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Should you buy or rent?

June 19,2007
Gordon Powers
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.”
Posted on Tuesday, June 19, 2007 at 11:10PM by Registered CommenterElaine in | Comments3 Comments | References1 Reference

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Reader Comments (3)

Good Article!

The following is my opinion from the UK!

House prices have been the lowest in May, this has been an opportunity for me to buy a house! Prices are in houses have fallen as you can see from this list -

However, renting may be best in the short term but if we consider the long term i think we can all agree that buying property is far wiser. Do you agree?

Thanks for this interesting article!
July 6, 2007 | Unregistered CommenterAlan Jones
Excellent article!

IMO, buying is definately the way to go these days, based on teh current rates. but not everyone is in the positin to do so, expecially singles amd students.

I dont' know what teh situation is like in other cities, but Toronto has a lot of rental properties available, in all price ranges and locations, ine just has to look.

July 14, 2007 | Unregistered CommenterJenny
Buying a house in today’s market is the worst financial decision ever. With current house prices in Canada so high it doesn’t make any sense to buy, keep renting and this is why. Considering the average Canadian home cost $344,000 and today’s buyers are young couples between 25 and 30 years of age and most already have student loans and other debts and don’t have any down payment. Not to worry the Canadian Banks will give them a 40 year mortgage with no money down. 68% of all mortgages today are of the “NO MONEY DOWN” type. If you think that is safer than an American sub-prime loan you’re mistaken. A monthly payment on a $344,000 loan is $1992.72 a month. After 40 years you end up paying $997,566.44 for a house that cost $50,000 to build. The Land transfer tax and closing costs would be over $20,000 in some provinces. The property taxes alone would be $400 per month for as long as you live. House maintenance and yard care would be $2000-$3000 per year. Even if you could pay off you mortgage (WHEN YOU’RE 75 YEARS OLD) which you won’t, you would have spent nearly $2,000,000 to live in that home. Do you really think you will ever see your house worth 2 million dollars someday………..pphsst dream on!!!
To make a long story short, if a renter were to take what they would pay just for property taxes and put that monthly payment away in a high yield savings account for the same length as the mortgage (40 yrs) they would have 1.28 million dollars to retire on. Starting with $0 and depositing $400 monthly over 33 years and 4 months (at a rate of return 9% compounded monthly), you will save $1,005,971 accounting 101. Think about it….to buy a house in today’s market is the absolute worst investment you will ever make.
June 20, 2008 | Unregistered CommenterDoug

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