A Canadian's random thoughts on personal finance

Apr 21, 2009

Still renting?

A year ago, I posted my most popular article yet: Save money by renting your home. A lot has changed in the last year, but one thing that's the same as ever is that I'm perfectly content renting for the foreseeable future.

The the article hinged on a calculation of the largest mortgage I could carry and still save money every month:

I pay $1200 per month in rent, including my parking space. That rent includes a number of items that would come out of my own pocket if I owned a home, such as property tax, repairs, maintenance, and some utilities. All told, I get about $500 in value every month included in my rent. That leaves $700 that is truly "thrown away" just like mortgage interest.

How large a mortgage would cost $700 per month in interest? Today's variable-rate mortgages are going for about 4.6% per year. At that rate, a mortgage of $182k would have interest charges of $700 per month. That means if I could stop renting and move into a house with a mortgage of $182k or less, I would save money every month.
Here's what has changed:
  • My rent has increased by $50/mth. That brings my "thrown away" money up to $750/mth.
  • Variable-rate mortgages can now be had for 3.05% interest.
With these new figures, we find that the magic mortgage number is now about $295k. If I can find a buy a home with a mortgage of $295k or less, I would save money every month.

Here's what hasn't changed:
  • Homes in my area still don't go for $295k. They're still up around $480k.
  • Condos can be had for $295k, but the condo fees move the break-even point below $295k, so they're still not better financially.
  • I still don't particularly want to own a home.
I'd like to leave you with one final thought. It is being claimed that now is the time to buy a home because of increasingly favourable interest rates and home prices. To my mind, the best time to make any investment is when the price is low and increasing. Right now, real estate prices are high and decreasing. As far as price is concerned, you could hardly choose a worse time to buy a home than right now (except perhaps six months ago).

The worst has happened. The sky has fallen. I've lost a gut-wrenching amount of money on paper in the stock market since September. But I'm as satisfied as I ever was in my asset allocation, my risk tolerance, and my decision to rent rather than buy.

Update, Apr 21: As of this week, you can get mortgage rates as low as 3.05%, so I have adjusted my calculations above to use this number instead of 3.3%.

Update, July 15: Looking at the same link given above, we see now that variable mortgage rates are as low 2.85%, so the break-even mortgage is up to $315k. This means I probably could buy a house in my neighborhood and, ignoring the buying and moving costs, I might save a few bucks every month starting on day one. But I still have no interest in buying a house just yet. For one thing, the moment the mortgages return to more historically normal rates, the mortgage's advantage over renting disappears, and I would be back to losing money every month relative to renting. I consider it unwise to bet against this happening in, say, the next five years. There are also non-financial considerations, like the freedom to change homes with just 60 days' notice at no cost, or my nearly complete protection from risk in the real estate market. A house would need to cost substantially less than my rent for me to take on the extra risk and responsibility of house ownership.

Update, November 3: Now rates are down to 2.25%, so the break-even mortgage is up to $400k. If I were convinced mortgage rates would stay this low indefinitely, and I liked the idea of skewing my asset allocation heavily toward residential real estate, and I didn't mind mowing my own lawn and fixing my own roof/furnace/toilet/whatever, and I was ok with losing the freedom to move with 60 days' notice, I'd buy a house right away!

Update, November 24: The neighbors just sold their house for $650k. It was a decent-sized 5-bedroom house, but it just goes to show that I wasn't being overly pessimistic by estimating $480k.


LottoMaster said...

Most of the people I see who insist that rent is throwing away money have never owned a home, and have no idea about how much money gets thrown away in home ownership.

Home ownership is a forced savings plan for some. If they rented, and were ahead a few hundred a month, they would likely spend it, and not invest it.

So, the decision can also be linked to your financial discipline!

People don't seem to want to do the math.

Astin said...

A problem with the math.

You're looking at a mortgage of $295k, not a total cost of $295k. Assuming you want to minimize costs, you need at least 20% down to avoid CMHC. On a $400k home, that's $80k down, meaning a $375k home would save you money. This might actually be achievable in the near future in a neighbourhood where prices are currently around $400k.

As well, ownership means you aren't beholden to a landlord or property manager. Nobody is going to sell your house from under you, perform unexpected renovations, or generally inconvenience your life without you letting them. This is a constant complaint from my friends who rent.

You also won't have anyone to blame but yourself for repairs and maintenance that goes undone. If the roof is leaking and you own the home, you get it fixed. If you're renting, you'd better hope your landlord cares enough to hire a roofer immediately.

Finally, you're taking the assumption that home ownership requires a large mortgage. If you can afford a place while minimizing or eliminating the mortgage entirely, then you eliminate the interest cost entirely, and only have a few thousand dollars of property tax and utilities as recurring costs. Maintenance comes into play, but the money saved by not paying rent every month would cover that easily. Sure, this might not be possible in Toronto or Vancouver, but there are plenty of places in the country where houses are significantly cheaper.

Patrick said...

@Astin: Yes, I agree with everything you say. The monthly costs of renting vs. buying are closer than I have ever seen them before.

One point I made in the original post that I didn't make here dealt with what home ownership does to one's asset allocation. For most people, they will end up with several times their net worth invested in a single residential property, which I don't consider very desirable.

Anonymous said...

The people who think that owning a home is some sort of automatic forced savings don't own a home in the US. My house is worth less than what I paid for it in 2003, and I am in a neighborhood that has never seen the sort of abuses that were in California, Nevada and Florida. I can rent it out for positive cash flow, but I didn't plan on going into the real estate business.

In the US, you can deduct the interest and local property taxes (sometimes $10,000 on a modest house!) and that is the only real money that I have saved in seven years.

Patrick said...

@Mark: Very true. And if people want an automatic forced savings plan, such things exist. There are RRSPs and 401(k)s for that sort of thing!

Unknown said...

I sold my home about a year ago now and love being a tenant. For one thing, I am now actively scanning the job market in various parts of the city I'm in and even in other cities. If I find something, I can easily sublet and move. My costs to do so are minimal and the turn-around time is not determined by how hard my local real estate expert wants to work on selling my home.

On the weekends, it takes me all of 90 minutes to do my housework. I don't have to worry about cutting grass, shoveling snow, or raking leaves. I just go out onto my balcony and enjoy the fresh air. Or I can use the central pool and other facilities which are already included in my rent.

More importantly, some new neighbours moved in a few months back. Man, are they loud! A few calls and emails to my landlord, and they not only stopped being loud - they were asked to leave. Just try getting to get the neighbours to be quiet in the yard next to your $750K home! Good luck with that.

I've struggled with the "guilt" from not owning a home for a few months, but after listening to my ex-wife tell her stories about how unexpected home repairs in her purchased home are killing her bank account, I know I made the right decision.

AND - I'm banking several hundred dollars a months in savings. Something I was not able to do while owning my home.

Glenn said...

Tell you what guys, renting and buying is so much different. If it's me, I'll buy because if you gonna calculate the rent you paid, you could unbelievably can buy a house.


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Patrick said...

@Glennda: Yes, you could buy a house at the end of 30 years of renting, but you could not buy one at the start. To do that, you would need a mortgage, and then you're very likely to be paying more in mortgage interest than I pay in rent.