Kristy Shen, who is in her early 40s, has never bought a home and doesn’t plan to (unless you count her shares in real estate investment trusts).

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But when she was in her late twenties and working in the tech sector, Shen felt the pressure to become a homeowner.

Still, after the 2008 financial crisis, Shen said her goals changed drastically after a coworker collapsed at his desk and underwent emergency surgery after overworking himself.

Shen decided she didn’t want to continue working until she was 65 just so that she could pay off a massive mortgage, and sought financial independence instead.

“Instead of taking the money that I saved to put a down payment towards a house, I put it into a portfolio and bought index funds, instead. And then that portfolio grew over time,” she said.

When she was 32, Shen and her husband managed to retire with $1 million in savings and started travelling the world.

The math on home ownership doesn’t make sense

The math on homeownership did not make sense for Shen, and doesn’t for many other young Canadians today.

“I think that we need to write a new rule book, because the rule book is coming from our parents who actually were able to afford houses that were only two to three times their annual salary,” Shen said. “And now my peers and the next generation are trying to buy a house that’s 20 times their annual salary. It doesn’t make sense.”

“I think there’s been too much of an emphasis on real estate and that being the only path for people to accumulate financial wealth, perhaps at the expense of other options, like investing in the stock market,” said Jason Heath, managing director and certified financial planner at Objective Financial Partners Inc. “If you were to look at (the S&P 500 index’s returns) over the course of the last 10 years, it’s generated about a 13 per cent annual rate of return — much higher, frankly, than real estate prices have appreciated in most parts of Canada.”

According to the Canadian Real Estate Association, the benchmark home price has climbed from $399,000 in September 2014 to $713,200 in September 2024. Crunching the numbers translates to a 6.3 per cent average annual increase.

However, it is important to note that in the past year, home prices have declined by 3.3 per cent.

“Even though real estate has done relatively well over the last generation in Canada, I think it’s super important that people don’t put all of their eggs into that basket,” Heath warned.

“We tend to suffer from a recency bias, where just because something has done well recently, we anticipate or expect that it will (do well) going forward. And I’m in the camp where I think the next 25 years may be very different.”

Can a renter generate the same wealth as a homeowner via investing?

It is possible for someone to become a wealthy renter today, Heath believes, noting that renting is typically cheaper compared with paying off a mortgage.

“A disciplined renter, especially if they were investing in stocks and a low-cost portfolio and they were taking advantage of tax-sheltered accounts — could they be in the same position (as a homeowner) years from now? I think they could be.”

Tsur Somerville, who holds a real estate finance professorship at the University of British Columbia’s Sauder School of Business, published a study in 2007 that compared wealth accumulation between homeowners and renters.

One of the key findings that still holds true today is that homeowners benefit from the “forced savings” aspect of making monthly payments on a mortgage, which allows them to build equity, Somerville said. It is much harder for renters to set extra funds aside and invest them on their own.

The report concluded that for renters to accumulate the same amount of wealth as homeowners, they needed to be “extremely diligent savers, invest in a high yield instrument, do so with minimal fees, and have the good fortune to live in one of the cities where the right combination of low rents and/or low house price growth allows them to invest more in a relatively higher return asset.”

For example, in the “best-case” scenario — which required renters to invest 100 per cent of the difference between owner and renter payments in the Toronto Stock Exchange and pay very low investment management fees — renters in Edmonton, Halifax, Montreal and Regina could accumulate 20 per cent more wealth than homebuyers.

However, the report found investment-savvy renters in Calgary and Toronto could not match the wealth gains of homeowners due to expensive rental rates in the former and rapidly rising home prices in the latter.

Can the average millennial or younger Canadian afford to invest?

Shen and her husband, who worked in high-paying tech jobs, had already saved about half a million dollars by 2012. Shen said her scarcity mindset meant she tried to be as thrifty as possible, taking public transportation and cooking at home instead of eating out. The couple’s rent has been relatively low, as well.

For other working young adults who live with their parents and pay little to no rent, it makes sense for them to start investing early and benefit from compounding rates of return.

The solution is not so simple for people who rent and do not receive financial assistance from their family, or who don’t work in high-paying jobs. The renting and investing scenario is contingent on whether the renter has the excess cash to invest in the first place, Somerville noted.

Statistics Canada’s 2023 survey of financial security revealed the median net worth of younger families (where the highest income earner was under 35) who owned their principal residence swelled by $142,800 from 2019 to hit $457,100 in 2023.

In comparison, the median net worth of younger families who did not own their principal residence increased by just $26,700 to $44,000 in 2023.

That said, the survey also found that an increasing share of young families who did not own their principal residence were generating wealth. Among young families who rented their principal residence and had no employer pension plan, 15 per cent had a net worth greater than $150,000 in 2023, compared with just 5 per cent in 2019.

Shen, who co-authored a book, Quit Like a Millionaire, and, with her husband, created Millennial Revolution, a personal finance blog, said she understands why younger Canadians today are frustrated and anxious about their future.

“But I would advise trying to look for opportunities to do things differently, instead of just banging your head against the wall and trying to follow the old advice from 20 or 30, 40 years ago.”

• Email: slouis@postmedia.com

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