Home ownership, the Canadian Dream—Barry Bradey lived it with gusto. Over the past decade, the 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 six per cent, 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 five per cent [commission] if I want to leave."
This is not yet another story about the real estate bubble. It's a story about why more of us don't do what Bradey did. 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.
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. In May, Ben Rabidoux, an Ontario financial adviser (and an unapologetic renter) who runs the Economic Analyst blog, illustrated the unprecedented gap that's opened between the cost of renting and owning with a series of fever graphs charting rents and housing prices in seven cities across the country. The lines track more or less in sync until a decade ago, when they diverge as home prices shoot toward the stratosphere, the gap growing wider with each year, like huge jaws swallowing homeowners' retirement savings and vacation budgets and pushing them further into debt.
Even before the recent run-up, renting suffered under the perception it's money thrown away that could be put toward building equity—a myth the surging home values have transformed into a near religion. Fed by this belief, Canada's home ownership rate rose to eclipse most other rich nations', up almost 10 per cent since 2000. Today, two-thirds of households live in privately owned homes, rising to 70 per cent in Vancouver and 74 per cent in Calgary. In New York, Paris or San Francisco, that proportion is closer to a third. In fact, in much of Europe, lifelong renting is the socially respectable norm, backed by rent controls and tenant protection laws.
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.
Every asset class has standard ways to measure value. For stocks, there's the price-to-earnings ratio; for bonds, there are different yields. For real estate, the typical valuation ratios are price to income (what you can afford to buy) and price or buy to rent (what you could make in cash flow). According to Ed Sollbach, a Desjardins Securities strategist, the buy-rent ratio for the four biggest Canadian cities is currently above 2:1 —meaning it costs twice as much to buy as to rent the average home—and 3.1:1 in Vancouver. That ratio, it bears noting, only compares rent to mortgage costs; it doesn't include the various expenses entailed in home ownership—taxes, maintenance, insurance—that can more than double the monthly outlay.
It's long been established that, over the long term and after adjusting for inflation, housing produces almost no return on investment. The calculus looks even bleaker for people who don't hold on to their properties for long. And that's most of us. In Vancouver, for example, a recent survey found that half of new condo buyers expected to live in their units less than six years. When commission and closing costs, maintenance, moving and other expenses are added up, the sum can easily eclipse any equity amassed in that short time—even in a city with a skyrocketing condo market. What's more, in the first years of ownership, your mortgage payments are going primarily to paying interest on the loan. Renters and owners both "throw money away"; the former just toss it to landlords and the latter to bankers. Or as Rabidoux, who's writing a book about our housing obsession, puts it, "the majority of new homeowners are still renters; they've just gone from renting space to renting money."
While financial gains from home ownership are iffy at best, the opportunity cost is significant. When Alexandre Pestov, a strategic consultant and research associate at York University's Schulich School of Business, compared buying a two-bedroom Toronto condominium to renting it over the past 25 years, he found that the renter ended up $600,000 richer than the owner if he invested the spare cash in low-risk bonds. Several other studies have reached similar conclusions: renting while you conservatively invest your savings is financially smarter than buying a home.
"We have a very distorted picture right now," says Pestov, "because of the very low interest rates and the influx of speculative capital." While these factors have propelled the buying spree, they've also been great boons to renters. The condo boom, for example, owes a lot to "specuvestors" who rent their units before flipping them. Since they're looking to cash in on the price appreciation, as long as the rent covers their mortgage payments, they figure they're ahead. Cheap mortgages, combined with rent control laws in most large provinces (except Alberta), have meant that this new stockpile of condos has suppressed rental prices. "In Toronto, it's a big factor," says Vince Brescia, president of the Federation of Rental-housing Providers of Ontario (FRPO). "This is brand new product, so it's very competitive."
Rents were also hit by a drop in demand as most people who could scrape together a downpayment rushed to buy. For example, in Ontario between 1996 and 2006, and especially in the last decade, tenant households dropped by 84,000. "It's unprecedented," says Brescia. "You have to go back to the 1940s to find the last time tenant numbers declined." Facing sliding demand and a surging supply, landlords refrained from jacking up rents. As a result, the growth in rents in Ontario has not even kept pace with increases allowed by rent control laws.
This confluence of trends has made renting uncommonly affordable. In fact, recent studies by both the International Monetary Fund and the Organization of Economic Co-operation and Development concluded that Canadian renters get a better deal compared to their owner counterparts than renters in almost every other wealthy country.
