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4 Home Buying Myths - Busted

April 9, 2013
5 mins
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As first-time homebuyers start to think about getting into the market, they often turn to friends, family and coworkers for advice. While these sources can provide useful tips and information, they also may perpetuate some common home-buying thinking that may not be as sound as it once was. Like ….

Myth 1: Buy a Home As Soon As You Can

If your lifestyle doesn't really allow for it, you could probably save some money by actually continuing to rent. There are stacks of people in the United States who wish they’d never got into what proved to be an overpriced housing market. And while the likelihood of a similar housing bubble happening here seems low right now, it’s not impossible. Canadian housing prices are still at least 20% overvalued, according to Fitch Ratings, a global ratings agency. It estimates the overvaluation in Ontario, Alberta, British Columbia and Quebec to be 21%, 15%, 26%, and 26% respectively.

Myth 2: You Can’t Go Wrong by Owning

Of course you can. There are times in your life when it makes sense to own a home and times when it doesn’t. If you expect to be moving a lot, then you probably shouldn't be in a rush to buy, for instance. Every time you buy or sell a home you incur significant expenses. Real estate commissions and closing costs alone could add up to five or 6% of your purchase. That’s not a problem if your employer is footing the bill, but a killer if you’re on your own. Unless you get really lucky and the value of your home jumps by something approaching 10%, you'll likely come up short by moving around.

Myth 3: Rent is Just Money Down the Drain

People born in the '60s or earlier had the merits of homeownership drilled into them. Today, that's not necessarily the case, particularly when you consider that the actual cost of ownership is often more than a third more than your mortgage payment alone. To make a sensible comparison, calculate your rent ratio. Find the going rent in the neighbourhood you’re interested in and calculate how much you’d spend in a year. Then, multiply that number — your annual rent — by 15. Now compare the asking price to buy a comparable space in the same area. If your rent costs are 15 times higher than the comparable sale price, then it may be time to buy. Where are we now? Well, price-to-rent ratios are now 60% higher than their 30-year averages, according to Fitch Ratings.

Myth 4: The Suburbs are a Better Deal

Since land is generally cheaper in the suburbs, first-time buyers often get more home for their money - but keep in mind that the farther you move from jobs, family and entertainment, the more you'll spend on transportation, according to a study from the Center for Neighborhood Technology. For many families in "drive 'til you qualify" zones, any savings realized from lower-cost housing are wiped out by getting back and forth. In fact, with gas at $1.25 a litre, transportation is the second-largest household expense for most suburban families. Average costs for a community can range from 12% of household income in efficient neighbourhoods with access to transit and a variety of services, to 32% where driving long distances is the only way to reach essential services, the study estimates.

Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

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