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Rising Real-Estate Proving Costly to Rent and Buy (ARTICLE #3)

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Rising Real-Estate Proving Costly to Rent and Buy (ARTICLE #3)

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The article explains that with rising housing prices, more people are depending on renting their desired place to live. However, it later explains that as the renting market becomes flooded with more prospective renters, there will be a rise in renting costs. With this rise there should be no surprise if we start to see young adults live with their parents longer to save, before buying their own home. This contradicts the start of the article, but does raise a valid point that if more people are focused on renting, the market for renting will only increase and thus increase the cost. Overall, it seems that there is a going to be a rough patch for young adults that desire to own their own home, but cannot rent in a desired location based on the costs rising.

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Buying a home is not the answer to insanely expensive rent.

In Toronto, rents are in some cases heading into the same zone as the mortgage payment on a modest house or condo. Renting a condo in a prime location might even cost you more than buying based on a comparison of rents and mortgage payments.

There are no easy answers to the question of how to live in Toronto in 2017 without blowing up your personal finances. More millennials will be moving back home, even if they're working. Some will rent in a godforsaken suburb or find roommates. And some will investigate whether owning can actually be cheaper than renting.
Rob Carrick: A millennial's guide to buying a house Financial Facelift: Millennials with debt face rent-or-buy dilemma Tool: Our house price data centre shows home prices trending in your neighbourhood
It's not. Owning a home or condo is a higher league of expensive if you look beyond just the cost of a mortgage and rent. This applies not just to Toronto, but any city with expensive housing.

Estimates of average rental costs in Toronto vary a lot - from roughly $1,500 on average for two-bedroom apartments of all types to $2,400 or so for two-bedroom rentals in condo buildings. Let's use $2,000 for this comparison because it's not far off the $2,100 per month payment on a mortgage for a $500,000 property made with a 10 per cent down payment, a five-year fixed mortgage rate of 2.7 per cent and a 25-year amortization.

Let's make that property a condo - there are some two-bedroom condos in the Toronto area for that much. Now, let's look at condo maintenance fees. A quick browse of the Condos.ca website showed $500,000, two-bedroom condos with maintenance fees as low as $369 and as high as $986. Condo fees vary according to factors like a building's age, condition and amenities, and the utilities costs included. Let's estimate $600 per month.

Property taxes might run you $2,500 per year in a two-bedroom condo, or $208 monthly. As an owner, you' probably want to personalize or upgrade your condo. On average, we'll estimate that you spend $200 per month on improvements like this.

Total cost of renting our hypothetical two-bedroom apartment: $2,000 plus utilities. Total cost of ownership: $2,100 plus an additional $1,000, give or take. You might spend less if you're really frugal, or you might spend more if you want to make substantial upgrades or you get hit with a special assessment for the cost of a big project in your condo that can't be covered from regular condo fees.

For years, I've suggested that people rent if they can't afford to buy. But renting, while not as expensive as owning, can still be toxic to your personal finances. There's a rough rule that rent should be no more than 30 per cent of your gross income, but that's a stretch today. It would take an income of $80,000 per year to make that $2,000 monthly rent in Toronto affordable over a year.

This leaves renters in the same position as prospective buyers - making compromises like finding smaller accommodations or moving further away from the city centre. Renters used to be able to say that if they couldn't afford to own, at least they could live in a desirable part of the city and not the suburbs. But expensive housing pushes people into renting, and that in turn causes rents to soar.

Under Ontario's rent control laws, buildings that opened before November, 1991, can only raise their rents each year by an amount influenced by the inflation rate (1.5 per cent for 2017). Newer buildings, notably rented condos, are not bound by this. That's the background behind a story told in my e-mail newsletter last week about a Toronto woman who moved out of her tiny condo after her landlord jacked her rent to by $950 a month to $2,600. She ended up "couch surfing," or staying with friends and family.

We'll have to be careful not to apply the failure-to-launch label on millennials who react to high rents by making the rational decision to move home. In fact, doing so might offer the most efficient route to home ownership. Even if a young adult pays modest rent to parents or help with household expenses, there should still be money left over to save for a house down payment.

It may turn out that rental insanity means some young adults never rent. They'll go right from their parent's homes into their own place, after an extended period of saving.

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Soaring rents still cheaper than owning a house

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Buying a home is not the answer to insanely expensive rent. In Toronto, rents are in some cases heading into the same zone as the mortgage payment on a modest house or condo. Renting a condo in a prime location might even cost you more than buying based on a comparison of rents and mortgage payments.

