Low interest rates and attractive financing options are encouraging more Canadians to buy instead of rent, even though home prices are rising more rapidly than landlords' levies, a recent Statistics Canada study suggests. Only about three in every 10 Canadian households currently rents, compared with four in every 10 in 1986, Stats Can reports.
So, should you be among them? Well, to many people, the psychological benefits of buying are almost impossible to overcome. Pride of ownership is a very real phenomenon. Plus, owning a property gives them the secure sense that, if nothing else, they have a solid asset to fall back on if something goes awry.
But it's also a choice that ties up hundreds of thousands of dollars that might be invested more safely, and sometimes more lucratively, elsewhere. And while the real estate industry likes to play it down, home ownership often carries a set of unexpected costs, particularly for first-time buyers. Ask anybody who has had to fix a roof and rip up an entire driveway in the same year.
Still, it's hard to argue with building up equity in a property. In fact, most Canadians who own their homes can expect to grow wealthier over time than renters, suggests recent research by Tsur Somerville, a professor at the University of British Columbia's Sauder School of Business. However, in a few large Canadian cities, renters may be able to outdo their owning counterparts in terms of wealth accumulation, so long as they remain highly focused.
In those centres, buying may not be quite as beneficial as realtors and mortgage brokers have made it out to be. Buyers have to pay property taxes on top of their mortgage, while renters have the taxes included in their monthly rent bill. Buyers also face thousands of dollars in closing costs. Renters, meanwhile, can invest what they would have spent on closing costs and a down payment in the stock market, an attractive alternative in recent years.
The study compares the result that homeowners achieve by paying down a mortgage, with what a renter could amass by investing the down payment instead, and putting the difference between ongoing owner and renter costs to better use.
Somerville and his team looked at nine Canadian cities and created multiple scenarios, to allow for variations between the costs of owning and renting, the type of rental properties available, and various mortgage contracts on the market. The analysis covers the period from 1979 to 2006.
On average, across all scenarios and cities, renters can't accumulate the same wealth as owners, and the gap grows dramatically when the researchers included such factors as investment fees, the tax-preferred status of homeownership, and the fact that mortgage interest is not tax deductible as it is in the United States.
Renters, for instance, could not match the wealth of homeowners in the dynamic real estate markets of Calgary and Toronto. Owner wealth accumulation in Toronto has been fuelled by fast-rising house prices, while in Calgary, tenants had a hard time catching up with owners as low vacancy rates and relatively higher rents translated into less of a difference to potentially invest.
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in these high-flying regions would have to rise more than 5% a year for a typical buyer there to do better than a renter.
But the wealth accumulation gap is not as insurmountable in other markets. Under best-case conditions in Ottawa, Winnipeg, and Vancouver, Canada's most expensive housing market, renters could accumulate at least as much wealth as owners. In these areas, even though rents have recently jumped, the costs that come with buying a home remain a lot higher than the costs of renting. As a result, buyers are basically betting that home prices will rise smartly in the near future.
Under the same scenario, astute renters in Edmonton, Halifax, and Montreal could accumulate 24% more wealth than homebuyers. Even here, the “best-case” scenario requires renters to invest more than 80% of the difference between owner and renter payments in equities, searching out products with low investment management fees at the same time.
It's worth noting that the nature of this comparison probably downplays some of the benefits of renting. First, renters are able to invest in much more liquid assets with little or no sweat equity involved. For homeowners, accessing housing wealth means either selling their home, taking out a mortgage, or purchasing a reverse mortgage. The first can take months and is extremely disruptive, while the latter involves a significant build-up of debt. Second, renters are able to create a much more balanced asset mix. In the analysis Somerville used, owners have 100% percent of their assets in residential real estate – not a prudent choice for most people.
The results of this research show that only renters who are highly disciplined, savvy investors are able to match the wealth that owners can accumulate simply by making their mortgage payments, says Somerville. Ultimately, he adds, “this suggests that a tremendously significant benefit of homeownership for individuals is that the constraint of mortgage payments effectively forces home buyers to save by building equity through the repayment.”
Math doesn't lie. To see if it makes financial sense for you, check out our Rent vs. Buy Calculator Here