Buy vs. Rent: Toronto vs. Calgary

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…

RentBuy

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:

Why young people who can afford it are choosing not to buy homes in Calgary

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:

Toronto: +107.6%

Calgary: +3.8%

TSX: +18.0%

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:

READER FEEDBACK: Rent or Buy – The Great Calgary Debate: Here’s what you had to say

78 Comments

Post A Comment

Your email address will not be published. Required fields are marked *

  1. Batalha says:

    Investing is so freakin’ hard? Really? Have you people never heard of this new-fangled internet contraption? As Josh touches on below, a couch potato portfolio (google it, folks) is about as simple as there is, and will do just fine (at worst) over time. But too many people prefer to simply roll their eyes and throw up their hands when they hear words like “invest,” “save,” and so forth (cue eyes glazing over).

    P.S. Fans of “Friends” may recall a show where the characters are talking about what they’d do if they were to win the lottery. Ross says, “I don’t know. I’d probably just invest it.” Chandler and Joey proceed, unsurprisingly, to give him grief, and the takeaway is that Ross is, in fact, a doofus to even consider investing for the future rather than do the “cool thing” by blowing it on frivolities. Obviously a lesson most of us have taken to heart.

  2. Josh says:

    TSX?? Comon, even couch potato investors know not to buy 100% CAD, how about compare TO RE to the S&P index? My portfolio is doing just fine thank you.

  3. O says:

    Just a personal observation…. a renter friend who has no kids/wife, made more money than me his entire career, has a dozen hustles on the go at any given time is much poorer after 25 years working than I am. I own, he rented.

    Family members and In laws both have the same regret…not buying the building their business was in when they had a chance. Richest friend? Owns 4 properties, looking for more. Richest guy I know? A kid (30year old) who’s family owns half of Young street. They sell a building every few years when they need to free up a few million…true story….I hate him too.

    I know in theory that a renter who is a) educated on the market. b) has the stomach for risk. c) Is willing to give up dinners/travel/partying to invest could come out ahead.

    I have never seen it in my life.

    1. Professional Shanker says:

      It is amazing that the majority of people are programmed to feel safe taking up to 20 times leverage in the property market (5% down CMHC mortgage) but yet are fearful of investing in blue chip companies which pay a dividend yield of 3 to 5% a year……..

    2. Kyle says:

      “I know in theory that a renter who is a) educated on the market. b) has the stomach for risk. c) Is willing to give up dinners/travel/partying to invest could come out ahead.”

      One thing i want to mention is that the pro-renting crowd always talk about the risk of house prices going down, but they ignore the fact that owning a house is a hedge against shelter inflation (i.e. it locks in the cost of keeping a roof over your head). Which IMO is a far bigger risk than losing paper equity.

      In the last 5 years rents in Toronto have sky-rocketed and many renters are now forced to put an increasing amount of their disposable income into rent (i.e. less money to invest over time). Unless renters’ incomes keep up with rent inflation, they will end up having less and less to invest or possibly even have to draw down from investments to keep a roof over their head. Then when they hit retirement, they are faced with a much bigger hurdle, as they have decades more of living off of lowered income but yet still face rents that continue to increase every year.

      That to me is the biggest risk – can a renter grow his investments enough to sustain them through their retirement?

      1. O says:

        “are fearful of investing in blue chip companies which pay a dividend yield of 3 to 5% a year……..”

        Exactly. I dont even undersand what you are talking about. I am sure I could look into investing and figure it out, but it is not where my head is at.

        Real estate is simple, I have it for x, you want it for y, we make a deal. I made money just by living my life. If the hosue depreciates, I still lived my life in my own home and will at least get back some of the equity.

        1. Professional shaker says:

          And fair enough, nothing wrong with your perspective, personal comfort in large life decisions is important!

          1. Kyle says:

            Assume a renter is 65 years old and planning on retiring and therefore will have far less income going forward. He currently pays $2000/month in rent and expects to live for another 30 years. Fortunately he has been saving and investing, but how much does he need to accumulate to ensure that he doesn’t outlive his savings?

            Food for thought…RENT FOR THE NEXT 30 YEARS WITH 2% ANNUAL INFLATION WILL COST OVER $1M – and that’s just for rent, not utilities, not food, not spending money.

