The assumptions made by the author are ridiculous, namely:
- In the 10-year comparison, rents paid are not factored in at all.
- In the forward-looking comparison, condo prices are assumed to be flat, mortgage rates go up (why? can't they be locked in now?), while equity prices go up 6-8% per year
- Taxes are not factored in at all - capital gains on a primary residence are tax-free, while investment gains will be taxable (eventually, even if buy-and-hold)
- Mortgages allow an effective leveraged investment on home equity, so your gains (and losses!) on home values are magnified
It's a worthwhile debate, and there are merits on both sides, but such blatant bias has to be pointed out.
Also: in the US, unlike Canada, there are tax benefits for a mortgage...
Great comment DMAC. The model shows what will happen if rates go up 1% and condo prices are flat. Rents paid are definitely factored in the model as are taxes. The investor is in a TFSA & RRSP which means capital gains are a non-issue. Property taxes cant be avoided though. Its a real advantage of investing in Canada to use the RRSP & TFSA vehicles.
You're right, mortgages can typically be locked in for five years.
But really people can check out the model and use their own assumptions:
1. RRSP & TFSAs have limits much lower than the assumed contributions, so there are tax differences between the two alternatives.
2. Even slight tweaks to your assumptions (e.g. reduce investment returns to 6%, increase condo returns to 2%) equalize the two scenarios. If you're going to use such an ill-conditioned model, you really must spend significantly more time justifying all of its assumptions, or else show sensitivities to them.
Canada doesn't have 30 year mortgage terms like the US. The max is 10 years and many people lock in for 5. However, with the low interest rates, many, many folks are doing the low teaser rates for 1%/year and renewing each year.
Fixed rates mortgages are mostly a US thing, from what I can find Canada (like most of the world) has very limited access to them for long-duration mortgages.
Just a small nit, for the most point I agree with your comment that this is a pretty biased view
+1. It's also assuming you are getting the same amount of money to invest in stock than to invest in your condo. Banks are more likely to finance your primary residence than your stock investment.
leverage is leverage, can work for or against you. Returns in real estate have been elevated above long term mean returns through low interest rates and flexible government programs.. increased amortization rates, lower downpayments, higher CMHC eligible mortgages.
I take issue with the assumptions of the second chart. If we allow the author to assume 6-8% growth in the stock market over the 25 year period shown in chart two, surely assuming 0 change in value of one's condo over the same period is nonsense.
Perhaps, I might allow for 0 change in "real" prices, but since the author is not making adjustments for inflation in his calculations, his assumptions suggest Toronto condos will be worth 40% less in inflation adjusted dollars 25 years from now.
While this is one possible future, it seems incredibly unlikely given the optimistic outlook for his equities growth.
The gold standard for this kind of comparison is the New York Times Rent vs Buy calculator. Note how relatively small changes in any one of many factors can result in very different outcomes.
Note that it needs a few adjustments for Canadian market, the biggest ones being mortgage rates are usually not locked in longer than five years in Canada and mortgage interest is not tax-deductible
Hey I'm Tim, the author, really glad people are into this. Interesting situation in Toronto. Check out the model and input your own assumptions if you'd like!
Neither. I had to do it all over again, I would buy a detached house in the middle of boondocks ( like Mississauga, Brampton , Vaughn ,Markham , Richmond hill etc. ) . The supply of detached houses is limited whereas condos in Toronto are growing like weed. The detached houses have grown more in value and they are not encumbered with maintenance fees.
A house starts falling apart as soon as it's put together... and it keeps falling it apart, and you have to keep putting it back together. The distribution of expenses is lumpier with a house than with a condo, but it's certanly an ongoing cash outflow.
Toronto is mostly made up of 100-year-old brick houses, so the maintenance is mostly soft stuff like painting, gardening, etc. unless you do major renovations.
My last house I did, essentially, zero maintenance over a 10-year span except for a drain replacement ($2K). Every other expense was month to month expenses like heating and electrical.
