Investing in homes, investing in tomorrow: survey

In the heart of the modern Canadian dream lies the cornerstone of homeownership. Beyond the practicalities of shelter, it's seen as an investment strategy that, for many Canadians, is a step towards securing a stable and prosperous future. A recent survey conducted by RATESDOTCA and Leger delves into the relationship Canadians have with their homes, revealing the complicated motivations, challenges, and shifting perceptions of what it means to be a homeowner.

For 60% of respondents, the decision to purchase a home isn't just about finding a place to live; it's a strategic move in their financial playbook.

Is your primary home an investment?

The answer depends on what an investment means to you.

Your home isn’t the most liquid asset. There’s a lot of effort involved in buying and selling a home. You also need your home to live in, so you can’t sell it whenever you want, making it different from other investments like stocks. It used to be the case that your home was simply, just your home – a place to live. For 24% of respondents, this remains true. They did not view their home purchase as part of their investment strategy. However, for others, this large expense can pay off big in the future.

Investing in a place to live

If you’re purely looking for a roof over your head, renting is always an option. However, living in a home you own offers some unique financial benefits, including:

Equity building: Over time, the more you pay back your mortgage, you’re growing your stake in the property. This equity can eventually become a valuable asset that you may consider tapping into for future home renovations or retirement income.

Potential appreciation: Real estate in Canada historically appreciates over time, which may result in a profit when you decide to sell. However, as with any investment, this isn't guaranteed and is influenced by factors such as market conditions, location, and economic trends specific to the housing market.

Stability and control: Homeownership offers stability and a sense of control over your living space. Homeowners might contend with fluctuating interest rates, but renters can see their rent raised at the whims of the landlord in units that aren’t rent controlled.

As such, real estate has generally been considered a valuable investment, and it has demonstrated the potential for capital appreciation.

The Canadian dream in flux: Ever-present struggle for affordability

However, with rising home prices and interest rates, and persisting economic pressures, Canadians find themselves re-evaluating the age-old notion that a home is a solid, long-term investment.

Related: 81% of Canadians are worried about a recession in 2023: survey

Market volatility: Rollercoaster of home prices

Of the respondents, 61% are homeowners, among whom 33% bought their homes ten or more years ago. An average home in Toronto today costs $1,005,945. If you were to dial the clock back to around ten years ago, the average home cost around $518,000.

“Over the past decade, homes have been perceived more as an investment and that’s largely because home prices have skyrocketed. A lot of existing owners have seen the value of their homes depreciate, as well. So, all of this is contributing to the mindset that we’re seeing surrounding homes as investments,” says John Pasalis, President of Realosophy Realty.

The RATESDOTCA survey data shows that the majority of urban homeowners (68%) are more likely to feel their decision to purchase a home played into their overall investment strategy.

Urban hubs like Toronto's east region that spans across Scarborough, East York and part of North York saw a 10-year increase in average price of 123.8% from August 2013 to August 2023. The average national home price is now more than seven times the average household income.

However, more of people’s money is tied into their home purchases now than they were a decade ago. The rising cost of homes means that first-time buyers must allocate a significant portion of their income to mortgage payments, which may give them pause to carefully weigh the financial impact before deciding to buy a home.

“The challenge is home prices have been rising for around the past 30 years,” says Pasalis. “For a period of time, rates declined, which made affordability improve. However, even with the dip in prices now, homes are still highly priced, and with higher interest rates. So now we have to see how prices progress – which largely depends on how long rates stay this high.”

Parents and children in the housing market

There’s no denying it: It’s more challenging to get into the housing market now than it has been in quite some time.

The RATESDOTCA survey results show that older Canadians (aged 35+), and 81% of respondents that are higher earners (with a household income of $100,000 or more) are significantly more likely to be homeowners. However, among those aged 18 to 35, 72% saw a home purchase as integral to their investment strategy.

For others, it’s not so much that they’ve changed their minds on how important or beneficial buying a home is, but rather that many have simply given up on the idea of affording a home.

“Even though our parents, or the Boomer generation, argue interest rates were even higher when they were buying than today, home prices were three times the household income back then. Now, they’re ten times the household income,” says Pasalis. “And that’s just one big difference.”

Recent data released by Statistics Canada finds that adult children of homeowners are almost three times more likely to be homeowners, with a homeownership rate of 23.8%, than the adult children of non-homeowners.

Pasalis observes that an individual may be more inclined to follow their parents’ lead. He adds that adult children of homeowners are better equipped with a support network of people who have navigated homeownership, and thus are more likely to buy more expensive homes when they do. And this cohort is likelier to have a bigger advantage than others.

