Canadian Housing

Your analyst is overly simplistic and therefore wrong.

You have left out housing expenses such as house maintenance, property tax, etc. that a renter would not have to pay.

Also, you are assuming the renter is not saving the difference between owning and renting and therefore has zero assets at the end of 15 years.

This is a simple illustration…the point was to be simplistic!

…taxes are already considered in the monthly carrying costs for the mortgage. But to be fair I’ve increased the monthly carrying costs to include a reserve for maintenance.

With a Canadian savings rate around 3% I think it is pretty safe to assume the renter would blow the difference on trips to Cuba. But a diligent renter would have $90,000 after 15 years. You make a good point here so I have adjusted the calculations accordingly.

Over the long-term the owner still comes out ahead.

Thanks for the feedback – I sometimes don’t have time to ensure my point is clear, so this is helpful.

I really wasn’t expecting this to be so controversial. It is a simple, back of the napkin example comparing ownership with renting. It is not meant to be a PHD thesis…

Here’s what I have to say about your points:

1. If the savings rate is negative, as you incorrectly suggest, the argument tilts in favour of the owner, not the renter. A negative savings rate means the renter is NOT accumulating assets at all. However, your assertion is wrong – as of Q4 2009, the savings rate in Canada was 4.6%. But you’re likely referring to older data.

2. You’re missing the point [and I wasn't clear enough] of the example. The example is someone that already owns a home (not someone looking to buy) and is wondering if they should sell and rent instead. There are plenty of people who own homes with $250k outstanding mortgage. At current re-fi rates a bi-weekly payment of about $950 (including tax) would pay off the house in about 15 years.

Forget the asset accumulation, maintenance, my example, etc. for a second…this is about lifetime costs. The comparable cash rent expense for 40yrs (best case, assuming no rent increases and rent stays at $1500/mth forever) is $720k. If someone in their 30s can’t work out how to acquire and maintain a home for less than that, we’re in big trouble. Moreover, this 40yr timeline doesn’t consider that property transfers to the kids after death. The property has value to them too. This is what I meant when I said ‘rent is forever’.

3. Are you trying to say that maintenance, utilities costs you $750-1000 per month??? Mine are a lot less than that.

4. My example for home price appreciation was more conservative than the 2% you suggest. I estimated 0% appreciation. Furthermore, I estimated 0% appreciation in rent costs. Both are unrealistically conservative estimates over the long-term. I also conservatively didn’t count transaction costs in my calculations – selling a home to rent means you lose 5-8% to agents, lawyers, etc.

5. Which investors are getting 8-10% returns annually? That’s a hugely positive assumption on your part. Is that your forecast for equity returns for the next 25 years? Even if that’s the case, the portfolio composition for a 30yr old may achieve those returns, but as he ages he will become more risk-averse and expected returns will decline. Moreover, most investors get far less than market returns due to fees and poor timing.

Also, you’re looking a returns from an absolute sense. You should be considering risk-adjusted returns – that ’8-10%’ expected return comes with lots of downside risk. You can’t pay rent with a depreciated stock portfolio, but you can live in a worthless house. Also, if equity markets do return 8-10% going forward, it is probable that real estate values are doing reasonably well too.

Another reason why many people choose to buy in Toronto is the lack of family-size rentals in prime neighborhoods. Most people with children don’t want to live in an apartment or share a house with younger renters but there arent many options in prime locations. If you want to live in a two story home in a great neighborhood with good schools like say Riverdale or Leaside, you simply won’t find anything to rent regardless of price. Before buying our first house in Leslieville, we pounded the pavement for a rental house as we didn’t have enough for a down payment. We looked for months and found next to nothing. The only houses available were dives or located on very busy roads, so not suitable for kids and pets. We decided to buy because renting was not a viable option. Just some food for thought.

http://www.thehousefly.ca

You left out the opportunity costs of using the left-over money from renting.

For example, if renting at $1500 vs property at $2000, you have $500 left over to invest at 8% in the markets. If you were owning, you wouldn’t have that money to invest.

