Should I buy or should I rent?

The Labour Day weekend saw the Vancouver Sun attempt to redeem itself with articles admitting not all is well in the world of Vancouver real estate. Max Fawcett’s “Real estate collapse? Bring it on!” raises a number of critical questions, including why it takes a writer from Toronto to get a bearish perspective published in the Sun. The next day, the paper ran an even more intriguing piece called “Should I buy or should I rent?” though in the tradition of the “15 Myths” debacle, the article fails to deliver the goods.

Rather than address the headline question, the buy/rent article concerns itself with market timing. The implicit assumption is that the reader is someone who intends to buy. Never is renting presented as a viable, standalone option with its own benefits. Instead, it’s a pit stop on the track to ownership. According to the hype machine, to rent is to give your money away. By this ideology, there’s no choice other than to own.

It’s time the levees broke on Vancouver’s ownership myth. A hard look at the numbers shows renting is vastly superior to the choice of becoming a homeowner. How do I know this? Because every month, I have $1,500 more in my pocket than I would have if I owned the same, brand-new apartment that I live in. I’m also off the hook for any building deficiencies, maintenance or the risk of being unable to move out when I want to. If I get a job somewhere else and need to relocate, the state of the market has no effect on me. In short, I have the fullest level of control over my lifestyle. Without owning.

But what about accumulating wealth? Well, you don’t get rich paying dump trucks full of interest to the bank. Today’s housing prices ensure a life sentence of mortgage payments. (Isn’t the point of owning a home to own a home, not rent it from the bank until you die?) For me, the better strategy is to live debt-free and invest the savings I gain as a renter. Just because I rent doesn’t mean I burn my extra cash on hookers and coke — I’m into stocks, bonds and dividend-paying investments that perform better over the long-term than real estate. (They also don’t leak or need extensive repairs.)

If you’re not cool with “sophisticated” investments like those I’ve described, there’s always an ING Direct savings account. Sure, the high interest barely keeps up with inflation but even then, it pays better than rental income based on current housing prices.

So long as the price-to-rent ratio remains out of whack as it is today, it makes no sense to become a homeowner in Vancouver. Don’t worry about never being able to get in. If you live here, you’re in. That’s all it takes to live the lifestyle, no matter what the condo hypers say.

36 Responses to “Should I buy or should I rent?”

  1. Peter Says:

    you are right on the money here. no pun intended.

  2. Hypester Says:

    Logic has no place in Vancouver real estate! Owning a home is like a guaranteed winning lottery ticket in Vancouver. Just buy and sit back and let the money accumulate. To buy Vancouver real estate is to be savvy and sophisticated; to rent is to be ignorant and pedestrian.

    Sell now or be priced in forever!

  3. Kablooey Says:

    If I switch from renting to owning it would be because I’d like to have a little more say in the running of my place and the colour of the walls.
    I doubt I could live for any less than I do now no matter how low the purchase price plummets. I like the idea that if the fridge or stove stops working the repairs or replacement won’t affect my bottom line at all.

    The interest earned on the money I’d use to buy pays my rent. If I use that money to buy I will still have to pay taxes, strata fees and any assessments that come up and I have to fix the fridge.

    If I buy there won’t be any money in the bank and I won’t have to pay income tax on the interest earned. Some number crunching would be required at the end of the day.

    Speculating in RE rubs me the wrong way so I’m not interested in how much money I might make if the value goes up. Unless I’m dead, I still have to buy something else in the market that I sell in.

    Renting isn’t better or worse than owning but it’s a lot better than owing your soul to a bank for 35 years. Renters aren’t necessarily better or worse than owners. The world of condo ownership is full of horror stories as is the rental market.

    In the end we’ve allowed ourselves to be fooled into believing that we haven’t succeeded or don’t count as much because we rent.

    Why is that? Greed.

  4. Luc Says:

    You mentioned INGDirect and I think that you should feature them in onve the columns under the “hype” category. PC Financial offers 3.05% interest while ING only 3.0%. Symbolic, maybe, but ING spends a alot of money on commercials telling how they save your money, but ironically, they’re no longer a market leader for some time now.

