“This is not yet another story about the real estate bubble. It’s a story about why more of us don’t rent. The belief that we’re not responsible adults until we own our home, whether or not we can afford it, has distorted and stigmatized the cheaper and safer alternative: renting. And we’re literally paying the price.” – Joanna Pachter, in the her article in ‘Canadian Business’, an excellent discussion of renting in Canada, circa 2011 [‘Rental Complex’, Joanna Pachter, Canadian Business, 14 July 2011].
We encourage all to read the entire article.
[Personal anecdote] Over the past decade, Barry Bradey, a health and finance entrepreneur, owned three houses in the affluent Toronto suburb of Oakville, and watched each soar in value. But after a divorce and a business failure, he needed cash on hand. So last fall Bradey (who asked that we use a pseudonym) did some back-of-a-napkin math. The 3,500-square-foot house he wanted would cost about $850,000. Even with $400,000 down, the mortgage would cost him roughly $3,000 a month. Add property tax and maintenance and “that’s $5,000 a month before you turn on the lights.” Utilities, insurance and various amenities would be another grand. He also figured the downpayment came at an opportunity cost of about 6%, equivalent to another $2,000 or so a month. He bounced these numbers off a local realtor friend; she thought the carrying cost should be closer to $12,000. Nevertheless, she insisted the house was worth the money because it was “an investment.”
Bradey didn’t buy that. To rent that same house would cost him—all in, and worry-free—about $3,500 a month. A 53-year-old father of two with a startup venture underway, Bradey did the financially prudent thing. He now rents a large townhouse in the same neighbourhood for $2,200 a month. “With a house, its market value might go up or down, but it would cost me $8,000 to live there,” he says. “My logic is, renting gives me flexibility. I won’t have to pay 5% [commission] if I want to leave.”
Over the past decade, as the value of the average Canadian home doubled, and tripled in some areas, rents remained stable or even declined. As a result, it now costs more than twice as much to own that average home as it does to rent it.
With widespread warnings that we’re approaching the peak of the housing boom, with Canadians more indebted than ever, largely due to their outsize home investments, and with cities like Toronto boasting some of the lowest rents among major world centres, why aren’t more of us re-examining the math? The reasons are cultural and emotional, backed by ill-conceived public policy. This Canadian Dream is an expensive delusion. There’s never been a better time to rent.
[Personal anecdote] Your lifestyle suffers, your worries mount—and yet, no matter how much data you throw at people, there’s an ingrained belief that being a homeowner signifies maturity and that renting connotes instability and transience. Moshe Milevsky, a finance professor at Schulich and one of Canada’s best-known home-ownership skeptics, has long argued that for young people with limited means and unrealized career potential, stowing most of their wealth in a single illiquid asset is foolhardy. Today, he thinks just about anyone would be better off renting. “I really wish I could sell my house and rent. Immediately!” he says. “The market is so overvalued. I’d sell to the biggest sucker. But my wife and kids would kill me.” That’s because, for most of us, financial considerations are only part of the equation. “The decision to purchase a house goes well beyond the practical,” says Milevsky. “It’s part of people’s identity.”
While the average price of a Vancouver home is now more than 11 times the average family’s income, the rental market has stayed earthbound. But VREAA notes that the bubble has raised the “social cost” of renting. “[It’s] become broadly socially synonymous with being relatively impoverished and disenfranchised,” he wrote in a post that drew passionate debate. [‘The Stigma Of Renting In Vancouver’ 25 May 2010 -ed.] One respondent noted that people are renting luxury units in new buildings they can barely afford to give the illusion they own. Another said that even though renting saves him and his wife $4,000 per month, in social terms, “we’ve never felt poorer.”
Vancouver may be extreme, but the stigma is just as real elsewhere. Bradey, the new convert to renting in Oakville, knows that his friends, who are largely well-to-do and own their homes, see his move as a regression. “Even in my own mind, I probably downgraded [my social status] from an A+ to a B+,” he says. Still, he believes that, were most people who may pity him now forced to go without income for three months, they’d be in trouble.
In the glow of our pride of ownership, we tend to forget that owning your residence is hardly the global norm. Quebec, where home ownership rates have been rising, remains a renting-friendly society, at least in the urban centres, and Montrealers who move to Toronto are often shocked by the pressure they feel to buy. In Switzerland, Sweden and other parts of Europe, particularly where rental markets are highly regulated, the majority rents. In fact, Germany, Europe’s economic engine, has the European Union’s highest proportion of renters, according London-based property research firm RICS. In Berlin, 90% of residents rent; in Hamburg, the share is 80%. And renters aren’t the lower-income contingent: professionals who spend half their earnings on rent are not uncommon. While Germans do want to own, they don’t feel pressed to buy when they can’t afford to, the way Americans, Canadians and Britons do. The difference can be traced to real estate market trajectories: Over the past decade, while housing bubbles percolated through much of Europe and in North America, home values rose less than 3% in Germany. Renting has no stigma because Germans don’t think of home ownership as an investment opportunity of a lifetime.
No one argues that owning a home is, in principle, a bad idea. But today, in this market, renting is a better one. After 12 years of rising real estate, a renter goes against a powerful cultural tide. But even if the housing bubble continues to inflate for months or years to come, it’s high time to recalculate the ownership premium we are willing to pay.
—/ end of excerpts
It is also noteworthy that Pachter’s article is given cover prominence with a strongly worded: ‘Home ownership is a losing bet: Why renting is suddenly making a comeback‘.
And the association of ‘Home ownership is a losing bet‘ with the ‘Suckered‘ headline story can’t be a coincidence, surely …