Renting vs Owning Your Own Home
When it comes to housing, renters tend to be as undecided as Hamlet. To buy or not to buy; that is the question. And there are no simple answers, especially not in Canada’s hottest real estate markets, such as the lower mainland of BC and southern Ontario. It all depends on where you live, how you live, the current state of the housing market, and how disciplined an investor you can be.
Questions to Ask Yourself before Buying a Home
Financial advisors and mortgage lenders usually begin by asking would-be home buyers a few general questions about their long-term plans. Do you expect to live in the house at least three, and preferably five, years? If not, you may not recoup your upfront costs, such as legal fees and land transfer taxes, and your selling costs, which are dominated by realtor commissions. How large is your down payment? Low interest rates and less than 10 percent down may look like an attractive way to enter the market, but a high-ratio mortgage and a 30- or 35-year amortization period are no bargain over the long run.
The Hidden Costs of Ownership
As the U.S. experience of the past two years has shown, home ownership isn’t for everyone. In weighing the cost of renting against owning, prospective buyers need to consider the hidden costs of ownership – everything from property taxes and utility costs, to condo maintenance fees or repairs, and other routine operating costs of a private home. Then there are some costs that are hard to assign a dollar value, such as the amount of sweat equity that goes into home ownership. Renters enjoy the leisure and convenience of someone else having the responsibility for mowing the lawn, raking the leaves, shoveling the snow, and taking care of pipes that burst during a cold snap.
How Do the Numbers Compare?
When it comes to crunching the numbers, researchers looking at Canada’s complex real estate markets say there are so many variables that buyers need to look at their own cities in detail to determine when to take the plunge.
In a 2007 study, the University of British Columbia’s Sauder School of Business came to the conclusion that, on average, home buyers are better off financially than renters – except when they’re not. In stable housing markets like Edmonton, Halifax, Montreal, and Regina, the study showed savvy renters could accumulate about 20 percent more wealth than homeowners over the same period by paying less for shelter and then investing the savings in a disciplined way.
Renters in Vancouver, one of Canada’s most volatile real estate markets, could break even with homeowners if they invested their surplus cash wisely. That was also true of Ottawa and Winnipeg renters. Meanwhile, Toronto and Calgary buyers proved to be much wealthier than renters – if only on paper – because of the appreciation in the value of their home compared to what the stock or money markets yielded on a renter's savings.
How Renters Can Keep Pace
Appreciation in the value of their house has been a primary driver of net worth for the average Canadian family in recent decades. Nevertheless, Professor Tsur Somerville, the lead author of the UBC study, told The Globe and Mail that renters could keep pace with homeowners on the lifelong road to higher net worth provided certain conditions are in place.
“For renters to accumulate the same amount of wealth as owners, they must be extremely diligent savers, invest in high-yielding instruments, do so with minimal fees, and have the good fortune to live in one of the cities where the right combination of low rents and/or low house price growth allows them to invest in a relatively higher return financial asset," Somerville said.
What’s Right for You?
The question of whether to buy or rent is often a lifestyle issue. But it can also be a question about how you choose to save. For many new homeowners, the unceasing burden of making monthly mortgage payments serves as a straightforward, enforced savings plan.
If you’re interested in purchasing a home, contact Creative Arts for advice on the right mortgage for you, and how you can make your dream of home ownership a reality. If you’re a renter, and happy to stay that way, Creative Arts can help you build your wealth through a range of savings and investment vehicles to make up for the real estate gains others are achieving.
You can reach us by phone at 416-642-6749 or 877-643-3660, or via email. Or drop by our office on the main floor of the ACTRA building for a confidential discussion of your options.