Should You Rent or Buy?

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I do the math on buy vs. rent for myself every year when my lease is up and I make the decision to sign on, move, or jump into home ownership. So far it’s never tipped in the favor of owning, even as real estate prices have fallen or stayed flat in my city five years running. However, making the case for renting instead of buying rarely is met with a positive response.

Last Thursday I sent a tweet that I didn’t think would go viral, otherwise, I would have double-checked my spelling and made sure the numbers for property taxes & utilities were in the right place (they should be switched):

A few hundred retweets and likes later, I had every real estate agent and mortgage broker in Canada losing their minds while every homeowner let me know why buying their house had no negative financial consequences whatsoever. A lot of people tried to remind me about the equity they were building, or why their utilities and property taxes wouldn’t be that much, or to let me know that in 25 years they’ll have a paid off house and I’ll “just be a renter”.

It was the best of times, it was the worst of times.

That tweet was not actually meant to incur the wrath of homeowners by suggesting renting is a better option. In fact, it was not meant to sing the praises of renting at all — only to point out that there’s plenty of wasted money in home ownership, just like renting.

Should you rent or buy? It’s up to you. Even if the math says “hell no!”, home ownership might offer enough emotional benefits for you to decide buy anyway. Likewise, buying a house might be cheaper but the benefits of renting far outweigh the cost of ownership, so you remain a renter. The way you want your life and your finances to look is entirely up to you, so spend (and live) accordingly.

Homes are emotional investments even more than they are financial ones. For most people, buying a home symbolizes adulthood as much as it does a retirement plan. Suggesting someone would be better off renting challenges the largest financial and personal purchase of their life.

You’re renting money from the bank or renting space from a landlord, but either way, you’re still renting

A homeowner is a renter, so long as they have a mortgage. Interest is rent. Taxes are rent. If you’ve found yourself in a situation where you pay both of those, you are a renter. There are many places where renting money is preferable to renting space, but Canada’s major cities are not one of them.

For a present example, here is a townhome currently listed both for sale and for rent in Calgary:

It is for sale for $399,000 and for rent for $1,650 per month.

If you were to put 10% down on this condo and financed it at 3.39%, your monthly mortgage payment would be $1,827. Because this is a townhouse, it also has $225 in condo fees (as listed in the description), which your total monthly cost to $2,052.

I don’t know what utilities are, but it doesn’t matter because utilities are not included in the rent so both the homeowner and the renter would have to pay the same amount. However, the homeowner will need to pay property taxes, which the Calgary Property Tax Calculator tells me were $2,560 in 2018, or $213 per month, bringing the monthly cost of owning the condo to $2,265.

Finally, homeowners are responsible for any repairs, maintenance, and renovations where renters are not. The townhome looks to be in good condition so may not need anything right now, but homeowners should always set aside 1-3% of a home’s value per year for when repairs and renovations are needed. We’ll lowball this even further just to prove the point and say you only set aside 0.5% of your home’s value per year, or a piddly $2,000. This is still an extra $167 per month the homeowner is paying that the renter is not.

  • Total homeowner monthly cost: $2,432
  • Total renter monthly cost: $1,650

The renter is ahead $782 per month. If they invest this in the stock market and earn a return of 10%, they’ll have $57,290 after 5 years. If they’re a bad investor and only got a 6% return, they have $52,898. Meanwhile, the homeowner will have paid down just over $51,000 on their mortgage during the same time frame.

But who is really ahead? It’s hard to say. If the renter also had $40,000 cash around for a downpayment but left it in the market while adding their $782 per month, they now have $122,000. Or $106,000 if they’re a bad investor.

The homeowner still owes $318,790 on their mortgage, but if their house has increased in value by 2% each year, it should now be worth $440,528, giving them $122,000 in equity.  If their house only increased in value by 1% in each year, they have $100,563 in equity.

The numbers are almost exactly the same. This is a good thing — it actually means the home is fairly valued compared to its rental price, and vice versa. But these numbers are speculative guesses, not fact.

Maybe next year the stock market crashes, or maybe the housing market does. Last year the S&P 500 returned 20% and the average price of Calgary attached homes declined 1%. Calgary real estate prices are expected to increase 0% in 2018. The stock market is expected to turn bearish within 6 to 18 months. We won’t know which was the best place to put your money until the time has passed. Until then, all investments are speculative.

In any case, all this comparison tells us is that the real losing position in this market is not renting or owning, but being a landlord. Don’t buy the townhouse to rent it out with the ridiculous idea that you can get “someone else to pay your mortgage” because you’ll still be on the hook for $782/mo and bleed cash every month it sits empty.