Bank of mom and dad: Gifts as down payments

With more expensive homes come more expensive gifts.

CIBC Economics reported that parents gave their kids more than $10 billion in down-payment help in 2021. This phenomenon is on its way to becoming a significant influence on wealth inequality. Owning property results in recipients possibly benefiting from future home price appreciation, thereby widening the wealth gap. Furthermore, a monetary gift also reduces the size of the mortgage, resulting in significant savings on interest payments over time.

In fact, the primary source of down-payment money for two-thirds of first-time buyers who received a gift was in the form of a gift.

Toronto and Vancouver, two of the most expensive housing markets, saw the most generous gifts. CIBC numbers show the average gift for first-time buyers in Toronto in 2021 was more than $130,000, while move-up buyers (moving from a starter property to something larger) received close to $200,000. Parents in Vancouver gave an average of $180,000 to first-home buyers, while move-up buyers received an average of $340,000.

“Fifteen years ago, monetary gifts were $10,000 to $30,000. That’s nothing today – most gifts are six figures because that’s what you need to get into the housing market,” notes Pasalis.

And the cherry on top – there are no taxes on monetary gifts in Canada. Whether it’s a partial down payment or an entire down payment, you wouldn’t have to pay any tax simply for giving it or receiving it.

“We haven't seen much inheritance come into play yet. But we’re seeing homeowner parents use their homes to take out lines of credits to help their children buy a home — which is a form of early inheritance.”

Related: How much mortgage can the median household income afford in these cities?

One-third of new homeowners doubt their home's long-term investment potential

Forty-three per cent of homeowners expressed that changes in the housing market strengthened the perception that their homes are good long-term investments.

This comes at a time when individuals with mortgages are facing increased financial pressure due to monthly payments driven up by rising interest rates. We’re beginning to see the tip into a buyer’s market, and many people are stalling on their plans to sell in the short term, pushing any hope for a handsome return on their investment into the distant future.

According to the survey data, 23% of respondents are worried about the impact of the recent changes in the housing market on homeownership.

“There are no brilliant strategies for getting into homebuying right now,” says Pasalis. “People are faced with crushing interest rates today. Even if they're getting mortgage rates at 6.5 per cent, they’re getting stress tested at 8.5 per cent. This is why demand for homes has plummeted.”

Related: 48% of Ontarians changing moving plans due to high interest rates

One-third of recent homeowners don't know if their property is a good long-term investment.

That may be because homebuyers in the past three years have been more exposed to recent fluctuations in the housing market, as well as the Bank of Canada’s decision to gradually raise interest rates to five per cent from the initial low of 0.25% in March 2022. Today, the benchmark home price is still 38% above its pre-pandemic level.

This puts new homebuyers in stark contrast to homeowners who have owned their properties for over ten years, who could buy their homes at lower prices and have had more time to pay off their mortgage at lower rates. However, as time goes on, their perception of this investment may change.

“People see that the market is volatile. We might see a dip in home prices in the short term but most of the homeowners and buyers that we talk to don’t see this as a long-term trend. They see it as a short-term dynamic,” says Pasalis. “They're confident that the market will re-balance. Generally, the sentiment is that over the long term, homes will be a decent investment.”

Read more: Mortgage temperature check 2023: How Canadians are responding to a “new normal” of high interest rates

Investing in urban hot spots

Regional dynamics also introduce their own challenges and opportunities when it comes to housing. Urban homeowners, at 68%, are more likely to view their homes as integral to their investment strategy compared to their suburban (57%) and rural (55%) counterparts.

Canadians who own homes in urban parts of Toronto such as, central downtown believe that their home investment value will only increase as housing prices in urban hubs like Vancouver and Toronto record soaring housing prices. That has produced a trickle effect over to smaller surrounding cities.

“People are moving out of metropolitans like Toronto and into places like Guelph, London, Waterloo for affordability reasons,” notes Pasalis. “Because of this, home prices skyrocketed in those places, as well. We largely saw that happenduring the pandemic when many people rushed out to those outer communities. We saw a rapid increase in prices. Right now, those areas are cooling.”

For instance, Victoria, B.C., saw a 15% rise in average home prices from September 2021 to September 2022.

Now more than ever, homeowners find themselves at a crossroads. Economic uncertainties, market volatility, and evolving priorities shape perceptions of homes as investments.

Related: Planning to move from an urban area to a rural one? New home insurance perils may await

Methodology

The study gathered insights into the perspectives and experiences of 984 Canadian homeowners aged 18 and above through an online survey conducted between November 3rd and November 5th, 2023. For comparative context, a probability sample of 984 respondents would typically have a margin of error of ±3.1%, 19 times out of 20.