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Following our last reader case from Edmonton, I got this little gem in my inbox:
“My husband and I are 40 and have a 2 year old. We move often due to work. We are both employed with a combined salary of $200K. We have previously owned homes in Ontario and Alberta and have made profit on each. However now we live in Saskatoon, SK where the economy has slowed due to oil crash. It is hard to get statistics but my sense is that employment is still high but the oil money is gone. There is still money here due to farming and mining.
We are currently renting for $1800/mo plus utilities. We have been hoping to buy but the only homes comparable to our current rental are $450-550K. We are not picky – that is the price you pay here for a good location. The condo market is almost non-existent. Given we are set to retire in 15 years and plan to move away, we are debating whether it’s worth buying at all. I am learning how to invest but at age 40 I may be too late to the game. What should we do, in your opinion? Also, should we buy our retirement home (in a very desirable location elsewhere in Canada) now, where I think prices will hold, or wait?”
Oh goodie, yet another rent-or-buy comparison. These are always fun because people often come to us with their mind already made up hoping that we’ll give them the green light to go ahead and pull the trigger on their obviously bad decision.
This isn’t one of those situations.
First of all, the usual red flags that I yell about aren’t there. This couple makes decent money, and isn’t contemplating going into too much debt. With a $200k combined salary and a $450K-$550K purchase, even if they screw up this purchase and buy a money-pit, they’re at most 2-3 years away from getting out from underneath that mortgage, so the debt is hardly monstrous. Remember, we aren’t actually anti-housing, we’re anti-crushing-debt.
So with that said…
Let’s Math this Shit Up!
Our reader claims that comparable homes are in the 450k to 550k, so we’ll split the difference and use $500k as the buy price, and since this couple makes a healthy salary of $200k a year, I’m going to give them the benefit of the doubt and assume they can put in the minimum down-payment of 20% to avoid CHMC insurance. Plugging these values and current skinny interest rates of 2.25% in our trusty amortization calculator, at the end of the 15 years this is what that mortgage would look like:
OK great. And because this is Saskatchewan and not some crazy out-of-control real estate market like Toronto or Vancouver, we will assume that the house appreciates at the same average rate as all real assets: the rate of inflation. This means that in 15 years with a 2% appreciate rate, the house would be worth $672,394.
So given that sell price, our homeowner walks away with a cool $672,934 – $187,178 (remaining balance on loan) = $485,756. Pretty sweet. (Note that the $100k down-payment is included in that $672,934 number since its part of the sale price).
But…let’s not forget about all those pesky ownership expenses:
|Real-estate agent commission (5% to sell)||$672,934 x 5% = $33,647|
|Land Transfer Tax (0.3% of buy price)||$500,000 x 0.3% = $1500|
|Property Taxes||Saskatoon's property taxes are actually the highest in the country, about 1.33% each year. Note that the property is re-assessed every 4 years.|
Year 1-4: $500,000 x 1.33% x 4 = $26,600
Year 5-8: $541,216 x 1.33% x 4 = $28,793
Year 9-12: $585,829 x 1.33% x 4 = $31,166
Year 13-15: $634,120 x 1.33% x 3 = $25,301
|Lawyer fees||$500 x 2 (buy and sell) = $1000|
|Home insurance||$100/month * 12 * 15 = $18,000|
|Maintenance||You should set aside 1-3% of your home's value every year for maintenance, so let's say 1%|
$5000 x 15 years = $75,000
So that means in order for our reader to get that $485,756 bank account, they actually had to spend $100k (downpayment) + $100,819 (interest on mortgage payments) + $212,822 (principal on mortgage payments) + $241,507 (ownership costs) = $655,148.
Which means, they actually made $485,765 – $655,148 = -$169,383.
Wait, what? They LOST money?
Even though they have a bank account now filled with almost half a million bucks, they had to spend $655k to get it!
Uh-oh. This does not look good for housing here. Remember in our previous article when we showed how a house making 7% annualized over years somehow made the homeowner NO money because all the expenses ate it all up? Well, in this scenario of a homeowner staying put for 15 years, under more normal house appreciation (i.e. inflation), they LOST money even as the home prices went up.