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Young Adults Prefer Renting in Calgary (ARTICLE #2)

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Young Adults Prefer Renting in Calgary (ARTICLE #2)

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This article describes the housing market in Calgary, and examines why young adults are choosing to rent a house over buying. It shows that young adults have become more independent and also more financially aware from previous generations. With online calculators to help a person view the math behind this decision, even the older generations can see that financially renting is sometimes the better option.

This article provides great insight into the financial factors that affect a persons decision to buy or rent a house. There are also links within the article that lead to the online tools used to help demonstrate these financial factors.

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If all goes well, the arc of early adulthood is supposed to go: graduate, get a job, buy a house.

We're told this is the formula for success. With each milestone you reach, friends and family pat you on the back. And by the time you reach the final step, you know you've really made it. You're a home owner now. Congratulations. Welcome to the club.

But wait. Some smart young people in Calgary with more than enough money to buy are opting to rent. Yep. Rent. Or, as your uncle might say, "paying someone else's mortgage."

Are they crazy? Or do they know something the rest of us don't?

The reasons for renting, by choice

The decision to rent or buy depends entirely on your personal circumstances.

If you're sure you'll live in the same place for more than a decade and are confident housing prices will outpace inflation, the standard arc of adulthood will probably fit with your life. In that case, buying can certainly be a good option.

But there is a risk, too. Taking out a mortgage might make your mom happy, but a lot of things will have to go right for you to make a fraction of what she made on her first home. And if just one or two go wrong, you might find yourself trapped.

Past returns are no guarantee of future returns. A cold, hard look at the numbers reveals how the scales of risk and reward can tilt in a different direction. It may run counter to conventional wisdom - the orthodoxy of ownership promulgated by governments, banks and realtors. It may prompt disapproving sighs from family members. It may even bring Tinder dates to an abrupt end.

But let's explore the reasons you maybe, just maybe, might want to rent.

Some quick numbers

It all comes down to math.

Prices for a typical, detached house in our city have hovered around the $510,000 mark for the past few years. So says the Calgary Real Estate Board.

To buy that house today would likely cost you about $3,000 per month. That would cover the mortgage, property taxes, insurance and maintenance costs. (We'll talk more about these estimates later on.)

If you wanted to rent a similar home, meanwhile, you can likely find something for $1,700 a month in the current market, which has seen vacancy rates increase fourfold during the downturn.

Right there, that's $1,300 you'd save by renting - each and every month.

Add that to the tens of thousands of dollars that you don't have tied up in a down payment, and now you have some serious capital to feed into in any number of other investments.

This is at the core of the calculations some young people have been making. They've considered the more diverse investment opportunities that renting offers, and they're attracted to the flexibility and reduced exposure to market fluctuations. So they're in no hurry to buy.

The math 'just doesn't work out'

Bridget Casey is a 32-year-old entrepreneur with an MBA in finance from the University of Calgary. She recently went through one of those life changes that often prompts people to buy a house.

She became a mom.

"I had a positive pregnancy test in hand only four days after I had moved into a new one-bedroom apartment," she wrote last April in her popular financial literacy blog, aimed at people in their 20s and 30s.

Casey had been saving - a lot - in preparation to buy. She had a hefty down payment to plunk down, but had been in no hurry to pull the trigger. As far back as 2015, she had her doubts, which she detailed on her blog.

Three years later, even as a new mom, she's still choosing to rent.

"Now that I have a baby, I was considering moving somewhere more permanent," she said. "But every time I do the math, it just doesn't work out."

Danny Haines has done the math, too. He figures it's 40 per cent cheaper for him to rent.

The 30-year-old engineer, who also has an MBA, bought a condo in Edmonton about 10 years ago, which he said he roughly broke even on, once realtor fees and other closing costs were paid. But now that he's moved back to Calgary, he sees renting as the better option.

He's taking the money he saves and socking it away in a variety of other places. That includes some money in real estate investment trusts, but only as part of a diversified portfolio.

"I mean, that's the first thing you learn in any business class," he said. "Tying up all your funds in one asset is a pretty silly idea. You're super exposed to any risk and fluctuation in the market."

Putting all your eggs in the real estate basket also comes with what's known as opportunity cost. This is a theoretical concept, but it translates into real money.

