By Tess Kalinowski - Real Estate Reporter
It’s a long-standing question and its urgency has grown in proportion to Canada’s climbing real estate prices: are you better off financially buying a home or would you come out the same or ahead if you rented and invested differently.
A new study by economist and housing analyst Will Dunning, published by Royal LePage on Tuesday, answers a resounding yes to the home purchase advantage.
Two academics not connected to the study looked at the report, called “Comparing Housing Costs — Owning versus Renting Homes in Canada,” for the Star and concluded its methodology and findings were sound.
The research compares the cost of renting and owning in seven types of homes in six provinces using historic data and some modest projections and assumptions about borrowing rates and property values. In each case, the assumption is that the buyer and the renter are living in the same kind of home and that the purchaser has a 20 per cent down payment.
In 253 of 278 housing scenarios, Dunning found that owning a home turned out to be more financially beneficial than renting. The 9 per cent of scenarios where renting came out ahead involved luxury homes in expensive neighbourhoods.
Dunning said he has periodically looked at the cost of owning a home versus renting for about 30 years and most of the time it was advantageous to buy — “Not all of the time, but most of the time,” he said.
Nevertheless, he cautions, your life situation has to factor into a decision of whether to buy.
“If you’re a person expecting to move frequently, then no, you shouldn’t buy. You have to plan to live in a house at least five years before it starts to make more sense to buy rather than rent. If you live in the city of Toronto and buy one property and sell another, the transaction costs are 10 per cent of the value of the house. On one end you have to pay the land transfer tax. On the other end you have to pay the realty commission and other expenses,” he said.
Dunning found that on a monthly basis, Canadian homeowners would pay about $705 a month more on average than a renter living in the same kind of house.
But the result is different if the homebuyer thinks about their mortgage as two separate payments: money owed to the lender in interest; and then money that goes to pay down the principal cost of the home, building equity.
Dunning calls paying down the principal a “forced saving.” That part of the mortgage that goes to the principal is where he says, “the ownership advantage,” lies — the difference between the net cost of owning and the cost of renting.
Based on 2021 second-quarter data, Dunning found that a home renting for $2,795 a month, including $280 for utilities, would cost $3,499 a month to own with a 25-year mortgage amortization — about $705 more than renting the same house or apartment. Dunning has calculated expenses such as property taxes, utilities and maintenance into the month costs of owning.
But if the buyer looks at the portion of the mortgage that goes to the principal as savings that they keep in the end — either in equity or by selling the house — the monthly cost to own shrinks to $2,026 — $769 less than renting.
The amount of the principal being repaid rises over the life of the mortgage, which means the ownership advantage also increases over time, says Dunning.
When it comes to looking at a home as a longer-term investment, his report says that most buyers would see a return even if only moderate assumptions about property values and interest rates are applied.
In Ontario, the report suggests rents would rise 4.6 per cent annually, while property values would grow 11.6 per cent.
The report makes a fair case for buying over renting but there are a lot of individual considerations for people thinking of home ownership, said Murtaza Haider, a professor of real estate management at Ryerson University.
Of particular value, he said, is Dunning’s breakdown of the principal and interest components of a mortgage. That is particularly important at a time of historic low interest rates. When interest rates are in the double digits, most of your mortgage payment goes to interest. But in this period of low single-digit rates, the bulk of a mortgage payment is paying down the principal.
Haider says housing prices have been rising since the early 1990s and there is nothing to suggest there will be a drastic shift in the near future.
“Low interest rates, low mortgage rates are going to be the norm for the foreseeable future,” he said.
Dunning’s study does, however, assume a 20 per cent down payment into the buying profile. Canadians can purchase a home using an insured mortgage with 5 per cent down. But even that can be a challenge in today’s housing market, he said.
That price appreciation coincides with the rise of the gig economy.
“So (young Canadians) have multiple jobs that may or may not amount to a living wage, which means that even that 5 per cent down payment could be a significant hurdle,” said Haider. “If their parents cannot lend them money or there’s no inheritance that becomes a big challenge.”
Ricardo Tranjan, a political economist with the Canadian Centre for Policy Alternatives, agrees that Dunning’s assumption of a 20 per cent down payment is a significant factor in the results that favour home buyers.
“A smaller down payment would change the math significantly,” he said.
The analysis also treats all houses as being in the same state of repair and uses $60 per month as the average maintenance cost, likely an underestimation, said Tranjan. Ideally a model would include higher repair and renovations costs rather than the $60 that the study allots, he said.
He also notes the analysis is not population-weighted. “The study shows that buying is better than renting in several areas across the country, if certain conditions are met. It does not tell us what share of the population meets those conditions,” he said.
Tess Kalinowski is a Toronto-based reporter covering real estate for the Star. Follow her on Twitter: @tesskalinowski