It is one of the most important decisions we can make about our financial future and there is much debate over the issue of whether it’s a smarter decision to buy or rent your home.
Most of us have grown up with the adage that ”renting is throwing your money away” and “ ownership is the path to wealth”. But in the increasingly unpredictable Toronto housing market, is that really the case?
In a market like Toronto where rents are soaring and the costs of home ownership continue to skyrocket, the choice of whether to rent or to buy comes down to a unique financial calculation and a review of each individual’s life circumstances.
Let’s review a couple cases from either end of the buying/renting spectrum…
First we look at first time homebuyers, who these days have increasingly chosen the expensive city lifestyle over the option of more affordable housing outside the downtown core. They value an arguably more comfortable lifestyle with shorter commutes and high walkability scores over the potential for more space and lower costs. However these choices take some serious number crunching:
The initial cost of home ownership typically includes:
- A 10% down payment
- Land transfer taxes (in Toronto this amounts to approximately 4% of the purchase price)
- Moving costs, legal fees and adjustments
Ongoing expenses include:
- property taxes, mortgage payments, maintenance fees (whether you own a condo or a freehold property), insurance and utilities
Remember: while renting has a more or less fixed monthly cost, you are not building equity. Here are a few thoughts around that:
- Purchasing a property forces you to put money towards building equity
- Historically residential real estate has more or less kept pace with inflation therefore, the buying power of your equity will be the same many years from now as when you bought it
- To make sense financially of the purchase of a property analysts say that you should live in the home for at least six years
- Investing in a diversified portfolio (the amount of your initial investment) is not dependent on the real estate market only
Many first time homebuyers find it difficult to save the initial amount necessary for a down payment in order to enter the home ownership game. Others find that they can afford a much nicer property by renting and that they can save money to either buy later or earn interest on the additional disposable money invested towards a better future. Another option that is gaining more and more traction with young adults is remaining or moving back to the family home even if it involves paying a modest rent to parents while saving the balance towards the down payment for a house. Another positive for Millenials is the fact that renting is a more positive choice for the environment. Living in the city can mean walking biking or riding to work reducing the need for a car and all of the green issues that result from that choice.The FRPO recently released a study called “Apartment Living is Green,” saying that renting contributes to greener living in a number of ways compared to low-density and ownership. There is also the positive personal health impact that results from biking or walking rather than driving and of course the time saved not commuting daily that could be spent in more positive ways.
A great financial comparison of renting vs. buying can be found in this Globe and Mail article…
The second group we’ll look at is downsizers. For empty nesters and older homeowners, the appeal of freeing up some cash flow, moving to smaller space with less maintenance or moving closer to amenities has a strong pull.
After accumulating substantial equity with home ownership many downsizers don’t want to tie up a large percentage of their net worth on one piece of real estate. They would rather diversify their nest egg and be free of the responsibilities that come with owning a property. To this group, renting can be appealing. It can be very liberating to just close the door and go…letting someone else worry about the maintenance issues.
The other side of that coin is that as a renter, you are out of the real estate market and its potential gains and you are at the mercy of the property owner and whether he wishes to continue to rent the unit. In this case, a commercial landlord rather than a condo owner would be a more reliable choice for long-term rentals.
This Toronto Star article discusses this in more detail…
There is no one size fits all for the rent vs buy question. I would be happy to discuss this issue with you and help you to evaluate your options. You can reach me at 416-834-3688 or firstname.lastname@example.org.