In Haines's case, buying a home would have meant missing out on the opportunity to invest his additional cash flow in the stock market. And, he says, those investments have done "really well" over the past couple of years.

"I'm sure they're doing a lot better than many people's homes," he said.

This also keeps him adaptable to changing situations. So when he was laid off from his construction management job in 2015, instead of fretting over how to cover the next mortgage payment, he travelled and worked in New Zealand for a year. Renting didn't just free up his capital, it freed up his life.

But Haines admits there is another cost to renting - a social one. He says his decision is a hard sell to some family members, especially those of an older generation who have done well in real estate. And then there's the sideways glances from people his own age, too.

"It's definitely come up on a first date: 'Oh, you rent this place? How much money do you make? This is weird.'"

Generational divide

It may be weird now, but it's becoming more common. Young renters are still in the minority in this city, but only just barely.

Home ownership rates have been on the decline for the past decade among people under the age of 35. In the 2016 census, it was down to just 50.6 per cent.

Among the baby boomer and older generations, by contrast, the rate has increased slightly to 83.1 per cent. Clearly, there's little debate in that crowd about the wisdom of home ownership. And understandably so.

"They kind of have a backwards-looking perspective on it," said Max Fawcett, a former Calgary resident who has written extensively on what he's described as the religion of real estate.

"If you look backwards over the past 30 years, buying has been a pretty good choice. But that doesn't mean that buying is going to be the right choice going forward."

The problem, he says, is prospective buyers are presented with an "imbalance" of information.

It comes from realtors and bankers with an incentive to sell homes. It comes from well-meaning parents who want their kids to benefit from the same returns they've enjoyed. It comes from governments who entice first-time buyers with the ability to borrow down payments from their RRSPs and claim tax credits for home renovations.

"It makes it difficult for people to accurately assess the information that's in front of them," Fawcett said.

And that task is already hard enough.

Assessing the info

Trying to compare the costs of renting versus buying - along with the expected returns on your choice of investment - is enough to make even the most mathematically inclined person's head swim.

Fortunately there are some online tools you can use. But they, too, can be confusing.

One of the more complicated but powerful tools comes from a brokerage called Mortgage Intelligence. Plug in a bunch of numbers and it'll show you how long it would take for a home purchase to break even against investing your down payment and monthly savings as a renter.

There's also an interactive tool from the New York Times that's easier to understand, with one complicating factor. You have to be sure to set your "marginal tax rate" to zero in order for the calculations to work in a Canadian context. That's because Americans have even greater government incentives to buy homes - they can deduct their mortgage interest and property taxes from their income taxes.

Use these tools with the numbers from our typical detached house, add in a few assumptions, and you'll see it's actually quite close between renting and buying.

Let's give it a try.

Plug in a three-per-cent mortgage rate, a 20-per-cent down payment, a lower-end estimate (1.5 per cent of the home value) for maintenance costs, and assume a modest annual return of two per cent for both house prices and any investments you'd make as a renter, and the math pretty quickly comes out in favour of buying. Cool.

But tweak a couple of variables and things change dramatically.

Boost the interest rate on your mortgage by a single percentage point and suddenly it takes twice as long for the purchase option to be more profitable. Reduce the expected gain in house prices by one percentage point and renting looks better for two decades or more. Assume a one percentage point higher return in the stock market and the math tells you to rent forever.

The question then becomes: How big of a bet are you willing to place on real estate?

Guessing at the future

If you buy today and prices grow by three or four per cent every year, then sure, you can sell in five years and likely come out ahead compared with renting. But what if they grow by only one per cent? What if they fall slightly? What if they crash?

If it takes 10 or 15 years for your purchase to come out ahead, what will interest rates look like by then? What are the chances of a leaky roof, a blown furnace, a special assessment from your condo board or some other major repair bill coming your way during that time?

On the other side of the coin: Renting is cheap now, but prices have begun to edge up. Will they outstrip the cost of buying?

Of course, none of us has a crystal ball. You can do your best to make an informed decision, but at the end of the day, it's never a sure bet. For the young people we've heard from, though, it comes down to spreading out the risks and not rushing into a long-term commitment.

"I do think smart young people value keeping their options open," said Fawcett.

"They know that they can buy whenever they want. That's the great thing about being a renter ... you can buy next week if the numbers change and the math starts to work in your favour or your life situation changes."

