Is buying a house better than living in a co-op?

With mortgage rates at all-time lows, is it a better financial investment to buy a house of live in a co-op?

Usually money is not the only issue when someone decides to buy a house, rent an apartment or live in a co-op. Some people prefer the co-op community, others enjoy the pride and pleasure of owning their house. I won't speak to these issues. I'll simply look at the question:

Would I have more wealth in twenty years if I bought a house or if I invested the difference between buying a house and living in a co-op?

I will need to make a lot of assumptions, but I will tell you exactly what they are and you can judge whether or not they are reasonable.

The House

Suppose Howie buys a three-bedroom, semi-detached house in Waterloo and Cathy moves into a three-bedroom townhouse at Beaver Creek. Let's assume that the semi-detached house costs $110,000 and that Howie will make a down payment of $10,000. (Did you know the average selling price for a house in KW so far this year was $170,000?) The townhouse currently costs $743 per month and we will assume the housing charge increases by two per cent each year for the next twenty years.

Initial Costs

The initial costs for Cathy at Beaver Creek are as follows:

  • Member Loan $743
  • Moving Costs $500
  • Utilities Hookup $150
  • Total $1,399

Initial costs for Howie are substantially more. Here is a sample of his costs.

  • Down Payment $10,000
  • Mortgage Application Fee $100
  • Inspection Fee examination by building inspector $200
  • Appraisal Fee bank appraises your house $100
  • Legal Fees $1,000
  • Adjustment Costs interest, taxes, utilities $200
  • Land Transfer Tax $1,000
  • Property Insurance $200
  • Moving Costs $500
  • Utilities hook-up $150
  • Appliances, tools etc. $500
  • Total $13,850

Monthly Costs

For Cathy, the monthly costs for housing are:

  • Housing Charge $743
  • Gas $50
  • Electricity $50
  • Total $849

Note that the housing charge will climb by two per cent each year.

For Howie, the monthly costs are most affected by the terms of his mortgage. The range of possibilities is very large and has tremendous influence on the final numbers. For this example I will assume that the mortgage costs are equivalent to carrying a 7.5 per cent mortgage for twenty years. In this case the costs are:

  • Mortgage $799
  • Mortgage Insurance $20
  • House Insurance $50
  • Maintenance $100
  • Gas $70
  • Electricity $50
  • Water $30
  • Taxes $160
  • Total $1,279

After Twenty Years

Howie will have completely paid off the mortgage and could look forward to many years of rent-free living. Cathy will have saved and invested the difference between what Howie paid and what she paid while living in the co-op. Assuming that the housing charge climbs at two per cent per year and that money could be invested at ten per cent a year, Cathy's investments would be valued at, sit down for this one, $388,500!

What do you think will be more valuable in the year 2017, a three-bedroom, semi-detached house, or $388,500? given that the baby boom will by dying off then, and that Canada's population will be stable or falling, I think house prices will not grow much. From an investment point of view, I'd rather have the $388,500.

Some Words of Caution

Some people might argue that 7.5 per cent is too high a rate for the next twenty years and that a figure like six per cent is more reasonable. I rather doubt that mortgage rates, even short term, will stay that low for twenty years, but if we make the assumption that Howie's mortgage rate is six per cent, Cathy will still have earned $329,000 on her investments.

Cathy, on the other hand, could earn substantially more if she invested the money in an RRSP and then invested the income tax rebate. She might also be able to improve upon the ten per cent rate of return. Also, in twenty years the co-op's mortgage will be paid off and Cathy's housing charges will go down. I have not considered inflation at all, but we could assume that it would affect both Howie and Cathy equally.

Other Financial Considerations

What would happen if Howie and Cathy lost their jobs at the same time and were unemployed for a year or more? Cathy would have subsidy available from Beaver Creek and there would be no change in the quality of her housing. The bank is unlikely to provide subsidy to Howie and he might be forced to sell his house.

A large increase in mortgage rates would be painful for both Howie and Cathy. A jump to a thirteen per cent mortgage from a 7.5 per cent mortgage would cost Howie an additional $348 a month. A jump in the interest rate for the co-op would be cushioned a little by an increase in rent-geared-to-income subsidy provided by the federal government.

The Answer

Live in a co-op.

This appeared in the January 1998 edition of Beaver Creek's DAM Newsletter