Renting vs. owning: Can you be financially secure without buying a home?

Here are some numbers to show what I mean. In October 2013, the composite benchmark home price in Canada was $380,700. In October 2023, it had risen to $731,700. The benchmark price peaked in March 2022 at $855,800. The 6.75% annualized 10-year increase is significant, though a homeowner’s experience varied from city to city.

The southwestern Ontario district of Tillsonburg saw prices rises by over 228% in total over that decade. Meanwhile, prices in Regina, Sask., rose only 4.5%, not even keeping pace with inflation.

Now, if we look back at inflation-adjusted real estate prices since 1970, prices were flat between 1974 and 1986. After peaking in 1989 and falling during the 1990s, prices did not recover on an inflation-adjusted basis until 2003.

Investors tend to suffer from recency bias, with recent experience having a disproportionate emphasis on decision-making. The recent decline in real estate prices has impacted some of the thinking around real estate, but most people under 40 still expect prices to rise, because the Canadian real estate market has been quite strong throughout their adult lives.

Buying a home vs. investing in stocks

Which earns more growth: buying real estate or investing in the markets? If the average Canadian homeowner saw their home value nearly double and rise by 6.75% annualized over the past decade, how would a stock market investor have done over that same time?

The 10-year return for the S&P/TSX Capped Composite Index was 6.69% annualized, and for the S&P 500 Index, it was 13.75%. At first glance, stocks seem the better choice despite a great run for real estate. That might surprise a lot of people.

However, that’s not the whole story. When buying a home, most Canadians will carry a mortgage. So, you are not investing $100 to buy $100 of real estate. You might put down $5, $10 or $25 to buy that $100 of real estate and borrow the balance from the bank. This leverage can increase the return from owning real estate, albeit at the expense of paying mortgage interest.

The stock market returns don’t tell the whole story either. Most Canadian investors do not invest all of their money in stocks. In actualit, they hold a mix of stocks and bonds. They are also more inclined to move in and out of the market, potentially selling low and buying high and missing some of the returns the market provides. There are also fees to invest that reduce an investor’s return: these fees can be up to 2.5% for mutual fund investors, or relatively small for self-directed investors. Most Canadian investors working with investment advisors pay 1% to 2% per year in fees.

Buying a condo: Let’s do the math

Let’s consider a condo purchase in Canada for $500,000. With a 20% down payment of $100,000, you’d be left with a $400,000 mortgage. Assuming 25-year mortgage term, with a five-year fixed mortgage rate of 6% (or a five-year variable mortgage rate of 6% with no rate changes), followed by a 5-year mortgage renewal at 4%, the mortgage balance would be $268,509 after 10 years. (This calculation assumes monthly mortgage payments and no change in payments at renewal.)

I don’t expect real estate prices to rise at the same 6.75% rate we have seen over the past 10 years, so instead, let’s say prices rise at 4% per year. Some people may think that number is high, while others may think it is low. But if you look back at U.S. residential real estate appreciation since 1890, which looks to be similar here in Canada, prices have only risen by a bit more than the rate of inflation, so even 4% may be generous. Nevertheless, assuming 4% growth is correct, the condo would be worth $740,122 after 10 years. Home equity, representing the condo’s value minus the mortgage balance, would be $471,613.

What if someone could rent the same $500,000 condo for $2,000 per month (a number that might seem high or low depending on where you live)? Compared to making monthly mortgage payments on that same property, the renter would be saving $559 per month. Their rent would rise over time, say, at 2% per year, so the $599 per month of savings would decrease over time.

Now, let’s say they invested their initial $100,000 (the amount that would have been used on a down payment) and $559 a month (a number that would decrease as rent increased) into a tax-free savings account (TFSA). If they earned 4% per year on their investment, they would have $204,396 after 10 years. The buyer, with $471,613 of home equity, is clearly better off than the renter, right?

The problem here is you cannot just compare the mortgage payment to the monthly rent. Owning has other incremental costs that might include:

Property tax: $200 monthly (not ap
Condo insurance: $10 or more per month, compared to tenant insurance
Condo fees or repairs: $500 more per month, compared to renting

Property tax rates can vary significantly depending on where you live. And condo fees and repairs can vary, depending on the age and amenities in the building. But if we added another $710 per month from the categories above to the renter’s monthly investment deposits, the renter would have $319,117 accumulated after 10 years. The same tax-free TFSA return of 4% is assumed, perhaps in their spouse’s TFSA.

The owner would still have $471,613 in home equity. So, owning is still better than renting, right?

Let’s not forget there are costs to buy and sell real estate. It could cost $10,000 in land transfer tax, legal fees and other costs to buy, and another $40,000 to sell after 10 years. If the renter added these amounts to their investments, they would be at $373,919. The buyer is still ahead of the renter with $471,613, but as you can see, the gap is closer.

We could modify assumptions like increasing or decreasing the real estate growth rate or the renter’s investment return. We could choose a higher or lower rent to compare to the purchase price. Ownership costs like property tax, insurance, condo fees and repairs could all be modified to make renting look better or worse.

Are you better off buying or renting?

I could definitely make a case for an aggressive, low-cost, disciplined Canadian investor coming out ahead of a home buyer in the long run. But when you buy a home, there may be non-financial benefits. You can personalize your space. You do not have to deal with a landlord who does not properly maintain the property. You don’t have to worry about your landlord moving in or selling the property. The value of not having to worry about moving out of a rental is hard to quantify for a family with young children or an elderly person who would be hard-pressed to pack and move on short notice.

The main takeaway should be that you cannot simply compare monthly rent to monthly mortgage payments. If inflation remains high and rents increase significantly each year, or real estate prices drop or simply do not rise much in the coming years, things could tilt more in favour of either buying or renting. But in a moderate scenario, where neither rent increases nor home price changes are extreme, the gap may be closer than you would expect. Especially if you are only considering living somewhere for a few years, do not see yourself living there long-term and plan to move.

It’s also unlikely that the real estate price increases we have seen over the past 20 years will continue for the next 20 years, especially given high debt levels and more normalized interest rates.

So, if you can afford to buy a home without compromising other things you value, and you expect to stay there long enough to put down roots, you should consider it over renting. But not because it is going to make you rich. A renter who is a disciplined investor could definitely give the home owner a run for their money.

Read more about investing and mortgages:

• Borrowing money to invest
• How to invest down payment funds while timing the real estate market
• Should you hold your mortgage inside your RRSP?
• Contribute to RRSP or pay off mortgage?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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