Garth Turner doesn’t envy those standing on the cusp of homeownership trying to decide between buying and continuing to rent, especially if they’re hoping to buy in one of Canada’s largest cities.
“Why would any young person want to buy a condo in Toronto or Calgary or Vancouver and actually pay twice the monthly cost than it would take to rent the same unit?” says the investment advisor, real estate blogger and former Progressive Conservative MP. “Compared to places like London or Paris, Toronto’s a backwater and yet we’re paying these amazing global prices – rents are actually really cheap in Canada because real estate values are inflated.”
Millennials, he laments, are caught in a workshop vice with the rent versus own predicament.
“One half of the vice is really crazy stupid expensive real estate prices and the other part is there aren’t great jobs and there’s no income gains because the economy sucks,” says the real estate blogger, advisor and former Member of Parliament. “We have a tremendous societal pressure today for young adults and young professionals to get into the real estate market.”
A lot of the pressure, says Turner, comes from the generational disconnect between millennials and baby boomers.
“The baby boomers were just lucky that it worked during the period of time when they were in their formative career stages because we had a lot of inflation and economic growth,” he adds. “Now the boomers have kids, the kids are in their 20s, 30s, 40s, and they’re getting a lot of advice and pressure to replicate the experience – the problem is we’re in a different world.”
It just doesn’t make sense in overvalued markets like Toronto, Vancouver or Calgary, says Turner.
“There are markets in Canada where it does make sense to buy versus rent – in Montreal there are lots of great bargains, as well as in Halifax and Winnipeg,” he says.
But market conditions aren’t the only aspect that comes into play says Erica Nielsen, vice president of products and segments for RBC’s home equity financing business.
“Lots of homebuyers have questions about where their career is going, where they want to live, to raise a family – all of these considerations you really need to think through before you jump into the notion of home ownership,” she says.
And then there’s the true cost of ownership.
“We know six to 12 months after being in their home, there’s always a whole set of costs that people underestimate when they’re actually doing their financial calculations,” says Nielsen. “But part of what you’re generating in that true cost is the equity that comes into your home.”
Real estate, like all great investments is a long term one, you’ve got to stick around long enough to see a positive return, says John Pasalis, president and broker at Toronto-based Realosophy.
“Most major mechanical repairs to a home – roof, furnace, air conditioner – have a lifespan of roughly 15 years,” he says. “While these repairs can be quite expensive when paid up front, if you spread these costs over their expected lifespan the monthly costs are actually quite minimal.”
He also cautions that renters aren’t exempt from maintenance costs.
“The difference between being a home owner and a renter is that the renter’s maintenance costs are embedded in their rent payment and are effectively reduced to a small monthly payment versus home owners who normally have to make large lump sum payments for repairs,” says Pasalis.
That’s why Pasalis would typically advise someone looking to spend less than five years in a spot to skip the purchase and rent.
“A common example we see in Toronto is when first time buyers want to buy a downtown condo but plan to sell it in a couple of years so they can buy a house,” he says. “The problem with buying a property and selling it in just 2-3 years is that the home needs to appreciate enough for you to cover all the transaction costs of buying and selling otherwise you might find yourself losing money.”
On the other hand, if you can call your house a home for at least five years you’re apt to see a better return.
“If home prices are appreciating at four per cent per year, after five years the home would be worth $487,000 which means the buyer’s $20,000 down payment yielded her a 435 per cent return of $87,000,” says Pasalis. “This simple example does not take into account the transaction costs of buying and selling a home, which are high, but even with these costs real estate is giving many home owners a far better return on their money than if they had rented and invested their money in the equity markets.”
Unless, of course, you’re living in a coveted major centre, says Tucker.
“Especially in Toronto, you’ve got to pay double land transfer tax, and you have to play closing costs and condo fees and property taxes and insurance and maintenance,” he says pointing out that none of those elements factor in when investing in a vessel like an exchange traded fund (ETF) for instance. “There is no way, on a dollar for dollar capital gains position, that you could really justify buying real estate even if you didn’t have this tower of risk hanging over us with the interest rate environment.”
Tucker is referring to the Bank of Canada’s inevitable increase of interest rates to keep pace with the U.S.
“Just take the amount of money that the average millennial pays on condo fees, property taxes, and insurance for a $400,000 condo, wipe out that and put that into a TSFA,” he says. “You’re going to be great going down the road, that’s the way to build wealth.”