You’re not buying a house in 2005. You are buying a house right now.

Many people think additional costs of home ownership are passed on to the renter, but that is not always true. Yes, landlords may have bought 10 or 20 years ago, and their mortgages are lower or paid off and they are profiting off of tenants right now, but a Millennial cannot travel back in time a decade or two buy a house, so this is irrelevant.

Current renters are not asking the question, “should I rent now or buy in 2005?”. They are asking, “should I rent now or buy now?” and for most Canadians living in Toronto, Vancouver, Calgary, or Edmonton, the answer is rent.

I have been told that both house prices and rents go up every year, but since 2015 I’ve been experienced the opposite. I’ve recently made the decision to move, not the least of which was the opportunity to reduce my monthly rent by 25% while getting a larger apartment in a more desirable neighborhood. My new landlord gave me an additional $400 off my first month’s rent to sign a 1-year lease. Even with the costs of moving, I’ll come out so far ahead in the next 12 months it’s like I gave up lattes and avocado toast for the next 4 years.

This isn’t the situation everywhere. I know in Toronto and Vancouver, rents are rising just like house prices are. In some cities, young people are not choosing to rent instead of buy, they’re choosing to rent because it’s the only choice they have. How do you go about even getting a foothold in that real estate market? The truth is, sometimes, you don’t. That’s a tough and painful reality for young people who want to be homeowners. I get a lot of emails from 20- and 30-somethings earning decent salaries asking how they can ever begin to save up a down-payment for a house in Toronto or Vancouver. Unfortunately, it might actually be easier to give up the dream of owning a home than to save up $300,000.

What are the financial problems with home ownership?

Owning a home you love is great, especially if it appreciates in value to give you a return on your initial investment. The problem is, even if it appreciates every year, that doesn’t translate into increased cash flow to help you with your other financial goals.

If a 20- or 30-something stretches themselves to get into the housing market right now, they often do it at the expense of retirement savings or paying down debt. This is justified by the rationale that home ownership is a cornerstone of their retirement plan, and therefore they can forego dumping $200/mo into their RRSPs in order to meet their mortgage payments. Likewise, they’ll carry their student loan debt a decade longer than necessary because they cannot afford to pay it down faster. When the additional costs of homeownership hit them — everything from property taxes to the expense of a longer commute — many drown.

If you put 10% down on a $500,000 home and the mortgage payment plus all your other bills leave you with only $40 in leftover cash each month, it doesn’t matter if your house increases in value. You will still only have $40 leftover each month. Most Canadians actually already live this way, with more than half a mere $200 away from not being able to pay their bills. How did they get in this position? They have large student loan balances, they financed their cars for seven years, and they took out lines of credit to make 5% down-payments on houses they cannot afford.

Many that did manage to finagle their way into home ownership, used the equity amassed in their home through appreciation to take out a home equity line of credit — which actually means a good portion of homeowners are renting from the bank twice over.

RELATED: Why You Need To Put At Least 10% Down On A Home (And How to Save It!)

The main reason I’m not a great advocate of home ownership is that I know the average Canadian is in a precarious situation of financial vulnerability. They are extremely sensitive to even minor increases in costs of living and interest rates. For those whose mortgages come up for renewal, even a 1% increase can eradicate the pitiful change leftover from their monthly budget.

Someone who put only 10% down on a $500,000 home and financed it at 3% will still owe $396,559 when their mortgage comes up for renewal in 5 years. If rates have increased 1% during that time (and remember, they recently went up 0.5% in just 6 months) they will renew at 4% and their monthly mortgage payment will now be more than $200 higher.

Canadians cannot afford interest rate hikes or increased gas prices. They cannot afford the cost of food, electricity, or utilities to go up. They cannot manage a $500 emergency. This is the real problem with the math of home ownership, not the home itself.

Mortgage Brokers and Real Estate Agents are the Payday Lenders of the middle class

Those are fighting words, but it needs to be said. Why are mortgage brokers, banks, and real estate lenders defending home ownership to the death? Because they make wild commissions to do so.

Someone who has a vested financial interest in you buying a home will not bring a balanced financial argument to the table.

Their bias runs so deep, even they believe it. And why wouldn’t they? If they acknowledge that Toronto is a real estate bubble, they’d be forced to admit to being a charlatan leading Canadian families into financial ruin. But I don’t think they do actually see themselves doing that — I don’t think anyone has any more faith in the Canadian housing market than the professionals profiting from it. They stand to gain the most from it continuing at its irrational pace forever, so they will do what they can to make sure that it does.

