rent vs. buy? no question who ends up ahead
To buy or not to buy, that is the question.
A recent report by the National Bank of Canada suggests it might be cheaper to rent than to own in some expensive real estate markets in Canada. Many thus wonder whether they might be better off renting if the monthly rental payments are lower than the monthly mortgage payments.
There is no one right or wrong answer to the question of whether to rent or buy. In fact, the answer depends on individual circumstances, taste preferences and housing market conditions.
In the long run, though, homeowners often fare financially better than renters because homeownership enables forced savings that accumulate over the years, growing into a sizeable nest egg.
The National Bank report revealed that the monthly mortgage payment on a median-priced condominium was higher than the average monthly rent for a similar unit in Toronto, Montreal, Vancouver, Victoria or Hamilton. At the same time, monthly mortgage payments were lower than rents in Calgary, Edmonton, Quebec City, Winnipeg and Ottawa.
The Bank’s report compared the total mortgage payment with rent. But in so doing, the report unintentionally exaggerated ownership costs and understated rents.
The monthly mortgage payment comprises two parts: the mortgage interest and the principal amount. The principal being repaid each month is a form of saving. A comparison of the net mortgage payment that excludes the principal is likely to change the calculus in ownership’s favour.
In fact, a report comparing the ownership and rental costs by veteran housing economist Will Dunning revealed that when the principal repayment is netted out, the cost of ownership is less than renting in most combinations of housing types and locations.