October 23, 2019

Cheap mortgage rates don’t justify home ownership

ROB CARRICK

The question of whether it’s better to buy a home or rent needs some fresh thinking.

Rents have been rising and mortgage rates are so low they almost look fictional. Have the economics of housing turned against renting?

Far from it, actually. But we do need to start recognizing that rising rental costs are a factor in the debate over housing affordability. If nothing else, we may see more millennials having to move homes because neither renting nor owning work.

Owning still represents a leap in costs over renting, though. The difference between the national average monthly rent on a two-bedroom apartment and the monthly cost of carrying the average-priced resale home is $1,525, on average. And that’s with discounted five-year mortgage rates at their lowest point since the global financial crisis flared up seven years ago . Unless our economy falls into a grinding recession, these may be the best mortgage rates we’ll see in our lifetime.

To understand the differences in living costs between renting and owning, let’s start with Canada Mortgage and Housing Corp.’s latest data on the average rent for a two-bedroom apartment in nine Canadian cities. In an effort to zero in on better quality properties in more desirable locations, we’ll mark up the average rents by 10 per cent.

For housing costs, we’ll use average June resale prices from the Canadian Real Estate Association and assume a 10-per-cent down payment plus a five-year fixed rate mortgage at 2.59 per cent. Monthly carrying costs are the total of mortgage payments and one-twelfth of property taxes and maintenance/upkeep costs pegged at an annual 1 per cent of the home price.

In each of the nine cities, average monthly rent was cheaper than the mortgage payment on the average-priced home, and that’s without property taxes and maintenance included. Winnipeg is the city where renting and mortgage costs are the closest. The average rent for a two-bedroom apartment (with the 10-per-cent markup) was $1,136, which is just $37 below the monthly mortgage payment for the average Winnipeg house in July.

Edmonton, Halifax and, to a lesser extent, Ottawa, are the other cities where the gap between renting and making a mortgage payment is within a few hundred dollars. Now, let’s start thinking in real-world terms by comparing renting against a broader range of home ownership costs.

Winnipeg is still the affordability champion for renters, but the gap between renting and owning grows to $571 per month. The gap in Halifax is $618 and in Edmonton it’s $816. That’s the good news, renters of the nation. In Victoria, Montreal and Calgary, the ownership cost premium is more than $1,000 per month. In Toronto, the premium tops $2,000; in Vancouver, it’s not far from $3,500.

The cost of home ownership for first-time buyers can be analyzed in about a dozen different ways. Let’s be clear that we’re talking about month-to-month affordability, not whether owning is better for wealth-building than renting .

Another angle is to compare the cost of renting with the cost of owning on a monthly basis. Don’t be swayed here by arguments that the cost of financing a mortgage is so low. The real estate brokerage Royal LePage made this point in a recent analysis that said the cost of home ownership is still more or less a bargain . It’s true – mortgage interest costs have plunged in recent years. But thanks to soaring house prices in some cities, total mortgage payments can be hard to handle.

High house prices are turning people into long-term renters, and this could drive rental costs higher. CMHC pegged the year-over-year rate of increase this spring at a reasonable 2.3 per cent on average for two-bedroom apartments in larger cities. But I recently featured a Vancouver Sun article in my Personal Finance Reader e-mail newsletter that was about an expected rent increase “tsunami” in Vancouver . Prepare for higher rents in cities with expensive housing markets.

Without better economic conditions that improve their job prospects, millennials are going to struggle with rising rents. Cheap mortgage rates don’t argue for buying, though. There’s no refuge from the cost of rent to be found in housing ownershipRent-Own Comparison

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