Katie and Louis are facing a seemingly age-old financial dilemma for young families: To buy or not to buy a home?
"What we’re looking for is some financial advice of what would be the consequences of buying a home versus renting," says Louis, who is in his late 30s and only recently started working as a civil servant, earning about $44,000 annually. "We’re just not really sure what to do."
Katie also recently returned to work as a teacher, earning $61,000 annually, after time off for maternity leave. As a result, the two haven’t had much opportunity to save.
Still, they’ve managed to stash some savings aside, about $40,000 spread out in RRSPs, TFSAs and other investments. As well, they both are members of good government pension plans through their employment.
While they’ve been happy renting, they would eventually like to own a home but worry if they do make the jump into the market, they will end up paying too much.
"Are we going to spend a lot of money on a house now and then have property prices drop?" Katie says, adding they figure they would spend about $350,000 on a home.
One concern is a scenario like the early 1980s when interest rates soared.
"A little factoid I’ve heard along the way is very high rates of home ownership are actually related to economic hardship for families because you buy into a house, and the economy changes and you’re less likely to move if you have a house because you may be forced to sell at a loss," Louis says.
"It’s that whole economic instability that’s making me nervous."
Moreover, the couple is thinking about having another child, and if that happens, Katie would only return to work part time, which would obviously affect their budget.
"I want the house, travel and lush lifestyle promised to me as a child," she says with a laugh.
"But financial reality likely won’t let that happen, and we don’t want to be eating Kraft Dinner to make ends meet."
Certified financial planner MaryAnn Kokan-Nyhof says Katie and Louis should focus on affordability rather than worrying about timing their leap into the real estate market.
"I felt I should ask a real estate person about the rent-versus-buy question," says the adviser with Desjardins Financial Security Investments Inc. "And she said that Winnipeg’s market remains stable and dependable."
In fact, the city is experiencing an increase in its housing supply, which should help cool prices, making it more of a buyer’s market. Furthermore, mortgage rates have never been lower at any other point in history, and a return to high rates like the early ’80s is very unlikely.
Of course, the risk of prices falling by 20 per cent is not out of the question, but it is slim in Manitoba with its steady-Eddy economy.
"Winnipeg has never had a roller-coaster market like Calgary; prices usually gradually go up and then stabilize for a while before they go up again," says the Winnipeg-based adviser.
The key to successfully transitioning from renting to home ownership is affordability, so no matter what the market does, they can still afford to stay in their home for the long term. That way, they can ride out a down market to avoid selling at a loss.
On the plus side, they both have good, steady jobs with defined-benefit pension plans. Given they don’t have substantial savings set aside for a down payment, however, they would have to use the Home Buyer’s Plan that allows first-time buyers to draw on their RRSPs without tax consequences up to $25,000 for a down payment.
If Louis and Katie want to buy a home in their price range, they’d be looking at payments of more than $1,500 a month. That’s on par with what they’re paying for rent every month — only being homeowners, they’d be building up equity along the way, too.
Yet what may be problematic are the additional costs of home ownership. If they use their RRSPs, they will have to repay the money they borrow from their RRSPs within 15 years, or they will have to pay tax on the withdrawals.
While that’s not going to be a substantial outlay in their budget, they will also have property taxes — at least a couple of hundred dollars a month — utilities, maintenance costs, and most importantly they will have no cushion for emergencies.
Kokan-Nyhof says while they do budget and manage to stash away about $700 into savings each month, they also have Louis’s $50,000 student debt looming over them — eating up more than $700 in cash flow each month.
On the upside, they have defined-benefit pensions that will be the cornerstone of their retirement plans, but they need to explore what they can expect at retirement from those plans. It’s likely they will need to save more, she says.
"Even with the best pensions, they will still only have 50 to 60 per cent of their working income replaced in retirement."
And these days, most people envision retirement with plenty of travel — not to mention helping out adult children with post-secondary education, buying a home and wedding costs.
Long story short, Kokan-Nyhof says it is good Louis and Katie are approaching home ownership with caution.
"But it’s not that they should be worried about prices falling once they buy," she says. "They should be more concerned about whether they can afford a home, and at this point, with their debts and their savings, they could likely get a mortgage, but they will be living close to the edge financially."
A better option is to continue saving and paying down debt.
"Aim for at least a 20 per cent down payment to avoid having to pay for mortgage-loan insurance," she says.
"They have good jobs, and there’s no rush to go into the market because while prices may continue to climb, they’re not likely to get much higher because affordability will become an issue eventually."
But timing an entry into the market shouldn’t be a major concern. Katie and Louis’s goal should be all about saving right now. Do that and the rest will follow suit.
"If they wait a few years so they can save for a down payment, they’ll also have a better handle on their expenses relative to their income, which sets them up well to achieve all their financial goals."