Owning beats renting in many cases
With Canada's housing market hitting records for both
home prices and the number of units sold, and with interest rates
near historic lows, many consumers wonder if it's the right time
to buy or if they should continue to rent.
Peter Vukanovich, president and CEO of GE Mortgage
Insurance Canada, a division of GE Canada Inc., says it is as much
a lifestyle decision as it is a financial one. GE Mortgage is the
private-sector supplier of mortgage insurance in Canada, covering
home buyers who don't have 25 percent or more as a down payment.
"I don't think financial consideration is the
only thing to take into account to determine whether you rent or
buy," he says. "Lifestyle and the whole psychological
thing around having a place that you can call your own" plays
an important role too.
"Obviously...your ability to maintain the property
is a major part of the decision," he says. The good news is
that "affordability is at an all-time high. Rates are low,
price increases are stabilizing and incomes are rising."
It's a potent blend that makes for a hot housing market,
and experts expect home prices to rise another 3 to 5 percent in
Important factors to weigh before buying
So is it worth entering the market while prices
are rising? Michel Matifat thinks so. A chartered accountant and
financial planner with KPMG in Vancouver -- one of the country's
most expensive housing markets -- Matifat recently crunched the
numbers for a client who wanted to buy a $300,000 home.
Matifat says potential buyers should examine three
factors in deciding whether to rent or buy:
- how much money you have to put down
- how much you currently pay in rent
- how much you can afford to pay in monthly mortgage and municipal
First, in order to obtain a conventional mortgage,
you need 25 percent of the purchase price -- in this instance, $75,000.
The buyer would then need a mortgage of $225,000. At a 4 percent
interest rate amortized over 20 years, Matifat says the payments
would work out to $1,360 a month. Add $200 a month for property
tax, and the carrying cost would be around $1,560.
However, he notes, you would have to put up $75,000
-- money that could otherwise be invested to earn income. Essentially,
that money is frozen, unless the value of your home is rising.
Also, there are utilities, home insurance -- which
is becoming more expensive -- and maintenance to factor into the
cost equation, all of which would increase your monthly expenses.
The upside to renting
Compare that to renting, where the hot housing
market has caused a rising vacancy rate, as more and more renters
opt to become home buyers. The average vacancy rate in Canada's
major centres now stands at 2.2 percent, up from 1.7 percent a year
ago, according to the CMHC.
"Nationally, vacancy rates have increased across
the range of rent levels in a number of large centres," says
Bob Dugan, chief economist at the CMHC.
The result is that in some places, rents are flat
or slightly decreasing and landlords are offering incentives, like
a month's free rent, to entice tenants.
That makes renting appealing, but there are other
associated costs to consider. Renters might have tenants' insurance,
but that likely costs less than a home insurance policy. Utilities
are sometimes included in rent, but upkeep -- like a new roof or
a kitchen renovation -- is the landlord's problem.
When your rent payment could be a mortgage payment
Nonetheless, the average rent for a two-bedroom
apartment in Toronto is still $1,040, down only 0.7 percent from
last year. Amortized over 25 years, that payment could carry a three-year,
$180,000 mortgage at the going rate of 4.85 percent. A renter would
then turn an expense into an investment and build up equity in her
home instead of paying her landlord's mortgage.
Mortgage Web site contains a sophisticated buy-or-rent calculator
that can help you analyze whether your financial situation
makes it worthwhile to buy.
Jim Middlemiss is a freelance
writer and lawyer based in Toronto, Ontario. He's a frequent contributor
to National Post, Investment Executive and Wall Street and Technology.