Memo to twentysomethings itching to buy a house: Patience pays

Rising house prices are commonly cited as the reason to buy as soon as possible – but with interest-rate trends uncertain, a down payment is a risky bet. (Kevin Van Paassen for The Globe and Mail)

I got a reminder of how driven young people can be to buy houses young earlier this week when I participated via Skype in Michael Buzzelli’s housing seminar for third- and fourth-year social science majors at the University of Western Ontario. Almost all of the 15 students in the group had a goal of home ownership, and a majority of them anticipated buying in their 20s.

The desire to buy as quickly as possible is understandable – prices are rising, mortgage rates are at or close to the lowest levels ever and renting is slandered at every turn. Plus, there’s the parental factor. Having cleaned up in housing, some parents are nagging their adult kids to buy a house as soon as possible.

You don’t have to ever own a house. If you’re a disciplined saver, you can rent and build comparable wealth to a home owner over the years. But most people should own – they’ll be happier that way. One proviso: Wait to buy. That way, you have a chance to get established in the world and limit the risk that home ownership becomes a 25-year sentence in financial prison.

The first reason why buying in your 30s makes sense is that today’s young adults can reasonably expect to live into their late 90s.

In a 95-year lifespan, buying at 35 means a paid off mortgage at the age of 57, assuming you make accelerated biweekly mortgage payments (you’re essentially making a 13th monthly payment every year and reducing your amortization from the standard 25 years). That leaves 13 years to pour on the savings to retire at 70. Even buying at 40 is doable with longer lifespans.

The next reason to buy in your 30s is that it gives you time to pay off any student debts, build an emergency fund, pay off a car purchase and then bring your full savings capability to bear on a down payment. A minimum 5-per-cent down payment will get you into a house, but there are solid reasons for saving more.

Borrowing less means lower payments and less money wasted on interest over the life of your mortgage. With a down payment of at least 20 per cent, you avoid the added cost of mortgage insurance. On the average-priced Canadian home bought with 5-per-cent down, this insurance would add $12,000 to the amount you finance through your mortgage.

Postponing the purchase of a house also ensures you have the ability to further your career by moving to another city. Mobility is a big asset when competing in a job market that can be a tough slog for millennials. In fact, these young adults are known for moving from job to job. U.S. statistics show the median time spent in a job for workers from the ages of 25 to 34 is three years.

Think you can sell a house you recently bought if you have to move? Even if your house appreciates in value, you lose money after factoring in all the fees associated with selling and moving.

A powerful argument for buying sooner is the fear of rising prices. Prices have risen at a faster pace than incomes for years and, if the trend continues, young people may be fully priced out of the market unless they work in professions that pay premium salaries. Take that risk, Gen Y. A market that has no room for you is a dysfunctional one that needs a correction.

Rising interest rates might do the job of slowing the market, but they’re bad for affordability. It would take only a modest rise in rates to offset a significant decline in prices. For now, economists are debating whether the trend for interest rates is lower, not higher. Longer term, you can take the edge off rate increases by increasing the size of your down payment.

Pressure from friends and family to buy a house as soon as possible is not to be dismissed. To the narrow-minded, home ownership says you’ve made it and renting says you’re either a misfit or a loser. When facing such prejudice, just say this about the argument in favour of home ownership: I buy it, but what’s the rush?

#mortgagesmadesimple

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