  5. jesse Says:

    “but ironically, they’re no longer a market leader for some time now.”

    No irony. They have to pay for all those oranges somehow, like, say, taking a 5bps skim off the top.

  6. kabloona Says:

    Actually, ICICI.ca offers 3.40% so I would rate them the market leader at the moment – at least in terms of high-interest savings accounts available for Canadians.

  7. Chris Says:

    Don’t be so harsh on those folks who would like to spend the rent dividend (the 1 – 2 thousand dollars a month bonus they get for not being saddled with 30 – 40 years of debt) on hookers and blow. You may like your ING account, but tastes vary…

  8. LB Says:

    My decision to not become a slave to a mortgage was solidified when the apartment I had in the West End was converted into a condo. I looked up the sale price for my exact unit. I had rented it for $770 (a steal), they renovated it (it needed it badly) and were trying to sell it for $370k. We figured that the mortgage and strata and property taxes would work out to about $2400 a month (this was a little while ago). For what is still a plain, dark, 1 bdrm apt. No thanks.

  9. anon Says:

    the rental market in my area is around $1500-$1600… same as what my morgage, strata fees and taxes are.

    Could I rent a similar place at a similar price? Yes.
    Am I better off for doing it? No. Or at least, I don’t see how.

  10. bearette Says:

    Amen brother.
    You can’t judge wealth by what your house looks like, or your car, or your clothes. It’s about what’s in the bank. And I don’t mean HELOCs….
    So many people in this city who are living beyond their means to look wealthy look down their noses at “poor renters” who in actual fact could buy and sell them twice over. But then, we’re smart enough to see their lifestyle as a terrible investment.

  11. exx Says:

    Anon, what area? Sign me up? Or did you forget to mention that you bought your property a few years ago?

    In the previous post I commented on a Port Moody property that’s being rented out for $1150, or on sale for $375K. You don’t even need a calculator to determine how f’d up that is, even if it was selling for $300K.

  12. dingus Says:

    Ditto on the amen. I may even add a hallelujiah brother.

    I rent a spacious, but older, duplex on the east side for 1300 that would sell for, dunno, mid to high 5s? In the past couple of years we have had roof repairs, new hot water tank, new fence, kitchen reno, new appliances, new alarm system. For which I didn’t pay a nickel (OK, my rent went from 1250 to 1300 — horrors!).

    Should I buy that crappy crackshack teardown bungalow down my street for 750k, kiss off my savings and start paying 3500 a month for 35 years (assuming mortgage rates never ever increase in the next 35 years)? Hmmm…. let me think on that and get back to you…

    You plug in the mortgage calculator, compare your rent, think about risk a little, and you start to realize just how far prices have to fall here to even bear considering buying. There’s a looooong way down to go. Hang on to your skivvies.

  13. Ds7777 Says:

    i agree with this article.

    w just moved to Vancouver a year back and decided to rent, as my wife and i arent sure we want to live here for good. Renting provides that flexibility.

    My dad tells me “Rent is money down the drain” but the money im saving by renting will allow me to place a larger down payment, hence reducing the interest when i do purchase down the line.

  14. Mr. BuyBuy Says:

    On what other investment you can leverage up-to 95%.

    You can borrow to buy some really really really stable stocks and guaranteed investments, if you have great credit and relationship with your bank. Only in real estate you can use the leverage..

    Now lets say all investments grow on average 7% a year for the next 10 years.

    ** You rent for $1500 and invest $1000 every month.. After 10 years you have made about $10,000 (roughly after taxes, I don’t have calculator on me)

    ** I buy my home for $350,000 and pay $2500/month for housing. I’ll be $245,000 ahead after 1o years….

    ….Now lets say real estate market remains dead for 8 years. and in the last two years.. instead of 7%..it goes up by only 5% a year..(which is about average for long term real estate investments) You are still making $35,000………. which is $25,000 more than the “rent and invest” option…

    Renters are forgetting two other major benefits of buying…

    1 Forced savings (This is really big, bigger than we think)
    2 Tax advantage

  15. jesse Says:

