Should you rent or buy a home?

EPISODE SUMMARY

This episode won't be able to make the decision for you, but today Evan and Jordan offer some food for thought when making the choice on whether to rent or buy.  Hopefully Evan and Jordan can help you be confident in your decision.

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TOPICS IN THIS EPISODE

1. Why this is a relevant discussion in 2022 
2. As house prices between more expensive, what are your options 
3. What factors should you consider for renting 
4. What factors should you consider for buying 
5. How do you compare the two options and make a decision 

RESOURCES MENTIONED

Your city’s typical rent cost 

Your city’s average home price


OTHER EPISODES

12. Buying a House Featuring Kindra Sowden 

44. How to Help Your Kids Buy a Home


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Transcript

Evan Neufeld: Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld. Today we're talking about a bit more of a hot topic these days, whether you should be renting or buying your next home.

Jordan, this is an interesting topic today. This is something that is showing up in headlines all the time. Especially as interest rates are going up, people are thinking about it. Houses are more expensive than they ever have been. So I hope you've got all the answers today, can we count on you for that?

Jordan Arndt: Absolutely! I got them all, so listen up here. 

Evan Neufeld: Perfect, let's go. The real reason that we want to talk about it today, is that because it's becoming such a popular discussion or let's call it a necessary discussion is that the median cost of a home is going up like crazy. 

Jordan Arndt: Yeah, it's interesting. You know, just a quick number here to kind of set the framework. In the 1970s, the median cost of a home was about three times the median family or household income. And in 2021, it was six times. So in about 40-50 years there, we can see that it's almost doubled in relative terms from the cost of the home compared to your income.  And so that's a significant increase when we can kind of see how it's becoming maybe harder for people to get into the home ownership. 

Evan Neufeld: Yeah, this is objectively a metric that deals with affordability. It's like, well inflation drives up prices and it's like, yeah okay, that's, that's fine. But if your income keeps up with it at the same rate, then we can continue to have the same conversation.  But if the price of a home goes up at twice the speed of your income, something's got to give. 

Jordan Arndt: Yeah, it just becomes less affordable, I guess, in simple terms.  

Evan Neufeld: Okay. So the benefits of home ownership are pretty well widely known and accepted. So today we wanted to maybe give a little bit more of the other side of the coin.  We can talk about some of the benefits of owning as well. So this isn't a “you should be renting instead of buying”.  But if you're having this conversation, the arguments in favor of renting are fewer and far between. So maybe this podcast can be an additional resource for you, as you're trying to determine what is most realistic for you when determining where you should live.

Jordan Arndt: Yeah, I think that's a good summary. Just to kind of follow up on the joke at the start. We don't have the answers here. I think this is a very much it depends on your situation sort of question. However, there are some standard considerations and questions that you can be asking as you go through this process of should I rent or should I buy that are going to be applicable to pretty much everyone as they're trying to navigate this.

Evan Neufeld: Perfect. Let's start with location, location, location. It matters. It does. It really does. Have you ever rented in a bad location or a particularly good location? 

Jordan Arndt: We rented a few different places. One was a basement suite. Nice new clean space. It was nice. We also rented an older apartment, maybe had some little critters that joined us perhaps. I don’t know if that's bad, I'd call that bad.

Evan Neufeld: Location's important.

Jordan Arndt: Location's important. 

Evan Neufeld: Yeah. So on the other end for me, I had the privilege of renting really close to the university here in Saskatoon. There's a neighborhood called Varsity View. That is a notoriously expensive and I don't know how we managed to snag it, but it was an awesome place to rent. Right nearby the university and I wouldn't have moved out of there for pretty much anything. The cost was higher than I've rented in the past, but I could go from door to door, to my class, walking in a snowstorm in 15 minutes. What more do you want?

Jordan Arndt: I think too, when we're talking here about you know, locally and in Saskatoon, there's difference between varsity view and the suburbs versus some other neighborhoods perhaps. Whereas we zoom out geographically to, you know, location Saskatoon versus Calgary versus Vancouver versus Toronto.  There's a big difference there on affordability. And price of home versus rent, as we all know, but a location really matters and where you're wanting to live makes a big difference. 