Hmm…maybe this is why so many homeowners brag about how much their house is worth all the time yet can’t afford to stop working.
Now just for shits and giggles let’s see what would happen is they rented and invested for 15 years instead!
15 years is a GREAT investment timeframe, since over that period of time the S&P500 NEVER lost money, and in fact made a median of 12.2% year-over-year! But we’ll continue to use the average returns of a 60/40 portfolio of 6% to be more conservative.
So if this reader were to take that $100k and invest it, and then continue to invest the amount of money he WOULD have been spending on his house ($249,941 cost to own, plus $313,641 in mortgage payments), minus that $1800 rent, this is what we’d get.
Yearly Savings = ($249,941 + $313,641) / 15 – ($1800 x 12) = $15,972. Let’s see what happens over 15 years…
Yowza. Our reader now has $611,419 in cold hard cash, versus the$485,756. they had with a house. And that’s not even addressing the question that’s been staring us in the face the entire time:
Who the Hell pays $1800 a month in rent in SASKATOON?
According to CMHC, the average rent for a 3-bedroom apartment in Saskatoon is $1097 a month, not $1800. What happens if our reader rents one of these instead?
YOWZA. Now we’re up to $800k!
So to our reader here, we’d say that unlike most of the reader questions we get, you aren’t contemplating taking on an insane amount of debt, so by buying that house you won’t exactly blow yourself up or anything. But if you were willing to bring your crazy rental assumption down to the average, you could be looking at a nice honking $800k retirement gift.
But enough of me talking. What do you guys think? Should our Saskatoon reader buy or rent?
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35 thoughts on “Reader Case: Buy Or Rent in Saskatoon?”
These comparisons are really helpful. Can you do an average comparison for a Millennial worker in the big US tech hubs – Boston and San Francisco (San Jose)? I think this would be really eye opening for many people here.
I’d love to. Care to send me some numbers?
Anecdotally, friends who have moved to SJ/SF have described sky-high rents coupled with buy prices that are equally onerous. The ones that manage to REALLY get ahead are the ones who figure out some kind of low-cost living arrangement (roommates, etc.) and bank their 6-figure tech salaries like nobody’s business. I’ve yet to hear someone “get rich” primarily from the SJ housing market.
Well, except real estate agents, but fuck em.
I’m only familiar with Boston Metro but here is a brief overview of the situation. The area is shaped like a small circle with a radius of about 20 miles. Traffic is a living nightmare because the road were built in 1820 on top of cow paths (not a joke). Public transit is falling apart and is a scheduling nightmare (trains just stop, get cancelled, or freeze at the worst times). So what would normally be a 20 minute commute is an hour stuck in traffic.
I’m describing to commute so you understand how constrained people in Boston are when it comes to housing. Essentially, you have to live close.
Now Boston is major tech hub because of MIT and other universities. This means that about 100,000 students move in and out of the area each year. On top of this there is a vibrant economy so many millennials are moving to the metro area for jobs. The average family income in the metro area is $80,000 but I would guess that the average Millennial high tech worker is making something like $100,000 (see glassdoor.com)
The closer you get to the city the more expensive houses are. An average house about 45 minutes (read 3-5 miles) from the city costs about $500,000, while the same house in Cambridge, just outside the city and home of MIT, costs $1,500,000. These numbers do not include insane bidding wars that are common. But what you get for this money is exactly what you describe when you talk about the crappy house that got flipped (the one that set you on this path). The housing stock is typically mid-1800 to mid-1900 and prices in the “affordable” range of $500,000 require gut renovations.
Now all of these numbers are actually tame because there is fierce competition for school districts. Its not uncommon to pay $800,000 to $1,000,000 so you can send your kids to public school instead of private school.
So what do rents look like? About 45 minutes outside the city you will pay $2000 a month for something like 750 sq. ft. In Cambridge you will pay $2000 for 300 sq.ft. (if you’re lucky) and probably more like $4-5000 for that luxury 750 sq.ft. Parking is often non-existent and frequently you will pay more. I know that on FIRE forums cars are typically regarded as evil no-nos but the situation in Boston Metro is that you need a car. You are pretty much forced to drive because rents near public transport are astronomical and biking is for people who 1. don’t mind getting hit by a car, or 2. are crazy enough to bike the New England winters.
