More thoughts on renting
I keep hearing about this, and I keep needing a place to process my thoughts. Maybe one day I'll even come to understand why this is still a debate at all.
Anyway, thinking through it further...
Renting still seems horrible. I'm sure there are markets out there which are different. But, from what I see and hear in Canada, most places where there is a large population and a strong economy have shifted to a place where rent prices are as (or even more) expensive than a mortgage.
And, in my opinion, rent would need to be SUBSTANTIALLY cheaper in the first place to make it worthwhile. Without crunching numbers, I would say, it needs to cost 40-60% of a mortgage.
If that sounds insane there is a method behind the madness; the cost needs to low enough to encourage one of two outcomes. The first is that it needs to be low enough to motivate people to save for retirement. And it needs to motivate them to save enough that they can afford housing on top of everything else throughout that retirement as well. And that is no amount of chump change. The second possible outcome that would be good would be that it motivates the renters to save enough to switch to a mortgage in time to retire mortgage free.
The problem is, most people are living paycheck to paycheck. And there isn't really much of a difference in the financial situations that way from renters to home owners from what I see. In fact, home owners tend to walk away with more tools to deal with problems. HELOCs and the likes are certainly double edged swords, but they are tools which CAN be used to address financial issues and which don't exist for renters.
If renters and owners are in fundamentally the same boat financially... it means that either rent and mortgage prices are negligibly different or that the difference is small enough that renters don't feel they've opened enough excess cash flow to use it to improve their situation.
And that is a huge problem down the road. While common talking points say that you need access to 60-75% of your pre-retirement income, you'll also find that this is predicated upon having your house paid off. If you're renting, you'll need something more like 120% of your pre-retirement income.
Why more than 100%? As any renter will tell you, rent prices only go in one direction; up. And they can rise sharply. Thus, if you don't own your house, you need to anticipate that you'll need to continue to spend the same on housing, adjusted for inflation, for 25+years (assuming retirement of 65 and death at 90 which is what seems to be common for most to speculate).
Another point is whether or not a house is an investment. Based on the above though, you see that it is in a sense. It is an investment which, no matter the cost, if paid off before retirement can drastically reduce your financial needs.
The other problem with that statement is relativity. Housing prices fluctuate within the area they built. So, if your house loses value, and it isn't because you let it fall into dis-repair, then it also means all of the houses around you lost value. And the reverse is true for gains. While having a price gain in value and then selling can open up some financial options, it doesn't normally get you any further ahead in home ownership unless you down size or move to a more affordable location.
And in my experience, people feel very tied to a city by work, maintaining their children's connections at school, and general anxiety. Put another way, most moves are within a city where pricing doesn't fluctuate much.
Secondly, people should be buying houses with the plan to live there as long as possible and either pay down a big chunk of their mortgage or pay it off. Like I said, the main goal SHOULD be to not have a mortgage or rent in retirement. NOT to turn a profit off your house. If the opportunity presents itself to make such a move responsibly, then by all means, profit.
But the fact remains, when you buy a house, there is always a potential for a positive financial outcome. Stick with the house until it is paid off.
Then, as to whether or not houses are an investment in the traditional sense? Absolutely. People seem to have this funny idea that something is only an investment if it is guaranteed to gain in value. But, investments are things which almost always bear some amount of risk.
If I were to slap my own definition on it, I would say that an investment is any activity which consumes incomes and has a reasonable chance of returning on that investment. Say, 33-100% of the time. Anything which tends to gain in value more than 50% of the time is a good investment. And anything which gains more than 66% of the time is a sound investment.
Through that lens, I think you'll find that housing is indeed an investment and one of the best ones out there. Sure, there are places with housing bubbles. But those places are a hyper minority. And they tend exist at the extremes of the spectrum; the most and least expensive housing markets in an area. And as such are generally easier to detect your exposure to risk.
Here is a great article I found detailing housing prices over time in Ottawa. If you scroll to the end. The percentage change is negative only very rarely, and the negative values are smaller by far than the average gains.
That being said... don't buy a house specifically as a financial investment. You can't control the market and you may be in a slump when you want to sell if you bought it for the wrong reasons. As I said, you should buy with the intent to stay for some time. Just like investing in higher risk ETFs, you need to be able to ride out the slumps. But, you should be able to turn a profit simply by waiting it out.
And, that is as far as I want to on this today. Renting isn't generally cheap enough to justify it as a financial "strategy" unless you are VERY disciplined with your money and can turn those savings into either a down payment or massive grow the size of your nest egg substantially.
Also, in realistic terms, a house IS an investment, and a fairly good one.
The fact that a house MAY lose value does not disqualify it from being an investment. In fact, that potential for losses pretty much defines what an investment is.
However, you don't need to LIVE in your other investments. So I still agree with not buying a house specifically as an investment.
I would rather suggest that, if you can carry the cost, choosing a house you WANT to live in over a cheaper one. You're likely to be able to trade down later. I also suggest trying to buy a house you could see yourself in for at least 5 years, but ideally 10+.