          2. Professional Shanker says:

            Kyle – Someone would need to conduct a monthly cash flow and determine what amount of money not wealth (all assets inclusive) they need to live a life they are comfortable with. If you are wealthy enough most people will continue to own, but the majority of Canadians will need to utilize their home equity in retirement at some point. Inflation is a real thing which you point out and people who are 50+ respect it’s wealth destructing properties a lot more than younger generations, IF and a big IF the yield curve continues to increase, any asset which requires leverage will be negatively impacted, so renting may prove to be a better option during the shake out period.

  4. downtown says:

    I’ve been working through this calc recently, to wrap my head around what conditions I would need in order to be better off selling and renting instead of staying put. My instinct was to compare the (a) mortgage interest + house maintenance expenses & property taxes, against (b) rent.

    But that’s not the right comparison. If the market value of the house grows exactly the rate of mortgage interest, then the interest cancels out and [item a] simplifies to house expenses and property taxes.

    More generally, I think the correct comparison is something like:
    (a) (rate of house market value appreciation – mortgage interest rate) x mortgage balance + home maintenance costs & property taxes
    versus
    (b) rent.

    In the low interest environment of the past 10+ years, the first item (MV appreciation – mortgage interest rate) has been very positive, making housing a very good investment.

    When interest rates eventually rise, that term will be negative. For example, a 2% rise in mortgage interest rates should cause about 15% decrease in home value. How much you care about that MV decrease depends on how leveraged you are, and how long you can hold onto the house.

    1. Kyle says:

      Don’t mean to be critical, but i don’t think this makes sense.

      When you say “to be better off selling”, you need to define what you mean: do you mean better off from a cash flow standpoint or a balance sheet stand point or an NPV standpoint?

      If you’re trying to figure out a break even level for selling vs renting. Then you need to state your assumptions, is the horizon for the rest of your life (need to know how old you are), what are the assumptions on how variables change over time? Not sure how you came up with a 2% increase in interest rates = a 15% drop in home prices, but if that’s your hypothesis, then what impact does the 2% increase in interest rates have on rents and your portfolio of investments?

      1. downtown says:

        Re: When you say “to be better off selling”, you need to define what you mean: do you mean better off from a cash flow standpoint or a balance sheet stand point or an NPV standpoint?
        > The latter. I was thinking in terms of accumulated value, but net present value gets you to the same place. That perspective ignores liquidity needs, but just takes into account net market value of assets net of debt.

        is the horizon for the rest of your life
        > 20 years as base scenario.

        Not sure how you came up with a 2% increase in interest rates = a 15% drop in home prices
        > Amortization factor for 20 year term at 3% interest (assuming annual cashflows for simplicity) is 14.9. That is, $100k debt at 3% interest rate would require annual payments of $100/14.9 = $6,700 to defease.
        Same factor at 5% interest is 12.5. So that same $6,700/yr can only support 6700 x 12.5 = $83,750 of debt.
        $83.8/100 is about a 15% reduction in the amount of debt that can be supported.
        Assuming most purchasers have a relatively high degree of leverage, I would then expect that to result in a 15% drop in housing prices.

        1. Kyle says:

          From an NPV standpoint, owning results in a positive NPV – because you are buying an Asset that generally appreciates, while renting results in a large negative NPV – because you are funding an expense.

          From a cash flow standpoint over a long time horizon (e.g. 20+ years) the cost of renting is always much higher than the cost of owning. If it weren’t there would be no such thing as Landlords. All costs associated with the home are eventually passed back to the renter and in addition Landlords will expect a Risk-adjusted return. In the short term, renting can require less cash flow, but over time cost of owning is relatively fixed unlike rent that rises annually. So at some point rents rise beyond the Landlord’s cost of owning. And long after the mortgage is paid off the Landlord still collects rent. This is how landlords make money. For the rent/invest strategy to come out ahead, the investments need to outperform the home appreciation by the additional cost of rent vs owning.

          The assumption that prices will fall based on the max amount one can afford, doesn’t hold in reality, because not everyone borrows the max and because the population isn’t static (i.e. you have new entrants on the demand side).

  5. Uneza Sheikh says:

    Star Marketing Pvt Ltd is offering Best Property for Investment in Pakistan great locations great facilities at affordable prices

    1. Kramer says:

      No way. No. Way. FINALLY!!!!!