Like payday lenders preying on the economically vulnerable, mortgage brokers also trap people in a debt spiral they cannot escape from. No down payment? No problem, your mortgage broker will move heaven and earth to get you a line of credit, so you can buy debt with debt.

RELATED: Why You Should Never Borrow Money For a Down Payment

Your mortgage broker or real estate agent does not care what happens to you after you buy your house. It doesn’t matter to them if you lose your job or get divorced. They do not care if interest rates rise or the market collapses and you end up underwater on your mortgage. It does not affect them if your debts remain unpaid, your retirement underfunded, and your budget stretched to its breaking point. These are the things you have to consider when you evaluate the costs and benefits (financial and otherwise) of home ownership.

I am not anti-home ownership

In fact, I expect to become a homeowner myself within the next 3 years, because since having a kid the non-financial benefits are starting to outweigh the financial downsides for me. I know that purchasing a house will cost me dearly in terms of stock market returns and passive income, which is why I’m not going to pretend its an “investment”, even if the property increases in value — but I also am not going to pretend there’s not a significant emotional upside to finally giving up renting.

I am, however, anti-bankrupting yourself for the sake of a mortgage and then acting superior to renters who actually may be the richest of all.


17 Comments

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  1. Amazing! It should be worth noting that in the next 12 months 47% of mortgages in Canada are up for renewal. This will likely severely impact the housing market and the economy. No one can tell what will happen which is why buying for a “guaranteed return” on a house should never be a factor in purchasing a home.

    Another thing is that in the major cities we have had a huge run up on real estate for the last decade or so and for some agents/mortgage brokers they have never seen a bad market in their careers. I believe that they are likely not going to know what to do if the major cities really take a hit and correct. Which is pretty scary to people who are selling their house and they are working with someone who never had to make an effort before because houses “sold themselves.”

    Great post!!

    Reply
    • Bridget Casey (Author)

      I’ve seen stats like that! It is legit terrifying that half of homeowners are going to be subject to increased rates over the next year.

      I feel like when I do buy it’s going to be at the top lol. Good thing it’s not an investment to me!

      Reply
  2. We went through the pre-approval process and then learned that my then-fiancé (now husband) was ruining everything (wink) with his low credit score. So we took him off the loan entirely and got approved. I am a teacher. Five years ago, I was a teacher. I don’t even think I made $50k. If that doesn’t prove your point, I don’t know what does.

    (Also, we are fine. I made sure we wouldn’t be house poor even though the lender was all 🤷🏼‍♀️. US 30 year fixed at 3.5%. But I hate my mortgage with every fiber of my being.)

    Reply
    • 30 year fixed rate at 3.5%. The planning that you can do with that information is incredible!

      We closed 5 years ago got 5 year rate of 2.99% and renewed in mid-2016 when interest rates were low for 2.19% for 2 years. Had to pay a penalty but it was worth it as it saved us about $5000. Our mortgage is up for renewal again this year and with the new rules for homebuyers as well as the higher interest rates we would be thrilled if we got 3% but we know we will likely get 3.5% or so. At this point we can’t do too much planning on when the mortgage will be paid off because we have no idea what the interest rate will be in 6 months nevermind 5 years from now. At this point we will likely lock in for 5 years if we can to provide some stability to the next years with daycare.

      Reply
  3. Erin

    This was a great post. I live in Barrie which experienced the insane housing market earlier this year. Prices have corrected a bit but it’s still bad. If I would of bought 3-4 years ago I could of easily got a 1 bedroom condo for like $180k. Now the same condo would be $350k minimum. But I liked the ease of renting and having no responsibilities.

    I got approved for a mortgage back in October. Despite having a great job and near perfect credit I have never felt so hopeless as going through this process. What I was approved for back in October I felt was basically nothing (for my city anyway) but since it’s been over 90 days I had to re apply and now am approved for $40k LESS because of the increase in rates.

    Reply
  4. Laura

    I currently rent but would like to buy in my 30s when I have a sizeable down payment saved.
    For me, the biggest perk of renting right now is that I’m satisfied in a 1 bedroom unit. If I were looking to buy right now, I’d want much more space.. Renting allows me to rent what I need right now, instead of anticipating what I want down the road.

    Reply
    • Bridget Casey (Author)

      100% agree! I’m renting a 2-bedroom apartment but I know when I buy it will be a 3-bedroom condo/house.

