Should you buy or rent?

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Ownership trumps rent in most scenarios: study

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Rent or buy? It’s a question that has plagued countless Canadians over the years, but as real estate prices skyrocket, deciding whether you would be better off financially buying a home or if you would come out the same or even ahead if you rented and invested your money. elsewhere it has taken on a new urgency.

“For many people, buying a home, especially a first, is a historic event and one of the most challenging decisions we will make in our lives. It’s a decision that is generally based on a lot of work, ”says economist Will Dunning, president of Will Dunning Inc., a consulting firm that specializes in housing market analysis.

In a study he conducted for Royal LePage (https://marketing.rlpnetwork.com/Communications/Rent_vs_Buy_2021_Report.pdf), Dunning concluded that for those who can make a 20 percent down payment, secure a mortgage of 25 years old and planning to stay in their home for at least 10 years, it is more financially beneficial to buy a home in Canada than to rent it long-term in 91 percent of the cases analyzed.

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“The message from this report is pretty clear: Most Canadians believe that home ownership is in their best interest and I think most of the time they are right,” he says. But young people are inundated with messages that suggest they are getting used to living a lifetime in rentals.

While there is nothing wrong with that, Dunning is “convinced that throughout our lives most of us will be better off, financially and in many non-financial ways, as landlords rather than tenants.” One notable exception: people who move frequently.

For them, renting can often be a better option from a financial point of view. In 253 of 278 scenarios you studied, the net cost of owning a home, which was calculated by taking the total cost of ownership and subtracting the savings through repayment of principal, was lower than the rent.

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Consider this example: based on data for the second quarter of 2021, a home that costs $ 2,795 a month to rent, including utilities, would cost $ 3,499 a month to own, including property taxes, utilities, and maintenance , with an amortization of 25 years.

At first glance, homeownership appears to cost $ 705 more a month. But remember, mortgage payments include principal and interest, and the principal component can be seen as a form of savings, even if it is forced savings.

Although the owner must pay the full amount each month, the principal is not an actual cost. If the buyer views the equity portion of the mortgage as savings, the monthly cost of the property drops to $ 2,026, or $ 769 less than the rent.

Also, the interest component is higher in the first month and gradually decreases over the life of the loan, effectively increasing the amount of forced savings each month.

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In nine percent of the scenarios where renting was more beneficial than buying, the cases were concentrated in luxury homes in expensive neighborhoods. Additionally, monthly savings were minimal for this demographic of $ 245.

“Historically, homeownership has been very profitable for Canadians, many of whom have taken their real estate investments into account when planning their retirement,” says Karen Yolevski, COO of Royal LePage. “Owning a home is widely seen as a means of saving money and creating value.”

The study calculated how homeownership might work as an investment, making different assumptions about how much values ​​might change over the next decade. The calculations found that even with a 10 percent drop in home prices, about half of the homeowners studied would still see a positive rate of return on investment. The other half, meanwhile, would break even or see a modest loss as an investment.

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If there is no growth in values, the property would result in a positive rate of return on investment in most cases. Other scenarios in which values ​​rise show increasingly attractive rates of return. “While Canadians want their homes to appreciate, potential buyers will find it reassuring that a significant price appreciation is not necessary for the property to be financially worthwhile. There are other benefits to owning a home in addition to the financial advantages, ”says Yolevski.

Owning a property allows more freedom and stability than renting. As a homeowner, you don’t have to worry about the landlord raising the rent or forcing you to move, and you can make the place your own with renovations and decorations, he notes.

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“I think most Canadians would agree that owning a home is as much about putting down roots in a community and creating memories with family, as it is about financial security.”

It’s time for a ‘reboot’

In his study for Royal LePage, economist Will Dunning argues that government policies stand in the way of homeownership for many Canadians and calls for a “reset.”
For starters, mortgage stress tests require individuals to demonstrate that they can afford a mortgage interest rate that “has no prospect of occurring in the foreseeable future.” He believes that the rate used in the tests should be “substantially reduced” to the maximum rate reported by the Bank of Canada in its official data for new mortgages with terms of five years or more.
Dunning also believes that 30-year repayment periods should be allowed for secured mortgages. “One of the two biggest impediments to buying a home has been the enormous amount of money that has to be spent on repaying the principal each month,” he says. The forced savings through a 25-year mortgage is equal to 12 percent of the income of a typical buyer; for 30-year amortization, it is typically nine percent of income.