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Homeowners are usually considered better off than tenants, and it’s true. Based on Statistics Canada numbers, between 1999 and 2019, the net worth of homeowners has increased from $325,000 to $685,000 in constant dollars, meanwhile that of tenants, from $14,600 to $24,000, reports Stéphane Desjardins, journalist and author of a recently published book.
But that is not an iron law. The same owners, if they had rented their home, could be even wealthier. Baby boomers who bought their house for $50,000 in the 1960s and recently sold it above $1.0 million think they hit the jackpot, Desjardins notes. “Illusion,” he quips. “The jackpot, they would have won it if they had invested their money in financial markets during this time.”
He gives the example from RBC Global Asset Management of an investment of $250,000 in a mutual fund or an ETF tracking the TSX index between 1993 and 2017. Such an investment would have returned 9% compared to 4.7% for a home of a similar value in the Montreal region. “A quarter century later, Desjardins points out, your investment in the market totalled $2,608,610 against $937,722 for your home.”
“In many markets, it is better to rent,” agrees Spencer Look, director at the Morningstar Center of Retirement Policy Studies in Chicago. “Previously, owning a home represented two to three times your revenue, but now it’s five to six times. Renting makes a lot more sense for a lot of people.”
The financial logic of buying a home escapes Josh Varguese, consultant, board member and former portfolio manager at CI Global Assets. “You’d be better off buying an apartment REIT, which in general has beat returns of the condo market. However, most financial analysts would consider it irrational to put all your net worth into a single REIT. But for some obscure reason, it’s totally okay to do it on a single property with an insane level of leverage.”
We often compare a mortgage with a rent, considering that with a rent you’re throwing money out the window which you would do better throwing into a mortgage. Such an equation obscures a number of hidden and tricky variables. Simply put, “your rent is the maximum you pay to lodge yourself, while your mortgage is the minimum you pay,” Desjardins says.
What the idea hides are the countless charges that come with homeownership. First, you have the one-time charges of inspection and notary fees, transfer fees, sales taxes (on a new property), moving expenses, and new furniture expenses. Then come the recurring charges: mortgage, taxes, insurance, gardening, repairs, and renovations.
In August 2023, the average 3 ½ apartment in the Montreal region had a rent of $1,587; while the average home in Montreal’s Longueuil suburb at the same time was $522,250, representing a monthly expense of $3,394 that includes a 5% mortgage and municipal taxes. The difference of $1,807 between both monthly charges ($3,394 - $1,587) amounts to $21,684 per year. “That’s a lot of money that you can invest in markets,” Desjardins sums up.
After 25 years, the house will be worth $1,093,500, assuming a yearly 3% compound return. But that’s a very generous and unlikely return. PWL Capital analysts Benjamin Felix and Raymond Kerzérho calculated in a 2022 study that over 20 years the annual return of a home, after inflation, taxes and repair expenses, yearly returns were closer to 1%. In comparison, the return of $1,807 per month over 25 years in a plain vanilla mutual fund earning 5% a year would deliver $1,133,901.
Granted, the difference between the home’s and the investment’s value is only $40,401. But that’s after 25 years. After 40 years, the difference would grow significantly. And then of course, there’s the time saved, predictability and worries avoided by having a landlord look after maintenance issues.
There remains a fundamental question: will the average tenant in Montreal with a $1,587 rent save and invest $1,807 per month? To begin with, if their budget shows them with a net positive balance of $1,807, will they be content with a $1,507 rent? Why not spontaneously choose to upgrade your location? Welcome to the shifting terrains of behavioural finance and lifestyle choices.
In pure financial logic, renting trumps buying. But then add the emotional and value considerations. With home ownership comes a sense of empowerment, of security, of stability, of prestige. On the flip side, being a tenant is not without its compensations: enhanced mobility, fewer responsibilities, and the convenience of proximity to urban life for many Canadian apartment and condo-dwellers. But then, will a tenant save $1,807 a month when his rent is $1,587? “Very few have the discipline to resist the sirens of consumerism and save the difference between their rent and a hypothetical mortgage,” Desjardins observes.
Buying your home may not be financially logical, but it is behaviorally sound, Desjardins admits. A home is a form of compulsory savings. You build up a financial asset which, at the same time, puts a roof over your head.
Whatever one’s lifestyle preferences, one should never lose sight of the fundamental imperative of budgeting. “If a mortgage (and all the extra expenses that come with it) stretches your income, you are better off renting,” Spencer Look insists. “What if you lose your job or you have to meet a big unexpected expense? Especially, if you really think you can save, rent. If not, buy. Just make sure your budget doesn’t strangle you.”