Weekend Reading: Renting Vs. Buying Edition
Canadians are nuts for home ownership, but with real estate prices soaring to unaffordable levels in many areas of the country it has become increasingly difficult to buy a home.
Still, the prevailing narrative around renting vs. buying is that renting is throwing away money and buying is a surefire path to building wealth. That has young Canadians in particular stretching their finances to buy a home, and relying more and more on the bank of mom and dad to help fund the down payment.
Speaking of mom and dad, where do you think this real estate obsession is coming from? Many parents put pressure on their young adult children to buy a home – citing their own anecdotal evidence of price appreciation from the time they bought their first home.
The problem is, we can’t go back in time and buy a house in 1984, or even 2004. Aspiring home owners need to buy at today’s prices, which are exceedingly unaffordable.
Meanwhile, there are approximately 5 million rental households in Canada (representing one-third of Canadians). Are they really throwing money away? Hardly.
PWL Capital’s Benjamin Felix tackled the problem of renting vs. buying in Canada in the latest episode of the Rational Reminder podcast, and then bravely shared the findings in a Globe & Mail article (read the comments if you dare).
“In perfect equilibrium, renting and owning should cost the same because house prices and rents adjust such that the cost of paying for housing is the same either way. But it doesn’t work like that in the real world. A 2012 paper in Real Estate Economics suggests that demand for homeownership, fuelled by perceptions that renting is throwing away money, may make renting even more economically attractive.”
Predictably, criticism included someone who bought a house for $40,000 in 1974 and sold it for $2M. But while the dollar amount sounds impressive, it’s an 8% annualized return before factoring in all the phantom costs that went into owning that home for 50 years (namely maintenance and transaction costs). Meanwhile, the TSX returned 9.36% annualized during that time, and the S&P 500 returned 12.09% per year.
Ok, so I read some of the comments.
I couldn’t get through all of them, but here are some I found interesting.https://t.co/WWkuw5qIWn
— Benjamin Felix (@benjaminwfelix) September 21, 2024
I think one of the major takeaways is to answer the question of whether renting is “throwing money away” and the clear answer is no. Buying then becomes more of a personal lifestyle / happiness decision.
For some, renting provides a sense of freedom and lack of stress. For others, renting is a source of anxiety due to the threat of eviction and lack of control.
Homeowners, on the other hand, often feel a sense of pride and may benefit from the forced savings (mortgage payments). But others feel stress over maintenance and upkeep, and may find the total cost of home ownership leaves little cash flow left over for retirement savings and enjoying life.
Your mileage may vary.
This Week’s Recap:
Last weekend I shared four retirement mistakes to avoid.
The US Federal Reserve slashed its target interest rate by 0.50%, and Canada’s inflation rate for the month of August slid in under target at 1.95%.
The market widely expects similar rate cuts from the Bank of Canada when our central bank makes its next decision October 23rd.
With the inflation dragon slayed (or at least tamed), central banks have turned their attention to employment and will try to stave off a recession. Time to stick this soft landing.
Promo of the Week:
Well, well, well. Wealthsimple extended its 1% transfer bonus promotion. Register before October 1st and you’ll have 30 days to transfer or deposit a minimum of $15,000 to get a 1% cash back matching bonus. Incredible!
Don’t forget to tell them I sent you. Use my referral code: FWWPDW and open your Wealthsimple account today.
Seriously, folks. If you’ve got a few hundred thousand dollars (or more) at another brokerage platform, you’ll get a few thousand dollars (or more) just for moving it over to Wealthsimple – where you can buy and sell stocks and ETFs for free. It’s a no brainer.
Weekend Reading:
Mortgage rates are falling fast and furious – including 5-year fixed rates that start with a 3.
Yes, a cottage is an investment property—here’s how to minimize capital gains tax.
Seniors seeking a decumulation strategy may be asking the wrong questions. Start with your spending plan, then model how you’re going to pay for it. Agree 100%.
The CPP death benefit of $2,500 is ripe for broader reform, like an increase or indexation.
Now for something I disagree with – Industry groups call on the feds to reduce or ditch RRIF mandatory withdrawals. Why?!?
Two recent CRA disputes show Canadians still don’t know TFSA contribution rules.
Morningstar’s personal finance expert Christine Benz says retirement is not a math problem:
“People might be surprised to see a book from me that is half nonfinancial — maybe not even half. But I feel like people are overly focused on the financial and not enough on the nonfinancial.”
After being told Freedom 55 was out of reach, this retiree changed his financial trajectory and retired at 51.
Finally, a great post by the Loonie Doctor on CIPF coverage and whether you should use more than one brokerage to mitigate risk.
Have a great weekend, everyone!
Rent vs. Buy is one of my favourite topics to read about. It’s such a heated debate and is tied up in self-worth and “The Canadian/American Dream” and picket fence life.
Those comments on the article speak for themselves – yikes.
The quote on a house going from $40,000 in 1974 becoming $2,000,000 is such a great story on why buy.
But when you read thats 8% before costs, and the S&P returned 12% during that time, it feels like a golden age – you could have put your money either place and made off quite well.
It’ll be interesting to see if it holds true as us renters + index fund investors hope for the next segment of history.
It’s an interesting debate. If you told someone 10 years ago not to buy Toronto or Vancouver real estate because prices were too high, that might have looked like really terrible advice in hindsight.