In the meantime, they're resisting the pressure to purchase. They're more than happy to put away the money they save by renting, while enjoying the freedom and flexibility that brings. Some day, they may choose to buy a home. But for now, they won't be swayed by their folks, their first dates or the fear of missing out.
Calgary: The Road Ahead is CBC Calgary's special focus on our city as we build the city we want - the city we need. It's the place for possibilities. A marketplace of ideas. So. Have an idea? Email us at: calgarytheroadahead@cbc.ca

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ANALYSIS | Why young people who can afford it are choosing not to buy homes in Calgary | CBC News

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If you've got money in the bank but are reluctant to be tied down, buying a home in Calgary probably isn't the best idea right now. You'll likely do better to rent and invest your cash in other things. Don't believe it? Take a hard look at the numbers.

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Young Adults: Buy or Rent a Home (VIDEO #3)

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Young Adults: Buy or Rent a Home (VIDEO #3)

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This video talks about how young people should consider saving their money while going through school and the short time after graduating. There is talk about the housing market going through hills and valleys, and compares how the public reacts when the market changes. There is also the advise of how a persons circumstance play a major contributor in the decision making process.

Personally I found this video informational and a great watch, since the entire video relates to a college student figuring out how to live on their own after school.

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Why people want to buy a home (VIDEO #2)

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Why people want to buy a home (VIDEO #2)

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Most people want to purchase their own house for the independence that it allows. This independence that people feel gives them freedom to decorate and change the house and property as they desire; whereas with renting you are restrained by what the landlord allows. There is also the concept of paying rent vs paying mortgage. Although mortgage is very much similar to rent, that house becomes yours when the mortgage is completely paid off, and you then have full ownership of the house. When you rent however, there is no “ligh at the end of the tunnel”, since you can never actually own that house you just continue to pay rent. There are downsides to owning a house, but when properly managed along side your money and other finances, owning a house can provide security and safety of a major asset.

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PROS AND CONS of Renting vs Buying (IMAGE #2)

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PROS AND CONS of Renting vs Buying (IMAGE #2)

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This image provides the 8 points for renting or buying a house. There are 4 pro points and 4 con points, with each option having to be weighed differently. This would be a good image to show younger people who are just beginning their independent life, as they can weigh these option and decide what is the most appropriate path for them to take in the immediate future.

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Has Buying a Home become better? (IMAGE #3)

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Has Buying a Home become better? (IMAGE #3)

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This image shows that in the past the cost of renting vs buying a home was similar, but that is not the case now. As visible, renting cost has increased from years past; whereas the cost of buying has actually decreased. This again may not account for certain variables of cost, but does show that is may be better to pay a mortgage that is your!

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Vancouver Properties - Rent or Buy (ARTICLE #1)

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Vancouver Properties - Rent or Buy (ARTICLE #1)

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This website analyzes the cost between renting a house in Vancouver versus buying the same house. Much like the first video posted it compares the two methods over a period of time, and analyzes how the owners net worth would change over that time. This again brings the individuals current financial state and other aspects into play. In this particular case, the Vancouver area sees different return value on town houses and detached homes against condos. This different in values also results in a different net worth between renters and buyers.

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You could buy a home, or you could rent one.

In Vancouver, the return on your investment wouldn't be much different either way.

That's according to an analysis that looked at three properties around Vancouver and examined how much money either a renter or buyer could make over the course of 25 years.
Coverage of rentals on Globalnews.ca:

Louie Dinh is the mind behind Quantitative Rhetoric, a respected blog that provides monthly reports tallying how much it costs to rent a place around Vancouver.

His most recent post offered up a series of " Case Studies in Renting Versus Buying."
READ MORE: Vancouver millennials need rentals. Seniors have rooms. There may be a solution here
He was motivated to do this after hearing a popular refrain among his friends, and online: "You should buy because renting is paying someone else's mortgage."

"Like most unsolicited advice, it's wrong," Dinh wrote.

Dinh searched online for properties that were for sale, and that were being rented at the same time, and chose three in total.

One was a downtown Vancouver condo, one a townhouse near Metrotown and one a single-family home in the Dunbar area.

Then, he looked at the cost of buying them, along with all the attendant expenses, against renting each one.

Dinh chose properties that are considered "typical" across the Lower Mainland, and he found that renting or buying produced "qualitatively similar results."

"Some people responded to my post saying the comparison's not great because you're buying a new build, but you're renting this old stock thing," Dinh told Global News.

"We're actually comparing the exact same unit."

