Are you better off renting or buying a home?

Home Buy Plan

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Whether you decide to buy or rent a home, whichever one you pick will have a huge impact on your life. Not only will your choice determine how much of your income you need to dedicate towards your housing expenses, but also play a huge role in determining the kind of lifestyle you can have now, but also in the far future once you retire.

On the one hand, home ownership has been an essential part of the Canadian dream for generations. It makes sense that owning your home carries all kinds of benefits, such as having a set place to raise your family, being able to modify your living space to your liking, and being able to will it to your family after you pass away. Conventional wisdom also tells us that owning your own home is a superior financial decision since homes appreciate over time. And if you ever run into an emergency, you can just sell your home and use those funds.

But on the other hand, thanks to the effects of the mortgage stress test, the rise in interest rates, and foreign investor and speculator taxes, home ownership hasn’t been this difficult for new home buyers in decades. Renting is more popular than ever, and the number of people making the claim that renting is better financially not just in the short term but also in the long term is growing.

Is home ownership still worth the effort? Or should you rent instead?

Home Rent

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Pros and cons of renting

There’s a long-held belief that renting amounts to little more than throwing away your money. That claim is not completely accurate though. Reality is a bit more nuanced than that.

Unlike smartphones, cars, and entertainment, housing is a necessity of life. Whether you’re renting or paying a mortgage, fulfilling your housing needs will cost always cost you money. And sure it’s true that any money you spend on rent is pretty much gone forever, since none of it is used to build equity, the same can be said for a large portion of your housing expenses when you become a homeowner. You can’t build equity on housing insurance, property taxes, home maintenance, or mortgage interests.

A big advantage of renting a home over ownership is mobility. Renting gives you the flexibility to move to a different location once your lease expires. And when you choose a new place to rent, you only have to worry about having enough money for your rental deposit. There are no closing fees, and no need to hire a real estate agent.

If you’re a busy person, you will appreciate not having to deal with maintenance either. Though at times your landlord may take longer to fix any problems with the property than you would like, at least you don’t have to deal with them yourself. And because many rental units include some utility bills on your monthly rent, it’s easier to calculate exactly how much money you need to spend towards your housing costs each month.

On the other hand, renting means that you never have full control of your home. If your landlord decides to sell the property, or turn your apartment building into condos, you have no say in the matter. You’re also limited in how you modify your home, and you may be unable to have any pets.

While B.C. has rent control laws, preventing landlords from pricing tenants out of their home without warning, rent still increases each year. From 2004 until 2019, rent in B.C. increased an average of 3.45% each year. That would mean that if you pay $1,200 in rent right now, and rent increases by a yearly average of 3.45%, in 25 years (the length of an average mortgage term) you would be paying around $2,800 in rent for the same apartment.

Home Owner Family

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Pros and cons of owning a home

Besides the obvious benefits of owning an appreciating, tangible asset, home ownership brings a number of intangible (yet extremely important) benefits. Calling a home your own brings a sense of stability to your life, gives you the pride of ownership, and allows you to become a part of a community. Your children will have a specific geographical location to call home, and they will be able to stay in the same school.

On the flip side because home ownership is a long term commitment, it may not be the ideal living arrangement for people who hate the idea of living in the same place for decades. Of course, there’s nothing to prevent a “nomad” from buying a home, since homes are an excellent investment if managed correctly. But homes are by definition an illiquid asset. Even in the middle of a seller’s market, it takes time to sell a home. And when you do find a qualified buyer, you will be liable for are a large number of expenses associated with, such as closing costs, inspections, and real estate agent fees. If you think that you may want to move in a few years, you may be better off renting instead.

In the short run, the overall monetary cost of homeownership tends to be higher than the overall cost of renting. Unlike renting, you are on the hook for property taxes, utilities, insurance, renovations, maintenance, and other expenses.

On the other hand, there plenty of economic advantages to owning a home if you’re in it for the long haul. The most obvious one being that homes appreciate over time (and sometimes quite dramatically. And we don’t have to go very far for an example. All we have to do is look at the meteoric rise of housing prices in the Greater Vancouver Area (GVA) in the last decade.

Though it’s difficult to know whether the GVA’s housing market will see such an increase in housing prices in the near future, homes are historically an excellent hedge against inflation. Historically speaking, home prices in growing metropolitan areas always trend upwards over. And their annual appreciation rate usually exceeds the national inflation rate.

And while a mortgage is usually the biggest expense people incur in their lives, it’s also the cheapest money they will ever borrow. Interest rates for mortgages are much lower than for credit cards, or other lines of credits. A mortgage you to tap into the power of leverage, by letting you purchase an asset worth several times your initial investment.

For example, if you purchase $100,000 worth of stocks with an annual rate of return of 2%, your $100,000 investment would earn you only $2,000. If you instead use those $100,000 as a 20% down payment to purchase a $1,000,000 home in Richmond, your $100,000 investment would net you $20,000; a difference of $18,000.

Finally, mortgages are a form of forced savings. Though it’s possible to invest what you would save in maintenance and other homeownership by living in an apartment, few people have the discipline and self-control to do so consistently for decades. Mortgage carriers, however, must make their monthly mortgage payments.

As time goes by, not only does the price of all goods and services rise due to inflation, but salaries rise as well. Unlike rent, mortgage payments tend to remain relatively stable over their entire amortization period, even when accounting for term renewals. That means that as more time goes by, the real dollar cost of your mortgage payments actually decreases. And if your economic situation improves, you can dedicate more money towards your mortgage, ensuring you pay it off faster, and lower the total amount of interest you pay.

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