When I finally decided to sell, I replaced the crappy carpet, painted the walls beige and made a 5x profit.
Most of those places are no longer really the boondocks(4 of the 5 are a 30 minute drive to the core) and are priced accordingly. You're going to have to go out to north of Whitby or north of Stouffville these days if you want a cheaper place.
That's really a different and more difficult question. In many cities (like Toronto) living in the "boondocks" as you put it vs. downtown is a pretty fundamental lifestyle change.
This comparison at least narrows the variables a lot.
Myth #1: Toronto condos have outperformed the stock market by a long shot
Isn't it disingenuous to include automatic dividend reinvestments in the price calculation for stocks but not include net income from rents reinvested into more condos?
Hey there, we assume that the condo you purchased you live in not as a rental property. The spirit of this post is to show that there isn't a straight yes or no answer to rent vs. buy...The shorter the time frame the less likely is you should own.
The article is interesting but does not mention a few facts:
- In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues (or: you cannot deduct your rent from your revenues). For instance, if you're renting a flat that you own but at the same time rent to someone the flat where you live, you'll be paying taxes on your rent income, but deduce nothing from the rent you pay.
- Rented flats tend to be in less optimal condition that flats that you own. Since the utility of a flat is to live (in the best conditions available), it's sometime a good idea to invest in renovation works, plan changes, etc. for which the owner of a rented flat will see little value.
And also it mentions but does not insist on one major thing. Taking a mortgage to acquire a property is a bet on future inflation. If inflation is/will be high is the next years, getting a fixed rate mortgage is a great opportunity (and there are little chances you will be able to get a significant mortgage for anything else than real estate). If inflation is low (or worse, we enter a period of deflation), renting is by far the best option. IMHO this criterion is by far the most important while deciding about rent vs. buy.
One thing easily forgotten with renting is that you can be kicked out. This can be extremely stressful. Then again, as a home owner you can be hit by surprise maintenance work, which has its own source of stress. But, on the other hand, as a renter you may not have much control over necessary maintenance work, and be forced to negotiate with your landlord through the court system. Trade offs...
> " In several countries (including France where I live), there is a "tax break" in owning real estate since the virtual rent is not added to revenues "
I believe that's why the author limitted the discussion to Toronto's condos.
I live in Toronto, I own real estate but not in the city (largely because I cannot afford to buy). I've invested in income property a few hours out of Toronto in a small town that produces positive cash flow that I reinvest in the stock market. I rent a small, shitty apartment in the city. This has ended up giving me returns of excess of 60% per year on the money that I've invested. I'm always amazed at how overlooked this strategy is.
> Myth 4: Renters throw cash away, at least owners build equity
It's no myth, because you have to live somewhere. (Well, you could put your money elsewhere, and go live in a cardboard box under a bridge, but let's be realistic.)
Owners are building equity with the money they would otherwise be completely throwing away on rent, and they got into that situation with just a little money down.
(Depending on area), current rents are in about the same ballpark as payments on a new mortgate, but: 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up. 2) only the interest portion of a mortgage payment is thrown away, and it goes down over time.
For the cost of the opportunity loss on your down payment, you're fixing the amount of a significant living expense that would otherwise continue to inflate, and you're getting a slice of that expense to go into equity that would otherwise be thrown out, and that slice gets bigger.
The opportunity cost on the down payment is not bad, if the property appreciates! You have to think in terms of leverage: if the property goes up by 80K, and the down payment was 80K, that's a 100% growth! You put in 80K, and it doubled. And your rent expense was replaced by something better. If you compared the leveraged view to the stock market, the stock market doesn't look so good. You can use leverage in the stock market also ("margin"), but that's a heck of a lot of risk.
I just renewed a mortgage for another term and the payment was supposed to go down (probably due to all the acceleration). Moreover, I declined that and kept it at the same amount. No way will a renter face a declining payment in the same area---not to mention that it would be irrational to refuse it.
