**Updated with answer to: In 2013, would you BUY or would you RENT?

[tobiwobi]

http://www.nytimes.com/interactive/b...ator.html?_r=0

This is a really good calculator. I guess OP the person who buys is ahead when they are 65 if they are 25 now, but 5 or even 10 years from now renter could be ahead. Buy and HOLD is the key to being ahead vs renting, not just buying.

[tobiwobi]

wow that "RBC analysis picture" is so bad!!! they are comparing 250K out of downtown vs downtown condo rent, apples and oranges. And when exactly is a 1 bedroom out of downtown core (in toronto's case 250K buys you studio out of downtown core, and for 250K one bedroom has to be WAY out of downtown core), going to be worth 420K? Never.

[Shwa Girl]

http://www.nytimes.com/interactive/b...ator.html?_r=0

This is a really good calculator. I guess OP the person who buys is ahead when they are 65 if they are 25 now, but 5 or even 10 years from now renter could be ahead. Buy and HOLD is the key to being ahead vs renting, not just buying.

Many 25 year olds (2013) will change jobs a few times before they are 65. Many 25 year olds will move. Buy and hold may not be an option for these 25 year olds, going forward.

[super807]

Would rent on a $400,000 house really only be $1500 a month? We rent the place we are in now and bought it from our landlord last year. We paid $2100/mth rent and it's a $300,000 house. In Ottawa we paid $1100/mth rent and the places sold for $200,000 or so. Seems to me the rent would be much higher than $1500.

I think the point of the prof's exercise wasn't related to the value of a specific dwelling, but whether for an individual, renting or owning would leave more money in the individual's pocket in the long term. That's why the mortgage amount and the rent were the same. The person is choosing if he will pay the $1500 in rent or in mortgage. Many renters actually live in nicer places than they could afford if they were paying the mortgage and some first time buyers are surprised at the compromises that are required in order to be able to afford to buy.

[Shwa Girl]

Many renters actually live in nicer places than they could afford if they were paying the mortgage and some first time buyers are surprised at the compromises that are required in order to be able to afford to buy.

So true.

[momof5boys]

Haven't read all the posts but to chime in here. We bought a decent sized house 22 years ago for $120,000....worth about $325,000 now. Mortgage free for 10 years. I'm glad we bought.

[Shwa Girl]

Haven't read all the posts but to chime in here. We bought a decent sized house 22 years ago for $120,000....worth about $325,000 now. Mortgage free for 10 years. I'm glad we bought.

Congrats.
The key to your situation was that you stayed - for 22 years. Someone starting to rent or own in 2013, probably would not stay in the same place (or even at the same job) for that length on time, based on studies.

[sweet sparrow]

It would definitely depend on the details, location, etc. We've been in our home for just over three years and over the past year, the cost of owning (property tax, insurance, utilities, repairs, etc.) was less even when factoring in the mortgage interest. If I invested the money over the same period, I'm not sure I could have done better. That would have depended on the investments as well. There will definitely be years when we have to pay for major work on the home, but averaged out, I would expect them to be fairly similar.

There's also a lifestyle cost to renting, like more neighbours, restrictions on your living space, shared laundry, less space, etc.

[saundyl]

The Answer

It turns out that renting is better than buying, for the following reasons:

• Down payment: Assuming the person buying a $400,000 home has a good down payment of $100,000, they are missing out on investing that money and growing their assets.
• Maintenance and property taxes: The renter does not have to pay for the roof, windows, upkeep of the house and property taxes. The renter has more money to invest.
• Job changes: In 2013, most 25 year olds will change jobs, change provinces and may even change countries where they work, over their lifetime. Changing housing (owning) frequently affect the rate of return.
• Rate of return on house = 6%. Some people think that they have earned more than that, but with house prices going up and down over the last 25 years, the rate of return from renters who bought stock in the big 5 Canadian banks, can be higher.

So, according to Professor Tristani of McMaster University, renting is a better investment than owning where you live. It also works out the same in other countries too.
Who knew?!
http://www.theglobeandmail.com/globe...ticle11952313/

The first part...Isnt a home considered an investment?

Job changes occur but people dont always move to change a job.

One needs to factor in the area and cost of the house. The minimum downpayment for a house in canada is 5% - which of the 400000 he said a house is one is required a minimum payment of $20000 down. that factors a little more interest in however One could still use the other 80000 for other investments if they so chose.

Also - regardless of renting or owning one will have to pay utilities and some sort of insurance. - which i noticed he factored into the cost of owning a home but made much lower for renting.
That is VERY dependent on what and where you rent. If you rent a farm house/acreage you end up paying more for power and renters insurance.

Another thing renters need on occasion is storage space and they end up renting a storage locker or a peice of land to store an RV on etc.

Theres alot of different ways one could figure out which is more valuable to them and all in all its more based off of everyone's personal situation not easily generalized.

[tobiwobi]

Haven't read all the posts but to chime in here. We bought a decent sized house 22 years ago for $120,000....worth about $325,000 now. Mortgage free for 10 years. I'm glad we bought.

That's exactly illustrating the point, as Shwa Girl pointed out: "The key to your situation was that you stayed - for 22 years. Someone starting to rent or own in 2013, probably would not stay in the same place (or even at the same job) for that length on time, based on studies."

[brunt]

The first part...Isnt a home considered an investment?

No, it is shelter. Housing is a cost, plain and simple.

Calling an expense an "investment" is a psychological trick. It conditions the brain to think that parting with money is a good thing. Every time someone calls something an "investment", I instinctively clutch my wallet.