      1. Kyle says:

        That wasn’t me…

        Some spammer with the same name. But yeah, that is cruel.

        1. Kyle says:

          Sorry meant for the string below….

  6. Kyle says:

    Very helpful. This is always the dilemma. http://www.tampa2enjoy.com

    1. Paully says:

      Wow! Safe to say that your RE dollar goes a lot farther in Tampa than in Toronto.

    2. Kramer says:

      I can’t believe you posted that sh#% in February bro, you are evil.

  7. Tom crosta says:

    A condo is not a home.

    1. CBA says:

      I assume you mean a condo apartment rather than, say, a condo townhouse? In which case, I’d imagine you don’t consider a rental apartment to be a “home,” either? My, how North American, 20th century, picket-fence middle class.

    2. Tommy says:

      It is in every major city on the planet.

    3. Appraiser says:

      “Where we love is home, home that our feet may leave, but not our hearts.”

      ~Oliver Wendell Holmes

      1. Long Time Realtor says:

        “Home is the place where, when you have to go there, They have to take you in.”

        ~Robert Frost

      2. Boris says:

        Confucius say: “Man who goes to bed with itchy bum wakes up with stinky finger”

        1. Phil Me In says:

          “Man with empty brain hears much whistling.”

          ~ Anon.

          1. Condodweller says:

            LOL

            Of all the things I lost, I miss my mind the most…..
            Can’t remember who

  8. FreeMoney says:

    David, why did you go with “a 5-year, fixed-rate mortgage at 3.39%” which is what would be available now, whereas you look back over the past ten years with respect to RE and TSX gains?

    Wouldn’t it have made more sense to look at the mortgage rate this hypothetical person would have been able to get in 2007 and then again upon renewal in 2012?

    Also, U.S. and global equities would have done substantially better over the last decade than the simple S&P/EAFE index figures might indicate, since the Canadian dollar is down more than 20% (vs. the U.S. dollar) over that time.

  9. Kyle says:

    One thing that hasn’t been mentioned, but it has been alluded to is that Calgary’s fortunes are hyper sensitive to the resource sector. They’re kind of a one-trick pony, not unlike the rust belt cities or Detroit, where there’s a huge reliance on a single industry. IMO, i’d rent over buying in these types of cities.

  10. Condodweller says:

    There is one more thing which potential young buyers may not be considering that those of us with more years under our belts have realized: years go by fast!

    A 25 year mortgage can be paid off in about 20 years if paid weekly which means your mortgage payment will disappear! At that point, in addition to having a large asset your monthly costs will also significantly drop below that of a renter because if you are a renter, you are a renter forever (unless you buy at some point but let’s ignore that for the moment). Now consider that by this point rents will have been inflated over the 20 years making the monthly savings huge which if one starts to invest, there will be no comparison between owning vs. renting.

    I have learned that successful people plan ahead, sorry for sounding like a broken record here, and in this case, it’s worth planning ahead to at least when the mortgage is paid off.

    One major reason for not owning is keeping mobility. I can fully appreciate that this new generation does not want to be tied down and feel overwhelmed by a mortgage which is fine. However, at that point, it becomes an emotional decision instead of a financial one and no amount of logic/math can argue with emotion.

    1. XYZABC says:

      ^This – @ just over 7 years after buying, we are about halfway into paying off our mortgage. The plan is to have it completely licked off in 14 years, and then just pay for the maintenance as needed, and the property taxes – which thanks to toronto rates is a lot lower than rest of GTA.

  11. Derek says:

    How much interest would have been paid on the mortgage for the $358,700 house between November 2007 and November 2017?
    How much interest would have been paid on the mortgage for the $415,000 house between November 2007 and November 2017?
    What are the gains over that period net of the interest paid on the mortgage?

    November of 2017, the Calgary HPI Benchmark price was $430,700

    November of 2017, the TSX Composite Index was at 16,067.50.

    1. Izzy Bedibida says:

      Great point. One that is never talked about. Once mortgage interest is factored in (which it never is) I’m sure that the number would change again, and the true costs would almost make it a wash.
      Ex-wife was surprised when the interest and other sunk costs ate up the “supposed gains” made on her moms house.

  12. A says:

    Great post, as I echo others!