Evan Neufeld: Yeah, you're right. So not even just the part of your specific city, but whatever city you decided to land into, we are perhaps a little bit more biased here maybe towards buying than the average listener might be just because we are in Saskatoon and both of us are homeowners, but it is more affordable than the average city in in the country. But I know you listener, are maybe finding yourself in Toronto or Vancouver or Calgary or places that are a little bit more expensive.  So maybe take some of these thoughts with a grain of salt, or try to apply to your situation anyways and just start to ask yourself a few more questions. So to summarize the location aspect, could I have owned as a student in the prime real estate here in Saskatoon? No, it's not even an option, but was my life objectively better by renting there? Absolutely. So maybe consider your personal stage of life and whether being close to work, close to family, something like that is actually more important than just owning.  So looking into your personal situation a little bit more. What are some of those other factors that you want to consider before pulling the trigger on buying a home.

Jordan Arndt: Yeah, one thing I think you'll want to look at is your current debt and debt levels. Typically home ownership comes with a mortgage which includes leverage where we're borrowing money for the purpose of buying a house.  If you have other debt at potentially a higher interest rate than your mortgage rates. Potentially much, much higher in the case of a credit card, for example. That would be one thing to consider I guess, maybe for paying down that higher interest before you take on more debt in the form of a mortgage.

Evan Neufeld: Yeah. It can be hard to even qualify for a mortgage if you have too many payments going elsewhere first. So your lender will realize that you have limited cash flow as we all do, then where's that cashflow going to go and that's your debt servicing requirement there. So on the other end of that coin is the stability of your income.  If you've changed jobs recently, or if you're in commissioned sales role or something like that, where your income fluctuates a lot. That might make it very difficult to qualify for a mortgage for the purpose of buying. 

Jordan Arndt: I think another interesting personal situation is flexibility.  You know, this kind of comes back to the stage of life point that you made Evan, but how likely will you want to move in the future? Are you ready to settle down? As a student you're maybe still figuring out what a career looks like and where you're going to end up and all that sort of thing. So flexibility is perhaps more important, but as time goes on, maybe your family's growing, you feel more settled in a community, in a place and so maybe that conversation changes. If flexibility is important to you, you lose that with home ownership. You are a little bit more tied down and it's harder, it's not impossible of course, but it is harder to switch where you're living. If you own that place.

Evan Neufeld: And more expensive, we're going to get into that a little bit more later. But beyond that, looking at your values.  So do you care about making a place your own? Do you care if you've got a wacky paint job in your place that your landlord picked? Maybe homeownership wasn't something that was ever modeled for you, or maybe the opposite where you're being highly encouraged by your parents or family members or friends that you got to buy a house, you got to buy a house.  Maybe that's not a priority for you. Do you want to plant roots in a community? We don't have the answers to these questions necessarily, but again, like we mentioned at the top, these are just hopefully food for thought questions that you can add to your roster as you're trying to make your decision.  Now, this is one of my least favorite comments to hear. There's some merit to it, perhaps, but let's talk about the other side of the coin of “renting is just throwing money away”. 

Jordan Arndt: Exactly. You should be owning. Renting is throwing it away. 

Evan Neufeld: So when it comes to owning, any homeowners listening to this podcast right now, start thinking about all the costs that you have as it relates to your homeownership, that are just throw away costs. Things like your insurance, property tax, maintenance, interest, utilities, condo fees, legal and moving costs, closing costs. A lot of those things provide value and they're necessary, but they don't provide any additional value over your situation renting. Not even close.

Jordan Arndt: Yeah. If we're comparing for going back to the rent versus buy conversation or comparison, we need to really can make sure that we're comparing apples to apples.  And if we're doing that, then we need to make sure that we're considering the all-in cost of ownership. And Evan you touched on a bunch of their transaction costs. If you're switching homes, they're also in there. We need to compare that to the all-in cost of rent and you know, that might be a rent payment, maybe some utilities, maybe some renter's insurance, but that's about it. And all those other things are paid by the landlord or whoever owns the building that you're staying in.

Evan Neufeld: Not only paid for, but are the responsibility of, right. So if you're looking at a situation where you struggled to budget and especially planning for a hypothetical large purchase, like a new roof or maybe a renovation, or even smaller things like a new water heater and whatnot, if that kind of stuff happens, if you're in a rental, that's your landlords problem.  So budgeting is a lot simpler because, and even for emergency funds, I've talked about emergency funds, a number of time on the podcast and the number of emergencies that you can have as a renter are way fewer than when you're an owner. 

Jordan Arndt: There's less risk, I would say involved with renting than ownership.

Evan Neufeld: Okay. Now let's look at the other side here. 

Jordan Arndt: So when we're calculating the ownership costs, we just need to make sure that the mortgage payments that we're considering, mortgage is a payment of interest as well as principal though, when that principal is really building equity in your home. And so if we consider the mortgage payment as part of our all-in costs, we need to consider that, hey we do have an asset here that we are building equity into.  And so, the Financial posted an interesting study back in 2021, so it's pretty recent. This is going to come out a little bit biased here, but they basically compared a bunch of different markets and housing types here in Canada. There's 278 of them and when comparing the comparative cost of ownership versus renting, ownership won in 91% of the cases.

