How slightly mortgage math helps swing the personal/lease debate in favour of shopping for a home

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Millicent Wong
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  1. Property
  2. Mortgages

Both sides are equipped with facts, figures and convincing opinions, but the home is one step ahead

Author of the article:

Murtaza Haider and Stephen Moranis, Special for Financial Post Home prices have recently risen by over 10 percent a year.Home prices have recently risen by over 10 percent a year. Photo by Lars Hagberg / Reuters

The transition from renting to buying is important for many young families, but it can also be a confusing time as both sides of the rent-versus-own debate are armed with facts, figures and compelling opinions.

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Popular belief is that renting an apartment is often cheaper than owning it, but Royal LePage decided to find out for itself. It recently commissioned a report from Will Dunning, a seasoned housing market expert, who uses data and simulations to compare the effects of rent and ownership in selected markets for different housing types.

His conclusion: “The cost of home ownership over time is significantly lower than rental costs, if you consider the net costs.” The reason for this lies in the mortgage mathematics and the interest rates.

Dunning used data for the second quarter of 2021 and estimated the average rental cost to be $ 2,795 ($ 2,515 rent and $ 280 for monthly utilities). If he owned the same apartment, he assumed it would buy $ 733,549, with a 20 percent down payment and a mortgage rate of 2.19 percent for a 25-year payback. He calculated the monthly property cost at $ 3,499 based on a monthly mortgage payment of $ 2,538, plus property taxes, home insurance, maintenance and repairs, utilities, and condo fees.

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The comparison above shows that renting is $ 705 cheaper, but it doesn’t take a little mortgage bill into account. The monthly mortgage payment has two components: interest and repayment. At an interest rate of 2.15 percent, the interest cost is $ 1,064. The main repayment is $ 1,473, which is essentially returned to the owner’s pocket. Subtracting the principal, the cost of ownership drops to $ 2,026, or $ 769 cheaper than rent, in what the report calls the home ownership benefit.

Housing markets are naturally local and diverse in nature, so the report also estimated the cost of comparison for 278 combinations of markets and housing types to see if the math still works in favor of ownership. The result: “Out of 278 cases, the net property costs are in 253 cases (91 percent) lower than the rental costs, and the rent is cheaper in only 25 (nine percent) of the cases.”

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The other benefit of owning a home is that property prices rise over time, which makes home ownership “always cheaper”. According to the Canadian Real Estate Association, the average composite quality-adjusted home price in Canada rose to $ 738,100 in August 2021 from $ 483,000 in August 2016.

The 53 percent rise in house prices over the past five years continues the long-term steady rise since the early 1990s. But there is a caveat: past returns are not guaranteed for the future.

Proponents of renting are also endowed with numbers. Alex Avery, executive vice president of H&R REIT, wrote a book called The Wealthy Renter in which he presented a hypothetical scenario for a couple deciding between buying a home for $ 250,000 or renting it for $ 1,100. Avery, unlike Dunning, included real estate transfer taxes (applicable in Ontario) and legal and relocation costs, which may not be significant compared to the purchase price but still need to be accounted for.

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Avery estimated almost the same gross amount for rent and monthly mortgage payments, though the mortgage payment includes the main repayment, which should be deducted before a dollar-for-dollar comparison.

If a couple sold after two years and assuming a seven percent increase in value, Avery estimated a net return of 1.1 percent per year on the initial investment of $ 50,000 (the down payment). But he argued that if the couple had left the money in an account with only two percent interest, their investment would have produced much higher returns.

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With such conflicting conclusions, it’s no wonder consumers are confused. But Avery’s hypothetical $ 250,000 home, renting for $ 1,100, doesn’t exist anywhere in urban housing markets today. In addition, the lack of rental security could mean that tenants move with a few months’ notice.

In the meantime, home prices have recently increased by over 10 percent per year, although similar price increases cannot be guaranteed for the future. And extremely low mortgage rates imply that the bulk of the mortgage payment will be repayments in the first month. For example, the repayment in the first month increases to 61 percent of the monthly mortgage payment with a mortgage interest rate of two percent, from 37 to four percent.

With so many moving parts and fluid assumptions, consumers should do their due diligence before deciding what to do. But a little mortgage bill would do them well too.

Murtaza Haider is Professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached on the website of the Haider-Moranis Bulletin www.hmbulletin.com.

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