Note: This article was published in the Calgary Herald on July 26, 2016.
As a symbol of prestige and accomplishment, property ownership is understood to be a central part of the American dream. It might as well be an advertising slogan — “If you work hard for long enough, you can have your own house (among other nice things)” – and we Canadians are equally taken by it, though probably to our detriment.
Conventional wisdom holds that given finite urban area, a growing population, and a perpetual demand for living spaces, the housing market will always gain value. Accordingly, a common retirement savings plan goes something like this: 1) invest in a home by getting a mortgage; 2) pay it off in 30 years or so; 3) reap the rewards of a house whose value has greatly appreciated over that time; 4) sail off into the sunset. That’s the Holy Grail scenario.
On the contrary, for many mortgage-debtors their sacred “investment” may well prove to be a poisoned chalice, especially if they purchased their home recently. The Canadian housing market is significantly overvalued at present, with the national average house price sitting above $500,000, 11 per cent higher than this time last year. Such lofty prices would normally prevent many potential buyers from entering the market, but historically low interest rates allow — and indeed encourage — just as many to get in on the action.
Mortgage debt accounts for nearly two-thirds of all Canadian household debt, which is now very close to 99 per cent of GDP. Interest rates will not stay low forever, and when they rise again, or when a recession forces a market correction, many homeowners will find that their mortgages have become unaffordable or have gone underwater. A market bubble like the one we are in right now makes owning a home the highest-staked game of musical chairs that most people will ever play.
Fortunately, there is another option. Unless one’s self-esteem is irrevocably married to the concept of ownership, renting may offer a superior alternative. Renters are not burdened with property taxes, maintenance expenses, interest payments, insurance costs, or legal fees, and are typically not responsible for upkeep. And while these sorts of costs are factored into rent prices, the average monthly cost of renting will still be far below the aggregate costs incurred by the average homeowner in today’s market. Additionally, renting grants greater flexibility for the occupants.
That last feature is particularly useful to a young person like myself who is confronting a shifting economic paradigm characterized by increasingly precarious work opportunities. Recent university graduates are arriving in a labour market that, as a result of intense competition, can promise neither rising real wages nor job security. The growth of household debt has vastly outpaced the relatively meagre rise in median household income over the last few decades: the average Canadian owes $1.65 for every dollar of income they earn. This means that when unforeseen economic shocks rattle the financial knife-edge on which many families are living — as happened in Alberta when the price of oil plummeted over the last two years — things can quickly go sideways. What is worse, this trend will only continue as advances in artificial intelligence steadily obviate ever more human labour from the economy, particularly in the manufacturing and service sectors. In light of these factors, for many people it makes more sense to rent than to buy, so as to minimize one’s debt exposure.
Despite the conventional logic that a house’s value appreciates over time, bubbles like this one show that the market is inherently endowed with a certain degree of volatility that can make or break a family financially when we are talking about homes that cost half-a-million dollars. Renting not only avoids mortgage debt, but also frees up money that one can use to save for retirement in other ways, like by investing in an index mutual fund that is low-risk and yields reliable long-term growth. The American dream, on the other hand, frequently yields less than hoped for most people, and to pursue it recklessly is to become an ever more indebted society.