Earlier this year, the National Bank of Canada released a report which suggested that it might be cheaper to rent than it is to own in Canada. I would say that this line of thinking would be contrary to popular belief as there seems to be an obsession with owning property. This topic is of interest to me as every year when I sit down with clients to review their financial plans, there are about 5 or 6 couples who consider selling their primary residence, and either downsizing to a smaller home, or renting.
Here are the numbers which the National Bank came up with: As you can see from the numbers, there are a number of markets across the country where the pure monthly cash flow comparison would indicate that renting may be a cheaper option than owning, especially when you look at more expensive cities like Vancouver, Toronto, Victoria and Montreal. This was not the case for other cities, including Winnipeg, Edmonton, Ottawa and Calgary where owning and paying a mortgage left you cash flow net positive as compared to renting.
This is somewhat interesting, but when I took a closer look, one of the considerations which the study failed to acknowledge was the principal payment component included in the mortgage payments for homeowners. Admittedly, this is still a cash flow out so for budgeting purposes it is important to include. On average, the cost of owning in Canada exceeds renting by $541 per year, but if you remove the principal payment the situation reverses, and the cost of owning is actually about $449 less than the cost of renting. This will likely come as no surprise to most of you as it has been ingrained into many of us by the real estate industry, our peers and certainly our parents that we need to own property. But again, does this consider the whole picture? What about maintenance? How about property taxes? Any consideration for investment creep?
What most homeowners fail to factor into these calculations is the additional costs of ownership. To illustrate this point, let's consider a quick example. Assume you own a $500,000 home. When it comes to maintenance there is a general rule of thumb which is that you should budget 1% of your home value annually towards maintenance, however I feel that this could be a little conservative. Recently I came across an article from Moneysense (https://www.moneysense.ca/spend/real-estate/the-ultimate-home-maintenance-guide/) where the author reviewed her own situation and evaluated the cost of maintenance on her home. I found the article to be fairly accurate to my own situation and the conclusion was that the cost of maintenance was likely closer to 2% annually.
In the case of our example that means you should budget an additional $10,000 per year. Next, let's consider property taxes. For this we need to make a bit of an assumption as the number can vary depending on what market you live in. Let's assume property taxes will be 1% of property value which I feel is somewhat of a conservative estimate. In our example, this would equate to an additional $5,000. So far, the cost of ownership is already $15,000 more per year or $1250 more per month.
One last consideration I will throw into the mix is the cost of investment creep. What I mean by this is cost associated to home improvements which also rarely get factored into the equation as they are forgotten over time. This is a particularly subjective component, so I won't make any estimates on numbers, but I do think it is worthwhile considering. After all, nobody ever loses on buying a little more house right? Just remember that when you go to upgrade to the new granite countertops.
Now you might start to conclude from the tone of this article that I am a proponent for renting versus owning, but that wouldn't be the case. As an owner myself I would actually recommend that one of the first assets you should own is property. As a younger person building your assets, owning property gives you the advantage of building an asset by using the banks money and when interest rates are low this can be advantageous for you. You get the benefit of forced savings as with every mortgage payment you make, your net worth increases a little.
However, I would argue that later in life, and especially in retirement years, there is less of an advantage for many people especially, if the mortgage has been paid off. Many people are sitting on large assets which generally don't offer as much of a return as other assets can and as I have pointed out above, the costs of owning may be much steeper than just simply renting.
So, does it make more sense to own when you're young and rent when you're older? The truth is it depends on a lot more than just the numbers and your own personal feelings towards renting certainly need to be considered. At the very least, it's important to know that you have options which should be considered.
- Grant White, CIM, CFP
Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.
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