    “….Now lets say real estate market remains dead for 8 years. and in the last two years.. instead of 7%..it goes up by only 5% a year..(which is about average for long term real estate investments)”

    1. Real estate went up 5% per year WHEN INFLATION AVERAGED 4%+ PER YEAR. Even then it did not really go up 5% per year, peak to peak, because the average you cite partially ignores building depreciation.
    2. Your scenarios conveniently ignore the possibility of renting for 5 years and buying when prices are lower or, if you prefer, flat.
    3. You ignore depreciation and maintenance costs in your comparison, including special assessments/major repairs.
    4. “Forced savings” is a useless concept if an asset is overvalued. I’m going to buy to save me from myself!!! LOL
    5. Renting must eventually be more expensive to own or landlords would not make any money, except by ever increasing property prices. If you can’t see that such a scenario is unsustainable, you should leverage as much as you can right now. You won’t regret it.

  16. anon Says:

    exx: yes, I did buy a couple of years ago.

    I absolutley agree that now is a better time to rent, specially for those who can’t afford to purchase. But the article is only claiming that it is better to rent than to buy, seeming not to take into account time in the market, or timing of the market.

    I know exactly how f’ed up the market is. My gf bought in pt moody earlier this year for about $25k more than I paid for my place in yaletown 6 years ago. I understand that recent offers on my place are astonishingly overvalued, but I don’t think it will ever drop below the original purchase price. Even if it does, I’ll have the equity to cover it. It would be great to make money when it does come time to sell, but just like those of you who rent, I’m not looking at it as an investment. It’s just a place to hang my hat.

  17. jesse Says:

    As to the buy vs rent comparison, these days a renter can rent and spend evenings filled with depraved debauchery and still come out ahead when prices fall to where properties cash flow again. Financially he would have been better to save the difference but, heck, he’ll still look like a genius, albeit with a destroyed liver and a shame that no domestic shower can scrub away.

  18. dingus Says:

    On what other investment are you forced to leverage on a single asset! And there’s there’s no way to diversify, hedge or take profits.

    Works great when it goes up, but nothing goes up forever. And it really hurts on the way down. Leveraging to buy securites, you can at least apportion the risk around to different asset classes, sell the ones that have performed well, deduct the interest, and take a tax loss on the others.

    I think the forced savings argument is BS. Surely the supposed inability of renters to save is matched by homeowners using HELOCs to finance living expenses, renos, cars, vacations and other consumer spending. And how much forced savings is there on a low down 35 year mortgage? It can take you years just to pay off the CMHC fees and PTT. And if values decline even slightly, there goes any savings at all.

    And Mr. BuyBuy: Nice math. A grand a month for 10 years, at 6%, less 3% for taxes works out to 140k.

    If you bought a 650k place with 10% down, 35 yr mortgage, at the end of 10 years you’d have paid 90k in equity (and paid 345k in interest). Now from your 90k subtract the 30k in taxes/condo fees you paid. Now subtract maintenance and repairs. How’s your forced savings going?

  19. dingus Says:

    Oh, and deduct the 18k you paid for CMHC premiums and, what, 8k for PTT?

  20. Chilled Says:

    AHHHHHHH!!! Stocks and bonds, NOT hookers and coke. Now I get it!!

  21. condohype Says:

    I don’t think it’s any disrespect to owners to say there comes a point where ownership isn’t worth it. I look at the numbers and it doesn’t make sense to own. In 2000, when the cost of renting was in line with the cost of owning, it made sense to take out a mortgage. I could build equity and maintain my standard of living. Today, the price of a home has no relationship to its actual use value. What we have are prices based on the expectation of perpetual, rapid price escalation. It’s pretty sad that the market is at a place where some people are willing to spend three times a home’s actual worth for the benefit of “possible” future appreciation.

    No matter where you stand, whether you’re cynical or hopeful, bear or bull, prices will eventually stabilize so that they’re in line with local incomes and what people are willing to pay for rent. That’s the only place for prices to go.

