It used to be commonplace to hear:
“buying is always better than renting”
“real estate is always a good investment” or that
“renting is throwing money down the drain”
In recent years, it seems this thinking is becoming slightly less universal. Home ownership rates are slightly lower among millennials than previous generations. At 30 years old, 50% of millennials own homes versus 55% of baby boomers at the same age.
So it seems like some millennials are asking themselves “is it really better to buy or rent” in the current housing market?
The truth is: there is no right or wrong answer to this question. It depends on your preferences, individual circumstances and the housing market conditions where you live.
The costs of renting vs buying in Canada’s top cities
A recent National Bank report showed that monthly mortgage payments on median-priced condos were higher than the average monthly rent for a similar unit in Toronto, Montreal, and Vancouver. However, at the same time, monthly mortgage payments were lower than rents in Calgary, Edmonton, Winnipeg, and Quebec City.
Source: National Bank of Canada Housing Affordability Monitor Jan 2019.
The simplistic way to look at this would be to say: it’s better to rent in places like Vancouver and Toronto and better to buy in Calgary & Edmonton.
However, as always, there’s much more to it than that.
Owners are generally wealthier over the long run
Data from Statistics Canada shows that in the long run homeowners are distinctly better off financially compared to tenants with similar age and income profiles. The reason for this is because owning a home forces you to consistently save (in the form of principal repayments) and that saving accumulates over the years.
It’s the “forced” part of this that is really important. Renters with the same income, just don’t tend to save as much as homeowners since they’re not tied in.
So you might be better off renting in Vancouver, but only if you invest what you save thanks to renting. Clearly you need to be financially disciplined for this strategy to pay off.
One common mistake people make is “lifestyle inflation”, where rather than investing what they save as renters, they just rent nicer apartments and increase spending on meals out and travel.
Another seldomly mentioned benefit of owning your home is the tax benefit when you sell it. In Canada, the “principal residence exemption” allows you to sell your home without paying tax on the capital gains (as long as it was your principal residence for every year of ownership). This means that even if you were renting and investing what you save as a renter, any money you made from investing would be taxed, whereas any money you make from your home is not taxed.
Rent vs. Buy: How To Decide
Where do you want to live?
One of the most important things to figure out is the cost of rent compared to mortgage payments in your area. As a general rule, if you’re paying more than $3,000 per month in rent, you can probably do better with a mortgage.How stable are your earnings?
Without predictable earnings or stable employment, you’ll have trouble convincing a bank to lend to you at reasonable rates.
Do you pass the 40% rule?
The 40% rule says that you should be able to pay your housing costs (principal, interest, utilities and taxes) as well as your other debts (credit cards, car, etc.) with no more than 40% of your gross income. This isn’t just a rule of thumb for consumers, it’s also a metric applied by lenders.
How long do you plan to live in your home?
In general, the longer you live in a home, the more likely it is to be a better investment. This is due to the fact that property prices are more consistent over longer time horizons and that there are costs to buying and selling real estate.
When to Buy:
• You’re ready to settle down in a specific location.
• You’re able to take on the costs of owning a home.
• You’ve got a steady source of income.
When to Rent:
• You can’t afford the mortgage payment and expenses that come with buying.
• You’re not ready to settle down, or your long-term plans are influx.
• You’ve got a lot of debt.
• You don’t have a down payment saved up.
• You want to invest your money elsewhere.
• You income is less stable
Bottom Line: Is it Better to Rent or Own?
When it comes to renting vs. buying a house, there is no one right answer for everyone. It requires taking an honest look at your personal, financial and local market situation.
If you choose to remain a renter, take the opportunity to set up an automatic saving plan. You may not be building equity with mortgage payments, but you can still build wealth with your disposable income.
If you decide to buy a home, take a closer look at Bōde Canada. Bōde gives you everything you need to successfully buy your first home. You can get comparable sold homes prices, instantly book a showing for any listing in Calgary or Edmonton, and use the offer and negotiation tools to quickly create a digital contract with the seller. Bōde makes the process so simple that you don’t need a realtor, which means you’ll save tens of thousands of dollars in commissions and take years off your mortgage payments.
Whatever you decide to do, if you follow some of the advice above, you can take comfort in knowing that you made the right decision for your own circumstances.
