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Should buyers beware?

Deciding whether to rent or buy should be based on a lot more than just the asking price


 
Should buyers beware?

Mary Altaffer/AP/ DARRYL DYCK/CP

In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.

Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.

The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.

Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.

Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”

Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.

More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”

In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.

For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.

Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.

A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.

There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”

Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.

Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds­. Easier said than done.

Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”


 

Should buyers beware?

  1. So many people seem to look at home ownership as something you HAVE to do. I make decent money and could afford my own home, but not in the same area I rent in. I would have to take a lifestyle hit to own and I'm not convinced it would save/make me money. Sure, some people see renting as throwing money away, but I see condo fees, mortgage insurance, repair bills, and locked-up money (not to mention increased vehicle costs for more commuting) as throwing money away too. And as a renter, if my neighbours are jerks I can just move away!

    • John D, you make an excellent point!

      the only time it really makes sense to own is when you buy low and sell, which nobody can predict

      • I think it can make sense if you have a good amount of money ready to put down, and you are able to buy the same house/neighbourhood you would otherwise rent.

    • If you pay rent, you are paying the equivalent of condo fees, mortgage insurance, and repair bills.. they're just not listed separately.. or do you think your landlord simply eats those costs from the goodness of his/her heart? No, you're just paying them in an installment plan.

      Locked-up money was certainly a valid concern not terribly long ago, but these days there's a lot of new instruments out there that can give you pretty much instant access to your equity.

      That said, you're absolutely correct that you're giving up a lot of flexibility and probably some choice in locations for it. Looking ahead though, there rises the question of "Where do you live once you're too old to work?" Unless you're taking good care to save a decent amount while working, renting can mean that question doesn't have a very pleasant answer in your old age.

    • It really depends on the individual's situation. I feel being in the realestate market is a better idea then renting. People have to consider their comfort zone, which means not buying a huge home which they can't afford. I suggest their first home is just big enough for their needs with a minimum mortgage, highest affordable payments, and lowest interest payout, which can be paid off qiuckly. Once paid ,continue your payments into a secured account which will allow for a bigger down payment or buying your next home mortgage free. As a owner your property investment fluctuates with the market which means if you sell low you will also buy your next home at a lower price point. Consider the amount of interest or rent paid, as it will never be recovered. Make sure that of your second home will justify your needs for a long time, as the cost of moving (realestate fees, land transfer taxes, lawyer fees) are never regained. I'm a 50 year old, blue collar worker, and own our home and cottage mortgage free. If my wife and I consider moving, it will be most likely as small as our first one, which should free up equity for our retirement. I HAVE ALWAYS CONSIDERED INTEREST AND EXPENSES WHICH IS NEVER RECOUPED.

  2. Excellent article.

    My spouse and I have made the decision to rent. We're in Miami and the economic situation is so precarious that we need the ability to leave for reasons of economic opportunity at a moments notice. We know far too many people for whom the "owned" house is an anvil around their necks. They need to leave MIA but can't sell their house.

    • If you live in Miami why are you reading a Canadian article and thinking it would pertain to you? the US does not have CMHC or anything of the sort which is why your housing market died horribly (along with a lot of other reasons). so yeah buying in miami might not be a good idea but it doesn't mean that buying anywhere is a bad idea.

      • I am Canadian.

        The reason we do not buy is economic insecurity. This insecurity exists in Canada, though to less of an extent.

        The US does have organizations similar to the CMHC.

  3. I have to agree with John, reting is good so I rent my condo and work of it so I dont havbe to comute or spend any traveling to work money I also own properties were I just rent them and create pasive income if I am really in the need to get some cash I can always get a loan against my the properties that I own and rent if there is no need for that the properties are paying for them self and in no time I will still flip them and make some cash and move on to the next property.
    Regards
    Perry Estelle

  4. Great article!
    Buy or rent? I think that depends on what and when you want to buy. If you can get a house with a couple suites that you rent our in addition to living there that's a big help cutting down the cost of ownership. Not so great if you buy something you can barely afford that will hurt your quality of life just because you want to get into the market. So many people work in the city but buy a home an hour away because it seems more affordable without considering the time and expense of commuting.

  5. Media – Shut the @@@@ up, one week buy, next week don't. You people write stories to give yourselves jobs. You are playing with people lives!

  6. Renting is good, only if you're smart about it! If you're going to save an extra 400/mnth because you're renting, it's smart to put that 400 in a savings account… Unfortuantely, most people see that 400 as "extra" money, so they tend to spend it on something that's not completely useful… It all boils down to what you do with your savings… if you're going to spend the "extra" 400, you might as well put it towards a mortgage, and actually own a piece of property in the next 25-35 years… just my thoughts

    For all your Toronto Real Estate Needs, visit my website here: MyHomeFinder.ca
    If you are looking for any recent Toronto Real Estate News, check out my blog here: MyHomeFinder.blog.com

    Thanks,

    Vahab

    • People need to learn financial discipline, no doubt about that.

      Though at least with rent and savings people have the option to spend the money if they want or something comes up — if they're slaves to their mortgages, they have no options… a situation that would only get worse if and when interest rates go back up.

  7. Home ownership is more than just shelter. Building equity as soon as possible is very important for young people. For example, you're not sure where you might go after school so you decide to rent. Five years go by and you haven't moved yet but you have lost five years of equity. I think it is selfish for a few to deride ownership when doing so can cost young couples years of missed opportunity (by building equity). Renting only helps Landlords build their own personal equity while you get nothing.

