Is now a better time to rent or own?

By Deirdre McMurdy, MSN Money, March 30, 2012

The war is over — at least for now.

After months of inter-bank battling to win market share by offering Canadian consumers the lowest mortgage rates, Royal Bank of Canada and Toronto-Dominion Bank recently reached a truce: they raised their respective "special offers" on a four-year, fixed-rate house loan by half a percentage point to 3.49 per cent.

Whether other lenders follow that bid to improve bottom line profit margins by dispensing with cut-rate financing offers, whether slightly higher rates will cool the surging spring real estate market, remains to be seen.

But it doesn't alter a more foundational issue: is it the right time to buy a house now — or ever?

It's always tough to time any market: the ideal entry and exit points are never clearly displayed. But when it comes to residential real estate — the largest single investment for most people — messing it up can cause a serious, long-term financial setback. Especially when the return on a sale factors in adjustment for inflation and the five per cent commission on a sale.

The tricky issue of timing — along with record prices, bidding wars and increasing uncertainty about the sustainability of the current housing market — are just a few of the reasons why some experts in
Admittedly, getting your head around that notion takes a bit of effort. After all, in Canada, low borrowing costs combined with a belief in the merits of owning a home have resulted in a 10 per cent increase in home ownership since 2000. Today, two-thirds of Canadian households live in privately owned homes, rising to 70 per cent in Vancouver and 74 per cent in Calgary. That's high by any international standard.

Culturally, we've all been inculcated since birth to regard home ownership as the holy grail of personal financial achievement. Emotionally, owning a home goes along with stability, commitment, security, family, community — all things we're hot-wired to value. It's an integral part of our identity.
sist that renting rather than owning, is the better way to go.

And then there's the lifestyle that's built around owning a home and customizing it to your specific needs — everything from interior decoration to pottering in the garden. The cost of which can, of course, be justified as enhancing your investment.

Then there's the formidable vested interest of the economic engine that pushes home ownership. Governments encourage it because it not only provides for satisfied voters, it ensures that voters are engaged stakeholders when it comes to elections and issues. There are several program and tax incentives to encourage home ownership in Canada (including access to RRSP funds and the capital gains exemption), even though mortgage interest isn't deductible as it is in the U.S.

It's also at least as important to understand that the aspiration of owning a home is an economic cornerstone for almost every sector from manufacturers, resource companies, retailers and bankers to those who provide service to homeowners. Consumer spending, lest we forget, still represents about two-thirds of gross domestic product. And much of that consumer spending is centered on housing.

So, if you can somehow manage to set all of that baggage to one side — and it's obviously a big "if" — is there a rationale for renting rather than owning?

First, there's the fact that house prices have climbed steadily over the past decade to the point where the average price in Canada is now $366,000. At the same time, rental prices have remained steady and even softened as more people have bought homes in a period of sustained low interest rates.

Then there's the fact that carrying costs — everything from municipal taxes to insurance to utility costs — have significantly increased in recent years. (A rule of thumb is that they run one to four per cent of a property purchase price.)

According to some calculations, it currently costs twice as much to buy as it does to rent in most major Canadian cities (three times if you live in Vancouver). That compares mortgage payments to rent only, excluding all the other costs that can almost double the monthly cost of paying down a mortgage.

Furthermore, in the first years of ownership, your payments go primarily toward covering mortgage interest. And the opportunity cost of using capital as a down payment can also result in a serious disadvantage for homeowners who can usually get better — and certainly more consistent returns — from the most conservative investments.

Arguably, of course, we make lots of irrational choices when it comes to spending our money. And return on investment is ultimately a very subjective calculation.

Speaking personally, I'm still tinkering with the financial model that justifies having two kids who are pure overhead. Not to mention my ROI on them.