Anyway, thinking through it further...
Renting still seems horrible. I'm sure there are markets out there which are different. But, from what I see and hear in Canada, most places where there is a large population and a strong economy have shifted to a place where rent prices are as (or even more) expensive than a mortgage.
And, in my opinion, rent would need to be SUBSTANTIALLY cheaper in the first place to make it worthwhile. Without crunching numbers, I would say, it needs to cost 40-60% of a mortgage.
If that sounds insane there is a method behind the madness; the cost needs to low enough to encourage one of two outcomes. The first is that it needs to be low enough to motivate people to save for retirement. And it needs to motivate them to save enough that they can afford housing on top of everything else throughout that retirement as well. And that is no amount of chump change. The second possible outcome that would be good would be that it motivates the renters to save enough to switch to a mortgage in time to retire mortgage free.
The problem is, most people are living paycheck to paycheck. And there isn't really much of a difference in the financial situations that way from renters to home owners from what I see. In fact, home owners tend to walk away with more tools to deal with problems. HELOCs and the likes are certainly double edged swords, but they are tools which CAN be used to address financial issues and which don't exist for renters.
If renters and owners are in fundamentally the same boat financially... it means that either rent and mortgage prices are negligibly different or that the difference is small enough that renters don't feel they've opened enough excess cash flow to use it to improve their situation.
And that is a huge problem down the road. While common talking points say that you need access to 60-75% of your pre-retirement income, you'll also find that this is predicated upon having your house paid off. If you're renting, you'll need something more like 120% of your pre-retirement income.
Why more than 100%? As any renter will tell you, rent prices only go in one direction; up. And they can rise sharply. Thus, if you don't own your house, you need to anticipate that you'll need to continue to spend the same on housing, adjusted for inflation, for 25+years (assuming retirement of 65 and death at 90 which is what seems to be common for most to speculate).
Another point is whether or not a house is an investment. Based on the above though, you see that it is in a sense. It is an investment which, no matter the cost, if paid off before retirement can drastically reduce your financial needs.
The other problem with that statement is relativity. Housing prices fluctuate within the area they built. So, if your house loses value, and it isn't because you let it fall into dis-repair, then it also means all of the houses around you lost value. And the reverse is true for gains. While having a price gain in value and then selling can open up some financial options, it doesn't normally get you any further ahead in home ownership unless you down size or move to a more affordable location.
And in my experience, people feel very tied to a city by work, maintaining their children's connections at school, and general anxiety. Put another way, most moves are within a city where pricing doesn't fluctuate much.
Secondly, people should be buying houses with the plan to live there as long as possible and either pay down a big chunk of their mortgage or pay it off. Like I said, the main goal SHOULD be to not have a mortgage or rent in retirement. NOT to turn a profit off your house. If the opportunity presents itself to make such a move responsibly, then by all means, profit.
But the fact remains, when you buy a house, there is always a potential for a positive financial outcome. Stick with the house until it is paid off.
Then, as to whether or not houses are an investment in the traditional sense? Absolutely. People seem to have this funny idea that something is only an investment if it is guaranteed to gain in value. But, investments are things which almost always bear some amount of risk.
If I were to slap my own definition on it, I would say that an investment is any activity which consumes incomes and has a reasonable chance of returning on that investment. Say, 33-100% of the time. Anything which tends to gain in value more than 50% of the time is a good investment. And anything which gains more than 66% of the time is a sound investment.
Through that lens, I think you'll find that housing is indeed an investment and one of the best ones out there. Sure, there are places with housing bubbles. But those places are a hyper minority. And they tend exist at the extremes of the spectrum; the most and least expensive housing markets in an area. And as such are generally easier to detect your exposure to risk.
Here is a great article I found detailing housing prices over time in Ottawa. If you scroll to the end. The percentage change is negative only very rarely, and the negative values are smaller by far than the average gains.
That being said... don't buy a house specifically as a financial investment. You can't control the market and you may be in a slump when you want to sell if you bought it for the wrong reasons. As I said, you should buy with the intent to stay for some time. Just like investing in higher risk ETFs, you need to be able to ride out the slumps. But, you should be able to turn a profit simply by waiting it out.
And, that is as far as I want to on this today. Renting isn't generally cheap enough to justify it as a financial "strategy" unless you are VERY disciplined with your money and can turn those savings into either a down payment or massive grow the size of your nest egg substantially.
Also, in realistic terms, a house IS an investment, and a fairly good one.
The fact that a house MAY lose value does not disqualify it from being an investment. In fact, that potential for losses pretty much defines what an investment is.
However, you don't need to LIVE in your other investments. So I still agree with not buying a house specifically as an investment.
I would rather suggest that, if you can carry the cost, choosing a house you WANT to live in over a cheaper one. You're likely to be able to trade down later. I also suggest trying to buy a house you could see yourself in for at least 5 years, but ideally 10+.
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