Interest + Condo Fees + Home Repairs + Property Taxes + Property Transfer Taxes + Realtor Commissions are throwing cash away every bit as much as Rent.
Mortgage payments are likely to go up the same way that rent does, or even more so. Interest reflects inflationary costs, so the same upwards pressures on rents would result in higher interest rates. Except with interest rates at record lows, just a small increase in interest can wipe out an owner's equity while a small increase in rent (which is also controlled in many markets) isn't going to impact a renter nearly as much. Also, rent generally reflects incomes more specifically than inflation in general, and incomes have been increasing at a much slower rate than inflation for decades.
Debt leveraging is debt leveraging. Doing it on housing isn't automagically safer than doing it on financial investments. Yes, variance on an individual stock can be higher than real estate (also depends on the particular stock), but a sufficiently diversified portfolio can reduce the variance to be in line with real estate or to possibly be even more risk adverse. Not sure why people think debt leveraging is automagically safer with housing; it simply is not.
Well yes, the fees are priced in. But in practice it is far from unheard for apartments to be rented for less than cost of mortgage if you were to buy today plus all fees. This can be influenced by the owner having bought a fair bit cheaper, or the owner counting on capital gains for the main income from the property, or the owner simply being unable to find a tenant that would pay more.
Ultimately the market decides the rent and landlords' cost is only one of the factors in the market price.
In Toronto and Vancouver condo markets it has been cheaper month-by-month to rent than to buy for a fair while. Which one will end up better 30 years down the line depends on a lot of future factors and is far from clear at the moment.
Incidentally, in 2011 I was offered lowered rent on my Toronto studio when I gave notice I would move out, in an attempt to get me to stay. I wanted to move out of the city so it was rational for me to refuse :D
(Sorry to see your posts downvoted, I upvoted you)
Basically if it's cheaper for a renter to live in a place than for an owner to live there, then the owner must be coming up with the difference, thereby subsidizing the renter.
That is the basic condition that makes renting more attractive: can I rent a place for lower total monthly payments than buying a similar place in the same area.
That owner who doesn't live in the rented unit has to live somewhere else, and faces living costs there, on top of subsidizing the renter.
That situation can hardly persist for long; landlords may be willing to take it on the chin for a while (e.g. to get into the rental business), but not over the long term.
The rent will have to go up eventually to close the gap, or else the landlord will kick out the tenant and move in to save money. Or even sell the place (whereby the new owners may kick out the tenant).
>> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate,
> Not in Toronto, which is like the whole point
Then what is the rent/mortgage situation in Toronto? That was never discussed in the article. In my area rent is 2-3x higher than a mortgage, all I know about Toronto is that property values are high.
The early-90s harbourfront towers by Bay and Queens Quay rent studios/1bds for $1500-1600 incl utilities or buy for $400-500k + maint fees $500-700/month + tax + util
1+1 in the area at the moment will go for around $1800-1900/month. Based on two places I've rented in the Pinnacle centre over the past 3 years(and looking for places in that complex and ones near by).
In the battle of anecdotes, my entry is a studio in the upper third of 99 Harbour Square, 120 degree lake view to the east, rented in July 2014 for $1500 including all fees and utilities. Has it gone up a lot over the past year?
I moved out of my last Toronto place a few months after that so I'm not 100% but I would say no given the rate of increases in the years before that I lived there. I can say that for a few hundred more a month you could almost certainly have a bedroom and a den pretty much across the street. Pinnacle has some of the better amenities in the area too.
Out of curiosity aren't condo fees based on the debt the condo coop has? In which it fluctuates based on current interests both on the loan as well as the condo fund?
Technically? Probably. In practice they depend a lot more based on the maintenance work that needs doing, and either increase as the building ages or the building standard is lowered. Most condo coops I'm aware of don't have an endowment fund.
