Should you buy or rent?

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Ownership trumps rental in most scenarios: study

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Rent or buy? It’s a question that has plagued countless Canadians over the years, but as real estate prices skyrocket, decide if you’d be better off buying a home financially or if you would either get out of it or even get away with it. in advance if you rent and invest your money elsewhere has taken on a new urgency.

“For many people, buying a home – especially the first – is a life changing event and one of the most difficult decisions we will ever have to make. It’s a decision that is usually based on a lot of hard work, ”says economist Will Dunning, president of Will Dunning Inc., a consulting firm specializing in analyzing the housing market.

In a study he conducted for Royal LePage (https://marketing.rlpnetwork.com/Communications/Rent_vs_Buy_2021_Report.pdf), Dunning found that for those who are able to make a down payment of 20%, d ” obtain a 25-year mortgage and plan to stay in their home for at least 10 years, it is more financially advantageous to buy a home in Canada than to rent it long-term in 91% of the cases analyzed.

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“The message in this report is pretty clear: Most Canadians believe homeownership is in their best interest and I think most of the time they are right,” he says. But young people are inundated with messages suggesting that they are getting used to living their entire lives in rentals.

While there is nothing wrong with it, Dunning is “confident that in the course of a lifetime most of us will be better off – financially and in many ways non-financial – as homeowners. as tenants “. One notable exception: people who move frequently.

For them, renting can often be a better choice financially. In 253 of the 278 scenarios he studied, the net cost of owning a home – which was calculated by taking the total cost of ownership and subtracting savings from principal repayment – was less than rent.

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Consider this example: Based on data from the second quarter of 2021, a house that costs $ 2,795 per month to rent, including utilities, would cost $ 3,499 per month to own, including property taxes, utilities, and maintenance. , with amortization of 25 years.

At first glance, homeownership seems to cost $ 705 more per month. But remember that mortgage payments include principal and interest, and the principal component can be viewed as a form of savings, even if it is forced.

Although the owner must pay the full amount each month, the principal is not an actual cost. If the buyer views the principal portion of the mortgage as a savings, the monthly cost of ownership drops to $ 2,026, or $ 769 less than the rental.

In addition, the interest component is highest in the first month and gradually decreases over the life of the loan, thus increasing the amount of forced savings each month.

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In the nine percent of the scenarios where renting was more beneficial than buying, cases were concentrated in luxury homes in expensive neighborhoods. Plus, the monthly savings were minimal for this demographic at $ 245.

“Historically, homeownership has been very profitable for Canadians, many of whom have factored their real estate investments into planning for their retirement,” said Karen Yolevski, COO of Royal LePage. “Owning a home is widely seen as a way to save money and build equity.”

The study calculated how home ownership might behave as an investment, making various assumptions about how values ​​might change over the next decade. Calculations revealed that even with a 10 percent drop in home prices, about half of the homeowners surveyed would still see a positive rate of return on their investment. The other half, meanwhile, would break even or view a modest loss as an investment.

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If there is no growth in values, the property would result in a positive rate of return on investment in most cases. Other scenarios in which values ​​rise show increasingly attractive rates of return. “While Canadians want their home to be appreciated, potential buyers will find it reassuring that significant price appreciation is not necessary to make the property worth it. There are other advantages to owning a home, in addition to the financial advantages, ”Yolevski explains.

Owning a property allows more freedom and stability than renting. As a landlord, you don’t have to worry about the landlord raising the rent or forcing you to move, and you can make the place your own with renovations and decor, she notes.

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“I think most Canadians would agree that owning a home is as much about being rooted in a community and making memories with family, as it is about financial security.

Time for a “reset”

In his study for Royal LePage, economist Will Dunning argues that government policies are hampering homeownership for many Canadians and calls for a “reset.”
For starters, mortgage stress tests require people to prove that they can afford a mortgage interest rate that “has no chance of happening in the foreseeable future.” He believes that the rate used in the tests should be “significantly reduced” to the maximum rate reported by the Bank of Canada in its official data for new mortgages with terms of five years or more.
Dunning also believes that 30-year amortization periods should be allowed for insured mortgages. “One of the two big hurdles in buying a home has been the huge sums of money that have to be spent on paying off the principal each month,” he says. Forced savings through a 25-year mortgage represents 12% of a typical buyer’s income; for 30-year amortization, this is typically nine percent of income.

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