    It is definitely a mistake to ignore the principal repayment portion of mortgage payments. Maybe it is implied that the “sunk cost” of mortgage payments and the carrying costs of a property should be compared to the rent.

    One of those who was interviewed was Max Fawcett. I am not entirely sure, but I think he is from Vancouver. If that is true, and if he has never owned property in Vancouver, it is easier for someone like him to be cheering on renting.

    Even though I own real estate and am almost certainly overweight real estate, I do believe that stocks as an asset class is the better wealth generator. I offer this observation not based on the last 10 years or so (the stats can be interpreted to say what you want them to say, as David always points out) but over a much longer period of time, irrespective of whether you are talking about Vancouver, Toronto, Calgary or St. John’s. One difference is that you can lever up more easily (generally speaking) with real estate, so the returns can get magnified when times are good.

    I say this even though the true metric, if you had to compare stocks vs real estate as investments, is the RISK ADJUSTED RETURN. You cannot compare just the nominal returns of these two asset classes, especially not after the great recession.

    As for the $600k cap gain? I would say anyone who says “it is useless unless one sells” is a fool. At a minimum, that can offer you job mobility. If you had to move to Silicon Valley, some of that equity can at least help you in moving there… so you are not starting from scratch.

  13. Paul says:

    David,

    Would you be willing to post what % of condo purchases you were involved in last year were investments vs. primary residence? I’m not sure if you even keep these statistics, but I would love to know.

    1. @ Paul,

      Sure, great question!

      2015 – 8.9%
      2016 – 10.8%
      2017 – 10.3%

      I’d actually never considered this before, and it’s interesting that the numbers are so consistent.

      1. Paul says:

        Thanks for that, the numbers are actually lower than I would have guessed.

        I would have thought somewhere ~30% of condos end up as rental stock. I know your numbers likely don’t include pre-con sales, which should lean more towards investors, but I doubt the total number is 30%.

        1. Gattu says:

          I can only suppose David works disproportionately with end user buyers. Urbanation statistics for 2016 (they have the most comprehensive project by project condo database) show 52% of GTA condo buyers were investors. Yes, that’s from a paid report.

          1. Daniel says:

            I think the investors really like the pre-construction product (about which David’s opinions are well known) and the end users want something that’s already built. Probably contributes to David’s low investor numbers.

  14. Juan says:

    It really isn’t correct to compare leveraged real estate investment returns to un-leveraged stock market returns.

    1. Professional Shanker says:

      bang on…..this is probably the least discussed point in the rent vs. buy discussion everyone enjoys having.

      Simply put, using a correct financial modeling perspective over many iterations (rolling terms, credit cycles, etc.) from a purely financial perspective there is no debate, renting will make you more money over the long term. That said life is not purely financial and the soft arguments of RE can easily persuade people to own as they should.

  15. Condodweller says:

    “…. 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.”

    We have two completely different scenarios here. Calgary’s re market has gone through a crash and is probably near long-term lows where Toronto has gone through a boom and is at a 20+ year high. If you believe in the buy low sell high theory, my initial starting point would be to buy in Calgary and Rent in Toronto. Next, you have to take into consideration human psychology as most people tend to shoot themselves in the foot when it comes to investing. Here you have to look at what you did in 2009 when equity markets tanked 50%. If you sold your equity holdings and bought fixed income, or worse, bought gold, your best best is likely to buy. If you can be disciplined with investing and were not scared out of the market when it crashed, you may be a good candidate for renting.

    The key part of the question is whether or not you can maintain investing discipline and not spend the money elsewhere once it starts to build. I would say for the majority of people the biggest pro for buying is the forced saving part and illiquidity of real estate though, unfortunately, banks have made it easy for you to blow the equity in your home nowadays. The other differentiator, of course, is the leverage people use for buying a home which the majority will not do for investments.

    Having said the above, to properly compare the two a long enough time horizon has to be used to account for market gyrations to be able to compare apples to apples.

  16. Ralph Cramdown says:

    As someone who has been renting and investing the difference for the last decade, I can tell you that your numbers above in no way correlate to my lived experience.

