The ultimate argument for home ownership

by Edward Robertson

This article digresses from discussion of the exempt market to focus instead on direct ownership of real estate. Consider the pros and cons of holding the principal residence, especially mortgaged, as part of the overall financial portfolio.

From one viewpoint, “perhaps residential real estate is no longer quite the engine for financial growth that it had been throughout most of the 20th century” --  I’m paraphrasing a remark to this effect made by Chris Waltzek of GoldSeek radio [1] some time ago. The wisdom of the idea of home ownership at all costs was also questioned more recently in an article by Sarah Milton [2] where she underscored the importance of individual circumstances, which might clearly militate against owning.

A forceful counter-argument was expressed by Wayne, a friend and former colleague of mine, last year over dinner and throughout the course of the evening. His perspective is that of someone who lived under Chinese communist rule and was among the first wave of university graduates permitted after the so-called Cultural Revolution. He calls attention to what he calls “the renter’s mentality”. Later that night, I couldn’t sleep and had to get to the keyboard to capture from memory Wayne’s points:

1. RATIONALE: Having one’s own home can be viewed as a fundamental human right, especially at this place and time: in a modern Western industrialized democracy, it does not make sense that a responsible and productive citizen should not have his own house and home.

2. RATIONALE: Land itself is a scarcity; it is not a commodity that can be reproduced within (the existing limits of) a desirable geographic area such as Victoria, BC. Therefore it only stands to reason that land will continue to hold and increase its value.

3. COMPARE TO RENTING: The cash flow when one is bound by a mortgage agreement is more difficult. Yet the day you cannot meet the mortgage payment is very likely the same day you cannot meet the rent payment. In the case of having at least partial home equity, you have something to fall back on. In the case of renting, you are back to square one.

4. COMPARE TO RENTING: Quality of life: while the renter and the owner are discussing together the ups and downs of the market and speculating on the fate of various investments, the person who has bought a house is enjoying a better quality of life.

5. COMPARE TO RENTING: For the payer, both mortgage interest payments and rental payments disappear into a black hole. Yet consider: rents will increase over time. You could find that your interest payments within a mortgage agreement are the same or even lower than monthly rental payments for a comparable property. But with a mortgage, you are paying down an asset. Also, it is likely to increase in market value, at a minimum, at the rate of inflation.

6. FINANCE: Mortgage financing is, from one point of view, very expensive, but consider that the bank lends money in today’s dollars, but agrees to be paid back in future inflated (diminished value) dollars.

7. FINANCE: Real estate is an investment that provides leverage. An investment of $100K gaining 5% yields $5K profit. A down payment of $100K on a $500K property that appreciates 5% yields $25K profit.

8. FINANCE: Renters can help you pay down the mortgage debt, and relieve the burden of high monthly payments.

9. FINANCE: The strategy (part of the "renter's mentality") of renting cheaply and channeling all available cash to investments -- in order to save the full purchase price of a house and avoid mortgage interest -- has flaws: taxes and inflation will diminish your investment savings; the real estate market will inflate the purchase price of your future target property.

10. STRATEGY: The main strategy to progress and build wealth is to climb the real estate stairway: this is the repeated discipline of selling and “buying up” in 3 to 5 year intervals. The opposite mind set of wanting to be without debt, to pay off the mortgage, is counterproductive, and is a way of thinking that belongs to a “renter’s mentality”.

11. STRATEGY: Transaction costs, such as real estate and legal fees, home inspection fee, property transfer tax, and moving costs… as well as monthly line items such as strata fee or maintenance costs, property tax, insurance and utility bills are all minor considerations when climbing up the real estate “stairway”. The renter’s mentality will present them as obstacles. Yet, the renter will pay many of these costs in one form or another anyway. The main consideration is to focus on the strategy of “trading up” – climbing the “real estate stairway”.

12. STRATEGY: Market timing is usually not viable. If the condo to be sold has decreased in value, the lost profit can be regarded as a sunk cost. The price of the new target property has likely decreased also.

13. STRATEGY: Buy the most house you can afford, in order to maximize the leverage effect.

14. STRATEGY: Purchase near a major university. This is a good way to help ensure regular market value increase as well as a steady supply of renters if you need to rent out rooms or a suite.

15. STRATEGY: When negotiating the mortgage, it is important to obtain prepayment privileges.

16. Real estate as an investment can be “foolproof”  compared to bonds, mutual funds, and stocks, due to its market illiquidity. Consider how many people wish that they had not sold in the 2008-2009 market crash. But of those who owned real estate at the time, some at least would have held the investment simply because transaction costs are prohibitive. In that sense, real estate tends to better weather market ups and downs.

Email from my friend Wayne: “Very good summary, in many cases you expanded, refined and completed my points.” In subsequent discussion, we identified four more advantages. Let’s call the whole series Wayne’s 20 Points:

17. Interest on monies borrowed against the house to invest is tax deductible.

18. The house adds to one’s net worth calculation.

19. “Sweat equity” signifies value increase through home upgrades.

20. Home office space represents a tax deductible expense.

Present Wayne’s 20 Points to anyone weighing the decision to rent or own, especially in the long term.



[1] Radio

[2] Sarah Milton "Why Own Your Home When You Can Rent?" (undated) published on Jim Yih's blog "Retire Happy".