      Everyone definitely has a tendency to go bigger (and thus more expensive) for a “forever” home.

      Reply
  5. Caron

    “Mortgage Brokers and Real Estate Agents are the Payday Lenders of the middle class”

    YES! I have been waiting for someone to say what I have been thinking for years! When I first moved to Calgary 8 years ago, my new bank pre-approved me for a $350K mortgage. I almost fell out of my chair! I knew darn well that on a single income, there was no way I could afford a mortgage that large, plus all the other home owner payments that go along with it. Thankfully, this was not my first home owner rodeo so I knew what I could realistically afford and only looked at homes that were in a set price bracket. Yes, if you buy a more expensive house, you stand to gain more if prices go up, but if prices go down you can be in real trouble, real fast. In the meantime, who wants to be house poor every month waiting for the real estate investment ship to come in?

    Reply
  6. Katie

    I applaud you for always being so honest about homeownership. The decision to buy vs. rent, in my opinion, always comes down more to where you are in life and what you want, its emotional more than financial. Yes, you have to be able to afford it financially, but you also have to know yourself and what you anticipate for your future before deciding which way to go.

    I think the argument that a home is an “investment” is absurd. If you look at the historical trends (like 30+ years) in the US, home values have risen by an amount almost exactly equal to inflation! It is not an investment and you should never buy a house anticipating earnings on it when you sell. Think about all the interest, taxes, and insurance you pay over the years, plus the maintenance that you will have to pay for at some point. Its almost guaranteed that you will not make money on a home.

    I prefer to view homes as similar to cars. They are both just things you need to live that will cost money and maybe one day you will get some of that money returned to you when you sell.

    And I took out a mortgage about a year and a half ago to purchase a home because at that point it made a lot of sense for my husband and I based on our lifestyle.

    Reply
  7. Great post. For some reason the rent vs buy debate is the most highly contested debate in personal finance and everyone feels the need to rationalize their own choice by bashing the other side. The reality, like with all areas of personal finance, is that the decision is personal. There’s no one “right” answer. As you describe, different life circumstances all help factor in to whether it’s better for a person to rent or buy.

    Reply
  8. Amanda

    Love this post. I am curious though about what you think of real estate agents who take the time to educate clients on what they can actually afford rather than sign them up for the most house that the bank will let them buy and who talk about things like having 10% down in cash. I’m not saying there are many agents that do that, I know there aren’t, but just wondering. 🙂

    Reply
  9. Sarah

    I really liked your post! I wish I’d read it about five years ago.
    My partner and I are in our early 30s and just recently sold our house because we had to move for work. Between the repairs we had to do while we owned it and the money we lost breaking our mortgage, the real estate bubble popping, and other fees, we estimate that we lost about 65K.
    If we’d rented the whole time we would have paid off all our student loans by now. We loved that house and had a wonderful time, but me vs me also wonders whether being debt free right now would be worth giving up those happy memories…

    Reply
  10. Renee

    Best article I have seen on this topic to date!
    The comment that buyers are also paying rent, at least until their mortgage is paid off – I would stretch it even further. Even after your mortgage is paid you are still paying taxes and maintenance costs. This is essentially still paying rent even AFTER your mortgage has been paid. There is no “no longer renting” in my mind.

    Reply
  11. Shayne

    Hi Bridget,

    I love your blog and for the most part you are providing some excellent, needed financial advice. I won’t debate renting vs owning as there are way to many factors and assumptions to be made to make a definite case either way. It is certainly a personal choice individuals should make based on their personal situation, wants and needs.

    I don’t think it is fair for you to vilify EVERYONE in the real estate industry. As with any industry the financial services industry has people with different knowledge levels, service levels, ethics, etc.

    I have come across some “no so great experiences” with financial planners as I am confident you have as well. This in no way means everyone who refers to themselves as a financial planner or works in the industry is not good at what they do. I would not discount everyone based on some bad experiences. These types of generalizations are not fair.

    One another note, I am going to send you a quick note via your contact page. Please have a look, I didn’t think it was necessary to post it here.

    Reply
    • Bridget Casey (Author)

      I’m not a financial planner. No idea what that has to do with anything.

      Plenty of people that are financial advisors/planners are swindling consumers with high-fee investment and insurance products.

      I received your mansplaining email and replied. In the future, don’t hesitate to voice all your concerns and opinions in the comment section. I’m a big girl, I can take it.

      Reply
  12. Jess

    Awesome article!

    Reply