Mid 2015 I wrote an article comparing Buying a home vs Renting a home (https://www.linkedin.com/pulse/home-ownership-canadian-dream-financial-nightmare-heera-singh/) in where I discussed, strictly from a ‘numbers’ perspective, on which strategy may actually be a better option long term. We know this debate has gone on for decades, and probably will still continue for decades to come, but as mentioned in my previous posts, the numbers just don’t lie!
In this post I’m going to do the same type of analysis I did in my last, except with updated numbers. We know the Real Estate market in Canada, specifically the Greater Vancouver area as well as the GTA, has been on fire the last few years, so we will definitely see some changes in numbers.
When deciding whether to buy or rent, there are so many different pieces of the puzzle to account for, that it can be a fairly strenuous task. A lot of the costs associated with owning a property are variable, which makes it a little challenging to get an exact number of the total cost of owning a home over a lifetime. That being said, we can get a fairly reasonable ‘ball park’ number by using averages over the last few decades, which should give people a good idea of the costs associated with owning a home vs renting a home.
This post is to give perspective from a purely numbers point of view and does not take into account the ‘psychological’ aspect of any individual/family. The reality is, whether home ownership is more or less expensive as compared to renting over a lifetime, many people still like the idea of ‘owning’ a home, as opposed to renting someone else’s property.
Let’s begin!
First, let’s look at the average home prices in Canada. The prices can vary drastically from city to city, and province to province, but the average overall cost for a house in Canada is $496,500[1] (Average cost of a home in the GTA rose significantly to $735,021[2]; The average cost of a home in the Greater Vancouver area has remained fairly steady over the last few years, currently at $1,050,300[3]). That’s not pocket change! In the last decade or so, the cost of buying a house in almost all major cities across Canada has been rising far beyond historical averages (which average about 5.5% growth over the last 30 years[4]). It is likely that at some point prices will take healthy drop to ‘come back to Earth’, but we can assume that over the long term, prices will continue to increase at a ‘normal rate’.
Down Payment:
Most lenders will require a minimum down payment of 5-10%, but ideally the higher the down payment, the better. Especially since anything below 20% down payment is subject to CMHC fees (up to 4.5% of the Mortgage[5], depending how much down payment you put down). So, if we take 20% of the average house cost in Canada, we get a number of $99,300. For many people, this might be 2 or 3 times their annual net take home salary. Needless to say, it can take several years to save for that down payment.
Mortgage:
Next, once you’ve decided to buy the house and put up the down payment, likely you would have to get a mortgage. Now, not all people will be able to put 20% down – some will only have enough savings to put 5 or 10% down and would mortgage the remainder – but for illustration purposes, let’s assume that 20% is the down payment, which means the remainder of $397,200 ($496,500 – $99,300) is borrowed as a Mortgage. Borrowing money also requires you to pay interest on the amount of money borrowed. It is difficult to get an accurate average of the average 5-Year Fixed Rate, over the last 40+ years, as different lenders will have different discounted rates. However, we know that 5 Year Fixed Rates rates were as high as about 20% in the early 1980s, were between 7-10% for much of the 90s, and were between 5-8% for the first decade of 2010. We know that rates will go up and down over time, but since we are using averages for everything, let’s keep it consistent and use a reasonable average of 6.5% over a 30-year period. If we assume 6.5% interest rate on a mortgage of $397,200 (over a 30-year period), the monthly payment comes to about $2,488 ($29,856 annually).
Cost of Borrowing:
This is essentially showing you how much it would ‘cost’ you (in interest) over a 30-year amortization to borrow that $397,200. If we take that 6.5% as an average over 30 years, it would have ‘cost you’ about $498,480 in interest to have that Mortgage. As you can see, this is much more than the value of that home that was purchased in the first place. Interest costs are almost always overlooked when doing a calculation on whether a home purchase is a good thing for you or not, but the numbers tell us that it definitely should play into the equation. Remember, the interest is compounding over and over until the full value of the mortgage is paid off.
Home Repairs:
Approximately 40% of Canadians do some sort of renovation to their homes annually, and the average cost of renovations is about $15,300[6]. This is a good chunk of money, considering it can come up every year. Even if it’s every 2-3 years, the costs still add up. If we were to even assume that everybody will do some sort of renovations every 3 years, over a 30 year period, it would have cost you approximately $153,000 (30 years / 3 x $15,300) over that period to keep your home renovated/up to date (that would be about $5100/year based off the above example). Now, not everybody will renovate their homes that frequently or spend that much money, but again, let’s stick to averages to give us a general idea of some of the numbers.
Property Tax:
We know that living in Canada, we’re all guaranteed 2 things: Death and Taxes. Owning a home is no different. Property taxes are paid to the municipality that you are living on, based on the “Assessed Value” of your home by that municipality. Now, the reality is, the ACTUAL value of the home is likely much more than that, but let’s stick to the average home price number to get a general idea. The average property tax in Canada as of 2017 was $8.66 per every $1000 in assessment[7] – the numbers range drastically from city to city with a low of $2.55 in Vancouver to $12.15 in Winnipeg. If we take that $8.66 average per $1000 and multiply that by the average home price of $496,500, we get an average property tax bill of $4300/year per home ($496,500 / $1000 x $8.66). Over a 30 year period, that would be approximately $129,000 paid towards property taxes.
