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In Vancouver and Toronto, average home prices are still around $1 million, requiring a sizable down payment
Published June 25, 2024 • Last updated 7 hours ago • 5 minutes reading time
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Construction crews work on Edison 50 in the Willowhaven apartment complex in Edmonton on June 7, 2024. Photo by David Bloom
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In a recent survey, Royal LePage found that 29 percent of renters had considered purchasing a property before renewing or signing a lease. And 33 percent of those prospective buyers said they would wait for interest rates to fall. With the Bank of Canada (BoC) cutting its key interest rate to 4.75 percent, it seems like it's time to revisit the age-old question of whether it's better to rent or buy. The Financial Post's Shantaé Campbell weighs the options in this evolving economic terrain.
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What has changed?
Thanks to the Bank of Canada's decision to lower its benchmark interest rate, loans are now a little cheaper, making mortgages a little more affordable. Those considering buying a home may be enticed by the prospect of lower monthly mortgage payments.
According to Ratehub.ca's mortgage payment calculator, a homeowner making a 10 percent down payment on a $703,446 home with a 5-year variable interest rate of 5.95 percent amortized over 25 years (total mortgage amount of $652,727) has a monthly mortgage payment of $4,157. With the 25 basis point cut by the BoC, his variable mortgage rate drops to 5.70 percent, bringing his monthly payment down to $4,061. That means the homeowner pays $96 less per month, or $1,152 less per year, in mortgage payments.
“People considering home ownership may find it more affordable, but it will also likely attract people who have previously been hesitant, which could drive up prices,” said Kari Norman, an economist at Desjardins.
Despite lower interest rates, real estate prices remain high in many parts of Canada. In Vancouver and Toronto, average home prices are around $1 million, requiring a sizable down payment.
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How do I calculate whether renting or buying is more expensive?
The five percent rule is a useful tool when weighing up the costs of renting versus owning. According to this rule, renting is financially attractive if the annual rent is less than five percent of the value of a comparable property. If it is more than that, owning may be better.
For example, if you rent a one-bedroom condo with a den for $2,000 per month, your total annual rent will be $24,000. Dividing that amount by .05 gives you $480,000. If a similar condo in your area costs more than $480,000, renting may be the financially wiser choice. If it costs less, buying may be more advantageous.
Another way to determine whether renting or buying is more expensive is to calculate the price-to-rent ratio for a particular area. This ratio is obtained by dividing the median home price by the median annual rent. While the price-to-rent ratio does not provide a comprehensive view of overall affordability, it can provide insight into the relative value of different types of property compared to rental prices.
A price-to-rent ratio of 21 or higher means that buying is more expensive than renting. A ratio below 16 suggests that buying is cheaper. A ratio between 16 and 21 suggests that renting might be cheaper.
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What is the price-rent ratio in Canada?
According to a Zoocasa report released in late May, investing in a condo can make sense when the price-to-rent ratio is low, such as in Edmonton at 9.7. Calgary and Winnipeg also have low ratios, at 10.8 and 11, respectively. In Vancouver, Kitchener-Waterloo and London, the price-to-rent ratio for condos is below 16, indicating higher rental costs compared to ownership.
Halifax-Dartmouth offers favorable conditions for buying a single-family home, with a rate of 12.9, even though two-bedroom rental prices have increased 15.6 percent year-over-year. Burnaby and Vancouver have the highest rates for single-family homes, suggesting that buying is much more expensive than renting.
Why are people currently hesitant to buy?
Lower interest rates make purchasing more attractive, but high home prices and significant down payments remain major obstacles for many potential buyers.
“While a third of Canadian adults currently rent, and there are families who are perfectly happy with that, the desire for homeownership remains strong among a large portion of this demographic. Our latest research shows that a significant number of renters want to transition to homeownership. Understandably, the biggest hurdle is the ability to raise the initial capital for a down payment,” said Phil Soper, President and CEO of Royal LePage, commenting on the survey results.
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In the same example, the down payment is the initial amount the homeowner pays up front. For a home valued at $703,446, a 10 percent down payment is equal to $70,344. This reduces the mortgage amount to $652,727, which the homeowner will repay over 25 years. In addition to a large down payment, closing costs for a home buyer can be three to five percent of the purchase price of a used home.
Renting, on the other hand, eliminates these high upfront costs and tenants are exempt from property taxes, maintenance and major repairs. This makes it a more financially viable option for many, although rent prices in major Canadian cities like Vancouver and Toronto often exceed $2,000 a month for a one-bedroom apartment. And while renting can be cheaper month to month, it doesn't build equity like owning a home.
However, Norman points out that there is no guarantee that property values will rise as much as they have in the past.
So what is the verdict on renting vs. buying?
The national median rent for a two-bedroom condo is $2,236. To purchase a home at the national median price of $699,117, a buyer must have saved at least $48,938 for a seven percent down payment, as well as $26,007 for CMHC insurance. Aside from all the additional costs associated with purchasing a home, that means the minimum monthly mortgage payment would be $4,206 at a 5.70 percent variable interest rate.
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For renters, the $2,236 monthly rent is subject to annual increases, while a homebuyer's variable mortgage rate can cause their payments to go up or down. Unless the renter moves to a less expensive property or changes their living situation, their rent is unlikely to ever go down.
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Rents in Canada have surpassed the $2,200 mark, hitting a record high, according to the June report from Urbanation and Rentals.ca. In May, rents rose 9.3 percent annually, matching April's growth rate and the 9.1 percent average annual growth over the past three years – including rent declines in 2020 and 2021.
Despite the recent interest rate cut, buying and owning a home is still more expensive than renting in most parts of Canada.
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