Still, many people factor in an ownership premium—the amount they'd pay over and above the cost of renting for the freedom, stability and simple bragging rights of having their own place. But it doesn't take a new homeowner long to discover just how large that premium can be in money and time: the constant outlays on maintenance and repairs (at least one per cent of the purchase price per year, experts estimate, and as much as four per cent), the chores and DIY projects that eat up weekends, the pressure to keep up with the ever-gentrifying Joneses. In fact, studies find that homeowners are no happier than renters and have higher levels of stress, largely due to the financial burden and greater time constraints.
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."
This feeling is particularly pronounced in the cities that have seen the biggest migration to ownership. Take Vancouver: "There's always been a high home-ownerships rate here, but through this recent mania, the stigma on renting has grown more extreme," explains the Vancouver Real Estate Anecdote Archivist (VREAA), a blogger who's tracked the housing run-up since early 2008 (and whose unpopular opinions have led to a carefully guarded anonymity). "It's very [common] for renters to go to a barbecue and feel sheepish when they speak to the brother-in-law or colleagues. And if you claim online that you can afford to buy but choose not to, you're jeered as clearly lying."
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. 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.
Canadians' attitudes about housing have long been shaped by government policies and the tax system. There is a large discrepancy in taxpayer subsidies for owners and tenants, according to a study released last fall by the FRPO and the Canadian Federation of Apartment Associations (CFAA). The average homeowner receives $1,823 a year through programs such as tax-free capital gains on the sale of principal residences and the Home Buyers Plan that lets first-time buyers withdraw money from their RRSPs for downpayment. Renters, meanwhile, get $308—even though, on average, they have half the income of owners. CFAA president John Dickie argues that this situations benefits neither taxpayers nor the economy. "The government should get out of the business of encouraging people to own," he says.
There's a broader economic case for encouraging more people to rent. Aside from consumers' dangerously high levels of debt, having so much money concentrated in housing makes the whole economy less efficient. In his 2010 manifesto Renting the Dream: Housing in America after the Great Reset, University of Toronto professor Richard Florida goes so far as to paint home ownership as a relic of a different time. "Owning your home made sense when people could hope to hold a job for most or all of their lives," he writes. "But in an economy that revolves around mobility and flexibility, a house that can't be sold becomes an economic trap," preventing people from moving to where the jobs are. Studies in both Europe and the U.S. corroborate this argument, showing linkages between high home ownership rates and unemployment.
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 to London-based property research firm RICS. In Berlin, 90 per cent of residents rent; in Hamburg, the share is 80 per cent. 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 three per cent in Germany. Renting has no stigma because Germans don't think of home ownership as an investment opportunity of a lifetime.
European governments are also less in-clined toward home ownership boosterism. In parts of Europe where renters dominate, tax regulations don't favour owners, rents are tightly controlled, unlimited-length leases are common, and supply of attractive apartments is plentiful. As a result, notes Dickie of the CFAA, European renters don't move as often as North Americans.
The European attitude is in line with the broader social trend of consumers focusing more on services rather than assets. Ten years ago, American economist Jeremy Rifkin predicted the onset of "the age of access," where we'd pay to use things, not own them. We already see this in other sectors, from the rapid growth of car-sharing to tech tools being rented off the Internet cloud. Richard Florida, for one, advocates what he calls "plug-and-play" housing, where flexible rental arrangements of furnished and unfurnished residences with hotel-style amenities will serve the increasingly mobile workforce.
In the U.S., after the fiasco of George W. Bush's "ownership society," a shift in mentality has already started. Home ownership has experienced the biggest decline in two decades, and the number of renting households has been growing by about 700,000 a year since 2006. In New York, San Francisco and other thriving cities, brokers are reporting sharply rising demand for luxury rentals, as affluent people who could afford to own decide there's no cachet anymore in being a homeowner, and lots of risk. Indeed, in a recent poll, 71 per cent of Americans conceded that renting has advantages over buying.
"Renting has become culturally accepted in the U.S.," says Desjardins strategist Sollbach, who's tracking the market correction. Ironically, this shift is happening at a time when the plunging prices in some regions make buying advantageous. "But Americans have had such dramatic losses that the whole idea of owning has been drummed out of people's minds," he says. "They've gone through a life-death experience." The equity markets have taken notice: the values of American apartment REITs have risen 72 per cent since early 2010.
Even in Canada, real estate dropouts seem to be on the rise. In the past year, major cities have occasionally seen bidding wars—not for homes but for prime rentals, with choice units renting for higher than asking price. But a broader shift likely won't happen until some economic factors—most notably mortgage rates—change. We prefer owning—even though, at $366,000, the average Canadian home today costs more than twice as much as its U.S. equivalent; even though a small increase in the lending rates will push scores of over-leveraged homeowners into crisis; even though Bank of Canada governor Mark Carney is practically guaranteeing that those higher rates are coming. We're still buying; in May, house prices rose 8.6 per cent nationally, and a stunning 25.7 per cent in Vancouver.
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.