So it was an overwhelming majority in almost all situations where the true cost of ownership, considering the equity that you are building in your home, was less than comparing it to rent. 

Evan Neufeld: So one of the things that they consider there was the appreciation in the value of the home. Is that considered an opportunity cost in this case?

Yeah, I think that's fair. You'd be foregoing by renting. Okay, so the caveat here of course is the same caveat we have with investing in stocks, bonds, mutual funds and whatever. Is that past performance does not indicate future returns or guarantee them or anything like that. So when you're looking at past data on, oh, it was a better deal in the past to do it, but our home prices in Canada going to continue to go up at exactly the same rates.  Sure hope not but they might, but you never know. So we can't say, okay well, 91% of the time it was a better deal to own, maybe over the next three decades. It's not as obvious and might not be as true

Jordan Arndt:. Absolutely. I think the other touching on the opportunity cost there. If you are going to own, you need to save up something for a down payment.  And so not to get into the exact rules here, but you know, minimum is 5% up to half a million and then beyond that to get away from CMHC insurance, you're going to need 20% down payment. Well, that's a significant amount of money and a barrier to entry, certainly in more expensive markets here in Canada to get in.  But it also touches on that opportunity cost where if that money is being saved and stocked away for the purpose of a down payment, that means you can't use that  money elsewhere; investing, traveling, spending, or whatever the case might be. And so just something to consider with ownership.

Evan Neufeld: Okay. Let's talk about the value of ownership then again, and just the historical value that it actually has provided. So for those people who were homeowners in 2016, the average home in Canada price is 438,000. And then coming up to the end of last year then in August of 2021, average home price was all the way up to 738,000. That's an increase of 300 grand. 

Jordan Arndt: Yeah, it's an incredible increase. Now one caveat on that is that is Canada wide, wherever you are listening, wherever geographic location you you live in and you're considering this decision on may likely will not follow that exact same increase. Right. It depends on your situation. Housing prices have increased dramatically in recent times here. 

Evan Neufeld: Here in Saskatoon and in the Prairie's a little bit more even on the east coast. Prices haven't appreciated at the same level as they have in Toronto and Vancouver and the areas around there, but the vast majority of homes and people live there.  So the average gets a little bit skewed a little bit. Maybe I'll jump in here and make a pitch for moving out to the Prairie's. It's cold, but man do we got space

Jordan Arndt: Beautiful sunshiny spring day here, the snow is melting fast. It's beautiful. I think another point here for ownership, a book that I know Evan you've read and I've breezed through a little bit too is called the Wealthy Renter. And one of the topics that it touches on there is ownership is really forced savings to some extent.  You are putting money into your mortgage payments every month, but that like we talked about is building equity in an asset that at some point, you know, you hopefully will be able to realize the value of that in one way or another.  And so in some ways you could look at it as a forced savings.  Renting doesn't have that, right? Renting is truly all the money is gone to the landlord or utilities, or maybe some insurance costs like we talked about. So if you are renting, I think in all cases, there's a case for a financial plan being important and saving and thinking about the future.  But just be aware that you know, ownership is kind of forcing you to do some automatic savings every month, right off the top. 

Evan Neufeld: That's a good point. And as you've heard on my podcast, and as I said to clients that the more you can automate your good habits, the better. So let's talk about the renting situation there.  The argument for renting, if the all-in cost of owning is higher, than the opposite is true where the all-in cost of renting is likely lower. But what do you do if you're then renting, say you could afford to buy, but you're choosing to rent. There's a gap there then between what you're all in rent costs and what you're all in ownership would be.  And so what are you doing with that money? That difference, I think is very important. If that goes to spending more. That's okay. Like that's totally fine and in many cases that's necessary, especially if you have young kids or a single income, things like that, you've got to make ends meet. And so renting might be the way to make ends meet.

But if you're trying to make the optimal, long-term what increases my net worth the most. You got to be making a really significant decision with the difference between your all in rent and you're all in ownership cost. 

Jordan Arndt: Yeah, you need to be diligent with those extra dollars that you have.

Evan Neufeld: If you have TFSA room, there might be a good place to put it. 

Jordan Arndt: TFSA is a great choice. 

Evan Neufeld: Great choice. Okay. So if we're trying to compare the price of owning to the price of renting, every region is going to have a bit of a different ratio between what is affordable for each and what is common for each.  And how do you know then, is there a number that we can use? 