But prices can’t increase at this pace forever and we’ve seen a pullback / slowdown over the past two years.
Parents tell their kids that real estate was the best investment they ever made, but their kids have to buy today and think about future expected returns in real estate.
If we start the debate by understanding that a house is just a place to live, and their are trade-offs to owning and renting, I think we could have a more reasonable discussion.
But housing seems to be our national religion, so I don’t see that changing anytime soon.
The WealthSimple 1% cash bonus for transfers seems like a good deal. Anyone try it recently? Assuming the bonus is not taxable? I like the idea of free ETF trades as well.
Hi Greg, from the Wealthsimple terms and conditions on the offer:
“Wealthsimple will not be issuing clients a tax slip to report Bonuses paid. Clients are solely responsible for any required tax reporting.”
Also, the cash bonus will be paid out in 12 monthly instalments into your Wealthsimple Cash account (their high interest savings account, which is really good). I think this is to encourage ppl to stay put for at least a year.
To me, the problem with renting is that it is ultimately more expensive than owning in the long run for the simple reason that homeowners pay principal, interest, tax, and maintenance while renters pay all of that (through the landlord) plus landlord profit.
Hi Mark, while intuitively that makes sense – unfortunately landlords cannot simply pass along every cost + a tidy profit. They can only charge what the market will accept for rent. Many jurisdictions have rent controls in place limiting increases, and many landlords will happily accept below market rent for a good, stable tenant who won’t destroy the place (like in Mary’s example).
New condo investors in Toronto are bleeding cash flow, losing an average of $605 per month: https://boomerandecho.com/weekend-reading-lets-talk-about-rental-properties-edition/
In the rare case where the landlord is profitable after regular expenses, they’d better be setting aside a maintenance reserve for the inevitable renovations and repairs.
A recently separated family member went through a lot of anxiety as the sale of the matrimonial home approached. They could not qualify for a mortgage big enough to buy without moving to a much less desirable neighbourhood. They considered relocating (quite far away) to be able to afford home ownership. The problem was their spouse had mismanaged their finances (and they blindly let it happen), so there was insufficient equity in the home they were selling.
Then we found ‘How To Live Your Rich Life’ and this quote really helped:
“Rent is the Maximum you will pay to live in a home, and a mortgage is the minimum you will pay to live in a home”.
Ultimately, not wanting to relocate forced their hand, but now, six months later, there is no regret about the decision to rent. The funds from the home were invested in a mix of ETFs and dividend payers to help provide some additional cash flow. They are doing great, feeling more and more confident about money and the future, and not saddled with a mortgage, property taxes, and maintenance costs that could cripple them.
As prices move down along with interest rates while the investments rise in value there may be enough change to evaluate a different path in the future but for now, it was absolutely the right decision.
Hi James, I like that quote and agree 100%. Thanks for sharing.
I’ve lived in apartments for years, even raising two children until they were teenagers. Never once did I hear them complain about not having a house. Then I got transferred out West and houses were cheaper and my income increased. I rented a beautiful townhouse for my daughter and myself. Then my son came, then my brother came. Life changes. I bought property and custom built a large home. Son left for USA. Brother went back to parents. After 5 years sold that home at a price which covered the basic costs, not all the extras. Daughter decided to say out West.
Transferred back to Toronto and bought a small house (1.5 bedroom) as I was on my own. But daughter decided to return and finish school. So built a basement apartment for my daughter. My income had increased, then bought a home in Kingston (to be my future retirement home). Renovated it into 2 apartments. After 3 years a tenant’s guest went crazy and literally demolished the place with $75k in damages. Lucky his brother was a lawyer and settled with me quickly. Real estate was now sinking. Met future husband who didn’t want to live in Kingston. It got sold at a loss.
By 1994, almost 50, married, no kids, we moved from my renovated little house and sold at a considerable loss. We searched for property, made a deal, hired architechs and builders, started a business using all the funds we both had and built living quarters above the business. Four years later we sold to large corporation with a 10 year rental arrangement to continue living above the business. Bought a beautiful vacation home. In 2009, we had lost $750k on its value. In 2010 moved back to Greater Toronto Area and bought our “last home” with all the extras. Spent $200k in court suing the builder and trades. Finally settled as Tarion was useless. Ten years later my husband died and I sold the house 3x purchase price..BUT those extras, poor workmanship repairs, taxes, mortgage and maintenance costs amounted to 2/3 of the sale. So after 50 years of buying and selling, only in 2021, sold a home where the selling price was more than the cost of the house.
I planned on finding a long term lease and begin renting again. However, my daughter became disabled. 3 kids with one still in school. So, I moved in with her. Renovated her walkout basement into a separate 2 bed apt. for myself and told my oldest grandson, to go live downtown to enjoy his millennial life and the women would take care of each other. He spends most weekends coming home and doing the maintenance and repairs. Her disability payments are very low so I pay for most the food, clothes and school expenses for the youngest. Her mortgage is due next September, and if the banks don’t go under, I’m planning on paying it off as a gift to her. Overall my advice… changes in life happen so if owing a house you never know when you may need to sell. For me most of the time, I lost money.
For the Wealthsimple offer of 1% do they also give a referral bonus on top of that for both you and the new client? If so how much?
Hi David, I think it’s 25 bucks.