Good job, fellow millennials.
We are unemployed, childless, renters sitting smugly on our high horse of debt. Our millennial cohort has done away with the old Canadian dream of having a career, two-plus children, and owning a home by 17. Well, maybe not 17. No matter. We are too busy taking selfies and figuring how to use emoticons to circumvent our inability to text full words or sentences to be bothered by such life milestones as becoming a corporate suit, rearing children, or mowing our lawns.
Collectively, the millennial generation has been such a disappointment to their baby boomer parents that we are now collectively lumped together as 20 somethings. The specifics of our age are of little significance. Ask any baby boomer and they will tell you millennials are lazy and are sheltering in post-secondary education as a means to avoid the illusive ‘real world.’
Consequently, graduate students are the worst kind of millennials. We went to University and graduated only to go back? The only explanation must be that whilst peering over our fair trade mugs of loose leaf tea into the job market, we were scared back to the sanctuary that is the Canadian university campus.
All jokes side, as a graduate student, you know that the reason we went back to school is to augment our education and become more competitive in the diverse and complex job market of the 21st century. Contrary to popular belief, choosing to go back to graduate school is a step toward securing the Canadian dream of getting married, having children, and buying a home. However, after all of our hard work, discipline, and investment into our education, is buying a house the best investment of our future earnings?
Conventional wisdom has always held that purchasing a home is the most important financial decision that you will make in your lifetime. When you buy a home, you signal to the world that you are a responsible adult who has secured their financial future. Most importantly, you have a trump card to play at family dinners when someone asks the question, “what are you doing with yourself these days?”
Renting, on the other hand, is and always will be viewed as the equivalent to flushing money down the drain. If you rent, then you’re simply not responsible with your money and you are not a steady earner. With millennials already carving out their own path for education, careers, and marital status, why not question home ownership.
Putting all intangibles aside for the sake of this article, the question is, would you be better off purchasing a home with the Canadian Mortgage and Housing Corporation recommendation of 20 per cent down over 25 years than you would be renting for the same period?
To answer this question, let’s start with an average condo in Winnipeg that costs $240,000. With a $48,000 down payment at a constant mortgage rate of five per cent over 25 years, you would pay $1,116.68 per month. Additionally, you have maintenance costs that we will set at four per cent of the $240,000 initial market value of the condo. This includes taxes, insurance and condo fees totaling another $800 per month. Consequently, purchasing the condo would be a $1,916.68 per month commitment.
Let’s assume that you are able to rent this same condo for $1,200 a month, with an extra $30 for rental insurance, to total $1,230 a month. The difference between purchasing and renting the condo is $686.68 per month. Using this article’s DeLorean style time machine, we are able to go back to the future – or just simply into the future – 25 years using a few more assumptions.
Historically, the stock market has provided investors with a nine per cent rate of return, compared to the housing market’s 3.5 per cent. Assuming our renter invests their $48,000 and contributes the $686 monthly savings into a portfolio with a nine per cent return, it would leave them with more than $1.1 million at the 25-year term’s end.
The home owner receiving a 3.5 per cent return will have a home worth $671,222 from their original purchase of $240,000. That is a difference of $503,450.21 in favour of renting.
There is plenty to argue about here with the assumptions made in this article. For instance, would a renter have the discipline to save and invest every month? Where would someone be able to get a nine per cent return these days? Who says that you can’t own a home and save and invest? One poignant argument that is left out is that people do not typically sell their homes when they retire. In fact, more and more are retiring with a mortgage to be paid on a fixed retiree income. Additionally, you always need a place to live. Therefore, even with a higher return on your home over 25 years, what does it matter if you aren’t willing to sell?
With all this in mind, both paths have been found to benefit the decision maker. Therefore, which is better really depends on the lifestyle you want.