Not always. Sometimes renting might be a better deal than buying.
There are several factors which need to be taken into account, such as mortgage interest payments, opportunity cost of downpayment, property tax, tax deductions, property appreciation, etc. Khan Academy has an interesting video on this topic: https://www.khanacademy.org/economics-finance-domain/core-fi...
PS: Sure, if your property appreciates by a lot you'll make a large return. But what if it deprecates? People being overly optimistic about property appreciations were part of the reason/most affected by the housing bubble.
> Sometimes renting might be a better deal than buying.
As a life-long strategy, or short-term only?
Buying isn't "sometimes". There is usually a commitment there. You'd never say, "renting isn't looking so good right now; I think I will buy for six or seven months and see how renting is looking then".
Disclaimer: I came to the comments first. I have not yet read the article.
From a purely mathematical perspective, it still depends on what your future plans are.
I purchased a property a couple of years ago, intending to live in it for a short period and then rent it out. I tracked all of the money that I've spent on the property, all of the money I've gained, and the general value (which I get from Zillow, although I know that's not necessarily accurate. If anything, though, the house is probably worth less than what Zillow says).
Note that this is a relatively new property (built in the 90s), which needed few improvements or fixes. So it's not like I've dumped thousands into renovations and so on, and it's not like a lot of expensive things broke with any kind of consistency. This is mortgage payments and basic home maintenance expenses I've tracked.
If I had sold the property within the first 1.5 years I'd still be out several thousand dollars despite the property's value increasing a little bit (I forget the exact number -- somewhere around $5k to $10k lost). I've only recently reached the break-even point, where if I sell now I'll have made money overall, and that's primarily because I found a tenant and have been making a profit on it.
The problems are:
1) The mistake most people make is that they look only at initial valuation and the final value of the sale. They forget to include the interest paid over the life of the loan, as well as any home maintenance costs. These add up!
2) Home values are not likely to increase 100% in the short term. If you plan on living in that exact spot for 10+ years, then yes, owning your home is obviously the correct choice. If there's a chance you might move in 5 years or less (even within the same city, to a better place or whatever) then you're probably at least as well-off renting, if not better because you don't have to worry about paying two mortgages during the move and so on. Obviously there're other variables involved, though.
But that's the myth. The delta between the total costs of renting and the total cost of ownership is wide enough that you can invest it in something that has much better returns than a condo. Even owning 50% of your mortgage payment gets thrown away at interest, plus your maintenance fees, taxes and the whole bit are also lost to the sands of time.
Rental buildings also pay taxes and maintenance, and have mortgages with interest. These costs are passed down to the renters. All the blood-sucking leeches are there (the government, banks, and the building itself) plus one more blood-sucking leech: the landlord.
If that is so, it means that whoever owns it is subsidizing you to live there. That owner lives somewhere else (paying a cost of living there), and also pays to make up the difference between your cost of living in the rental unit and the true cost. If so, that's a temporary situation. The rent will creep up to eventually close the gap.
There's something big missing: you can sublet your condo, therefore building income after it's paid off or to offset the mortgage. You will never be able to do this with stocks.
>Renters can build equity by building their investment portfolio.
But you can't live in an investment portfolio.
I get the point that the author is trying to make. The TSX has outperformed the Toronto condo market. But I would still invest in a home before I invested in the stock market for the same reason I invested in GPUs to mine Bitcoin instead of Bitcoin a few years ago.
GPUs (as well as condos) are tangible. If Bitcoin (or the TSX) was worthless tomorrow, my GPUs and condos would still hold value.
If the stock market was wiped out tomorrow, I would still have a place to live if I owned the property.
I would hate to be in the situation of relying on my next monopoly money dividend to pay for the rent on a home which I do not own.
It's a worthwhile debate, and there are merits on both sides, but such blatant bias has to be pointed out.
Also: in the US, unlike Canada, there are tax benefits for a mortgage...