Buying vs. Renting a Home: The Great Debate

photo by Alan Cleaver

photo by Alan Cleaver

This seems to be a debate where the two sides will never declare a truce. The leader of my investment club is vehement in his belief that he is better off renting and he refuses to buy a home in the Vancouver area. When I first joined the club about a year ago, he had just moved into a rental home and was gloating about how much cheaper it was than anything he could buy. He lives in the Port Moody/Coquitlam area (a suburb about 45 minutes from downtown Vancouver). He believes that he will be better off in the long run if he invests the difference into stocks.

Then, about 4 months later, he sheepishly admitted to the group that his landlord decided to sell the house so he has to move again, after all the effort of moving, finally unpacking the boxes, getting internet, and all the utilities hooked up. There is a slight bonus in that he got a month or two of free rent and help with his moving costs, per BC law. The following month we learned that he found a better place to live and was very happy about it.

Other members of our group disagree. There are practical reasons, like how difficult it is to find a place in the Vancouver area if you have pets. Many in the group have done very well with the rise in property values. Our leader would counter that he doesn’t have to worry about maintenance or property taxes. He believes that there is a risk of a real estate bubble and that the dramatic increases in value are an anomaly and we will not see those going forward. Besides, when you factor in all of the costs to own (closing costs, mortgage, repairs, realtor commissions, etc.), you really haven’t made as much money as you thought.

There was an article in the Toronto Star recently that conclude from 2005-2015 you would have been better off investing $50,000 in the stock market in the condo market. Readers wrote in to dispute the claims.

On June 18, the National Post published an Article called “Crazy to buy real estate” . They next day they published another one called “Eternal Truth: Don’t be a renter”.

The argument for renting and not buying was along the lines that housing prices have risen faster than inflation only twice since 1890, and so the real return on your housing investment is zero.

Other members of the group counter that when they bought their homes in the 1980s, interest rates were in the 18% range and that they had a huge celebration when they renewed and their rate dropped to 16%. They see tremendous interest rate risks. In those days a house would cost 3-4 times their annual salary, while nowadays it is over 10 times annual salary for many. A few of them are convinced that the market will return to those price levels.

The argument in favour of buying is that over time you build up equity as you make your mortgage payments. While your payments may exceed rent in the first few years, over time you come out ahead as an owner. One day your mortgage is paid off, while if you rent, you will always have to pay rent.

My thought is that if you plan to stay in a place for a minimum of 5 years, then owning is the way to go. The closing costs, realtor fees and market risk make it too likely that you’ll lose money over a shorter time frame. I have 2 dogs and I live in a part of the world where I would have a hard time finding a place to rent with them in tow as landlords in BC are reluctant to rent to pet owners. Home ownership is also a form of forced savings as you have to direct a large chunk of your income into mortgage payments, with your home equity slowly rising over time.

For shorter term plans I would be much more comfortable renting, I did very well with Vancouver real estate prices. I bought a condo in 1997 and that was one of the wisest things I could have done. However, from 1997-2002 it sure looked like I was better off renting and at times I regretted it, because it was very hard making ends meet every month. Property values dropped over that time as well. But somehow, somewhere around 2004 my condo was worth more, I had received a few promotions and it wasn’t as difficult to make my mortgage payments.

 

Michelle

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