By Iman Khan

Image source: freeimages

 

To buy or to rent? The mind boggles! After all, would it not be judicious to own a house if we intend to be here for the long haul instead of whiling away money in rent every month? And like every new immigrant, this ubiquitous question had been on our minds ever since we made Canada our home a year ago.

For most of us, our parents’ generation gravitated towards investing in land or property as hands-down ‘the’ winning choice for financial stability, since real estate always appreciates in value. But perhaps it is time to move away from ideas we grew up with and reassess our investment portfolio! In the current scenario, with banks handing out loans and credit even to the most financially vulnerable of us, the real estate market has now reached a whole new level of nonviable.

To get us out of our buying vs renting predicament, we conducted some beginner’s research into the housing market of Canada. We relied on hard facts, prevailing figures and core trends to draw a more vivid picture of what is currently out there, instead of being fixated on – ‘But everybody is doing it!’ – mentality. In conclusion, here are four very convincing reasons why buying in the current real estate climate may not be as lucrative it is made out to be!

Overvalued Homes

House prices in Canada, especially in major markets like Toronto, and Vancouver are significantly higher than their respective average household incomes. It is common knowledge that for a stable economy, salaries and home prices have to be balanced.

Source: bcbusiness.ca

Source: bcbusiness.ca

 

This report by Gold Zebra sets the tone for alarming numbers in Vancouver, British Columbia, a city already known for its superior real estate market, but THIS high? The average income for a Vancouver household is pinned at $68, 910 whereas buying a home in the same city will render you $800, 176 short. Some thing does not quite add up.

 

Business Insider Report - Global House Prices to Rent Ratios - 2013

Source: businessinsider.com

 

A cursory glance at the above bar graph report published in November 2013 by industry specialist, Business Insider, should put most housing dilemmas to rest. In the year 2013, the cost to own a house as opposed to renting one in Canada was heavily skewed, with little to no change in the present year.

While some countries including the United States and Switzerland showed no major disproportion, residents of Japan would be more prudent to own a house rather than rent. But what of the market in our home turf Canada? We showed a massive lapse in the housing market, with the distinction of being the leading country in the world with hugely overvalued homes.

Risk to Net Worth

richest_poorest

This report by the Federal Reserve Survey of Consumer Finances says it all! Gone are the days when real estate was considered a fail-safe and well founded investment. With banks churning out loans to all and sundry, it may appear that relying on a house to be your primary vehicle for retirement is no longer a feasible choice.

Statistics show that within a span of 18 years ranging from 1992-2010, investors who diversified their financial portfolio, and did not spend all their money in that single dream home, comfortably tided over any economic recessions or financial busts with little compromise to their overall net worth. In the interim, consumers who did not necessarily have the means to own a house and instead resorted to just about fulfilling their monthly mortgage payment obligations did not fare so well, their net worth taking a serious nosedive in the penultimate years.

Household Debt At All-Time High

With banks recently plunging their interest offerings to teaser rates of less than 2%, more consumers who can ill-afford to purchase property are lining up to do the same, consequently burying themselves in years and years of overwhelming liabilities and payments.

Source: greaterfool.ca

Source: greaterfool.ca

 

Observe the chart above and notice how most countries are moving towards a more deflationary approach. The amount of household debt in Germany, for instance, shows a commendable decline in the past decade. The UK and Australia climbed up the debt charts between 2004-2008, but are since coming down, slowly but surely. However Canadian households paint a grim picture, accumulating debt amounting to more than a staggering 160% of their annual income. The Canadian market is not special and while nobody can predict the how’s and when’s, it is overdue for a correction.

Demand and Supply

With growing rates of unemployment in a stuttering economy it is becoming increasingly difficult for qualified and skilled new immigrants to find relevant employment. Consequently, the future withholds fewer home sales resulting in a price drop in the real estate market.

Glancing over in the crystal ball, most experts are decidedly convinced that while we may not see a massive meltdown in the housing market, home values will show a slowdown towards the end of next year. While buying a home is a very personal decision and a huge landmark for so many of us, be shrewd about the way you spend your hard-earned money. Diversify your assets to reduce financial risk and most importantly, live within your means.

 

About the author:

Iman Khan is an editor at MuslimMoms.ca

 

What have your experiences been as a home owner or renter in the current Canadian housing market? Have you taken advantage of any Islamic Financing services to make your dream a reality? Other Muslims Moms in Canada would love to hear from you!