To Rent or To Buy, That is the Question

House in Calgary by Bill Longstaff
House in Calgary by Bill Longstaff

Home ownership is one of the safest investments. It grants decent returns; however, there are several situations in which it’s smarter to choose the cheaper and safer alternative: renting. Even though interest rates are at an all-time low and it might seem like the only smart solution is purchasing residential property, there are several factors that should always be considered before making the choice. It’s important to keep in mind that the market is in a period of relative stability: half of people think that the market will fall and the other half think that everything is as it should be. These two groups neutralize each other, resulting in a resale home market that is heading more or less sideways in terms of sales activity and recording only light price increases. Millions of Canadians who face this difficult task should be aware of the advantages and disadvantages of buying and renting and check their affordability before taking this important step.

Pros and Cons of Buying a House

Owning a house is a Canadian dream, and many home buyers feel a great sense of pride in it. Having your own space and freedom is considered an important part of an adult’s life, and in these times buying a house is a safe and reliable move. Home owners feel stronger ties to the community they live in and their residential property rewards them with satisfaction and security. Home ownership is an appreciated value that has many financial benefits. Homeowners can reasonably expect the equity in their homes to grow over time as their mortgage is paid down. Equity is the part of your property that you actually own through your payments and the longer you stay in your home, the more mortgage you pay and the more equity you’ll have. This vital addition to your personal net worth is considered much wiser than “throwing” your money away as rent. Buying a home is the right solution for people who have already figured out their future plans and want to live a stable life.

Calgary House by Naserke
Calgary House by Naserke

The affordability of buying a house is a crucial issue. The average national price of houses was $369,677 in March 2012 and it was even higher in cities such as Calgary, Toronto, and Vancouver. However, you have to be aware of the fact that the cost of owning includes much more than the initial payment. Moving into a new house means paying hundreds or thousands of dollars for various items such as commission, maintenance, furniture, mortgage, legal fees, property tax, insurance, utility payments, landscaping, and closing costs. If you plan to move within the next few years, you most likely won’t recover the closing costs of buying a house.

Furthermore, you’ll lose flexibility in choosing a new location or job after you’ve purchased a house. Even if your home increases in value (which is not guaranteed) as times goes by, you won’t get a big return quickly. Moreover, the opportunity cost of buying a house should not be ignored. Alexandre Pestov, a strategic consultant and research associate at York University’s Schulich School of Business, compared purchasing a two-bedroom condo in Toronto to renting it over the past 25 years and he discovered that the renter ended up $600,000 richer than the owner if he invested the spare money in low-risk bonds.

Pros and Cons of Renting a House

Recent studies by the International Monetary Fund and the Organization of Economic Co-operation and Development inform that Canadian renters get more favourable deals compared to their owner counterparts than renters in most other countries. The affordability of renting is caused by the fact that there’s no down payment required to rent. Rents were also struck by a decrease in demand, as most people who were able to accumulate enough money for a down payment rushed to buy. For example, Canadian Business informs us that:

“In Ontario between 1996 and 2006 and especially in the last decade, tenant households dropped by 84,000. Facing sliding demand and a surging supply, landlords refrained from jacking up rents. As a result, the growth in rents in Ontario has not even kept pace with increases allowed by control laws.”

Townhouses by Bill Longstaff
Townhouses by Bill Longstaff

People who rent do not have to pay property taxes or other similar expenses such as utilities, as they are often included in their rent. Thus they have a better overview of their monthly expenses and are able to create a pretty accurate budget. Renters aren’t responsible for problems with appliances, plumbing, and other maintenance issues in their flat. They have more flexibility in choosing a new location and job. Renting doesn’t have to be a permanent solution. In fact, it’s the ideal option if you want to evade an unfortunate decision and consequently drowning in debt.

Canadians consider renting a sign of instability and transience through which you aren’t investing in yourself and are throwing away your money. Probably a more valid argument against renting is that you don’t own your own space and must adhere to policies and rules as stated in a lease agreement. Moreover, renters could be subject to rent increases.

For many years, the Canadian attitude about housing has been influenced by government policies and taxes. There’s a major difference between taxpayer subsidies for owners and tenants according to a study released in fall 2010 by the FRPO and the Canadian Federation of Apartment Associations (CFAA). The study suggests:

“The average homeowner receives $1,823 a year through programs such as tax-free capital gains on the sale of principal residences and the Home Buyers Plan that lets first-time buyers withdraw money from their RRSPs for down payment. Renters, meanwhile, get $308—even though, on average, they have half the income of owners. CFAA president John Dickie argues that this situations benefits neither taxpayers nor the economy. “The government should get out of the business of encouraging people to own,” he says.

Having too much money concentrated in the housing market makes the whole economy less efficient. Especially in these times when mobility and flexibility is a fundamental element of our economy.

Affordability Check

Sum up all your monthly payments including your mortgage, add your expected monthly share of property taxes and heating, and then count what percentage of your monthly pre-tax household income it comprises. When leaving some room to save for unexpected payments, you should consider an upper limit of 30 to 35 per cent.

If you’re crossing this line, you probably won’t be able to pay all the expenses that come with purchasing residential property. In such cases, there’s only one solution left: renting. Even though it might not be a perfect and permanent solution, it offers a way to save some money for future investments.

Compiled by: Home Insurance Blog

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