Let me know if I can help at all with more information!
Ouch, yeah that sounds a lot like SJ. In that situation to really get ahead you kind of have to say “I’m not going to live here permanently, just until I’m FI.” and plan accordingly. I can find room-mate arrangements on Craigslist for about $1000 a month, and like I said that’s how some of my friends in the tech sector really managed to sock away a lot of money in a short amount of time.
Boston is not at all like SJ because it’s a lot more compact. One can imagine biking to work a lot of the time and there are cities like Somerville which have been gentrifying but haven’t quite finished doing that yet, as far as I can tell. There’s also increasing amounts of bicycle infrastructure. My favourite webcomic about biking in Boston: http://bikeyface.com/
And hey, I just talked today to a Waterloo SE alum who lives in Boston who was not complaining about high rents.
So maybe you can’t buy something right now. But a quick look on craigslist reveals rents in line with what FIRECracker suggests. Studio in Fenway for $1600/month (way cheaper than SF for sure); 2BR 1000sqft in Somerville for $1800.
I actually really like these rent to buy comparisons. Without having an overview on the Canadian housing market my humble opinion is the following:
When reading that they often move due to work, I already thought that it’s not gonna worth to buy. Are they sure they not gonna move again in a few years? Irrespective from where you live, you have so many costs at the beginning. Costs around getting a mortgage, in the first years you pay mainly interest, you surely want to have at least an overall painting when moving in etc. Plus if you need to move again, there come the expenses for the selling of the place. On the top of that the property tax seem to be pretty high over there. All these add up to quite a big percentage of the house price.
There are only two cases when it would still worth buying: property price boom or inflation boom. The latter surely won’t happen in developed economies in the next couple of years. I can’t really comment on the first one, but as they say the economy has recently slowed down there, so not sure what would drive a house price boom.
All together I’d be careful with buying if I were them, even though by definition I’m generally not that negative about buying a property…
I gotta be honest, I really know nothing about Canadian cities in the middle of the country. (Canadian flyover cities?). From your math, it seems like it’d make sense to rent and save the money. But ultimately, whether to buy a house or not really comes down to the consumption aspect. What do they value? If they value a house more than the money, then sure, buy the house, since it seems like they can afford it. Just don’t treat the house as an investment.
The SP500 never lost money over a 20 year period if you discount data before 1950. If you invested right before market went crashing down in 1929, your portfolio wouldn’t have recovered until 1952. That is a 23 year period. this doesn’t change the great points you make in your articles though because like you said, you have to have a little faith that great depression level black swans don’t happen twice in 1 century in order for index investing to make sense.
Not if you account for reinvested dividends, which naturally continue buying you in at the bottom of the market. Plugging Jan 1929 – 1949 into here:
I got -38% return in price, but a +83% return (over 20 years) with reinvested dividends.
Here’s another way of looking at it – at what pace would the value of the house need to grow in order to surpass the value of renting and investing the difference?
The only variables that would change in this analysis are:
1) The expected growth rate in housing prices
2) The commission paid, which is a function of the final price
3) Property taxes (I had no idea they were so expensive in Saskatoon!)
I can’t figure out how to post the numbers as a comment but, based on my calculations, housing prices would need to increase 7.9% per year in order for the reader to break even.
In that situation, the value of the house would be $891K higher than shown above (but they would have paid $45K more in real estate commissions, and $57K more in property tax). Thus, they’d get to keep an extra $790K, which exactly offsets the amount by which renting & investing is superior to buying ($611K with renting and investing the difference versus a $178K loss with owning = $789K – difference due to rounding).
I don’t know much about the real estate market in Saskatoon. The reader would need to ask him/herself if it’s realistic to expect 15 years of real estate rising at almost 8% per year. I think that’s an absurd growth rate for Saskatoon (it would be higher than the growth in housing prices in Toronto over the past fifteen years). Saskatoon, with all due respect, has much lower demand than the GTA and (presumably?) has more supply because they can always expand south – it’s not built next to a lake.
