Post Morbus

I only recently started following Rational Reminder and I found this video on renting vs. owning in Canada fascinating. One, because it is a Canadian model; and two, because I have always thought “owning is throwing your money away” was a silly comment. Housing is a need, being angry about renting is – to me – equivalent of being angry at your grocery bill because you eventually have to go to the bathroom.

That said, I also have discovered that a lot of people prefer owning because of the reasons laid out below: it’s more of a psychology problem than a money problem. While I have discussed this issue in other posts and don’t regret my decision, a $15000-$22000 savings (on average) if you do EVERYTHING right as a renter just isn’t worth it to me. I really enjoyed this deep dive and model and I have summed up some of the key points below.

Renting vs. owning in Canada: research & a model

– Houses are forced savings. People are better at paying a bill than they are about saving money. If you are going to rent, it is only a better deal if you are investing the money.

– Owning is riskier short-term but is inflation-hedged in the long term. Renting is the opposite: riskier long-term due to inflation.

– Ben Felix’s model (2005+) includes both current rents and rent controlled units (vacant vs. occupied) for myriad rental types (bachelor, 2-bed etc) and both the primary (purpose-built rentals) and secondary units (condos someone may choose to rent) and includes things such as down payment and insurance costs as well. He runs the model as if the difference is invested in the market and is not taxed (ie: in a TFSA). See the video for a more detailed explanation of how he invested the money and the fees for owners and below market vs. jumping to a market rent as well as where he got his pricing details from. It assumes you would save 90% of the difference between renting and owning. Land also typically increases but building decrease so he does include some maintenance in his calculation. But he basically concludes that:

o Renting beats owning in 7 of the 12 metropolitan areas where he ran his model

o The renting net worth beat owning by +$15000

o Edmonton had the least difference between +renting vs. -owning

o Kitchener-Waterloo had the highest difference between +owning vs.-renting

o Investment fees are important: 0.25% is used for this model but people were actually paying WAY more (probably around 2.5% on average). In 2022 it was 1.76% on average, largely driven by active mutual funds. If he bumps the fee up to that 1.76%, renting trails owning in 10 of the 12 areas. IMO: this is a super important finding mostly because Canadians didn’t have access to discount brokerages for this entire period and were paying higher investment fees. We tend to forget but before the 2010s, self-directed investing was more difficult than it is today! Most people used banks or FAs that charged an AUM!

o On savings efficiency (how much of the difference you actually save to invest). If you save:
– 100% is where owning comes out ahead in 5/12 areas
– 90% is where owning comes out ahead in 7/12 areas
– 80% is where you are better off owning in 10 of the 12 areas
That is a HUGE difference!

o For the maintenance cost assumption:
– 2% it was better to own in 7 areas
– 3% it was better to rent in 3 areas
– 2.2% (the average) is 6 out of 12 favour owners

o They assumed amortization is 25 years but if you knock it back to 15, owning only beats renting in 3 areas and renter wealth exceeds owner wealth by $78000 on average. A 35 year amortization owning beats renting in 6 areas and owner wealth beats renter wealth by a little over $15000.

o With a 50% downpayment renters come out ahead in 9 out of 12 areas & renter wealth exceeds owner by $59000. With a 5% downpayment, renters still have a 7/12 advantage but the renter wealth advantage drops to $12000. Leverage works!

o This assumes you were also all-in on 100% equities, which may have been super difficult for people, especially through the 2008 financial crisis. “People panic sell stocks when they go down but rarely does anyone panic sell a home.”

o Disc: Maintenance/depreciation as a percentage of the housing value is contentious because the exact same structure may not cost more to maintain just because it is in a HCOLA area. BF then goes out to silo maintenance vs. depreciation and for this he looked at condo fees and discovered that in lower priced cities, condo fees were higher and in higher priced cities condo fees were lower (as a percentage of the property value). The result? Only one city – Victoria – switched sides from renting to owning being more of a benefit and it only increased renting to being advantageous by $22000 vs. $15000 in the model above.

