Toronto real estate - home ownership as investment

Canadians in all major cities have switched from the fickle stock markets and mutual funds to the security of housing as a form of investment. Over the last decade the average price increase in the country was 53.7 percent, over 5% per year on average. The highest increases were noted in Montreal (85.9% over the last decade), Calgary (81.7%) and Halifax (77.3%). Toronto, with a 60.3 percent increase over the last decade ranked tenth, and Vancouver was far behind, with only 19.1% increase.

For those wanting a steady return on their money, investing in real estate might be an answer. When the baby boomers started madly buying houses in the 1980s, suddenly real estate seemed like the path to instant wealth. The real estate markets fluctuate constantly. There have been times (albeit few) when house prices have gone down. However if you look at the overall price of homes in your area over the last 10 years, in most cases, (depending on your region) prices have risen substantially.

Where is the housing market headed? Nobody can accurately predict. But even if house prices don't rise phenomenally, your home has two strong things going for it as an investment.

First, any capital gains on your principal residence are tax-free. If your house appreciates by 6 percent, you get to keep every cent of your gains.

Six percent may not sound like much, but in terms of how much of that gain ends up in your pocket, you'd have to earn as much as 12 per cent on a fixed-income investment such as a GIC to match that return, after tax.

Second, you don't have to come up with the full purchase price, meaning you're able to harness leverage. The conventional mortgage requires a down payment of 25 per cent of a house's appraised value. The high ratio mortgage, however, requires only 5% down payment. For example, if you buy a $200,000 home, you need to come up with around $50,000 for a conventional mortgage. If the home's value rises to $220,000, that's an increase of 10 per cent. But what's really happened is you've put up $50,000, and made $20,000. Your real gross return on your invested funds is around 40 per cent. But notice the word “gross”. Don't forget that your real return will be less. Unless you are living with your parents, however, you are spending money on rent. This amount should be subtracted from your house ownership costs, that include mortgage interest, taxes, heat and hydro.

Buying a home and having a mortgage is also a tremendously powerful forced savings program. You have to make your monthly payments.