Summary – I agree with the analysis in the main post, and an unrealistically high growth rate in Saskatoon real estate prices would be needed in order for the reader just to break even.
I just realized that I only used the initial price of the house ($500K) to calculate annual maintenance – it really should be based on the increasing value of the house each year. FIRECracker made the same error. I’m not going to correct it (this way our numbers remain comparable) – however the growth rate would need to be even higher than 7.9% in order for the reader to break even.
Yeah, that’s another way of doing the analysis and I bet someone’s going to come in and say “HOUSES WILL DEFINITELY INCREASE BY 8%! BECAUSE OF TRUMP! AND OIL! AND THE CHINESE SOMEHOW!”
The calculations all look good except for one thing: ain’t nobody gonna be paying $1097/mo (or probably even $1800/mo) in rent fifteen years from now. Shouldn’t inflation, at least, be factored into that? I’m sure the scale still tilts heavily in favor of renting, but may as well fix it before the detractors pipe up.
Yeah I ran the analysis with inflation included and renting still won. Problem was it made the explanation WAY too complicated. Basically, if you include inflation in the rents, you also have to inflate the person’s salary over time, so their savings rate also increases by 2% each year. Also, the 6% ROI on the stock market needs to go up to 7-8% as well. And the number at the end will be in “2031 dollars” and not today’s dollars.
So the answer is still the same in the end, but is much much more confusing to explain.
Thanks, that was a great post! It’s minor to the calculations but I just wanted to point out that some of the buy/sell fees are a bit conservative especially the legal fees. (I know I posted before about it!)
I recently sold (in TO) and bought (in Ottawa) a house this summer. It cost me 900 for legal fees and 330 for disbursements and 650 for title and bank charges (HST included)! OMG, that’s 1880!
My legal fees to sell was under 750 and disbursement and other fees were 250 so total was under 1000! My land transfer tax in Ottawa was over 3000 for 300K home. (Good compared to Toronto’s double land transfer tax!)
Anyways, total costs were under 6000 (almost 3000 was legal fees). FYI, my realtor fees for Toronto was 3.5%+HST which was a good offering. (In some neighborhoods, it would be a full 5% and others would be 3%.)
Personally I think my “legal” fees were way too high this time around. In 2011, when we bought the house and sold my condo, it only cost me 1500+900 = 2400 for legal and disbursement fees. I’m sure you can get a lawyer who was much cheaper than the 2 I used. It’s just so hard to predict the final costs because the lawyers often just quote you their base price and not all the added “disbursement” costs.
That’s why I love investing in a self-directed account with low costs ETFs. Better transparency regarding trading costs and MERs.
If you used a realtor then you do not require an expensive lawyer to process the legalwork. Instead, use a Notary Public and you should get cost down to under $1000 if you shop around.
However, I have heard if you are negotiating a private sale directly between parties withour a realtor, then it is required to use a lawyer because the contracts might not hold up properly with a Notary.
Minor error but in calculating property taxes, final years 13-15 is actually 3 years (not 4 years) to come up with 15 years total. End result is inflated expenses of about $8,4 30, but it does not factor into your convincing overall thesis.
This article is fantastic, really hits the target, especially for those who contemplate moving to a more “affordable” home ownership city/town than say crazy Vancouver or Toronto. The reality looks to be still a nightmare at current price levels.
Hey, great catch. I’ve updated my ownership costs to reflect your fix. Thanks, Eagle-Eye!
A little off topic; for a portfolio what types of bonds are good to get?
The Canada savings bonds rates are less than a savings account. I heard the government is going to get rid of them.
Yeah! What about rent inflation? Like Adam is asking?
One thing that is missing from this analysis is that rents can and probably will increase and may even double or more in 15 years. In fact, if more people buy into your plan, mortgage rates and/or prices increase, governments/banks tighten lending rules and make it harder for foreigners to buy real estate (this is currently happening) demand for rentals will increase making substantial rent increases inevitable. Not to mention living in a condo or apartment is going to be a big step down from owning a spacious detached home that you can renovate and have more room for your kids to run around in. Also, at some point the mortgage will be paid off but the rent payments never end. In Vancouver and Toronto the lost opportunity costs may not be worth it but I think that in Saskatoon it would be if they plan on staying put for at least 5-10 years. They can also pay a lot less interest if they pay off the mortgage faster.
