It was the belief and desire that home ownership is the best thing to do that drove millions of Americans to purchasing homes they could not afford. This blind desire to own a home, fuelled by the media and misunderstanding of the economics of home ownership significantly contributed to the skyrocketing of real estate prices. What made it worse was the government’s willingness to help families buy homes when it made more financial sense for them to rent. Yet, the calculation of whether one should buy or rent is very straight forward.
The cost of renting your home usually includes:
– Monthly rent
– Utilities used
– Tenant insurance
The cost of owning our home usually includes:
– Mortgage payments (principal and interest)
– Maintenance fees (if a condo unit) or maintenance costs
– Property taxes
When you add up the costs if you were to rent or own a specific home there are years when it is cheaper to rent and years when it is cheaper to own. Theoretically, the cost of renting should be equal to the cost of owning a home (less the principal repayment component of the mortgage payments). Leading up to the devastating collapse of the United States real estate market the comparison clearly showed a significant premium in owning a home. In other words, it was about 25% cheaper to rent than to own. So, home prices were overinflated and out of equilibrium. It was only a matter of time before the market adjusted itself.
In Canada we’re experiencing the same situation with housing, especially with condominium units, such as in downtown Toronto. For example, it costs about $3,000 a month to own a two bedroom condominium unit at 12 Yonge Street (at the harbourfront) in downtown Toronto, assuming a 10% down payment. Yet, to rent that same unit only costs $1,800 (utilities and parking included). Even if you subtract the $150 that goes to the principal of the mortgage, by renting rather than owning one will be saving $1,050 per month. After a year that equates into a savings of $12,600 which can be used for a down payment for when the real estate market adjusts itself.
Very simply the market is not in equilibrium and just like the American real estate market the Toronto condominium market is poised for a major correction. Going by the example above, the market could correct by as much as 40 percent downward. This means that someone that rents a unit a two bedroom unit at 12 Yonge Street today and waits a year or two while the condo prices continue to drop by about 40 percent would be able to buy the same unit (now priced at $409,000) for about $245,000 for a savings of about $164,000 (in that they won’t have to carry that extra mortgage) plus the $12,600 from monthly savings for a total of about $176,600.
Now these numbers may be off, but even if you adjust for only a 20 percent market correction it is still quite a figure.
The market indicators in Toronto are that now is the time to rent as the market is going through an adjustment downward.