Blessed by the Potato

Back when we talked about the gross debt service ratio, we discussed how sometimes a simple rule can scale in surprising ways.

A set percentage of your house’s value is a very common rule-of-thumb for estimating ongoing maintenance costs — 1% is typically seen these days (and what I use), though older articles from before the massive run-up in prices can be double that. It’s a tough thing to estimate accurately because there are so many line items and they’re all irregular; however, maintenance is a pretty big part of the cost of ownership so you can’t ignore it when considering the costs of shelter. A rule-of-thumb at least gets it in people’s minds — people who might otherwise only consider the costs they had to pay in the last few months (indeed, so many bad amateur rent-vs-buy considerations just use the mortgage payment). So if it’s even approximately right to +/- 50% I’m happy to continue to spread the rule-of-thumb.

In a comment this morning, Geoff says:

My issue with such articles about homeownership is that anytime they mention home maintenance, they use a percentage of the house value to estimate costs; this worked maybe when home price reflected the size of the house. But there’s no way that my 1961 built 1200 sq.ft house in toronto (worth I’d say $750,000 easy) costs more to maintain than my in-laws 3500 sq.ft house in Trenton (worth I’d say $150,000).

And that’s totally fair. The rule-of-thumb isn’t perfect, indeed even for Geoff and his immediate neighbours their maintenance costs may not be that close because of luck or the materials and workmanship they choose. To some extent size will matter, but a maintenance rule-of-thumb won’t scale perfectly with size, either: it costs so much to get a new furnace in the first place, and only a bit more for a bigger one; likewise the expensive kitchen/bathroom/etc. stuff only scales up a bit for larger houses, with most of the extra space being bedrooms/offices/living rooms that are basically simple shells. And within a jurisdiction size is usually captured by price increases anyway.

But keep in mind that there are other factors that will make a smaller place in the city more expensive to maintain than a larger one in the country, so there will be some scaling with price (though it’s never going to be a perfect set percentage).

For instance, the potentially higher labour costs in the city is a somewhat obvious one, but a much bigger factor is that the standards will be different. More expensive houses (larger or smaller) will be more expensive to maintain because they are lived in by people with more expensive tastes (or are situated in neighbourhoods with more expensive standards). For example, on PEI my parents’ kitchen is now about 20 years old, and still perfectly fine — heck, it’s probably still one of the more recent ones out there! In Toronto a 20-year-old kitchen would be scandalous and require a reno — a 10-year refresh is de rigueur — though in that case it may not be a cash cost as you can choose to not do it and just suffer relative depreciation (or reduced appreciation) relative to the trendy neighbourhood. Likewise, when a kitchen renovation does come up on PEI a whole new set of appliances would likely come in a fair bit under $5000; in a prestigious Toronto ‘hood each stainless steel, celebrity-chef-approved piece might run that much. Similarly for the rest: the standard for outdoor appearance in a less-expensive area might be a bag of grasseed and patience whereas in a million-dollar neighbourhood landscapers, sod, and shrubbery would be expected. Etc.

Indeed, it’s for this reason that I think the more common rule-of-thumb is value-based rather than size-based. And for cases of extremely expensive small properties or very cheap large ones, well, you’ll hopefully know to nudge your estimates up or down appropriately.