An interesting article is out today. H/T to S2 for the link.
Mr. Powers kind of hedges his bets in this one, me thinks. But what he has to say is likely more factual than anything I'll give you. Here are some highlights:
- Only about three in every 10 Canadian households currently rents, compared with four in every 10 in 1986, Stats Can reports
- home prices are rising more rapidly than landlords' levies (rents)
- [home ownership] ties up hundreds of thousands of dollars that might be invested more safely, and sometimes more lucratively, elsewhere
- most Canadians who own their homes can expect to grow wealthier over time than renters (Sauder School of Business UBC)
- Buyers have to pay property taxes on top of their mortgage, while renters have the taxes included in their monthly rent bill
- Renters... can invest what they would have spent on closing costs and a down payment in the stock market
- Under best-case conditions in Ottawa, Winnipeg, and Vancouver, Canada's most expensive housing market, renters could accumulate at least as much wealth as owners
- buyers are basically betting that home prices will rise smartly in the near future
- astute renters in Edmonton, Halifax, and Montreal could accumulate 24% more wealth than homebuyers
- renters are able to invest in much more liquid assets with little or no sweat equity involved
- owners have 100% percent of their assets in residential real estate – not a prudent choice for most people
- only renters who are highly disciplined, savvy investors are able to match the wealth that owners can accumulate simply by making their mortgage payments
Down payment is $45,000. Our monthly mortgage payment at 6.5% (below historical average, I'm feeling generous) is $1206, but we'll round to $1200 for ease of calculations. I know we can rent this same condo for $975/month. Now lets factor in M.A and property taxes. M.A. is $175 and property taxes are $125, for a total monthly obligation (before inflation) of $1500/month.
So if we're disciplined, we take that $45K down and put it into a blue-chip mutual fund (TD Blue Chip fund averages 9.2% since inception) and set up regular monthly contributions of $525 (the difference in own vs rent costs in this market). Coincidentally, I have room in my RRSP to do exactly this scenario.
What do we get?
$965,670 is what our condo would be worth based on these flawed assumptions after 25 years. But that isn't our true worth, because we would have had interest costs bringing down our investment's net worth (we were out of pocket money that we won't see again right? So it's a deduction) in this case it's $182,000, so our "investment's" net value is now $783,671.
How did we do if we kept renting and saving disciplined-ly?
Our doesn't-need-to-be-adjusted-given-the-same-assumptions future value is over $1M, just slightly. Ironic that the actual difference in the Wealth War outcome is eerily similar to the same purchase price of $225K.
Now, we can argue that inflation changes this outcome, but all the costs associated with renting and buying are subject to inflation except the mortgage principle amount. I'm too intellectually lazy to delve deeper into the calculations but I highly doubt that the outcome would be disproportionately dissimilar to what we have here.
In this town, in this market, if you are a disciplined renter/investor and can stomach blue-chip equity exposure, have the room in your RRSP to shelter from taxes, you come out ahead by not owning.