He then set out an analysis in which anyone buying these properties would make a 20 per cent down payment; renters in this study would take the same amount of money and investment in a stock market index fund.

Dinh then looked at average yearly returns for condos (3.9 per cent), townhomes (4.63 per cent) and detached homes (6.69 per cent), using data from the Home Price Index for Greater Vancouver.

He also took account of average yearly returns for the stock market - eight per cent, not adjusted for inflation.
READ MORE: Rent in the city, own in small towns: Canada's new real estate trend
Charts produced as part of Dinh's analysis showed the value of a renter's or buyer's investment over the course of 25 years.

A blue line, representing renters, indicated "what total dollar value you have in your bank account at any given time" after investing in the stock market, he said.

A red line, representing buyers, showed "how much equity you have in your house, so how much of that principal you've paid off," he added.

The downtown condo that Dinh looked at was listed for sale at $600,000; it was also listed for rent at $1,600 per month.

From there, he took the amount of a 20 per cent down payment ($120,000) and charted its potential increase in value over the course of 25 years - both invested in a home, and in the stock market.

For a buyer, he took into account expenses such as property taxes and maintenance fees. Mortgage payments were kept constant.

With stock market returns growing at an average of eight per cent per year, and condo returns growing at an average of 3.9 per cent per year, there wasn't much of a difference in value when it came to the condo at the end of the 25 years.

A condo buyer's investment in the condo grew to $1.56 million, and a condo renter's investment in the stock market grew to $1.55 million.

"At current price/rent levels, purchasing a condo appears to offer no benefits," Dinh wrote.

Townhomes and detached homes were a different story.

In each case, buying such a property produced better results than renting, but it took over 15 years to realize them in Dinh's analysis.

The person buying a townhouse near Metrotown would have seen their investment grow from $988,000 to $3.04 million, with the buyer's returns exceeding those of the renter's at about the 15-year mark.

The person buying the single-family home in the Dunbar area would have seen the value of their investment grow to $17.14 million over 25 years, with the buyer's returns exceeding that of the renter's after about two decades.

Dinh said the returns would likely differ if this analysis was carried out in different parts of the region, but he didn't do that analysis himself.

"I haven't looked closely at the rental numbers or the listings numbers," he said.

"So it's all about the ratio of how much you're renting or buying for."

In conducting this analysis, Dinh said he was only making projections of what these investments could look like after 25 years, and that he did so based on known figures.

But he also said, "it's still just a best guess basis."

Dinh's conclusion about renting versus buying was "reasonable," said Thomas Davidoff, a professor who focuses on housing at UBC's Sauder School of Business.

He said there's not much certainty around what will happen to people's investments outside housing, as well as what home prices could look like in the future.
READ MORE: Should you rent or buy? This real estate calculator will help you decide
As for renting versus buying, Davidoff said, "one would expect that given the tax preference to owning, for a rich household, in the long run, owning would be superior."

But with home prices where they are in the Vancouver area, "I am not surprised by the result."

"We do not know how home prices or other investments will perform going forward," Davidoff said.

"Roughly similar performance is not a crazy outcome, given we know that some people own and others rent."

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Buying vs. renting in Vancouver - moneywise, it doesn't make much difference: analysis

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You could buy a home, or you could rent one. In Vancouver, the return on your investment wouldn't be much different either way. That's according to an analysis that looked at three properties around Vancouver and examined how much money either a renter or buyer could make over the course of 25 years.

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Analyzing Net Worth of Renting vs Buying (VIDEO #1)

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Analyzing Net Worth of Renting vs Buying (VIDEO #1)

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This video walks through the process of determining if renting a home over the course of certain number of years is wasting money. As shown in the video, there are less upfront fee when you rent a home, but that also means that there is no additional assets gained. Renting can work if you are smart about how you invest the remaining portion of your net worth, however on the flip side, owning a home provides stability and financial comfort. By the end there are a number of uncontrollable variables with which can make neither option look appealing, and therefore the personal choice all depends on how someone sees themselves in the future.

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Drawing Conclusions: Is renting really a waste of money?

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Renting vs Buying - Both have benefits (IMAGE #1)

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Renting vs Buying - Both have benefits (IMAGE #1)

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This image shows that there are benefits whether a person wants to rent or buy. All people have to do is match their current situation and needs with the upside of one of the otption. Although minimal, this image does provide a strong starting insight into the topic.