    Entre nous, we didn’t have half a million dollars (or 2007 equivalent) to plunk into the financial markets ten years ago, and certainly didn’t feel comfortable using leverage to up the beta on what we did have. We’ve been investing a percentage of household income as it comes in. Markets have spent most of the last ten years going up smartly, most of our money was invested after the crash at the beginning of your decade, and our simple dollar cost averaging and dividend reinvestment strategy meant we were buying more when the markets jagged lower, less when they were higher. We’re in pretty good shape now — let it not be said that Freedom 55 is dead!

    N.B. The TSX is too overconcentrated in Canadian finance and commodities to be a smart benchmark for any investor’s portfolio — diversify globally, or at least to the US. Anyway, even the lowly TSX is up a fair bit over the decade, with dividends reinvested. But thanks for rehashing the old realtor trick of ignoring the dividends.

    1. J says:

      I think one of several reasons that the general public has a hard time digesting the advantages of investing in a diversifies portfolio over real estate is that you don’t hear stories like this often. It’s gauche (and boring) to talk about the performance of your portfolio at a dinner party, whereas bragging about real estate appreciation is fair game.

    2. Appraiser says:

      You are to be commended @ RALPH CRAMDOWN because you are one of the few. Most people, let alone most investors, have a hard time consistently following through on a financial plan over an extended period of time. Thus forced savings like real estate prove to be vital components of a dignified retirement for so many Canadians.

      Renting always wins financially, in theory. In practice the winners are those than can stick to the plan. Congrats.

      1. Ralph Cramdown says:

        Thanks, but my consistency and will power aren’t all that. Setting up regular withdrawals and investment, once, so that the process keeps going automatically — that’s the key.

        1. Long Time Realtor says:

          Setting it up is easy, keeping it going takes persistence.

          1. Kyle says:

            And not spending it, when it starts to accumulate.

  17. Real estate millennial says:

    1st year real estate at UBC and Guelph U – real estate is regional and not all markets are the same, so you can’t paint them with a broad brush. I think it’s a false equivalence comparing Calgary to Toronto and maybe there is case for renting over buying it’s just not a philosophy I usually subscribe to. I think the appropriate question is how well do you think Calgary will do over the next decade or 2, will it be this amazing place to live with a bustling diverse economy? in short probably not – so I wouldn’t buy their either. City value is derived from the size and diversification of the central business district or local economy along with scarcity of a finite resource, land. It’s blows my mind listening to people prognosticate about real estate who have no clue as to how it works. Everyone is a residential real estate maven and we get “expert” opinions and anecdotes that are far from the truth. David is part of the few good brokers out there because most are terrible (Al Sinclair). I wonder why we don’t have the same conversations about commercial real estate as we do with residential. Class “A” office space has had really low vacancies and the price of retail space to purchase has also hit decade wide highs in the core. Personal thought, it’s fair more analytical and not something the average person is going to armchair quarterback, yet there is a direct correlation between commercial real estate and residential if you know what you’re looking for.

  18. Kyle says:

    I think we’ve done this debate to death. The ultimate conclusion using reasonable assumptions (as Geoff wisely put it “in all probability”) is that over a longer horizon owning is better than renting, and over a short time horizon renting is better than owning. The end.

    1. Kramer says:

      Agreed.

      And as far as investment properties go, keep your portfolio diversified among asset classes.

      i.e. this comparison between real estate and equity indexes below should be reframed, because if anything you should be in both…

      If your downpayment represents your entire investment portfolio value, then the technically correct answer is don’t buy investment property.

      Portfolio perspective people… always. Anything else is just wrong off the bat.

      1. Kyle says:

        Exactly – The real take should be this – to increase your wealth buy more appreciating assets relative to expenses. Its not really about choosing Asset A vs Asset B, because it’s better to have Assets A, B and C.

    2. Chris says:

      Yep that’s a pretty fair summary. There’s a lot of inputs that go into renting vs owning, but time you plan to stay in the house/location is probably the most important. The high transaction costs of real estate mean that if you’re only going to be there a short time, you’re probably better off to rent.

      Not much more to add to this discussion really. Rent vs own should be viewed on a personal basis, and decide what is best for you.

    3. Condodweller says:

      I think most people realize that homeownership is a long-term commitment, especially with today’s high transactional costs. Therefore short term ownership shouldn’t even enter the equation. The question at hand is whether long-term ownership is better vs long-term renting/investing; acknowledging the fact that a renter could buy anytime if conditions become favourable.

