Personal Investor: Is a house still a good investment?
For generations of Canadians it’s been a given that buying your own home is one of the best investments you can make. For that reason, it’s the biggest investment most Canadians ever make.
That assumption is being challenged right now as real estate prices – especially in Vancouver and Toronto – skyrocket.
Canada is a big country and real estate markets vary from region to region but there are ways to determine how your house stacks up to other investments.
How a house is like other investments
Equity appreciation: You often hear of huge year-over-year short-term price increases but according to the Canada Mortgage and Housing Corporation (CMHC) the average Canadian house has increased in value by just over five per cent each year over 30-year spans since the 1970s. Over 30-year periods house prices could rise and fall but in the long-term they tend to average out to a decent return.
Preferred financing: The fact that houses at least retain their value allows banks to lend money to homebuyers at low rates. Since the loan is backed by the property, lenders really take little risk that the value of the property will drop below the down payment. Right now a five-year mortgage is available at a rate of 2.5 per cent.
Capital gains tax exemption: Assuming the house appreciates in value, the gains made when it is sold are never taxed as long as it is your principal residence. The tax implications are identical to a tax-free savings account (TFSA), where gains are never taxed. Half of equity gains outside a principal residence or registered account are taxed.
Income potential: Owning a home saves the occupants having to pay rent. Home owners also have the option of generating income by taking in renters. They can also draw income from the equity in their home through a home equity line of credit (HELOC) or a reverse mortgage.
How a house is NOT like other investments
Borrowing to invest: Most Canadians must borrow to invest in a home. Borrowing to invest always brings an added layer of risk. Even if the property appreciates in value, homeowners could lose their jobs and their ability to make regular payments. House prices can fluctuate over the short term and being forced to sell brings the risk of selling in a down market.
Not diversified: Investment portfolio diversification lowers risk and exposes the investor to opportunity. A house is not diversified. It is in one geographic area and in one sector (real estate).
Needs maintenance: While house prices rarely depreciate in value, the physical house deteriorates and could depreciate in value if it is not maintained. You never need to put a new roof on a mutual fund or exchange traded fund.
It’s where you live: Wise investors say never invest in anything you’re not prepared to lose. If you lose a house, you lose your home.