  22. bearette Says:

    BuyBuy:
    Intelligent adults don’t need to be “forced” to save. That’s for adolescents with poor impulse control.

  23. Happy Renter Says:

    I pay $2070/month in rent for my condo. Let’s do a little math:

    Current list price of same unit: $1.1m

    Amount $1.1m earns monthly in a 5-year GIC: $4354
    Monthly maintenance fee: $398
    Monthly tax: $268

    TOTAL MONTHLY COST OF OWNING THIS CONDO: $5020

    $2950 in my pocket every month, for hookers, blow or anything else I want. Renting is good.

    The funny part is that the condo was worth about $700K when I started renting for slightly less than I’m paying now. Even then the numbers didn’t even come close to working.

  24. freako Says:

    Mr. BuyBuy

    Do you really believe the string of fallacious and flawed assumptions you base your conclusion on?

  25. islander Says:

    When rates are low, prices stable and affordable, and jobs secure, buying a house beats renting. The only thing those other “investments” have going for them is their liquidity. They are no more likely to stay significantly ahead of inflation as housing, and are taxed much harder than a principal residence. It’s no contest, in fact.
    The 50s and 60s were a great time to own a house.

    However, when rates vary, prices swing wildly and become stratospheric, and jobs are part-time, temporary or fleeting, buying a house is an illiquid trap. The mid-to-late 70s were scary for homeowners with shaky jobs and 21% interest rates on thier mortgages. Even with relatively low rates today, jobs aren’t for life like they were in our parents’ generation. Your wife’s hours get cut, or your company downsizes you, you’re bank will foreclose on you @zz so fast you’ll wonder what just happened. Try being late with a payment by just one day. The bank will send you a letter. Even renters get five days.

  26. Carioca Canuck Says:

    I pay $1,650 in rent for a 3 year old luxury condo in the trendy Mission district of Calgary.

    1,200 square feet, a huge balcony, underground heated parking, 2 bedrooms, 2 bathrooms, 3 large walk in closets, track lighting everywhere, kitchen island, a fireplace, floor to ceiling glass walls.
    …etc…etc…..

    Right beside the river on a quiet cul de sac…..the whole street is full of high rise $500K ++ luxury condos……

    If I bought I’d pay $3,335 PI…….then taxes of $150…..insurance of $50…..utilities of $200….condo fees of $500….etc….etc…..$4,235 a month. My numbers are based on a $450K mortgage at 7.65% over 25 years. Assuming I paid $500K and put $50K down.

    In 10 years my mortgage balance would only have been paid down by $90,977 !!!!

    Yet, if I saved the monthly difference over those 10 years (which we have been doing for the last 5 years now)…..I’d have $310,250 in the bank not counting interest !!!!

    Real estate…..what a great investment…..LOL !!! It’s the biggest rip off on the planet IMHO.

  27. Mr. BuyBuy Says:

    Now forget the math… Let us look at history..

    I copied few lines from the article (a link is provided in the main post above)

    “The net worth of homeowners is greater than renters in the long term. This view is supported by Somerville’s 2007 report for the Centre for Urban Economics and Real Estate, comparing the amount of wealth that a renter and a homeowner with a given income could amass over a period between 1979 and 2006.

    The reports states that in Vancouver, both renter and homeowner would come out financially even only if the renter was disciplined enough to invest his or her spare capital (money that would have gone to mortgage payments and home maintenance costs) into profitable investments.

    Unfortunately, most people aren’t disciplined enough or savvy enough in their investment decisions to come out financially even with homeowners.”

    I agree 100%+ with above statement.

    Abd did you know?

    The most millionaires in the world made their money in the real estate and they are NOT renters.

    I think you guys are just pried out of the market and hoping that it ‘ll come down somehow. It ain’t gunna happen. It may take a little dip but look at other major urban centers around the world. Your math won’t work. RENT will go UP to because prices are not coming back to 1999 level anytime soon.

  28. Happy Renter Says:

    Mr. BuyBuy, you’re awesome.