      1. Kramer says:

        I think Kyle answered that by saying “over a longer horizon owning is better than renting”, generally speaking.

        What do you think?

        1. Condodweller says:

          Even if one only looks at the financials there are too many variables to say definitively. If you compare apples to apples and employ the same amount of leverage with the investments as with the mortgage and assume you don’t shoot yourself in the foot by taking equity out of the home/investments along the way or by succumbing to emotion and buy investments high and sell low in the long run, renting should win most of the time.

          For most people owning will be the most workable solution even though it can get very complicated very quickly when you factor in the desire to move up, divorce, death, job loss, basement floods, very high prices etc. etc.

          No matter how well you can prove that one is better than the other on paper, emotion will enter the picture and in the end, people will go with what they feel comfortable with. This is why I say for most people owning is the best way to go because even if you are the type who uses a HELOC to blow equity, you will be more likely to blow your investments once it starts to build. It is very difficult to not spend money that you have readily available. This is what banks are banking on, literally, when they give people HELOCs they didn’t ask for.

  19. Marina says:

    Two other things:

    1. This is anecdotal, but I have seen a LOT of people who choose to rent and then don’t invest the money they “saved” by renting. There is a big behavioral factor for the average person that should not be ignored

    2. On the renter side there is also an assumption that the average person knows how to invest, i.e. pick a diversified portfolio, etc. Most people just end up buying mutual funds, and there is a cost there as well.

    Bottom line is it always depends.

    1. Condodweller says:

      These are two very important points. The basic tenet of this comparison is that one invests the money they save by renting. If they can’t invest they would be better off buying. The best way to invest would be in something illiquid that can’t be accessed easily. How to invest is an entirely different problem.

      As long as the money is invested though, one should be ok even if the savings are invested in mutual funds. Even if 30% of the funds end up in mutual fund fees, one will end up with a positive net worth and still do better than someone who blows their savings or equity through HELOCs. Saving and keeping it for the long term is the name of the game.

      1. Professional Shanker says:

        To the same point, I don’t believe the buy decision typically contemplates higher interest rates charged via B lenders or for that matter the increasing amount of lending conducted through HELOCs (which are prime + instruments) and the rent decision assumes that the person is a seasoned investor.

        Fact remains that for the average middle class person housing is regarding as a stable and safe investment (even though you are significantly leveraged for a time period) which governments provide incentives to ensure their citizens participate in – i.e ~70% ownership!

  20. J says:

    Including principal payments as a cost of owning is a common mistake in buy vs. rent comparisons, so it’s very helpful to highlight this fallacy. However:

    – Ignoring closing costs such as land transfer taxes, realtor fees, inspections and legal fees is misleading. The round trip costs for realtor commissions and land transfer taxes in Toronto alone are over $38k for a $510k property (5% commission + $13,350 in land transfer taxes). Assuming you buy and stay there for 10 years (how many people stay in a 1BR condo for longer?) that adds an additional $324/month (ignoring the time value of money and assuming the selling price is the same for simplicity).

    – The values for the TSX index returns above exclude dividends. Including dividends boosts the return for the TSX composite to 73% from 2007 to 2017 (source: ). It’s also worth noting that this is during a period of time when the TSX composite trailed its historical average while Toronto housing vastly exceeded its historical average. And your returns would have been higher and less volatile with a globally diversified portfolio that includes fixed income.

    – $1,000/month for maintenance, property taxes and insurance seems a little light to me (it’s common to ignore maintenance costs within your unit and special assessments, which aren’t covered by the monthly fees). But I will take your word on this one as it is not my area of expertise.

    – I can understand the desire to compromise completeness for clarity’s sake. Both David’s and the CBC’s methodologies (as well as my points above) make oversimplifications. But when analyzing whether to spend decades of after-tax income on a home, I would dig a bit deeper.

    1. Kyle says:

      These are all fair points, but in fairness, David has also ignored the fact that rents generally increase over time, principle residences are exempt from cap gains, and that any portfolio worth it’s salt will also have a fixed income component (i.e. higher annual taxes) and require rebalancing (i.e. transaction costs and cap gains taxes need to be paid out overtime which reduces compounding).

      1. J says:

        – There are inflationary pressures on all the numbers including maintenance and property tax costs, not just rent.

        – A couple that’s worked for 10 years each would have close to $510k in combined RRSP and TFSA contributions room available.

