Two options, two cities, and an infinite number of opinions.
Before this story gets too stale-dated, I wanted to bring it to your attention.
The CBC published a feature a few weeks back about how young people in Calgary are choosing to rent, rather than buy.
Let’s look at the story, the numbers, and then see how this compares to Toronto…
Ah yes, it’s the old “Rent vs. Own” debate once again!
This is an age-old, time-tested debate, and one that never really seems to die.
There are a lot of reasons for the debate, but I think it comes down to the same reason that all debates about real estate exists: passion.
Buyers are passionate about the idea of home ownership, and renters are passionate about the freedom from mortgage debt, and often, the belief that they’re ahead of the game.
Of course, buyers and renters alike are often more passionate, especially on forums like these, when they have a horse in the race.
I’ve often opined that some of the most ardent market bears are those that do not own real estate.
I think it’s fair to say that ‘the guy’ who told all his friends back in 2008 that the 50% market crash was coming, and who has held on to that sentiment like grim death, is going to be the loudest voice in the crowd of market bears, whether they’re touting the benefits of renting rather than owning, and perhaps still predicting the market crash.
But it’s also fair to mention that the folks who bought in 2008 didn’t have a crystal ball. 100% of those buyers will flex their prognostic muscles, in hindsight. But how many bought based on a thousand hours of market analysis?
A few weeks ago, the CBC wrote the following:
For many people this was a welcome read, as we’re constantly inundated with stories about buying real estate, especially here in Toronto. Renting, by comparison, isn’t quite as sexy a story.
But what I found most interesting about this article was that it actually contained factual evidence, and statistics. In Toronto, a typical newspaper story about would-be renters is usually a bitch-fest about how unfair the real estate market is. And more often than not, there’s some veiled threat from a millennial who suggests that he or she, and the rest of the brood, will simply “move up north,” and turn their backs on us, with little thought for the fact that Toronto jobs don’t exist in Muskoka…
No, instead of the typical moaning and groaning, we actually met three young professionals who explained why they’re renting instead of buying, as well as explaining what they’re doing with their money now that it’s not tied up in real estate.
From the CBC article:
It all comes down to math.
Prices for a typical, detached house in our city have hovered around the $510,000 mark for the past few years. So says the Calgary Real Estate Board.
To buy that house today would likely cost you about $3,000 per month. That would cover the mortgage, property taxes, insurance and maintenance costs. (We’ll talk more about these estimates later on.)
If you wanted to rent a similar home, meanwhile, you can likely find something for $1,700 a month in the current market, which has seen vacancy rates increase fourfold during the downturn.
Right there, that’s $1,300 you’d save by renting — each and every month.
Add that to the tens of thousands of dollars that you don’t have tied up in a down payment, and now you have some serious capital to feed into in any number of other investments.
This is at the core of the calculations some young people have been making. They’ve considered the more diverse investment opportunities that renting offers, and they’re attracted to the flexibility and reduced exposure to market fluctuations. So they’re in no hurry to buy.
There are a lot of arguments to be made, both for and against the stance taken in the article, but first, let’s look at the numbers.
The article claims that a house costs $3,000 to own, and $1,700 to rent.
The issue I have here is that we don’t know what the house costs. The article references the “average detached home costs $510,000,” and we’re to assume that’s what they’re basing their $3,000 number off of. So let me work with that.
Assuming a 20% down payment, a 5-year, fixed-rate mortgage at 3.39% carries for a little over $2,000 per month.
The article says the $3,000/month figure includes mortgage, property tax, insurance, and maintenance. Let’s assume that totals $1,000/month, and thus the $3,000 number is correct.
I don’t work in Calgary, so I’ll take their figures as given with respect to the $1,700/month rental cost. So I have no issue with their $1,300 “savings,” as the math works.
The one thing I will bring up, however, is that $900 per month of that mortgage payment is principal.
I’ve heard people argue before that this somehow doesn’t matter, and that in the context of renting versus owning, the entire mortgage payment is a sunk cost. But that’s simply not the case.
Of your $2,000 per month mortgage payment, only $1,100 is truly “sunk.” That’s interest that you’ll never get back.
The other $900, however, is taken off your “tab.”
Whether that property goes up in value, or whether it drops and you find yourself under-water, you’re still essentially “paying yourself” each month.
So the argument that a house renting for $1,700 per month is $1,300 cheaper than if you bought and paid $3,000 instead, just isn’t true.
It’s actually only $400 cheaper when you factor in principal repayment.
It doesn’t make the story quite as sexy, however, and that’s likely why this wasn’t included in the calculations. Or, perhaps as I mentioned above, you’ve still got people arguing that it’s “about the monthly carrying cost,” but it’s just not. You can’t ignore principal repayment.