    Another consideration is the "cost of waiting". If a condo costs
    $250,000 and you decide to wait a year and save a larger deposit, guess what, a year later that condo costs $265,000 (assuming prices rise by 6% – they have been rising between 5 and 8 % for years now). You would have to save $15,000 just to keep even.

    Talk to a real estate professional before you decide – there is more to consider.

  8. I disagree with Moshe — the bloggers and forum lurkers like myself have perhaps been getting overly financial in the debate, but the general public has not. Or, if they have — with dreams of increasing real estate prices and easy roads to financial freedom — it's because the financial debate has been very superficial. Far too often I've seen the old "rent is throwing your money away" line, or comparisons that forget to include big items like property tax, maintenance, or transaction fees. A financial notion only, not backed by any math. The debate is not nearly financial enough for most people. Indeed, I suspect that is how we got to a ~70% homeownership rate, a level that's even higher than the peak in the US, where people now openly admit that banks loaned money to people who had no business buying a home: by people deciding that they wanted the ownership lifestyle aspect without taking the time to do the math. Plus, those lifestyle decisions — when to move, how much space will be needed for a family and when — should at least partly factor into the financial equations anyway.

  9. Currently, I strongly believe in ownership for a few reasons:

    Interest rates are low.
    There's a ton of money being pumped into the economy.

    Put these two things together and you have a vastly increased money supply.. which easily leads to inflation.

    Inflation on your house value is alright.
    Inflation on your rent.. not so much.

    And with inflation will come an increase in interest rates.. making it harder for those who are renting to get out of that situation into buying. While those who bought earlier will have had an opportunity to pay down the debt before the rates rise.

    Also, an increase in interest rates *will* push rents up as landlords who owe will have to raise the rents to keep up, allowing those who don't owe the room to raise theirs as well.

    Finally, if you own your home you can easily become a renter. Going the other way not so easy.

  10. I have never earned a high salary and I'm retired now. If I had not bought a home along the way and made some sacrifices in order to pay it off quickly, I would have to continue working until age 100! My contemporaries who have never even bought a small condo are unable to retire and they pay exorbitant rent for mediocre little apartments in older buildings.

  11. Invest well, invest in real estate..

  12. I read this article and some of the comments quickly so I might have missed something, but it seems to me that people who think it's a good idea to rent all their lives are assuming that there will always be acceptable rental accommodation available. I hope that is the case in your community, but it is certainly not the case in my city. If you have lots of money in the bank and the rental vacancy rate is zero, you could still be sleeping on a neighbour's couch for an extended time, or paying hotel rates, or sticking it out in a substandard rental unit because there is nothing else available for several months or years until the rental market changes.

  13. I really have to wonder how people can afford to buy a home in the GTA or BC or many other cities anymore. Who makes that kind of money that they can afford a $1500-$3000 mortgage payment – along with car, utilities, savings, food???
    Salaries have not kept up with the cost of housing and that's a big problem.

    • Why not $1000 – $1500 mortgage payments. Start Smaller, save and then move up.

  14. It really depends on the individual's situation. I feel being in the realestate market is a better idea then renting. People have to consider their comfort zone, which means not buying a huge home which they can't afford. I suggest their first home is just big enough for their needs with a minimum mortgage, highest affordable payments, and lowest interest payout, which can be paid off qiuckly. Once paid ,continue your payments into a secured account which will allow for a bigger down payment or buying your next home mortgage free. As a owner your property investment fluctuates with the market which means if you sell low you will also buy your next home at a lower price point. Consider the amount of interest or rent paid, as it will never be recovered. Make sure that of your second home will justify your needs for a long time, as the cost of moving (realestate fees, land transfer taxes, lawyer fees) are never regained. I'm a 50 year old, blue collar worker, and own our home and cottage mortgage free. If my wife and I consider moving, it will be most likely as small as our first one, which should free up equity for our retirement. I HAVE ALWAYS CONSIDERED INTEREST AND EXPENSES WHICH IS NEVER RECOUPED.

  15. A bit too simplistic. Real estate is local and even then it depends on what you buy and what you plan to do with it. Most millionaires have their money parked in businesses and property. Hmmm.

  16. The main problem in our society is we have been conditioned to live beyond our means…want a new flatscreen t.v. I don't need? put it on a credit card…want top of the line appliances and leather couches? Throw it on a line of credit.

    Real estate is a proven, viable investment vehicle that can make you alot of money over the years as long as it is done right. You just got married, are a first time buyer, have a decent downpayment and the bank says you are approved for $500,000? Good, buy a townhouse for $300,000 and bank the difference….You have no kids and therefore no need for that huge 'dream home' just yet

    I'm a Realtor and I own rental properties…ownership makes you money in the long run, renting makes your landlord money.

    Buy a home, but be smart about it

    Any other questions email: mike@raccohomes.com

  17. Absolutely Botto, I own properties in Victoria and it is all about LEVERAGE people. Based on the numbers in this article; $20,000 invested in the market at 6% growth would be worth approx. $27,000 in 5 years, that same $20,000 invested as 5% down on a $400,000 home would be worth $72,000 in 5 years based on a 2.5%/yr incerase. Trust me, I LOVE renters! They are investing in my retirement fund every month!
    YOU SHOULD RENT!

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