When Does It Make More Sense to Rent Than to Buy?
posted on January 23, 2024
If you are a renter, chances are at least one person has told you that your monthly rent payment is equivalent to throwing your money away. Or they may have proclaimed that buying is a superior financial plan and that everyone should aspire to one day own a property.
That thinking, however, is old-fashioned and reflects an economic time that simply no longer exists. Yes, buying a house can be a good investment and aspirational goal. However, there are many situations and circumstances in which renting makes more sense than buying.
Renting as the more realistic option.
In November 2023, the Canadian Real Estate Association (CREA) shared that the average home price in Canada is $646,134. The latest Statistics Canada data shows that the average Canadian household income is $54,000. That means that the average Canadian home costs almost 12 times what the average Canadian earns. Not surprisingly, more and more Canadians are finding house purchasing is out of their reach. For many, renting is the more realistic option and there is no shame in that.
Lower upfront costs.
As stated above, the average house price is a costly $646,314. In Canada, all homes that are worth $500,000 or less require a downpayment that is 5% of the purchase price. A house that costs between $500,000 and $999,999 requires a down payment that consists of 5% of the first $500,000 and 10% for the portion above $500,000.
That means that just to own the average home in Canada, a buyer needs a minimum of a $39,631.40 down payment. If your down payment is less than 20% of the price of your home, you also will likely need to buy mortgage insurance. Not to mention the sales taxes, realtor and lawyer fees, and numerous other expenses necessary to purchase a home.
In contrast, there are relatively few upfront costs when renting. A landlord may require a security deposit as well as one extra month's rent to secure the apartment, but that is usually all that's required. Renting is much more accessible to the average Canadian than buying a home.
You enjoy the amenities and inclusions.
When rental costs are discussed, it is largely in terms of the number of bedrooms an apartment has and how that affects the price. Many fail to consider the amenities and conveniences that are included in the rental price. Rental companies such as Panoramic Properties include amenities such as fitness and recreation rooms at the cost of their rentals, as well as 24-hour emergency maintenance staff on-call should issues arise.
Rentals also largely include appliances such as stoves and refrigerators that would be very costly if a renter had to purchase on their own. Not to mention the ease of never having to worry about shovelling snow or cutting the grass. Owning a house means you are also responsible for the upkeep and maintenance of the land it is built on. When considering that rental prices mean you get to enjoy beautiful outside space with none of the effort of maintenance, the value for money increases dramatically.
Allows you to live in a big city.
Renting allows for more flexibility when choosing where to live, whereas home buyers are limited to places that they can afford to buy. Of course, if a city has high housing prices it will usually have high rental prices as well, but an individual is much more likely to find an affordable monthly rent price than a mortgage in a larger city.
The amount you pay for rent is fixed for the duration of the rental agreement you sign. Landlords can increase the rent, but they must provide adequate notice beforehand. You know the exact amount you are expected to pay each month and can budget accordingly. The money that you save can be invested to grow your wealth, potentially allowing you to buy later down the road.
Buying a house, on the other hand, will require a mortgage for most buyers. As we have seen in Canada, the first two years of the COVID-19 pandemic saw many buyers taking advantage of the period of historically low mortgage rates to purchase homes. However, mortgage rates have increased sharply since March 2022. This means that mortgage holders are now facing much higher mortgage payments, or they will be when it comes time for them to renew. Most buyers will need to make significant adjustments to be able to continue to afford their mortgage. Additionally, they may face unaccounted-for costs such as flooding that they need to pay for. There is a very real risk of overextending themselves financially and becoming house-poor, meaning they have very little funds left over for other areas of their lives.
You don't need all the extra room.
Canada’s fertility rate has been steadily declining since 2009, with the average number of children per woman sitting at 1.4. Simply put, Canadians are having fewer children. As a result, they require less room. Why pay for a large home when all you need is a few bedrooms?
In summary, there is no one-size-fits-all approach to choosing where to live and what you can afford. Both buying and renting have their perks and their disadvantages. What is clear though is that buying is not the clear-cut, superior answer. One-third of all Canadians are now choosing to rent. There are many more factors to consider than just someone around the dinner table telling you not to rent and throw your money away. So take the time, think out your options, and should your circumstances lead to renting as the better choice, come see us at Panoramic Properties!