Now let’s compare the rent-vs-own in Calgary to that of Toronto, for a moment.
We know you can’t find a detached home for $510,000 in Toronto, on average.
So let’s look at a $510,000 property, and what it would rent for here.
On Friday, I sold a condo at the Bohemian Embassy for $515,000, off the market. It was to an investor, and we think this unit is going to rent for $2,200 per month.
I know, the rental market is nuts, and $2,200 for a 1-plus-den, 1-bath is tough to believe, but that’s just where we are.
So all things being equal (and they’re not always, but let’s just assume), we have a similar scenario here in Toronto to that in Calgary: a $510,000 property, that costs $3,000 to buy, or $2,200 to rent. That $500/month difference, between the $1,700 it costs to rent in Calgary, and the $2,200 per month it costs to rent in Toronto, is the very reason why people buy in Toronto, and it seems, do not in Calgary.
All things being equal, you go from being $400/month cheaper to rent in Calgary, to $100/month more expensive in Toronto.
I know, many of you are playing around with the numbers – different down payments, opportunity cost, land transfer tax, house expenses versus condo expenses, etc. But as I said – “all things being equal,” which takes a simplistic approach to the analysis, just like the CBC article did.
The article goes on to detail what one of the young renters is doing with his money, now that it’s not in the market:
In Haines’s case, buying a home would have meant missing out on the opportunity to invest his additional cash flow in the stock market. And, he says, those investments have done “really well” over the past couple of years.
“I’m sure they’re doing a lot better than many people’s homes,” he said.
Great, let’s run with that.
So Mr. Haines, who owned a condo in Edmonton for 10 years, and “broke even,” is doing “really well” with his investments in the stock market.
Just for fun, let’s go back a decade and see how the Toronto real estate market, Calgary real estate market, and TSX Composite have fared.
I’m going to use November of 2007 and November of 2017 as our decade, since December in real estate is extremely slow, since I might be accused of having an anti-stock market bias (ie. I sell real estate, so I’m going to convince you it’s a better investment), I’d like to avoid the last month’s significant drop in the stock market.
November of 2007, the Toronto HPI Benchmark price was $358,700.
November of 2007, the Calgary HPI Benchmark price was $415,000
November of 2007, the TSX Composite Index was at 13,619.10.
November of 2017, the Toronto HPI Benchmark price was $744,700
November of 2017, the Calgary HPI Benchmark price was $430,700
November of 2017, the TSX Composite Index was at 16,067.50.
For those of you playing along, that’s respective gains of:
Yes, well, I certainly can see why people are choosing not to buy in Calgary.
But ironically, it has nothing to do with the cost of renting.
And that CBC article could have made an even BETTER argument for renting if they’d talked about the incredibly poor performance of the housing market in Calgary over the past decade, although, now that I think about it, a market bear might not see it that way.
Think about: the saying, “What goes up, must come down” is a favourite of today’s modern bear. So perhaps pointing to a 10-year, 107.6% increase in Toronto, versus a 3.8% increase in Calgary during the same time period, is its own argument for why to buy in Calgary, and not Toronto.
Of course, the people profiled in the article are looking backwards, and not forwards. They’ve all been renting for quite some time now.
So what conclusions can we draw here, other than the fact that nobody will agree on anything, as per usual?
I think in the context of renting versus owning, the CBC nailed the most important argument, which is what the same house costs to rent, versus own. If there’s a monumental gap between the two, and if you want to ignore the impossible-to-value “pride of ownership,” and refuse to put a price on the added marginal utility one gets from going home every night, rather than to a property they rent, then absolutely – renting makes sense, over owning.
And for one of the people profiled in the article, who said he was travelling for work, and was able to pick up and move with more ease as a result of not owning, it makes perfect sense.
But the one thing that “Rich Dad, Poor Dad,” which is the Holy Bible for those who choose to rent versus buy, didn’t explain was some of the monumental gains in price that cities around the world have provided property owners with.
All too often in Toronto, people say, “What good is the gain, if you can’t move anywhere? So you paid $500,000 for a semi-detached that’s now worth $1.1 Million. But the $1.4 Million move-up house you’d have wanted is now going to cost $2.3 Million.”
But that’s too simple an argument. That $600,000, tax-free capital gain is still a $600,000, tax-free capital gain, regardless of how other houses, in other areas of the city, and other price brackets have performed.
And as that argument pertains to renting instead of buying? Please. Show me one renter who, even with the “you can’t move anywhere argument,” wouldn’t choose that $600,000, tax-free capital gain, over not earning it.
The CBC article was a great look at the Calgary rental market, but ignoring appreciation was a mistake.
In case you’re interested, there was a follow-up a few days later: