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):
"Renting is a waste of money" – person who buys $500,000 house with 10% down at 3.39% and over 25 years will pay:
– $14,000 CMHC insurance
– $300,000+ interest on their mortgage
– $100,000+ property taxes
– $150,000+ home maintenance, repairs, upgrades
– $140,000+ utitilities
— Bridget Casey (@moneyaftergrad) February 1, 2018
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.
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.
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.