Aside from a few free thinkers who see merit in the financial flexibility of renting, this is a country of people who want to own houses so badly it hurts.
It’s almost sadistic to keep arguing the case for buying at a time when a growing number of young adults will be forced by unaffordable home prices to rent for extended periods, maybe for life. And yet, the war against renting goes on.
The realty company Royal LePage has released a study it commissioned on whether it’s better financially to own a home or rent. The conclusion was that owning was more financially beneficial over the long term than renting in 91 per cent of the cases analyzed, assuming a 20-per-cent down payment.
Bulletin for Royal LePage and the rest of Big Real Estate: The buy-versus-renting debate is long over. Buying won the battle for hearts and minds, and it was never close.
Keeping the rent-versus-buy argument going is the most pointless exercise in personal finance. Our reality is that renting is how a growing percentage of the population will live unless home prices fall. In this country’s housing crisis, the plight of renters is worse than the unaffordability of houses.
A sustainable housing market needs rentals to incubate the next wave of buyers as they build their careers, save for down payments and plan families. Sure, build more houses for first-time buyers. But first, give us more affordable urban high-rise rentals where you can live affordably and without fear of renoviction.
The Royal LePage study suggests it’s hard not to come out ahead financially by owning in the long term. The underlying idea here is that a mortgage payment and rent are not directly comparable. While all the rent goes to the landlord, only part of the mortgage payment is lost as interest paid to the lender. The rest goes toward building up equity, and thus should be removed from the long-term cost calculation.
In the study, property taxes, insurance and an exceedingly small allocation to maintenance and repairs – $60 a month – were included in the owner’s costs. All together, the net monthly cost of owning turned out to be $769 cheaper on average than renting a comparable property in the 278 cases analyzed in the study. This is what the study calls “the ownership advantage.”
The study also found that owners with a 25-year amortization pay an average $705 more a month in a real-world sense, so this ownership advantage is not immediately useful. You can’t use it to buy food or pay for daycare. It mainly reflects the point that the owner has a house decades down the line, while the renter does not.
You’ll find all kinds of takes on renting versus buying if you do a Google search. Though they don’t build equity over the years, renters do have a cost savings on a monthly basis that allows them to invest and build wealth over time. Renters also have more mobility to accept better jobs in other cities, and more predictable living costs.
What renting does not do is deliver the financial highs of home ownership. House prices have soared in the past 18 months and have been on the rise for the better part of the past two decades. The value of homes for long-time owners has doubled and tripled, giving them unimagined increases in equity.
The housing boom has pretty much killed any appeal there might have been in renting a home. Renting is removing yourself from all the equity growth owners enjoy, and subjecting yourself to erratic landlords who can jack up your rent or “renovict” you.
The pandemic caused a drop in average rents in some cities, but a rebound is well under way. There are stories going around about rental bidding wars where tenants offer to pay more than the amount being asked. It’s not just the big cities – small-town rental markets are squeezed as well.
Renting is the stopgap alternative to unaffordable housing that almost everyone thinks is worse than owning. We need to deal with it, and not with studies showing that owning is better.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, October 6, 2021