Yes, in some instances, houses have been sold for significantly more than was paid for them. The demographic trends of the last 50 years have heavily tilted the playing field in this direction. Those same demographic trends will now tilt it back away from large houses and cottages to seniors complexes and condos.

Additionally, interest rates have been falling pretty well constantly for 32 years straight. When interest rates fall, assets which produce/require a steady payment stream increase in price. It happened with bond prices as well as houses. Interest rates are extremely unlikely to fall further, and are likely to increase.

Just like the investment prospectuses state - "past returns do not guarantee future returns". In fact, it is often worse, the fact that prices have increased so much in the past often increases the probability of a period of time of price falls.

Job changes occur but people dont always move to change a job.

But they often do. The point here is that extremely often the rent versus buy calculation assumes that they stay put. Typically they don't.

The point here is that there are very substantial fixed costs for buying and selling a house. The period of time during which you own the house is critical for figuring out the average annual costs.

One needs to factor in the area and cost of the house. The minimum downpayment for a house in canada is 5% - which of the 400000 he said a house is one is required a minimum payment of $20000 down. that factors a little more interest in however One could still use the other 80000 for other investments if they so chose.

But then that would also increase the interest paid on the mortgage - which is not tax deductible. The extra income would be taxable. Thus this strategy would require a return of roughly 5-8% annually (depending on your marginal tax rate) in order to just break even.

I also take issue with assuming a 3.9% rate for 25 years. This simply isn't going to happen.

Also - regardless of renting or owning one will have to pay utilities and some sort of insurance. - which i noticed he factored into the cost of owning a home but made much lower for renting.
That is VERY dependent on what and where you rent. If you rent a farm house/acreage you end up paying more for power and renters insurance.

Renters insurance is significantly cheaper than house insurance. You are insuring contents only, not the building.

Comparing renter's insurance from city to country is a red herring. House insurance is more expensive in the country as well. This is a geographic issue, not a renting versus buying issue.

Another thing renters need on occasion is storage space and they end up renting a storage locker or a peice of land to store an RV on etc.

That may be true if the renter rents a smaller place than the buyer buys. But, to be fair, one should compare apples to apples, not oranges.

Theres alot of different ways one could figure out which is more valuable to them and all in all its more based off of everyone's personal situation not easily generalized.

That is true.

My beef is that most comparisons done on a strictly dollars and cents basis is usually deeply flawed.

[Shwa Girl]

Calling an expense an "investment" is a psychological trick. It conditions the brain to think that parting with money is a good thing. Every time someone calls something an "investment", I instinctively clutch my wallet.

Really good answer. I will have to remember that, next time I see a commercial stating that their product "is an investment". It's better for the money to stay in your wallet - I agree.

[lilo0003]

as others have pointed out the key is to stay put. We live in the GTA so even a job change would not mean a house change. We have been in our home for 18 yrs, I have stayed with the same company for 16 yrs and DH has been with 4 companies. Several times we looked for bigger homes in our city but at the end of the day there are so many costs with a move not to mention the increase in the cost of housing during this time so we opted to stay put. Current value of our home is 400 000 more than we paid for it and we are mortgage free now, but that does not mean I have $2000 extra to spend every month. We have increased the eductaion savngs and the retirement savings. We also waitied to do some renovations and are now saving for those.

[saundyl]

No, it is shelter. Housing is a cost, plain and simple.

Calling an expense an "investment" is a psychological trick. It conditions the brain to think that parting with money is a good thing. Every time someone calls something an "investment", I instinctively clutch my wallet.

Yes, in some instances, houses have been sold for significantly more than was paid for them. The demographic trends of the last 50 years have heavily tilted the playing field in this direction. Those same demographic trends will now tilt it back away from large houses and cottages to seniors complexes and condos.

Additionally, interest rates have been falling pretty well constantly for 32 years straight. When interest rates fall, assets which produce/require a steady payment stream increase in price. It happened with bond prices as well as houses. Interest rates are extremely unlikely to fall further, and are likely to increase.

Just like the investment prospectuses state - "past returns do not guarantee future returns". In fact, it is often worse, the fact that prices have increased so much in the past often increases the probability of a period of time of price falls.


But they often do. The point here is that extremely often the rent versus buy calculation assumes that they stay put. Typically they don't.

The point here is that there are very substantial fixed costs for buying and selling a house. The period of time during which you own the house is critical for figuring out the average annual costs.


But then that would also increase the interest paid on the mortgage - which is not tax deductible. The extra income would be taxable. Thus this strategy would require a return of roughly 5-8% annually (depending on your marginal tax rate) in order to just break even.

I also take issue with assuming a 3.9% rate for 25 years. This simply isn't going to happen.


Renters insurance is significantly cheaper than house insurance. You are insuring contents only, not the building.

Comparing renter's insurance from city to country is a red herring. House insurance is more expensive in the country as well. This is a geographic issue, not a renting versus buying issue.


That may be true if the renter rents a smaller place than the buyer buys. But, to be fair, one should compare apples to apples, not oranges.


That is true.

My beef is that most comparisons done on a strictly dollars and cents basis is usually deeply flawed.

My feeling is that the analysis is just too general..there are many factors in cost to rent as well as cost to own be it geographic area, down payment, interest (on a 25 year mortgage unless theres a deal RBC states the interest rate is 8.97% right now), insurance, upkeep or storage.

[tobiwobi]

I pretty much agree with everything brunt said there except for "I also take issue with assuming a 3.9% rate for 25 years. This simply isn't going to happen." world economy is gonna be in the toilet for a very long time to come - 25 years sounds about right

"Every time someone calls something an "investment", I instinctively clutch my wallet." LOL