When Michael was a First Time Home Buyer…
It was Christmas 1993, and the Canadian Real Estate market was in the worst market decline in a generation and I was signing my name to buying my first home. I was 28 years old, newly married and scared out of my mind. We firmed up the deal on December 24th, and that Christmas, I was sick.
I mean emotionally and physically sick.
The place we bought was a fixer-upper, located in Oshawa, Ontario. We took possession in January of 1994 and we were scared out of our mind. We had never repaired a toilet, fixed drywall or much else that homeowners were supposed to do, and here we were buying a house.
Did I have buyer’s regret? You betcha.
But, we were entering the world of being a real grown up. We didn’t know what we were getting into. We had things break down that we didn’t even know what they were. Because we bought an older home, we learned about things like a knob and tube wiring, oil tanks, asbestos, lead paint, and sooooo much more.
Did we just make the biggest mistake of our lives?
First Time Home Buyers’ Buyer Remorse
I just read an article on how most millennial homeowners have buyer’s remorse in the U.S. market.
What I want to share with any young Canadian who might be reading this blog is that it remains true that 90% of the world’s millionaires got that way through real estate. But what I look at is far more individual.
If you ask the average 35-year-old, who own their home, has a good career, and is saving money in some kind of retirement vehicle, like an RRSP or TFSA;
“Of your current net worth, how much of it came from owning your home, versus the equity investment?”
My guess is you will hear that over 75% of their current wealth came from their real estate. Now if you ask them the second question of what percentage of the money invested in wealth building went into that down payment versus other investment vehicles, my guess is that number will be far lower.
Big banks are so confident in the safety of Canadian real estate, in good markets, that they are willing to hand out up to 95% of the purchase price of that home to the qualified buyer at interest rates under 4%. Why are they willing to offer Canadians such a huge amount of money for that purchase? Because of the track record found in this industry.
According to the Canadian Bankers Association, in October 2018, there were 2,006,116 mortgages in Ontario. Yet there were just 1,815 mortgages in arrears of 3 or more months. That works out to a percentage of arrethe ars to number of mortgage ratio of an astonishing 0.09%.
What’s a First Time Home Buyer To Do?
But as they say in the game show business, BUT THAT’S NOT ALL!
According to data from the 2016 Canadian census, 39% of Canadians own their home mortgage-free. That means no mortgage debt whatsoever! It is my experience that homeowners have little chance of having their homes foreclosed by a bank when it is owned free and clear!
This means the stat above is even lower if you compare the number of mortgages in arrears as a percentage of ALL residential real estate in the province.
So, millennials, will everything go smoothly in your home buying experience? Hell no!
But owning real estate in a solid economic market remains one of the safest, most secure investment vehicles available. It allows you to control assets of relatively great value, for a very small amount of cash infusion.
I don’t want to get into the discussion that “you have to live somewhere”, as a savvy investor could rent a dwelling and use available funds to invest and generate wealth. However, the Canadian government and banking system have provided a unique opportunity for home ownership. The leveraging opportunity is simply unmatched in any other investment vehicle, but also, in the event that you one day sell the property for more than you bought it for, you are NOT subject to income or capital gains taxes as a result of the profits of the sale.
If you have $25,000, that would possibly allow you to purchase a home valued at $500,000 (assuming you can qualify of course). Let’s say over the next three years, the property rises in value 10% total, or just 3.3% a year. Because of leveraging, the value increase is on the entire property value, so with a 10% rise, the property is now worth $550,000. This means that your $25,000 initial investment saw a profit (or return) of $50,000. In Canada, if you are living in the home yourself (ie. not an investment property), those profits are entirely yours to keep. There are no income tax ramifications whatsoever.
Let’s compare that if you bought a bitcoin or hot investment stock.
First off, you likely wouldn’t be able to borrow funds at a comparable interest rate. Likely there aren’t any leveraging opportunities at all. To make a similar return to the measly 3.3% return in the example above, one would have to turn $25,000 into $75,000 in order to make the $50K profit. In three years, this means you need to AVERAGE a 66% annual return for three consecutive years to match the home purchase. However, if you did, in fact, make that profit, then sell the investment, it would be subject to income tax. Depending on your rate, your net return after taxes lowers tremendously. You might need an annual return close to 100% to match the 3.3% leveraged real estate return.
What seems more probable to happen to you?
Before you bring this up, yes, there is interest and mortgage payments attached to this purchase, as unfortunately, the banks want some return for loaning you up to 95% of the purchase price. But even factoring that in, (and not counting the rent you would have to pay if you didn’t own anything), ownership will come out way ahead.
The system is stacked to favour Canadians who own their own homes. You can protest it, but there seems to be very little pressure to change this, as long as most voters are in fact, homeowners.
So, if you want to really get ahead, believe me, I know it is scary as hell, but owning your own home is simply the safest way to build some long term wealth in this country.