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Question from our GenYmoney Facebook group: My husband and I are first-time home buyers. We are worried that we are priced out of the market. Would it be wise to keep saving a larger down payment and hope that inventory increases or house prices correct? We feel there is a huge overvalue on homes in the area we are looking, in the Durham region just outside of Toronto.


Ben Felix provides one-on-one financial advice sessions about investing, insurance, financial planning, and anything else personal finance related.

Benjamin Felix is an associate portfolio manager with PWL Capital in Ottawa.

Answer: Choosing where we live and the way that we pay for housing (renting vs. buying) is one of the most important decisions that we make in our lives. These decisions tend to be made more on the basis of impulse or social pressure than on sound logic or evidence. There are times when it makes a lot of sense to buy a home. There are other times when renting might be a far better option.

With Toronto housing prices faltering recently, and interest rates on the rise, it might seem like a good time to buy real estate. Unfortunately, basing the decision to purchase a home on the perception of over or undervaluation of the real estate market, or an impending rise in interest rates, is a losing game.

Just like the stock market, it is impossible to successfully time the real estate market with any consistency. Keep in mind that the current valuation of the real estate market does not matter to you if your intention is to buy a home that you will live in for the long-term. If you are considering the purchase of a home that you don’t see yourselves living in for the long-term, you may want to revisit the decision.

Buying a “starter home” as a first-time home buyer will often seem (and might be sold as) a sensible idea. Buy a smaller home now, and use the equity in that home to purchase a larger or more desirable one later. This might work out really well if real estate prices keep going up, but it can go the other way very quickly if prices begin to fall. Even if they do rise, they would have to go up enough to cover the significant transaction costs associated with selling a home.

A home purchase with short-term intentions will trigger large real estate, tax and legal costs, and it exposes you to the price risk of the real estate market. If the price of the house falls, you might end up taking a loss, or feeling like you’re stuck with the home (to avoid taking a loss).

Just like I would never recommend stocks to save for a short-term goal, I would not recommend purchasing a home if you don’t see yourself there for at least 10 years. If this means that you are not able to afford your long-term dream home now, you are better off renting and saving aggressively.

When someone tells me that they are going to buy a home, I ask them what their main motivation is. The usual answers are financial: renting is throwing money away, a home is a good investment, etc. These financial reasons for purchasing a home are flawed. Renting is not throwing your money away. In fact, a disciplined renter can build as much, if not more, wealth than a homeowner over the course of their life. Purchasing a home is not guaranteed to be a good investment. Watch this video for more on that.

If you are sure about buying something that you can live in for a long time, buying something that you can afford will always be sensible. Putting 20 per cent down on a home is a good idea for most people (read more on that here). Not only does it allow you to eliminate the need for CMHC coverage, which can be costly, but it forces you to save aggressively for a down payment. An aggressive savings plan to reach a 20-per-cent down payment is excellent practice for your eventual mortgage payments. Here’s calculator that can help you with this math.

In making this decision, do not feel like you need to own a home for financial reasons. If you want to buy a home because it will bring you happiness, then I would suggest continuing to save until you can put 20 per cent down on a home that you see yourselves living in for at least 10 years.

Until then, there is no shame or financial loss in renting a place to live.

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