WRITTEN BY JIM ADAIR
If you can afford to buy a home, do it. That’s the message from a new study by Mortgage Professionals Canada, which compared the costs of buying versus renting in 266 scenarios across Canada.
“The report demonstrates that the money Canadians are spending on monthly rent, if used instead to finance a home, would be a very beneficial investment over time,” says Will Dunning, author of the report. “The costs of owning and renting continue to rise across Canada. However, rents continue to rise over time whereas the largest cost of homeownership – the mortgage payment – typically maintains a fixed amount over a set period of time. The result is that the cost of renting will increase more rapidly than the cost of homeownership.”
“Buying a home also has more long-term upside than renting,” says Dunning. “Everyone wants to save for their future, but rising costs, including rent, are making that more difficult. The lower life-time costs of homeownership mean that owners have more ability to save for retirement than do renters. The financial benefits of homeownership go beyond equity accumulations.”
The report comes as Canada’s homeownership rate is dropping for the first time in 45 years. A report by Point2Homes found that 11 of 13 provinces saw the share of homeownership drop in the 2016 Census, according to Statistics Canada.
Homeowners still outnumber renters by more than two-to-one. The homeownership rate hit a high of 69 per cent in 2011 but dropped to 67.8 per cent in 2016. The number of renters rose from 31 per cent in 2011 to 32.2 per cent in 2016.
Dunning acknowledges in the report that it’s not easy for first-time buyers to come up with a down payment, due to rising house prices and government housing policies such as the mortgage stress test. It requires borrowers to qualify for a mortgage at two percentage points higher than the posted mortgage rate.
The study determined that across the dataset of 266 locations and different dwelling types, the total cost of homeownership is an average of $3,052 per month, compared to $2,511 for renting the same property.
“However, the cost of ownership includes a substantial amount of principal repayment ($990 in the first month). Since this results in a reduction in the amount of mortgage owing, it is a form of saving,” says Dunning. “There is, therefore, a net cost of homeownership that excludes the repayment of the principal. This net cost of $2,062 per month is lower than the cost of renting by $449 per month. On this basis it is, on average across the dataset, currently cheaper to own than rent.”
He says that since the homeowner is tying up a lot of capital with the down payment and closing costs, they should consider the rate of return on that investment.
“In this data set there is a negative rate of return (-5.2 per cent per year) when the total cost of homeownership is calculated,” he says. But when calculating rate of return, “the repayment of principal must be taken into account (since it is a legitimate component of the return on investment). On this basis, the rate of return at the beginning is an annualized rate of 4.3 per cent.”
While some people might consider this “inadequate,” Dunning says that since buying a house is a low-risk investment, a high return on investment shouldn’t be expected. His calculations did not include any capital appreciation on the home, since there is no guarantee that house values will go up. “In most situations, homeownership is justified financially without any need to expect price appreciation,” he says.
Another advantage is that homeownership in Canada has a tax-free rate of return, which other investments do not.
In Dunning’s scenarios, if the mortgage interest rate does not change, in 10 years the cost of ownership will be lower than the cost of renting in 263 out of the 266 cases. If the rate rises a full percentage point after five years, owning will still be cheaper than renting in 92 per cent of the cases, and if the rate is up by two per cent after five years, 82 per cent of the homeowners in the scenarios still come out on top.
“Looking even farther ahead, by the time the mortgage is fully repaid in 25 years or less, the cost of owning will be vastly lower than the cost of renting in every one of the 266 cases,” says Dunning.
He also looked at data from Statistics Canada to compare the wealth of homeowners versus renters and found that homeowners ìare distinctly better off financially compared to tenants who are similar in age and level of income. The difference is not just in terms of their home equity. Owners have more non-housing wealth than tenants. This may reflect that because owners have lower lifetime housing costs than tenants, they have more opportunity to accrue other savings.î
Dunning adds: “In this light, is it any wonder that Canadians remain highly interested in homeownership? Contrary to what might be asserted by some ‘housing bears’, home buying is not the result of a ‘cult’, a ‘mania’ or a ‘delusion’. It is the result of a reality that, even at much higher house prices, and even with the risk that interest rates may increase substantially, in most situations Canadians, over long periods of time, are still much better off as homeowners than as tenants.”