ll assume home prices grow by an average of 6% a year, rents rise by 3.25% a year, the renter’s investment portfolio appreciates by 5% a year, and annual inflation of 2% applies to insurance and home maintenance costs. 

After the 25 years, the renter’s net worth exceeds $2.5 million while the home owner’s falls just shy of $2.9 million. It might be nice to own a home, but you don’t actually need to own one.

Some experts might argue that the rent should start at 4% (annualized) of the home purchase price. It’s a useful figure for single-family homes, which can be significantly more expensive than homes in multi-family dwellings, such as apartment buildings. But even with that adjustment, the renter still comes away with nearly $1.9 million while their investment portfolio continues to grow. That should still give the renter a comfortable retirement, despite continuing rental payments.

Depending on your age, the time to start investing in your renter-self could be right now. “Set up a regular deposit to your investment account, ideally on payday so the money disappears, and you save first and spend second,” Heath advises. “In order to be in the same financial position as a home owner, you need to be saving and investing. And that requires discipline that not everybody has.”

Ian Portsmouth is an award-winning writer and editor specializing in business and personal finance. He is based in Toronto.

Read more from this issue of The Get:

1. Why do used cars feel shockingly expensive?
2. MVP: ​​Drew Scott on debt, success and that SNL skit 
3. Why isn’t fast food cheap any more?
4. 5 fees you’re unknowingly paying

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