While Canadians vastly prefer to own their homes, there were always some strong points in favour of renting.
Just try and make a case for renting today. The brutal dynamics of today’s housing market have nullified every possible advantage to renting, even as they slam owners with higher mortgage costs and falling prices.
The awfulness of renting is notably an issue for Gen Z and millennials, which is to say people in their 20s and 30s. But a rental survey we did back in February showed a substantial portion of the rental market is made up of people aged 60 and up. Renting was once a refuge from the high cost of home ownership; now, it’s just another word for unaffordable.
House prices have fallen sharply in many cities from the peak in February, but rising mortgage rates have offset this entirely. A few weeks ago, RBC Economics declared that “buying a home in Canada has never been so unaffordable.”
If people can’t afford to buy, they must rent or move in with family. Rising demand for rentals has been further stoked by the end of pandemic lockdowns and a return to normal city life. Those who moved home want their own places again.
Strong demand for rentals coupled with inadequate supply has given landlords back all the pricing power they lost in the pandemic. Average rents in the Rentals.ca database were up by 20 per cent or more on a year-over-year basis in seven of 35 markets tracked, and another eight were up between 10 and 20 per cent. The average national one-bedroom rent was $1,743, with Toronto at $2,474 and Vancouver at $2,590.
The top benefit of renting is that you pay less on an average monthly basis over time than an owner, who must cover mortgage plus property taxes, upkeep/maintenance and a full proportion of utility and insurance costs. This is still true, but the distinction matters less than it used to. Renting is expensive, which means renters can’t save like they used to.
They’ll need more time to save for down payments, which means the housing market may not get all the first-time buyers it needs in the years ahead. Some aspiring owners will never save enough to buy a home unless they find cheaper rentals or increase their income.
Lifelong renters don’t build equity over the years, but there’s an opportunity for them to accumulate wealth by investing the money they save compared with owners. Home equity has an advantage in that a principal residence can be sold tax-free, but the investments of a renter are much more liquid. Until you sell a house, the only way to get access to the equity is through a home equity line of credit or reverse mortgage. Basically, you have to rent your own home equity.
Soaring rental costs steal wealth from renters by reducing the amount of money they have left over to invest. Renters could become a permanent underclass as a result.
Another cancelled benefit of renting is the opportunity for young adults to live an independent urban lifestyle, without roommates. Now, the search for affordable rent means you have to look to the suburbs and consider roommates.
The economic mobility benefit of renting has also been ruined. Once, renters had the freedom to jump on a better job or improved living arrangements by simply giving the required notice to a landlord. Today, affordable rentals are so scarce that moving raises the risk of paying more in your next location. If you have affordable rent, you’re almost more stuck in place than a homeowner right now.
Renters have also lost some of the monthly cost predictability that they once enjoyed. Bidding wars have largely died out for home buyers, but they’re happening in the rental market today. And where rent increases used to be in line with inflation, they’re now much higher.
Average rents for one-bedroom apartments in Toronto increased by an average annual 3.1 per cent from 1990 through 2001, Canada Mortgage and Housing Corp. numbers show. For the same city, the average year-over-year increase shown by Rentals.ca in September was above 20 per cent.
There are some affordable rental zones across the country, according to Rentals.ca numbers. Saskatoon, Edmonton, Winnipeg and Montreal stand out, and the Toronto suburbs of East York and Scarborough are middling.
But over all, there’s not much good to say about renting. Just now, it’s worse for your finances to rent than own.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, October 19, 2022