Jordan Arndt: Yeah, this is an interesting metric that we'll try and do our best to explain here over this medium, but the price to rent ratio effectively takes the median home price in that area and divides it by the median annual rent, again in that area.  Higher than 21 means that it's cheaper to rent in that area. So San Francisco in 2019, it's priced to rent ratio was over 50. I think we all know that San Francisco is an expensive place to live, over 50 is a high number so we can do this from a Canada perspective as well. We can look at Saskatoon versus Vancouver. There's different median home prices in those areas, and there's different median annual rent. So you can calculate some sort of number. Coming back to the San Francisco example with a ratio of over 50 for every $1,000 in rent that you'd spent.  You'd have to pay $601,000 to buy something comparable. So at 4,000, you'll just simple math at $4,000 rent per month. That's approximately $2.4 million to buy a comparable property at that levels. It's cheaper to rent because your mortgage you're simply just your mortgage payment on a $2.4 million property well exceeds that $4,000 rent. So we can kind of see how in that case, since it's well over that ratio of 21, you'd be better off, or I shouldn't say that, it's cheaper to rent in that area when comparing to homeownership. 

Evan Neufeld: Better off is always the tricky thing, because you only know it in hindsight, right.  And renting versus buying, you're starting from square one, hoping that you have a good handle on what's going to happen over the next 30 plus years and you never really know. So when we use a ratio like this, of course it's not cut and dry. It's not predictive of the future necessarily, but it helps.  Rules of thumb ratios that we can use here, they're just little helpers to improve our decision-making. And so this one, the price to rent ratio of 21 might be a good place to start. I’ll have a couple of links in the show notes here to take a look at some recent data on the average rental price in most major cities across the country, and then some more data showing the average price of a home that was purchased across Canada. It's a little bit more interactive than the rental one, but you should be able to come up with approximate numbers there that you can use to compare for you.

Okay. Let's summarize some of the things that we talked about here. So the first section that we discussed was considering your personal situation. What do you value? What kind of flexibility do you want or need? What is the stability of your cashflow? What's your budget? Even if you can afford a house, should you, like what does that actually mean?  So like, should you have as much money being diverted to your house as any other things? So whether you rent or buy, you should have a budget and stick to it and you want to avoid the creep of cost and expenditures and with a home it's a lot harder to stay in check with that. 

Jordan Arndt: Yep, absolutely. It can it can sneak up, but I think in either case it's still relevant and it's important as we allocate a fixed amount of dollars every month, every year to, to have that budget and try and stick to it as best as possible.

Evan Neufeld: There's a few other macro influences. So big picture things that we didn't really talk about as much, but they're important because they help determine the opportunities that you have to either rent or buy and the cost of each. So things like interest rates, the location that you want to be in, and even who your landlord is.  I've had the blessing of having really, really good landlords.  And I know a lot of people that have had a really bad situation. Sometimes you have a corporate landlord and you're dealing with a property manager or something like that. Or you might be dealing with a widow or a friend or something like that. Someone who's really reasonable and you might live in their basement and you might even build a bit of a friendship with them.

That's not really a great thing to be able to consider necessarily, but if you're looking at a rental, take a look at who your landlord is, and that might help make the decision.

Finally, at the end of the day, you've got to consider the economics of it. What is the all-in cost of renting versus buying? And are you actually able to save up for a down payment. At the end of the day if you want to be an owner, you're never going to convince yourself to be a renter I don't think, but you still have to make the numbers work in either case. And so make sure that you're comparing apples to apples as much as possible. And once you consider a number of these other things that we talked about today, hopefully you'll make a decision that you can at least be comfortable with, even though it might not be perfect in the long run.  At the end of the day, you've got a roof over your head and four walls. 

Jordan Arndt: Yeah, I think that's a great summary. We're not saying one is better than the other here, but hopefully just providing some food for thought. So you can be confident in whatever decision.

Evan Neufeld: Awesome. Thanks again for listening today. We really appreciate it. We've got a number of great reviews on the podcast recently, some funny ones too. Shout out to Spencer Meisner there for the awesome review. If you haven't seen it, go over to apple podcasts and take a look at that. If you've enjoyed the show, I'd love it if you'd share it with a friend or a family member or someone you think that would benefit from it, any of our previous episodes as well. Thanks again for listening. Have a great week. 

Thanks for listening to this episode of the Canadian money roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan.  Evan Neufeld is a Certified Financial Planner and Registered Investment Fund advisor. Mutual funds and ETFs are provided by Sterling mutuals Inc.