Good points to consider

– People may be buying for their future selves, not their current needs.
– In an emergency, the last thing you will stop paying is your mortgage but the first thing to go is the savings.
– All things need to go right in order for the models to truly favour renting: discipline to save, low fees, not panic selling your portfolio and psychologically, this is very difficult.
– Renting is throwing your money away unless you are already prone to throwing your money away

The Commentariat

They did a video update based on the comments they received, and it is also well worth the watch:

– Here is the Globe and Mail article they reference
– You can’t get evicted owning but if you have to move, the transaction costs are a lot
– Moving is disruptive (especially for kids)
– Maybe there aren’t rentals in the place you want to live & it’s especially more difficult to find single-family homes
– “Renting isn’t throwing money away, throwing money away is throwing money away, buying a home may help people to throw less money away”
– “People rent for the minimum they will accept but buy for the ideal” …or buy for the future
– People don’t do the math on housing. The amount properties increase never are as crazy as they seem when you break it down
– Owning a home becomes more attractive when you have maxed out your other non-taxable accounts due to the no capital gains on your primary residence in Canada
– Landlords are taking a loss on ownership in some areas & holding out for capital appreciation (they didn’t discuss that a lot of landlord expenses are tax deductible though as are losses when rent doesn’t pay the bills)
– “Wealthy people tend to be owners!” But renters also tend to be younger, make less money and spend more of their income on housing. Correlation ≠ not causation
– Just because you could hypothetically have a higher net worth doesn’t mean you should necessarily borrow against your house but for a lot more volatility and less peace of mind
– Renters need more wealth because they don’t have the hedge against future housing consumption
– If you do find a great rent controlled place, renters can have less stress and more money
– Labour mobility: owning while young could commit you to one geographic location and it could stifle your career

…but are owners happier than renters?

– Canada: no significant impact except for lower income households were more unhappy. Similar neighbourhoods = similar happiness
– Switzerland: no, maybe small negative relationship between owning and happiness
– Germany: yes, but much less than people think (especially for people who are extrinsically motivated)
– US: no. Owners are more unhappy because they spend less on other enjoyable activities
– Germany: mortgage debt negatively affects people, especially for people who have higher mortgages relative to income

There are some things that I have brought up before but I feel need special attention here as well:

You can go a very, very, very long time not doing any maintenance to a house except for emergency repairs and still have a liveable space & see a huge appreciation in your land value. Almost every neighbourhood I have every lived in has had one of those neighbours who keeps to themselves, does almost no home maintenance and the grounds are only sporadically maintained. The roof shingles are peeling, their cars are on blocks and they generally seem to be shut-ins. One day you see a for sale sign, a dumpster is placed in the driveway and it is sold for land value & torn down. Now, I am not recommending this by any means but most homes can go a very long time without preventative maintenance. You can live somewhere for a really long time without it falling down around you.

On the back of that, I’d like to say: if you are poor, disabled or on a fixed income: buy! Smarter people would buy together. If you are going to have to rent a shared space anyway, then if you can qualify for a mortgage, do so. Single parents, disabled folks and poorer folks have less options when they are renovicted. So why not buy with friends? In my province it is two adults per sleeping room. I mean, I also lived in a 17-bedroom Goth commune in university so maybe I just have a higher tolerance for friction than many other people.

We have a pretty ok financial plan but if everything went to crapola, we would rent rooms out. The going rate in my neighbourhood for a room rental is $1000. Having a house would allow us to take in some renters to smooth over some rough patches in our retirement plans. Do I want to do this? No. But I would in a heartbeat over losing my home or not eating. Sure, it’s great for Mr. Tucker and I to have a shared office but if we needed to we’d pack it in and rent the room. Having a home gives us this option. Even if we end up selling this house when the kids move and buying, say, a smaller condo I would definitely stick with a two-bedroom so that we could take in a renter if need be. Heck, having co-op or exchange students would bring in income and give you summers off if you wanted as well. I can’t rent a part of my portfolio (although, I may be able to use it for a loan).

To me, the peace of mind of having an accessible, paid off home that can house my family is worth the $15000-$22000 price tag of a LIFETIME of PERFECT investments. I know I won’t be a perfect investor, so forced savings works for me. I also like to put holes in my walls to hang up art and I adore my accessible bathtub. I have been tossed from way too many apartments in my 20s to really consider going back to renting unless I was under duress. Sure, our house appreciated by 55% in the 7 years since we bought it (which mimics a similar investment in the TSX) and because the house was maintained well by the previous owner we’ve only done cosmetic things to it (except for the bathtub but I got tax credits for that). So overall I am happy with my choice.

(I have done my best to take notes/summarize as much as possible. Most errors are probably my own and not the creator’s. Apologies if there are mistakes)