Miscellaneous Costs:
There are usually several other costs that, whether one time or annually, also add up over time. Let’s take a look at a few:
Closing Costs – Generally calculated as 1.5% of the home value — $496,500 x 1.5% = $7447.50
Real Estate Fees – May average around 2 – 2.5% of the home value — $496,500 x 2.0% = $9,930
Land Transfer Tax – This varies from province to province, but let’s use an average of $6500
Home Inspection – $500
Appraisal – $250
Title Insurance – $250
Home Insurance – $840/year average across the Country[8]
Utilities – $400/month ($4800/year) – Annually
Based off the above analysis, we can see that the costs are adding up more and more:
Annually, to maintain living in a home would cost you about $44,896 (Includes mortgage payments, renovations, property tax, home insurance and utilities). Also, the up-front costs associated with the purchase of the home (closing costs, Real Estate Fees, land transfer tax etc…) would be another $24,877.50. Over a 30 year period, the total cost of owning that home would be $1,471,058 (Annual costs x 30 + up-front costs + down payment).
If we assume an average home price increase of 5.5% per year, then over 30 years, the house value would have climbed from $496,500 to $2,474,532. This would give you a net positive of $1,003,474 (home value after 30 years minus total cost of owning a home over 30 years). Not a bad number after 30 years.
Opportunity Cost:
There is one more cost that needs to be analyzed before you can decide whether or not owning a home is in your best interest. The “opportunity cost” is something that needs to be calculated. This is the ‘cost’ of using your money for the home as opposed to if you were to take that money and invest it. One way (and maybe the simplest way) to calculate this would be to use initial costs (down payment + up-front costs) as the initial lump sum investment ($99,300 + $19,860 = $119,360), and then the difference between the monthly costs of owning vs renting, as the regular monthly investment that could have been made had you continued to rent.
Just like buying, rental costs vary from city to city, from $1500/month to $3500/month (based on a 4-bedroom home), but let’s use an average about $2500/month. With renting, the renter is not always responsible for paying utilities, but sometimes they are. If we were to add half of the average home utility costs ($200) to the rental budget, that would put the total monthly cost of renting to $2700/month. Remember, the renter is not responsible for property tax, mortgage interest, renovations or any of the other costs associated with owning a home. This puts the total annual rental cost to $32,400 – a difference of $12,496/year ($44,896 – $32,400) or $1041.33/month.
The next step is to calculate what that initial cost of $109,540 (down payment + up-front costs) plus a monthly investment of $1041.33 would have grown to over a 30-year period. Even though the 30 year stock market average is approximately 8.5% return, let’s assume a little more moderate investment return of 6.5%. The number is pretty staggering – we get a total investment value of $1,841,157 after 30 years. If we were to use the actual market return of 8.5%, that number would be $2,888,333. We can reasonably assume that the actual value would be somewhere between the $1.81 Million and the $2.88 Million.
What this essentially means is that if you invested that money rather than using it towards a home purchase, after 30 years, you would have between $1.81 Million and $2.88 Million in savings. That is 1.8 to 2.8 times the net positive amount of owning a home.
The Result:
If we compare that overall net positive of owning a home to the $1.81 Million you could have got by investing your money, you would be at least $800,000 ahead by renting, after 30 years. This is an astounding difference between renting and owning, and would likely catch many people off guard. Now, as mentioned before, the assumptions used above are just ‘average’ numbers across the country, so they can be higher or lower depending on where you live or want to live. However, this should still give you a good understanding of a lot of the costs associated with home ownership and the potential difference in overall end value as compared to renting a home.
As mentioned, this post is looking at things from a purely numbers perspective, and psychology has not been discussed. That being said, from a purely numbers perspective, renting (and investing the difference) would generally put you drastically ahead financially, as opposed to buying a house.
Now, this doesn’t mean that 100% of the time renting is better or buying is worse, but this post should at least open your eyes and provide you with a different perspective from what the vast majority of people say or think. We’ve all been fed the connotation that home ownership is a great strategy, but often the numbers don’t lie. There may sometimes be a great opportunity to purchase a home, for example if we saw a big drop in prices (which I feel we’re going to over the next little while), so when the time is right, then maybe it would make sense. At this point, however, it’s not something I would encourage people to get in to.
Going through this entire process really opens up a person’s eyes and changes their perspective. The assistance of an Elite level Financial Advisor would help you effectively analyse the situation for yourself and is always recommended. There is no one size fits all solution and there definitely might be some situations where owning is a mathematically better option. However, the point remains that an Elite level Financial Advisor would be able to crunch all the numbers and help you figure out what is the best scenario for you.
[1] http://www.cbc.ca/news/business/crea-house-prices-1.4487522
[2] https://www.thestar.com/business/real_estate/2018/01/04/toronto-2017-home-sales-down-from-2016-average-price-up.html
[3] https://www.theglobeandmail.com/real-estate/the-market/canadian-home-sales-rise-for-fifth-straight-month-in-december-crea/article37601887/
[4] http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/renters-make-for-wealthier-investors/article17834799/
[5] http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm
[6] https://www.cibc.com/ca/advice-centre/home-ownership/canadian-renovation-spending.html
[7] https://www.altusgroup.com/wp-content/uploads/2017/10/Canadian-Property-Tax-Rate-Benchmark-Report.pdf
[8] https://insureye.com/average-home-insurance-premiums-canadians-pay-840-average-annually/
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