Owning beats renting in many cases
By Jim Middlemiss • Bankrate.com

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 2004.

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 tax payments

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.

The GE 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.