When Stretching To Buy A Home Makes Financial Sense

The real estate market in Canada has been the subject of much opinion and speculation over the last five years as prices continue to rise to new heights. Houses are over-priced, but by how much? Should prospective buyers wait for a crash before jumping into the market, or should they get in now before they’re priced out of the market forever?

Two recent columns by the Globe and Mail’s Rob Carrick got me thinking. One argued, correctly, that if buying a home will stretch your finances too much, especially in cities like Toronto, Calgary, and Vancouver, then you should just hold on and save more.

Related: Pros and cons of waiting to buy a home

In Carrick’s second piece, he suggests a 10-year rule for homeowners, similar to the mantra of a buy-and-hold investor. It works for those of us who are worried about a housing correction because the rule implies that the purchase was made for the long run and that there’s plenty of time for prices to come back.

That brings up a different issue that doesn’t get a lot of media attention and it has to do with our propensity to trade up to a bigger and better home every few years after that “new-house smell” wears off.

The high cost of trading up

First-time homebuyers have long been advised to not buy “too much” home.  That’s why it’s common to see Canadian homeowners trading up several times as they move through different stages of their lives.

Indeed, the Canadian Association of Accredited Mortgage Professional (CAAMP) says the average Canadian will own 4.5 to 5.5 homes in their lifetime.  A survey by ComFree suggests that 28 percent of homeowners get the urge to move every five years, and 14 percent actually want to move every year.

Reasons for moving include a new addition to the family, job relocation, children leaving the nest, retirement, an increase in cash flow, or the need for major renovations.

But acting on the urge to move every few years can be harmful to your wealth – over a span of 60 years one could easily spend as much as $180,000 in real estate commissions alone, not to mention lawyer fees, and moving costs.

Related: Do you need a real estate agent to sell your home?

That’s where Carrick’s 10-year rule comes into play:

“If you do buy a house for 10 years, you need to think long and hard about your purchase because you won’t have the recourse of addressing your house’s shortcomings by moving up in a few years.”

A home for every stage

A homebuilder in Lethbridge claims to have a home for every stage of your life – from condos and starter homes to medium-sized family homes, to large dream houses.  They want to sell you a house that fits just right for your current situation so that you’ll consider trading up sooner rather than later.

Of course, the problem with trading up frequently is that each move takes a considerable bite out of your net worth.  If you sell your home with a full service real estate agent, expect to pay 5 percent in real estate fees (plus HST in some provinces), not to mention any upgrades, touch-ups, and staging required to sell your home.

Related: The hidden costs of buying and selling your home

Add in land transfer taxes, legal fees, and moving costs and you’ve lost another 5 percent of your wealth.  When you trade up from a $300,000 home to a $400,000 home you could easily see $30,000 completely vanish in fees and taxes before you move.

If you’re going to stretch, make it count

Before building our current home three years ago we initially considered several properties that were a step above a starter home but lacked the space we wanted in a forever home.  That meant we’d probably get the itch to move after just three or four years once our kids got older.

The houses in this range were priced around $330,000 – $350,000 and we considered our ceiling to be about $400,000.  We found a bigger home that we loved but it was priced at $420,000.  Rather than overextending ourselves and getting into a situation we couldn’t afford, we simply waited until we had saved enough to put 20 percent down on the house.

Related: How much house can you afford?

We bought the larger house with the intention of it being our forever home – or at least the home where we’d stay 15-20 years to raise our kids and see them off to college.  We still like to look at the new show homes every year – real estate porn, as my wife calls it – but we love our home and I don’t think we’ll get the itch to move any time soon.

Final thoughts

So should you stretch your finances in order to buy a home, or keep saving and wait until housing becomes more affordable? One comment on Carrick’s Facebook page summed up my thoughts perfectly:

“Those of us who are stable and have had houses for a while likely will say not to stretch to buy a house but then I think back and I have to say I don’t know anyone that didn’t have to stretch to buy that first house. I know I did (32 years ago) and I think it’s always been that way. I think few of us found buying that first house was easy on the budget.”

How Do You Define Affordability?

A TV commercial for a local credit union features people discussing finances at a “round table.” One man comments, “It depends on how you define affordability?” Huh?? Is it affordable? Tanya sees a great sale on a designer scarf for $200. This brand almost never goes on sale and she just has to have it.