To buy or not to buy, that is the question.
A recent report by the National Bank of Canada suggests it might be cheaper to rent than to own in some expensive real estate markets in Canada. Many thus wonder whether they might be better off renting if the monthly rental payments are lower than the monthly mortgage payments.
There is no one right or wrong answer to the question of whether to rent or buy. In fact, the answer depends on individual circumstances, taste preferences and housing market conditions.
In the long run, though, homeowners often fare financially better than renters because homeownership enables forced savings that accumulate over the years, growing into a sizeable nest egg.
The National Bank report revealed that the monthly mortgage payment on a median-priced condominium was higher than the average monthly rent for a similar unit in Toronto, Montreal, Vancouver, Victoria or Hamilton. At the same time, monthly mortgage payments were lower than rents in Calgary, Edmonton, Quebec City, Winnipeg and Ottawa.
The Bank’s report compared the total mortgage payment with rent. But in so doing, the report unintentionally exaggerated ownership costs and understated rents.
The monthly mortgage payment comprises two parts: the mortgage interest and the principal amount. The principal being repaid each month is a form of saving. A comparison of the net mortgage payment that excludes the principal is likely to change the calculus in ownership’s favour.
In fact, a report comparing the ownership and rental costs by veteran housing economist Will Dunning revealed that when the principal repayment is netted out, the cost of ownership is less than renting in most combinations of housing types and locations.
Before the principal repayment is subtracted from the monthly mortgage payment, the author found that, on average, the “cost of owning exceeds the cost of renting an equivalent dwelling by $541 per month.” After the principal is subtracted, however, the net ownership cost is $449 less than that of renting.
In markets with growing demographics and economies, housing prices often rise over time, resulting in even greater capital appreciation. Dunning’s calculations, though, did not include price increases over time because of the uncertainty associated with the magnitude and timing of house price changes.
The long-term financial benefits of ownership are also well established. Dunning used data from Statistics Canada to compare the wealth status of renters and owners. As expected, he found that homeowners were “distinctly better off financially compared to tenants” with similar age and income profiles.
Rental units are often not of the same quality as owned units. The difference in structural quality, especially in purpose-built rentals, is part of the reason that rents on average are lower. A true comparison would require comparing the rents and ownership costs for the same units.
… when the principal repayment is netted out, the cost of ownership is less than renting in most combinations of housing types and locations.
according to housing economist Will Dunning
Even when one agrees with the numbers presented in the National Bank report, other challenges with renting remain. For instance, the cities with high housing prices and lower average rents might seem attractive to rent, yet renting could prove challenging given the low rental vacancy rates.
In Toronto and Vancouver, the rental vacancy rates are down to one per cent. Finding a rental unit in one’s desired neighbourhood has become increasingly difficult because many households who would have changed tenure from renting to owning, couldn’t do so anymore because of higher prices and stringent mortgage regulations.
The result is an even higher demand for renting, which is pushing rents higher and vacancy rates lower.
Statistics Canada’s data on income dynamics show that the average household income of owner households is twice that of the renters. Whereas the renter households’ incomes have grown faster than owner households from 2006 to 2016, the gulf between their incomes is too large to be narrowed considerably even in the long run.
Higher household incomes not only facilitate the transition from renting to owning, they also enable households to select more desirable neighbourhoods, for example superior-quality school districts, where rental units may be few or non-existent.
Renting might still be preferred for younger cohorts, such as the millennials, whose careers might take them to different cities or countries. The fixed costs associated with home purchases in the form of transfer taxes and commissions could prove a deterrent to relocate for exciting opportunities elsewhere.
It makes sense to many in Montreal to rent and in Calgary to own. Thus, a prudent answer to the question of whether one should rent or buy is ‘it depends.’
Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.