        – A diversified portfolio that includes equal parts US/Canadian/World equites and Canadian bonds would have actually increased by 92% over that period.

        – Brokerage commissions for rebalancing annually would be $40/year (4 trades x $10/trade).

        1. Kyle says:

          Are you suggesting that maintenance and property tax cost increases don’t translate to rent increases?

          1. J says:

            As I mentioned, those costs, along with rent, are all prone to inflation.

          2. Kyle says:

            What i’m saying is those costs get passed on to the renter in normal economic times. So your point about maintenance being light or rising over time is at best a wash between renting vs owning, because both inhabitants will pay for it regardless of type of tenure.

          3. J says:

            Yes, that’s exactly what I intended – it’s likely a wash.

          4. Kyle says:

            Got it. When i said rents generally increase over time, i meant vs a mortgage payment which is sticky and finite, unlike rent which typically rises and is infinite.

          5. J says:

            That makes sense. Although unlike inflation which has a generally upward trend, mortgage costs can rise or fall. Mortgage costs have fallen from 2007 to 2017. However, this can go the other way too (Canadians have short term mortgages, unlike the 30-year fixed term mortgage in the US). This means that homeowners who can’t recall a time before 1981 may be in for a bit of a surprise upon renewing their mortgages.

          6. Kyle says:

            Again that is a fair point, but remember we are talking in the context of renting vs owning. Mortgage costs are exposed to rises and falls. Rent however is only exposed to rises, when mortgage rates go up, they too get translated to rent not so when rates fall.

  21. Jackie says:

    The S&P 500 is up 82% over the same excluding dividends. Including dividends would get you closer or above the Toronto benchmark return, with lower transaction costs to actually liquidate if required.

  22. JCM says:

    You’re ignoring dividend yield, and you’ve cherry picked one of the worst performing stock exchanges over the past 10 years (the TSX, which is highly tied to commodities, which were expensive in 2007 and are cheap now).

    If you factor in dividends in a properly diversified portfolio with exposure to the US, Europe and emerging markets, you’re probably looking at gains of around 7-8% per year for the last 10 years.

    1. JCM says:

      Frankly, it shows a pretty serious lack of sophistication to ignore dividends… I’m shaking my head over here.

      Here’s a nice chart showing that over the last 20 years, the TSX has yielded on average 7% per year. The S&P 500 has yielded an average of 21% per year over the past 5 years. Not bad!

      https://www.taxtips.ca/stocksandbonds/investmentreturns.htm

  23. Geoff says:

    Interesting post. I think there’s always mistakes to be made in these type of generalizations – for instance, not sure where land transfer tax, legal fees and other costs are factored into that math. What I like though is that’s emphasizing math. Personally I think though it’s another offshoot of math – probability – that also is a factor in these decisions. If you’re single and upwardly mobile, I think renting may make, in all probability – more sense, as the costs of moving to another city etc are lower with renting than owning. On the other hand, if you’re 45, married with kids, you may not want to move even if you got a great job offer, because you’ve established the dreaded roots.

  24. Kramer says:

    Great post. The principal payment is obviously a crucial factor, especially in Toronto, where it’s almost impossible to have rent cover the owner’s entire outbound cash flow early in their ownership. I experienced this first hand, and was paying the equity portion of the mortgage payment out of my own pocket, and was fine with it because a) I’m paying myself that portion, and b) I knew it would shift over time, and it was meant to be a long term investment anyways.

  25. Pete says:

    I plugged the numbers you gave ($510K house, 20% down, 3.39% 5 year fixed term) – I used 25 year amortization (maybe you used 30 years to get the payment down to $2000/month) and the RBC mortgage calculator shows a monthly payment of $2484. I then averaged the interest portion of the mortgage over the 5 year term, it averages $1318/month. Add the $1000/month for property tax and maintenance (which renters don’t pay), and you’re looking at $2318 a month in sunk costs. Renting in your example was $1700 so you are in fact saving $618/month PLUS (assuming you are capable in the first place of affording the mortgage) the principal part of the payment. Yes, if you buy, that principal is equity, but only if your house value stays the same or increases. But if renting, you could invest those dollars in another form of investment too.

    1. Kramer says:

      If I lived in Calgary I would rent too.

TWEETS