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Many Canadians end up overextending themselves with sky-high mortgage and maintenance expenses because they don’t want to pay rent; however, buying a home they can’t afford leaves people house-rich and cash-poor.MARK BLINCH/The Globe and Mail

Even before COVID-19, young Canadians were worried about getting shut out of the housing market. But now that prices have jumped nearly 33 per cent since the start of the pandemic, financial planners say a deep fear of missing out – or FOMO – is pushing people to buy homes they can’t necessarily afford.

Benjamin Felix, a portfolio manager and head of research and client education with PWL Capital in Ottawa, said people feeling pressured to buy a place as soon as possible should re-evaluate whether ownership as a personal decision is actually the right one.

“I think people get pretty wrapped up in any asset price appreciation, we’ve seen it with real estate and with crypto. Any time an asset price increases a lot, the FOMO that people get is really natural,” Mr. Felix said.

“But chasing past asset returns is not a smart thing to do.”

He said many Canadians end up overextending themselves with sky-high mortgage and maintenance expenses because they don’t want to “flush money down the toilet” by paying rent.

But buying a home you can’t afford leaves people house-rich and cash-poor. It also leaves a large portion of their equity tied up in their home, rather than diversified portfolios. Lastly, it can mean they’re exposed to unaffordable monthly payments once interest rate hikes begin.

There can be personal benefits to not owning a home, too: There’s a sense of freedom in being able to move easily, and renters have more command over how they want to spend their cash for things such as travel and experiences.

“There’s a lot of research on what kind of spending makes people happy, and a lot of it comes down to spending on experiences rather than spending on things,” said Mr. Felix, who chose to rent for many years himself.

“The antithesis of buying frequent small pleasures is buying a house, which is a one-time lump-sum material purchase that actually limits your ability to do other things, like going out for dinner, or small trips – all the things that actually make you happy.”

Although rents initially fell during the pandemic, they have been creeping higher as the economy reopens, making it harder to save money over the long term. In October, the average price of a one bedroom rental in Vancouver was up 11 per cent compared with the previous year when the pandemic was putting downward pressure on rates.

Despite the tighter rental market, Mr. Felix believes renting long-term is still financially viable. For people looking at it as a lifelong option, he says a rule of thumb is for yearly rent to cost no more than 5 per cent of the price of a home you would consider buying.

So, if you live in Toronto and would want a $1-million home, renting would generally make long-term sense if you paid $50,000 or less in a year, or $4,166 a month. For a $600,000 dollar home (near the average cost of a home in Canada), renting at $2,500 a month would be viable in the long term.

Mr. Felix said this formula accounts for the fact that homeowners would have to spend more on things such as home repairs, interest, taxes and all the other costs associated with owning a home.

He’s created a downloadable calculator where people can plug in their own numbers around rent or mortgage payments and compare how renting or buying would work out financially.

Making it work long-term even in cities such as Toronto that have sky-high rent is possible – just take Eva Tang as an example.

The 30-year-old rents a condo in downtown Toronto and makes $135,000 a year in the tech sector – enough to buy a home if she wanted to.

The cost of renting compared with owning is cheaper for her on a monthly basis than maintaining a home and paying a mortgage, and she puts the money saved into her long-term investing account with Wealthsimple. After about five years of saving, the account has $125,000, and she says she’s well on her way to a comfortable retirement, with expected returns of around 5 per cent on her savings each year.

Even if owning meant her home equity increased by 10 per cent or 20 per cent a year, “the stress and all the other trade-offs that come with it to me aren’t worth it,” Ms. Tang said. She appreciates that she can move easily and doesn’t have to worry about maintaining a home.

“I already know that I’m going to get there,” Ms. Tang said, referring to retirement, “so why trade off a lifestyle preference for something that I don’t really think I need?”

But as Mr. Felix and Ms. Tang have seen in their circles, finances are only one piece of the puzzle.

“Even if you show the math and use the calculator, I have friends who’ve said ‘I know the math equals out, but I just don’t feel good paying someone’s mortgage,’ or ‘what if they can kick you out?’” said Ms. Tang, who said there’s a very real stigma around renting in North America.

“I don’t try to convince anyone. So long as I can explain it to myself and the strategy is sound, that’s the only thing I have out worry about – not whether other people are going to validate my housing decisions.”

Millie Gormely, a certified financial planner with IG Wealth Management in Thunder Bay, said it’s important for home ownership to be both a financial and a personal decision.

Where one person might see the risk of eviction, another would see the freedom to move cities and spend their money on other experiences, such as travel and hobbies.

She said there’s a lot of stigma around renting, particularly in smaller communities like her own where people believe ownership is a part of adulthood.

One of the biggest factors prospective buyers should look at is the amount of time they plan to spend in a community. Home ownership really becomes a good option when you’re planning to spend many years in the same place, she said.

If you can’t take a step back, and really look at what your situation is and what you want it to be, “then you definitely shouldn’t be throwing your money into the market,” Ms. Gormely said.

“Because now you’re gambling with your lifestyle and with your future.”

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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