When it comes to first-time homebuyers, many millennials cite Canada’s overheated urban housing markets as the reason they’ve been forced to the suburbs. With the average house prices in virtually every capital city now over $500,000, many young people simply can’t afford to live near their work and opt for suburban communities with lower-priced homes instead.
But are they really saving money?
The short answer is no. Not by a long shot. In fact, moving to the suburbs is a net-zero gain financially in most cases, and a huge loss if you count the physical and mental stress of commuting. Of course, most people don’t count those things, only I do because I’m a personal finance weirdo that’s addicted to early retirement and financial independence blogs where everyone is always calculating the costs of everything.
But the costs can be calculated, and they will surprise you if you run the numbers.
Living in the suburbs isn’t economically beneficial if it requires you buy a second car.
As most of you know, my husband and I share one car, and even it stays parked at least 3 days per week. I work from home now, but before this I typically took the train or walked to work. My husband walks to his office. This set-up wasn’t accidental. When we were shopping for apartments a year and a half ago, we only looked within walking distance of both our jobs. People have balked at our pricey $1,750/mo rent, and then in the same breath told me they pay $250/mo to park at their office. For whatever reason, we seem to be of the very few that understand that a dollar is a dollar is a dollar, regardless of whether your spend it on housing or vehicle costs.
After payments, gas, maintenance, and insurance, the average cost of a compact car in Canada is $9,500 per year. Most people don’t know this. In fact, 60% of people under-estimate the cost of car ownership by $4,000 or more, which is probably the main reason my anti-suburbia argument falls on deaf ears 90% of the time. In any case, this works out to approximately $800 per month. It doesn’t sound like much, because nothing ever sounds like much in the context of a monthly payment, but if you assume an average tax rate of 18.7%, a Canadian will spend $11,685 of their gross salary on nothing more than driving to and from work. Yuck.
Most two-person households in the suburbs require two vehicles, so each person can get to and from work, bringing their total vehicle ownership costs to $1,600 per month. This isn’t small. Actually, it’s quite large, and the money could be allocated a totally different way for a much better lifestyle.
You can afford to spend $200,000 more on a house if you can get by with only one car.
As far as monthly payments go, it costs the same amount to own a $400,000 house in suburbia and drive two cars as it does to own a $600,000 house in the centre of the city and get away with one vehicle. This means choosing a more expensive home near one person’s employer of a two-person household is actually cheaper than living further away and forcing both to drive to their respective jobs.
I used RateHub to calculate the monthly mortgage payments at a 2.49% interest rate on a $400,000 home and a $600,000 home, assuming a $50,000 down-payment which is the average first-time homebuyer’s down-payment in Canada.
Obviously, $50K goes further on a $400,000 house than a $600,000 one, which is why the costs of a $600K house is $150/mo more expensive, but I think the cost equation is still close enough for comparison.
This calculation illustrates beautifully how adjusting your lifestyle is infinitely more powerful than tweaking your budget when it comes to having the life you want.
Now think of where your money is going: into a depreciating asset (the car) or a typically appreciating asset (house)
This is where the more expensive urban home becomes even more appealing than the lower-priced suburban one: when you are spending more money on your house, you are likely putting money into an asset that will increase in value, whereas choosing to spend more money on cars is just putting money into something that will keep decreasing in value.
This is an imperfect argument since Canada is likely in a housing bubble right now and there are markets, like Calgary, where house prices are declining, but it is something to think about in the long run, or if you live in any other geographic region. Even in the worst economic situation, the central house is likely still worth more than the suburban one, so if given the choice to spend $200,000 on more residential real estate vs. personal vehicles, the former is better.
But this doesn’t even begin to scratch the surface of how expensive your commute from your suburban home really is.
Your commute is ludicrously expensive, because the real price of your commute is your happiness. Now, I know that sounds really dramatic, but it’s true. People think of commuting as a very neutral activity, which is why they don’t mind buying houses 50 minutes from work, but it’s not. A long commute is actually extremely detrimental to your physical and mental health. People with the longest commutes have the lowest levels of life satisfaction. This comes first, directly from the stress of sitting in traffic, and secondly from the resentment of the sheer time wasted that could have been spent doing virtually anything else.
Entrepreneurs, freelancers, and the self-employed will cry about the lost time spent commuting because it is time that could be spent earning more money, which is true, but you don’t have to see each hour as a lost income opportunity to get upset about it.
A shorter commute could mean more time to sleep in each morning, or more time at the end of the day to unwind. As trivial as it may seem, I don’t think anyone would deny they would feel happier watching an extra hour of Netflix rather than spending an extra hour in traffic.
Furthermore, the longer commute a person has, the more likely they are to be overweight and have high blood pressure. The origin of this is twofold: the first, and most obvious, is spending more time in the car leaves less time to go to the gym, and secondly, sitting is the new heart disease so tacking on another 1hr+ in the car after 8 or 9 hours at the office is almost a self-served death sentence. In other words, if you want to live a long and healthy life, give up your car.
Finally: your children don’t want a yard, they want more time with you
One of the things I’m told constantly in response to my adamant stance that I will never move to the suburbs is that I will change my mind once I have kids. I’ve even been told I should move to the suburbs to start a family, rather than continue my vigilant stakeout for fairly priced homes in my Calgary’s core. However, I never looked critically at the relationship between parenthood and commuting until I read this post by Mr. Money Mustache in which he says:
“Would you really waste an extra $3,000 per month just so your kids could play on your personal fenced-in postage stamp overlooked by vinyl-clad suburban houses in every direction while you are out stuck in traffic? No.” – Rent vs. Buy: if you have to ask, you should probably rent
I’m still nowhere near starting a family, but his argument completely unwound my previous hesitations that I might change my mind about housing locations in motherhood. Now? Not a chance. I definitely think children would prefer parental company in a public park than playing all by their lonesome in a 100 sq ft yard, but my ideas are just theories until proven in practice. The only downside to this is that the suburbs are chock full of kids, so living there typically means they have neighborhoods upon neighborhoods of children, whereas my offspring will be left to navigate busy city streets surrounded only by adults, poor things. When asked by suburban playmates why they do not live next door, they will cite the astronomically high opportunity cost and then probably never be invited over again. Such is the burden my family must bear for its frugality.
I actually made the mistake of sharing that MMM post above with my husband, who now is of the camp that we should rent forever. This is a more extreme perspective than I was hoping for, but that’ll teach me to bring expert sources into my long-winded rants about the merits of renting.
In any case, the suburbs aren’t cheaper. For many, rushing into home ownership in neighborhoods far from their jobs under the illusion of affordability is a gross financial oversight. When it comes to making any major purchase, there real financial (and emotional, and physical) implications extend far beyond the visible price-tag, and are worth taking the time to consider. However, no matter what you choose — cars in the suburbs or short commutes to a city house — it is always the same money, only being spent a different way.