Owning a house—the American dream

We call it the American dream, the dream of being a homeowner. But is it a dream or a nightmare?

When I ask people to share their financial goals, they generally say:

1. To save for retirement
2. To buy a house
3. To provide education for their kids

But is buying a house really a good financial objective?

We often hear the same anecdotal evidence:

“My grandmother bought a house four decades ago, and now she’s made ten times her money back.”

But did she really?

Did she take into consideration:

• All the repairs done to the house?
• All the property taxes?
• All the time invested in keeping the property functional?
• All the insurance expenses?
• All the worries that come with being a property owner?
• The cost of replacing the roof?
• The plumbing improvements?
• The lawn mowing?
• The snow removal?
• All the time spent finding the house?
• The lack of liquidity from having her money tied up for decades?
• The interest expenses?
• The broker’s commission and title fees?
• The cost of replacing the hot water tank?
• And all the other expenses I can’t even imagine right now?

Probably not.

And did she compare the return of her house by putting all that amount of money and energy into investing in a broad-based index fund generating about 8% return and having liquidity all the time?

Probably not.

And did she compare the return on her house with what she could have earned by putting the same amount of money and energy into a broad-based index fund generating around an 8% return, while maintaining liquidity?

Probably not.

We have this misconception that owning a house is a great investment. But it’s not. The real return on homeownership is similar to the rate of inflation—and that’s only if someone stays in the house for over ten years.

Only 37% of North Americans stay in their homes for more than ten years. The median stay in a home is 5.9 years. This means that for 63% of North Americans, owning a house is a money-losing activity.

If we consider that the commission to sell a house is around 6%, and inflation is about 2% per year, we would need to sell a house for 18% more than we bought it for after six years, just to break even—without even considering the other costs such as taxes, notary fees, attorney fees, and so on.

But let’s say you’ve bought into the idea. Let’s say you are determined to buy a house because that’s the script: go to school, get a job, buy a house, and retire at 65. How much house can you afford?

These are the two main things to consider:

1. Don’t buy a house unless you have a 20% down payment. If you don’t have 20%, you’re not ready to buy a house.
2. Your housing expenses should not exceed 25% of your monthly income. If you make $4,000 per month, your housing expenses should be no more than $1,000.

Things to Consider When Borrowing Money to Buy a Property

We are currently in a time when mortgage interest rates are at historic lows. I secured my mortgage at 2.5%. This means I can borrow a lot of money to buy a house and still have low mortgage payments. But what will happen when interest rates go up? Fortunately for me, I can afford higher mortgage payments, but some people cannot. You should stress-test your purchase. Imagine the mortgage rate was 2% higher than your current rate—could you still afford the house?

Location, location, location

One of the biggest factors to consider when buying a house is the location. Here are some average prices in some of North America’s most popular cities.

• Vancouver: $1.5 million CAD
• Toronto: $1.3 million CAD
• San Francisco: $1.29 million USD

These are outliers, but can you imagine how putting so much of your net worth in a piece of real estate only because you have been told that everyone should own a house? It doesn’t make sense.

When Does It Make Sense to Buy a House?

• When you have a 20% down payment.
• When you plan to stay in the same place for more than ten years.
• When your mortgage payments are lower than rent payments for a similar property.
• When you can withstand a 2% interest rate increase without falling into financial difficulty.

Other real estate posts

• Why I prefer to rent as opposed to owning a property
• Cardi B nightmare as a landlord
• Fires in Hawaii and Yellowknife teach us not to put all our money in Real Estate