Buying a House?

If you make a right call for an impending housing bubble – like what happened in Calgary 7 years ago – it is quite justifiable to purchase a house. But this is not an easy call to make and such bubble does not happen every decade.

Buying a house is not automatically profitable. The up-front cost is roughly 5% overhead cost due to filling up the house with furniture, upgrades if buying a new house or realtor's fee if buying a resale (used) house, moving cost, and lawyer's fee.

The biggest cost chunk actually comes from mortgage interest. For the first 10 years of paying down bank loan for your house purchase, a 4% annual interest rate means roughly 50% of each mortgage payment goes toward the mortgage interest. For example, if one pays $2000 monthly mortgage payment, $1000 will go to the bank, while $1000 will go toward paying down your mortgage. Over 10 years, one will give away about $100,000 to the bank.

Living in a house also means paying fully heat, electricity, water, and garbage collection. This works out roughly $500/month. Over 10 years, one will pay $60,000. In addition one has to pay property tax which depends on the market-value house price. For Calgary, this works out roughly $1500/year for a $350,000 house.

So, over 10 years, the total cost of owning a house is (5%×$350,000) +  $100,000 + $60,000 + $15,000 = $192,500. Yes, you will save $1000/month × 120 months/10 years = $120,000 in your house, but you will spend $192,500 in order to save $120,000!

Bottom line: Owning a house is not a cheap proposition. $192,500 – or 55% of the $350,000 house price – is the opportunity cost of owning a house. For what opportunity, you might ask? For the opportunity of house price inflation (i.e., housing bubble in the best case scenario). To break even, you need a steady 4.5% house price inflation over 10 years. If you don't get this house price inflation, your house purchase is definitely a losing proposition!

But remember that $192,500 could be spent differently. If you think about this, the cost could be even higher. You could accumulate this amount for 10 years as a retirement saving, as a business capital, or simply as money for travel or education. You need to really do your homework before deciding for sure to buy a house.