The housing crisis is widening the wealth gap between renters and homeowners
Home ownership has long been the primary method of accumulating wealth in Canada, encouraged by various support mechanisms such as the Home Buyers’ Plan (HBP), the First Home Savings Account (FHSA) and the Canada Mortgage and Housing Corporation (CMHC) mortgage loan insurance.
While it has often been argued that renters benefit from greater flexibility, the current crisis is changing the situation as housing becomes scarce, and therefore expensive. In 1999, Canadian renters spent an average of 25 per cent of their net income on housing costs, compared to 23 per cent for homeowners. By 2022, those numbers reached 29 per cent and 21 per cent, respectively.
As an indirect result, while homeowners have seen their net worth increase from nine times their disposable income to 13 times since 2010, for renters, this amount increased from 3 to only 3.5 times over the same period. According to the Observatoire québécois des inégalités, families who own their homes have 20 times more wealth than those who rent. In this context, can we realistically say that renters and homeowners have equal opportunities to grow their wealth?
Putting things into context
David Truong, CPA and financial planner, President, National Bank Planning and Employees Benefits, offers another perspective: “Becoming a homeowner does not guarantee systematic wealth creation, because it’s hard to predict returns—for example, location is critical, and the past is no guarantee of the future. It also ties up most of your financial resources, especially in the first few years, when you pay a lot of interest and very little principle.”
“A tenant theoretically pays less in rent and can save more, but that implies a lot of discipline, since you would have to systematically invest the difference between your rent and what you would be spending on home ownership costs,” says Truong.
Even then, it depends on the investments you choose: “Between bonds that generate an average return of 3 per cent over 15 years and an equity portfolio that generates between 6 per cent and 7 per cent, there is a big difference, not to mention management fees. Just going from 2 per cent to 1 per cent significantly improves the bottom line.”
Still, you need to be able to save, says David-Alexandre Brassard, Chief Economist at CPA Canada. “While homeowners’ mortgage payments are relatively stable and set to fall along with the lowering of the key interest rate, rents are on the rise. Over the past nine months, they have been growing at an annual rate of 8 per cent.”
Identifying the hurdles
When it comes to addressing these challenges, the two experts identify a number of issues, such as the lifetime limits of the FHSA ($40,000) and the HBP (which will increase to $60,000). “So that means that a couple will be able to withdraw up to $200,000 from their savings? But what young family has that?” asks David Truong.
As Brassard sees it, these ceilings are designed to help affluent people living in high-price cities such as Toronto and Vancouver, when in fact the problem is largely one of population growth.
Faced with a housing shortage—last fall, CMHC estimated that 3.5 million units would need to be built across Canada by 2030—many vulnerable tenants can only hope to keep their homes. To help protect them, Quebec Housing Minister France-Élaine Duranceau passed a bill that will impose a three-year moratorium on certain types of evictions (Bill 65).
The housing shortage combined with current mortgage rates is also affecting homeowners who would like to buy a larger home—first homes are often smaller because they are more affordable. If they are unable to move, just as many renters will have to wait to become homeowners.
Exploring possible solutions
The gap between renters and owners is not going to close any time soon. That’s why we need a comprehensive approach, which Brassard believes starts with keeping education costs low across the country, as is the case in Quebec, in the hope of securing better salaries.
He also urges increasing financial literacy and examining how financial advice is structured in Canada. “Financial institutions don’t charge for the advice they give, but they give it to those buying investment products. Without products, there is no advice, and it’s not always easy or affordable to get independent financial advice.”
Hence the need for support, particularly from a CPA, stresses Truong. “A CPA can do a lot more than tax returns. If you haven’t saved enough for a down payment, they can explain how to help you get there, lower your taxes and optimize your tax refund so that it can be put to full use.”
According to Brassard, “Canada is due for a global rethink, initiated by the national housing plan, because the current measures don’t change anything and don’t reduce inequalities.” Our debt levels are the highest among the G7 countries, with mortgages accounting for 75 per cent of the total. Meanwhile, social and community housing represent just 3.7 per cent of real estate, compared with an average of 7 per cent in OECD countries, and 34 per cent in the Netherlands.
“In North America, we are very attached to ownership, which means having it all, on our own, which is beyond our means,” Brassard says. “Focusing on the community, on projects that combine private spaces and shared resources, can allow us to give more people access to home ownership, and to rebalance things a bit.”