Sunday, May 25, 2014

Rent vs. buy revisited

As house prices increase and affordability for first time home buyers looks as if it’s diminishing, the question of whether to rent or buy inevitably comes up. It’s a good question, especially in the current economy, but with no clear answer. 

Just ten years ago, the answer was simple – buy!  It had been the answer for much of the past twenty-five years.  Mortgage payments were relatively low; in many cases less expensive than renting, and a house was a solid long-term investment. But those were different times – for the most part, jobs were relatively stable, incomes rose steadily, unemployment rates were manageable,  home prices were not crazy and the real estate market was balanced, with the exception of a few corrections here and there.

Today, in many parts of Canada, house prices continue to rise. For one, housing starts are decreasing across the country, yet demand is still there – the result is higher resale pricing. A few months ago, affordability may have been an issue; however, we are now sitting at sub-3% fixed mortgages and variable rate mortgages as low as 2.4%.

If you’re considering buying, take a look at your current situation.  If you’re single – living in a high-priced market like Toronto or Vancouver and have a job with an average salary, it might make more sense to rent.  The basic rule is when a house costs more than 200 times the monthly rent it generates, it makes more financial sense to rent rather than own. In Toronto or Vancouver, for example, the prices of houses are 300 times the rent they would generate. If you rent a condo in Toronto for $1000, you’d be paying $1700 a month to buy it – that doesn’t include condo fees and taxes.  Not all markets are pricey but not all markets offer employment opportunities, so there’s the big trade.

 Families with children usually prefer owning a home even though it might cost them more. The stability of ownership and providing a good home for the kids becomes the deciding factor. Having two income-earners can make mortgage payments and housing costs more manageable. If commuting is not an issue, house prices just outside a major centre offer value – bigger houses for lower prices.

Aside from financial concerns owning a home is certainly an emotional issue. Most millennials grew up in families where home ownership was the cornerstone of every investment portfolio. But the economic realities today are far different.

But life is change and we are seeing those changes in the housing market and in the economy. Inflation hit 2% last week.  This is the benchmark the Bank of Canada uses to make its interest rate decision. Clearly, rate cuts are not likely. But a fixed-rate mortgage under 3% is something to consider.

Talk to your mortgage broker to help you decide if homeownership is right for you right now. If not, then, put a plan in place to get that home when you’re ready. 

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