Renting gets a bad rap, especially in Canada. Many of us believe that investing in a house is one of the best financial decisions you can make, given that it helps build wealth.
That belief has largely been correct, as housing prices have seen unprecedented growth in the last decade. According to the Canadian Real Estate Association, the average cost to own a home in Canada is $665,850 as of June 2022, which is out of reach for many Canadians. Statistics Canada shows that the median after-tax income of Canadian families was $66,800 in 2020.
It’s easy to see the benefits of owning a home instead of renting, as buying a house can help build equity so that you’re not wasting money on rent. There can also be a feeling of comfort and security that comes with owning your own home.
There are many options for income generation as well; you can rent your property out or list a portion of it on Airbnb. For many, a home can also be a status symbol and a declaration to the world that you’ve officially entered adulthood.
Yes, there are many benefits to owning a property, but if you are priced out of the market and have to rent, don’t feel too bad. There are several potential financial advantages to renting over buying. For example, here are some of the costs that you can’t get back once you own a home:
- Maintenance costs: Equal to roughly one per cent of the property value each year on average.
- Property tax: This can be a significant cost, depending on where you live.
- Interest payments: These can be very high, especially with interest rates predicted to increase.
- Realtor fees and closing costs: This depends on the cost of the house and province you’re in, but realtor fees and closing costs amount to an average of between two to three per cent of the total cost of the property for the buyer.
So, how should you decide whether to rent or buy a property? There’s a simple calculation you can use to help you determine this.
PURCHASE PRICE VS. RENTAL PRICE
The price-to-rent ratio is a simple calculation to determine if the current market you want to buy in is potentially overvalued, and if you might be better off renting:
- Take the price of the property you are thinking of buying
- Divide that number by the total annual rent of that same property
If the number you get is between one and 15, it’s suggested that it is much better to buy than rent. If it’s between 16 and 20, it’s a tougher call, but it’s typically better to rent than buy. If it’s above 21, then it is strongly suggested that you rent instead of buy.
For example, say you are looking to buy a condo in Vancouver for $700,000, but you can rent the same property for $2,500 per month. The calculation would be $700,000 divided by $30,000 (which is the result of $2,500 multiplied by 12), which gives you 23.33. According to this ratio, you might be better off to rent than buy this condo.
Take the results of the price-to-rent ratio with a grain of salt. Like any ratio or rule of thumb, it’s one factor of many that you can evaluate when making the decision to buy or rent a home.
There are also many non-financial benefits to renting as well. As a renter, you have more mobility and freedom to choose where you want to live. There can also be a lot of stress in owning a house if repairs need to be done or property taxes increase. When moving to a new city, there’s a lot you might not know about the area, and it might be better to rent for a period of time before buying.
There’s also no guarantee that activity within the Canadian housing market will continue to grow in the future. In a worst-case scenario, there could be a housing correction or crash after you purchase a home, and your house could be worth a lot less. This seems to be starting to happen in parts of Canada, and with interest rates rapidly increasing, housing values have dipped in some markets.
Yes, I do still think it is a good goal for most people to own real estate, but only if it makes sense financially. If home price growth has outpaced rental price growth by a large enough margin, then it would make more sense to rent.
At the end of the day, it’s a very personal decision, and you have to determine whether homeownership or renting is the right choice for you.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.
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