Toronto Condos: Should you rent or buy?
blog.wealthsimple.com
blog.wealthsimple.com
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...
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:
https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...
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.
Just a small nit, for the most point I agree with your comment that this is a pretty biased view
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.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
https://docs.google.com/spreadsheets/d/1ZJnbA2MO7iuQc4xEX9E2...
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.
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.
That's true for inner Toronto but not for the suburbs as manishsharan suggested. Newer developer-built-subdivision wood-frame rules out there.
This comparison at least narrows the variables a lot.
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?
- 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.
I believe that's why the author limitted the discussion to Toronto's condos.
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.
Not in Toronto, which is like the whole point
> 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up
Condo fees go up and up
Indeed. As a building ages, you can be assured that the condo fee will go up with inflation.
> 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.
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.
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.
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".
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.
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)
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).
Something like 10 years and counting in Toronto. Markets can stay irrational for a long time.
> The rent will have to go up eventually to close the gap
Or, property purchase prices unable to be sustained by rent or buyers' income will fall.
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.