Everybody should always consider buying a house. Owning a home can be the ‘American Dream,’ and it’s always been that way. Here’s why.

1. The mortgage interest deduction. You can’t deduct your rent payment. Whereas the interest on a mortgage is deductible and probably will be one of the last tax benefits to be taken away by Congress, unless we are lucky enough to go with a straight flat tax.

2. No rent increases. Unless you have an adjustable mortgage, which I would never recommend anyone get, your cost to stay in the house is fixed for thirty years or less. Thirty year mortgages with no prepayment penalties are the way to go because you can ‘create’ your own 15 year or 20 year mortgage by paying additional principal each month; and if you run into financial problems and can’t make those higher payments for a certain period of time, you just stop making those over-payments.

3. Not at the mercy of a landlord. Who would you rather have control over when you need to move, your landlord or yourself? If you are on a month-to-month, and your landlord’s brother-in-law is coming in to town next month and needs a place to stay for a year, you will get a thirty day notice telling you that you now have to start looking for a new place, get an estimate from movers, pack your stuff up (boy do I love packing for a move NOT), and then actually moving. Even if you have a one or two year lease, the landlord can still do the same thing prior to 30 days of the end of the lease.

4. Has bailed out many retirees. I keep hearing about retirees who lost most of their earnings in their stock portfolio after the market crash, yet because their house was paid off or almost paid off, were able to sell their home, buy a much smaller place, have plenty of cash left over, even after the real estate crash.

5. You can do what you want with it. Suppose you want to paint the interior of your house purple with pink polka dots. If you rent, your landlord will go nuts. Same if you want to knock out one of the walls to open up the living room area. When you own your own home, you can be the one to go nuts.

6. If you can’t afford it, you can walk away from it. Many people weren’t aware of this until the big real estate crash that started in 2005. Now the whole world knows. Almost every mortgage is a non-recourse loan; doesn’t matter whether its a conforming loan, a non-conforming loan, an FHA loan, or a VA loan. What non-recourse means is that the bank can’t come after your personal assets if you walk away from the loan and the sale of the house can’t satisfy the balance due on the mortgage, unlike an auto loan or a credit card debt, which are recourse loans.

7. The return over long periods of time far outpaces any other investment. This is probably the most important reason of all. Let’s look at the hard numbers. One of the major mistakes that almost every major publication has made is comparing the growth of real estate versus the growth of the stock market, without taking into consideration that with real estate, buyers only put up a small portion of the purchase price.
Almost nobody pays all cash for real estate; almost everyone puts down 10% to 25% of the purchase price (and I hear that some lenders are starting to offer 3% again). As for stocks, almost everybody pays all cash for stocks; the percent of people who buy on margin is very small, especially when you consider all the 401k and mutual fund investors.
So if you really want to compare apples with apples, you need to compare how and how much people invest in the asset. Let’s look at a period when we’ve had a couple market drops in both stocks and real estate. How about from January 1987 to this summer.
The average annual return of the S&P 500 through May of 2010 is 5.9%. The average annual return of the Case-Shiller Real Estate Composite 10 Index over the same period is 4.0%, assuming homeowners pay all cash. However, if you assume that the homeowner puts up a down payment of 20% with a 5% mortgage, the real life average annual rate of return is 10.4%, almost double the return on stocks.

All that being said, I don’t believe anyone should consider their home as an investment. A source of emergency funds, if absolutely necessary, but not an investment. If you can afford a home, seriously consider buying one.

By Fred Fuld at Stockerblog.com

Anyhow, in brief, here are the changes:

1. Prospective homeowners are required to meet payback standards of a five-year, fixed-rate loan even if they choose a variable-rate mortgage or a agree to a shorter-term.
2. There is a limit on the amount of home refinancing up to a maximum of 90% (was 95%).
3. Prospective real estate investors require a 20% down payment for non-owner-occupied properties if they wish to qualify for CMHC insurance.

Overall, I agree with the changes the government is trying to protect new homebuyers from themselves, eager (and possibly) greedy for expansive new homes made available largely because of historically low mortgage rates. Indirectly, the government is playing its role and I commend them for it; sustaining the general welfare of its citizens through the establishment of policies and programs. However, Im convinced these new rules will not halt what has been for a few years now, a red-hot Ottawa housing market. My reasons are as follows:

1. The government isnt going anywhere. Job security, for the most part, is very high in the national capital region. Job security helps increase confidence; confidence helps consumers spend; spending sometimes goes towards real estate purchases; real estate purchases help build equity. The new mortgage rules won’t change this paradigm in Ottawa.
2. Based on 2006 Statistics Canada census data, Ottawa has one of the highest household incomes in Canada (over $85,000). That income translates into cash that can be used to purchase a new home, refinance a home or purchase an investment property. Cash will always be king, with or without new compliance rules.
3. Ottawas demographics are different than any other major urban city in Canada compromised mostly of middle-aged families who are white collar public service professionals. Although this data is somewhat dated (isn’t there another Canadian census coming soon?), Ottawas 2001 census data revealed it had a moderately young population, with about 47% of all residents under the age of 35. Even if this average age is a bit higher (recall our 40s are the new 30s”), this age group is hardly the first-time-homebuyer-type in Ottawa, due to reasons # 1 and #2 above.

There are many more reasons and I could go on, but I’m convinced the new mortgage rules won’t hinder new Ottawa homebuyers.

What I would put my money on however is that household debt is the much bigger elephant nobody wants to face and in the long-term, its the wild animal few Ottawans or Canadians might be able to tame. The mortgage landscape is due for a shakeup, but not because of new compliance rules. For the most part, thanks to historical low rates, Canadians can afford their current homes. In our age of consumerism, theres less and less money devoted to mortgage pay downs, savings, investments, emergency funds and retirement plans and more money going towards LCD TVs, iPhones, iPads, new cars and exotic vacations. Whether out of choice or necessity, people aren’t making do with less; they’re buying more with less. When interest rates do rise, it shouldnt be Finance Flaherty we blame for cooling the housing sector or the broader economy, we might want to look in the mirror at that elephant and love of indulgences.

Im not against nice TVs, cars or a great vacation. We’re fortunate enough to have an LCD TV and we’re planning on taking a great trip later this year. But personally speaking, those items only come through savings and patience for us. We dont buy TVs we couldn’t pay cash for and we don’t take vacations that arent paid for before the plane leaves the gate.

In closing, Aprils mortgage rule changes will impact only a select few currently on the fringe of buying their first home. The fringe will become mainstream if household debt continues to escalate as it has in recent years, partly because of the false security created by historically low mortgage interest rates and our growing love of material goods. Like most things in life, anything that can be had too fast, too often, too much and too easily eventually comes with too many consequences. As our collective household debt grows, I hope were ready for them.

What do you think? Are new mortgage rules going to change the borrowing landscape in Canada (or in Ottawa)? Or do you think household debt is the larger issue here and mortgage rules are the government’s backhanded way of notifying the public about this issue? Your comments are always welcome!