Saving money: The choice between buying and renting is a complex one

Originally published in Maclean’s. In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units. Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge. The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent. Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before. Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says. Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.” Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers. More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.” In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics. For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket. Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands. A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible. There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.” Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money. Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done. Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”

Saving money: The choice between buying and renting is a complex one

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