Let’s go back to November 2010. Prince William and Kate announce their engagement, Conan O’Brien returns to late night tv and Taylor Swift has a number 1 song.
If we play a game with two sets of players let’s see where the results of the game would 13 years later.
First players, let’s call them Bob and Alice, are shopping for a home and buy a property as their first purchase. The average home in Durham Region in 2010 was selling for $337,000 and the going rate for a 5-year mortgage was 5.19%. Assuming they put down 20% ($67,400,) They would end up with a mortgage of $269,600 which would carry for $1,900 including taxes.
Our second players are Gabrielle and Tony. They decided against purchasing and opted to rent a home. They found a reasonable rental at $1,800/ month. Let’s dig in and see where they ended up 13 years later.
The Buyers would have cycled through three 5-year mortgage cycles and would be 2 years away from renewing for a 4th term. Assuming that the Buyers made the minimum mortgage payments, making no additional lump sum payments, the mortgage that started off at $269,400 would have been paid down to $197,000. This means they have paid off $73,000 from the principal of their mortgage. Along with the equity built up by paying down their mortgage, the average selling price of a home in Durham Region has increased to $855,000! This equates to a value increase of $518,000. Adding the mortgage paydown and value increase means that their downpayment of $67,400 has increased to $591,000!
Now for our second example, Gabrielle and Tony; they have rented for 13 years making 156 rent payments totaling $281,000. (I am not adding any legal rent increases)
At the end of the 13-year cycle one couple is $591,000 richer and the other has paid out $281,000 with nothing to show for it in the end. A common objection may be that it is far more expensive to own vs rent, however the payment for owning compared to renting comes out to $100/month more expensive.
To add a bit of a twist on this example, if it was an investor who purchased the home and rented it out, their investment in the property would have jumped $591,000 and assuming they owned a home before investing, their net worth on both homes would be over $1,000,000.
What are the differences today vs 2010? The rates are a bit higher with a 5-year mortgage coming in around 6.5%. The prices are substantially higher, and inflation has spiked. Not only have the prices of homes escalated, but rents have shot up dramatically. In November 2010 a townhome in north Oshawa was rented for $1,650 and this month a townhome in the same area was rented for $3,000/month.
There are no guarantees that the next 13 years will offer the same return, however even if the values return to a normal 5% increase a year that $885,000 home will be worth in the neighborhood of $1.6 million – almost doubling the prices today.
What we do know is that pre-pandemic we were in a housing crisis. The Provincial Government commissioned a task force to offer solutions, and since the report was released, over 1 million people have immigrated to Canada, and adding in international students, Ontario has about 1,000,000 new residents which will cause our housing crisis to worsen. The market has slowed with the increase of mortgage rates, however, if history is a predictor of future behaviors, we will see a buying flurry in the very near future.
The expression, “the best time to plant a tree was 30 years ago and the next best time is now” is applicable to Real Estate today. 30 years ago, that cute little bungalow you are dreaming about now was selling for $110,000. My suggestion is if you own a property, consider buying a rental home. You will be richly rewarded in the future, and you will offer a necessary rental unit into a desperate market. If you are considering buying a home, do so now, as the prices rarely stay flat for long. Oh, and some things never change, Taylor Swift is topping the charts more today than she was 13 years ago.
If you are considering either buying a home or an investment property, I can be reached at lindsay@buyselllove.ca or 905-743-5555
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