  29. condohype Says:

    The beauty of rent is that it’s intrinsically connected to local incomes. The argument that Vancouver rents will go up isn’t much of a threat to renters because it means their incomes will be going up. Speculators can’t inflate the price of rent. Rent is priced at what people are able to pay. And for 99% of the population, what people are able to pay is based on their salaries.

    I’ve been renting in the Vancouver for over ten years. I’m probably paying 15% more (for a comparable place) than I was in 1998. Meanwhile, the cost to buy a place is up something like 125%. The real estate boom hasn’t hurt me. Far from it; I now have more choice and will probably see rents stabilize or even decrease as all these “investment rental condos” come to completion.

    Ignore the hype. It pays to rent.

  30. Timothy Says:

    All I can say is that I bought my 1st place when I was 19. Payments then seemed like they would kill me. I am now 50 and have a net worth in excess of $3million which is all due to investing in Real Estate. It is always a good idea to get into the market whenever you can. As far as 3% what good is that if the Government is going to take part of it in income taxes.
    We still have capital gain exemption from gains when it comes to our principal residence.

    If you can buy, just do it!

  31. Charles Says:

    @condohype: “The argument that Vancouver rents will go up isn’t much of a threat to renters because it means their incomes will be going up.”

    I’m on your side here in general, but has it not escaped your notice that Vancouver incomes have *not* gone up to match rents? The cost of living is skyrocketing here and employers are sluggish to catch up.

  32. condohype Says:

    I know all too well about the sluggishness of employers when it comes to salaries in this town. It’s a regular topic of conversation for me and my friends. I share your pain; Vancouver is not a good city for most people seeking truly competitive salaries.

    The thing is, rental rates reflect what people are willing and able to pay. As much as I hate the thought of how much I pay to rent my place, I do pay it. It’s pricey but that’s what it’s worth to me and to other people out there. Obviously it fits my budget and income otherwise I wouldn’t be willing and able to rent it. This is what I mean about rents being in line with local incomes.

  33. CondoVan Says:

    Condohype-love the site. Do you think the amount of money you ‘saved’ in the last tens years by renting is equal to the amont of equity and appreaciation if you would have bought back then?

    1998 was a great time to buy.
    One advantage of buying back then would have been forced savings as noted in a past post. Realistically/statistically people do not manage\spend cash at hand well.

    Real estate has worked out very well for me, it’s obviously about buying right. I like using cheap bank money to make money-even after taxes and fees. Just because you have a 30 year amort doesn’t mean that you cannot sell before that.

  34. condohype Says:

    CondoVan, glad you like the site. I would’ve gladly bought in 1998 but unfortunately my parents waited until the 1980s to bring me into the world. It’s pretty tough for a teenager to qualify for mortgage. 🙂

    The situation I’m in today is obviously very different. If the market of ten years ago existed now, I’d be a buyer. It has nothing to do with hindsight but the real numbers of the day. In 1998, there wasn’t much of a gulf between renting and buying if you could come up with the downpayment. In some instances, it was cheaper to own than rent.

    My comments about renting as the better option are based on the current market. I suspect that within not too long Vancouver real estate will return to sanity. I won’t be cheap to own — it never has been — but it will make sense in context to the cost of renting.

  35. willbuy Says:

    Great site condohype, but I have to say I agree with buybuy on this issue–it is much better to own than rent.

    Rents are set by landlords and they are going up. If a landlord cannot make what he sees as a reasonable amount of return on his investment, he will just sell the place. The reason some rents are still low is because the owners bought a long time ago and have been lazy raising their rents because they don’t need to. But now there are a lot of places out there bought for higher dollars and landlords are raising rents the maximum 3-4% that they are allowed to each year.

    RE prices may fall a bit in the near future, but rents are surely going to increase a lot.

  36. condohype Says:

    Thanks for the praise, willbuy. Landlords may choose to raise rents at the maximum level but they risk losing their tenants if they do so. The rental market is efficient in this regard.

    Rents increase based on demand. Because of the RE boom of the last ten years, tons of new units are on the market. This is absorbing demand and having a flattening effect on rents. It’s also important to note that Vancouver incomes aren’t rising much, if at all, and this imposes an affordability ceiling for rental rates.

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