What about the potential if the house has a suite in it. There’s an extra
600-700/month income that could be
invested or paid toward the mortgage.

That would definitely work in the owner’s favour. But being a landlord is a hassle.

I left out a lot of things for the sake of simplicity. My view on the potential return on the $500 left over is that it comes with risk. Look at the S&P 500 over the past 10 yrs…about -2% annualized in USD. Much worse in CAD.

With a house, even if the asset price depreciates it still has big utility – i.e. you can live in it. Call me conservative, but I’m not comfortable relying on the stock market to cover my future shelter expenses.

I agree. I’ve considered selling and renting many times, but whenever I look at rental properties in TO anything comparable to my house comes with ridiculous rent.

I will simplify even further…$720,000 lifetime expense for the renter with 40yr life expectancy. It’s not hard to make the numbers work.

let’s look at it this way, you purchase a $450k home and you are selling it for $600k netting $250k after mortgage payment of $300k in major downtown center. You wait 12-18 months as prices cool due to higher interest rates etc and you could then move to the burbs and likely buy a buger home for the same $450k with a 200k mortage. you just saved $100k on your mortgage

granted this is all dependant on your curent location but people have an opportunity right now to sell high and gain with a lower mortgage down the road.

It is also dependent on transaction costs (both ways) and perfect timing. Will the home price decline more than make up for transaction costs? Also, don’t forget about rent.

Also, timing is hard. Many tried this strategy in Canada 1-2yrs ago expecting the Canadian market to correct.

Anyone who buys a house now is going to suffer later. The affordability index of housing in Canada is through the roof; it is currently cheaper to rent than buy. Add to this that we are in the middle of the deepest recession since the great depression; Canadians are not receiving cost of living salary increases; Canadians are carrying record debt loads; the unwinding of the baby boomers assets, of which housing is the largest asset; the increase of taxes (HST) and the increase of mortgage rates as seen within the last few weeks. All this points to the making of a depressed / buyer’s real estate market. Housing will be coming down in price within the next two years; real estate pundits say somewhere between 15% and 35%. Don’t listen to realtors if you’re thinking of buying a house, they want to make a commission and if they aren’t selling they don’t make any money. So rent for a couple of years and wait for the housing prices to come down and you will be rewarded when you purchase your house.

For those of you who currently own a house and are thinking of selling put it on the market now, before the correction occurs. Be prepared to take a lower price than you want, but you’ll still be profiting IF you can sell it. Buy low and sell high…now is the time to sell.

Hi guys,

I have to laugh when I see the “anti-owning” bias – especially on the web comments boards. I see people – no moral judgement here, just observation – who just do not have the mental time horizon to see the logic of owning. Look, I own two properties, I got lucky, but I also know that the reality is, if you play your cards right, in 20-30 years, you get a free house. If you rent, you never do. How many of my tenants put away the difference between their rent and what they would pay to maintain the home I rent to them? None. I wouldn’t either. Most of us need a forced savings plan. Yes I have given up a lot that I miss: my last cheap-ass sun vacation was in 2007, and before that in 2001, and before that in 1996. Would I rather be in Cuba sipping mojitos twice a year? You bet. Am I rolling in money? No way. Do I like fixing things on Sunday morning because my tenants need that? No. But I do see that in 20 years or so, I will get (inflation increased) rent free of a corresponding mortgage payment, and I will have no mortgage payment myself – assuming the siren call of mojitos does not sway me from my righteous path. In this situation, there are only two categories of people, those who pay rent, and those who collect it. I know which category I like. You can make all the speculative comments about prices you want, but my neightbour thought he got ripped off when he paid $5K – yes $5,000 – for his house 50-60 years ago. I paid $250K for mine across the street from him. I sold it for $600K. What the pro-renter crowd does not understand is the inexorable decline of interest costs over time, and the fact that one repays the purchase price in dollars diminished by inflation. I think a lot of this anti-owning bias springs as much from personal immaturity as from mathematical ineptitude, but that’s getting personal now.