Net Cost of Owning Versus Renting
Mr. Will Dunning, Chief Economist for Mortgage Professionals of Canada, released an insightful report called, Owning Versus Renting a Home in Canada, release September 2018.
Increase in Home Prices vs. Renting:
- According to the Canadian Real Estate Association, over the last twenty years, home prices in Canada have appreciated by an average of 6.2% per year.
- According to CMHC, rents over the past twenty years have increased by an average of 2.7% per year.
- Statistics Canada reports that during the same period, the average weekly wage rose from $573.47 in 1997 to $955.81 in 2017, or an average rise of 2.6% per year.
- RBC: Canadian Housing Affordability is at a 30-year low
Given the discrepancy, does home buying still make sense and are young people better off renting?
Yet Home Ownership is at an all-time high
Notwithstanding the perceived “deterioration in affordability” due to price increases, “Canadians remain highly interested in becoming homeowners, and they continue to succeed at buying homes.”
Mr. Dunning reports that compared to renting, those able to invest in ownership would be better off in the long term as opposed renting.
- He agrees that upfront monthly costs for renting can be cheaper in most locations.
- However, the net cost of owning a home compared to the comparable rental cost is less and more cost effective over time.
And that’s without considering a home’s appreciation.
The Net Cost of Owning Trumps Renting
Over time the cost of owning or renting will both rise. The net cost of owning, however, takes the following into account. The largest cost of ownership is the mortgage payment which typically becomes a fixed amount over the term of a mortgage contract, as in a five year term.
During this period, and with each mortgage payment, a portion of the principal is paid down increasing the owner’s equity in the home.
This savings effectively reduces cost resulting in a net cost savings.
Here is the Result on Average
According to Mr. Dunning, the result, based on a Canadian average price of $569,849, 20% down and a 3.25% over 25 years is as follows: On average, the cost of owning exceeds renting a similar home by about $541 per month.
Yet once the “the principal repayment is considered, the net cost of owning is $449 less than the cost of renting.”
Over 25 years or less, once the mortgage is paid off, he projects the cost of ownership to be about $1,549 per month versus $4,655 for renting a corresponding dwellings. What’s more, because the lifetime costs of housing is lower than that of tenants, owners have a greater opportunity to accumulate more savings tend to be better off financially.
How Does This Pan Out in Niagara
The regional overall average price year-to-date is about $470,000. Based on the same parameters as above, the net cost of owning exceeds the cost of renting by about $640. Minus the principal repayment, the net cost of owning is $380 less in the first month.
Over year one it’s about $6,400 less, given the principal repayment.
Other Housing Costs
Average annual increases for housing costs in Canada for the past 5 years:
Property taxes 2.8%;
Home insurance: 5.4%;
For full report, Google Owning versus Renting in Canada-Mortgage Professionals.