Although I live in Texas, I’m very familiar with Saskatchewan real estate as my family farms in Saskatchewan (near Yorkton.) I would caution NOT to buy a home in Saskatchewan unless there is a big price drop or you can find a great deal or you’re planning to stay there permanently. Since oil prices have dropped there has been some significant loss of jobs in Saskatchewan (my cousin farmers and their hired hands all used to haul for oil companies in the winter and that trucking work has disappeared) however, farm labour work is still priced at a premium resulting in very high wages for farm help. Farmland prices and grain prices are at record highs. Numerous young Saskatchewan farmers and their young hired hands, who have never personally witnessed farm economy problems in the past, (such as in the nineties, when you couldn’t even break even on grain) are buying way up in the housing market in town, thinking they’re never ever going to have a tough time farming. Their are always going to be cycles of tough times in farming. When the tough times arrive again, there will probably be a substantial decrease in housing prices in Saskatchewan. The decrease in housing prices could be especially substantial if the oil jobs haven’t recovered by then as well. Unless you want to stay in Saskatchewan permanently or don’t mind losing some money on a house I wouldn’t buy.
I have a couple problems with your math, if not your conclusion.
First, assuming a 2% annual increase in home prices but a 6% annual increase in the other investment portfolio over the same period seems biased against home price increases. In truth no one can predict either over a 15 year period. Home prices could be up 6% per year and the S&P flat. Or it could be even better in favor of the investment portfolio. This is why a home, as a different form of investment, can be a good idea for the risk adverse because it can act as a hedge against your portfolio. That said, investing in home should be done with an understanding of the market. Some are much better than others.
Second, you didn’t increase your rental expenses over the 15 year period. If you inflate your home values by 2% per year, you should inflate your rental costs by 2% annually as well. Rents are always creeping up. A mortgage with a set payment becomes increasingly better over time as rentals become worse because they are always increasing in price. If home values go up more than 2%, say 4% then renting becomes even more expensive in comparison.
Third, I think your assumption that you will spend 1-3% per year on maintenance is a little high. Some properties will be in bad shape and some on great shape. With grit and a bit o” sweat and the help of YouTube, you can do you much of your own maintenance. Depending on the property you could easily get away with $15-35,000 in maintenance over 15 years. If you can do the easy maintenace yourself (electrical and plumbing, etc.) you save big. That expense is only more accurate if you call a plumber every time you need to flush a toilet. Or if you are super high maintenance yourself and need to remodel your bathroom or kitchen every 5 years. Someone who is a badass and is seeking to maximize a home as an investment should learn to do repairs and stay away from spending uselessly. Insurance can cover many expensive repairs. I would say it is entirely possible to spend less than 0.5% or less on maintenance per year.
Adjusting for these quibbles ($54,000 more in rent paid based on increasing rental prices by 2% per year and saving maybe $30,000 on maintenance because you are willing to learn to maintain your own home) you come out ahead renting over 15 years. But buying is much better over 30+ years. But who buys a home planning to stay that long? Not many.
Thanks for that perspective. You Texans have gone through a couple oil crashes before and I fear my fellow Canuckistans for some reason believe they are indestructible.
When I began reading this article, I almost thought for a second housing might have been the winning option.
Hahahah. Oh due diligence.
Another great post!
Housing put up a good fight though. Maybe next time. 😛
Question: what about the tax implications? having it invested will mean that half of the gain will be taxed if in a non registered, while a house as a principal residence would not be taxed what is the result then? If it was invested in rrsp full amount is taxed when taken out. I suppose all of it could have been in the TFSA if 100k room is available.
The biggest advantages when it comes to tax implications, is that when you invest, you don’t have to sell anything to get the passive income (dividends, fixed income, etc). They continue paying you without having to sell. In fact for early retirees, long term investing means staying invested and living off the passive income and capital gains. That’s the entire point of investing. Why would anyone sell all their investments?
Whereas for a house, you don’t get a single cent until you sell the ENTIRE thing, at which point you get hit with massive closing costs. You can’t just sell a brick or a window.
Another advantage is that investment income is taxed favourably. You can get up to 50K of dividend income per year without having to pay taxes. You can also structure the investments efficiently so that the highest taxed assets (bonds) are in RRSPs, equities in TFSA, and preferred shares in non-reg. This minimizes your taxes. Since we are now retired and our income is essentially zero, we can gradually withdrawal the investments out of the RRSP without having to pay taxes.
Well, not really? My house pays me a dividend, I rent a room, and when the kids more out will have 3 rooms to rent, and still live in it. a room in Victoria, is about $850, in 10 years it will be, maybe $1000, so thats $3000/month, my mortgage is $1700, and will be paid off in 20 years.
Once the mortgage is paid, I don’t have to pay rent. That is the dividend. In 10 years my dividends on the house will more than pay the mortgage, and generate income, and I have a place to live.
That’s good for you, but most people I know DO NOT want to share their space. If they buy a place, they want it all to themselves. To them, what’s the point of buying if you just have to share your space with someone else?
And no, it’s not true that once your mortgage is paid, you don’t have to pay rent. Even after your mortgage is paid, you still have to continuing paying property tax, home insurance and maintenance. That’s just a different form of rent.
Very good post, and of course, the numbers can go up and down, they are all based on assumptions. but if you look long term on housing, equity markets, almost all investments
average around 5-7 % including recessions, and crash’s. I am talking 30-40 year spans.
I think the key here is inflation being the same, maintenance, interest costs, opportunity costs etc. If its cheaper to rent the “SAME” property you want to live in, as apposed to owning, and you “Invest the difference in a balanced portfolio” -you will probably come out ahead in 15 years
I think buying a apartment/house can sometimes be worth it.
If you’re already FIREd and staying somewhere apartment is cheap like ching mai.chiang rai. Owing a place to live give me peace of mind when I’ll be FIREd.
Good article. Though I find these CMHC averages are terrible to use, 1097$ a month in Saskatoon for a 3 bedroom would be a total dive especially to raise a kid in.
I live in Saskatoon….PurpPrince is right. Rent is HIGH here and only increasing. In the last 6 months it has gone up $300/month for something decent. Anything less than $1000 is a dive or a bachelor or your already a long term renter and are lucky to pay less. If you want a decent 2 bedroom rental (apartment or apartment condo or more likely a basement suite) your looking at $1250+/month, a 3 bedroom rental (only the top floor of a bungalow, with a seperate basement suite) is $1500+/month. For a whole 3 bedroom house – basement unfinished in an outlying town from Saskatoon is $1850+/month. In Saskatoon….$2000+/month. All of those are plus utilities unless your in an older apartment with boiler so water & heat are included. Some condos include water. Want to use the garage? Extra cost/month….usually $100-$200. And few places accept pets anymore, but if they do your paying a non refundable fee (anywhere from $500 to a full months rent!) plus usually a $20-$40 per month pet fee per month on top of your rent.
Our house prices are rising but not as fast as our rent costs. I could buy a $400,000 house and pay much less a month on my mortgage giving me room to invest my savings. And right now it’s a definite buyers market. Yes a housing bubble could pop and then if you were renting and had a lot of savings could get a great deal….but if that happens the whole country is going into a big recession and everyone will be in trouble.
Long story short: taxes are high so rents increase to cover the costs the landlords are paying. Every year the property taxes increase as do utility rates (in the last year: 10% for water, 3.5% property taxes, nat gas increase costs to heat house, electricity increase, plus gas prices for your car as it’s not super bike or walking friendly except for a few areas and the bus system is a joke, food price increases….you see where i’m going) And water and tax prices seems to go up the same rate each year…..at least for the last several years. Saskatoon is expensive. Rent or buy but I do believe if you buy a comfortable smaller home it’s going to end up being more affordable over time. Especially if you work hard to pay off your mortgage faster or opt to put in a legal suite to help with the payments so you can drop savings into investments. IMHO if your staying long term…5+ years buy. If your moving around or only staying for a few years…rent.