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Toronto Loft Conversions

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Modern Toronto Lofts

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Unique Toronto Homes

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Condos in Toronto

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Toronto Real Estate

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Tag Archives: mortgage brokers

Should everyone consider renting over buying right now?

Ben Rabidoux – The Globe and Mail

Given the uncertainty clouding Canada’s housing market, it’s no surprise that the debate around whether to buy a home or rent has resurfaced.

As many readers know, I am quite bearish on the Canadian housing market, particularly a few of the larger cities and the condo segment. And although the numbers suggest renting has never been more appealing, there are considerations outside of financial ones that are important when considering your next move in the housing department.

Below are a few questions I’m frequently asked regarding whether it makes sense to buy now or rent for a while.

Q: If you are a current owner, does it make sense to sell now, rent for a while, and try to buy later at a lower price?

A: The current consensus is that Canada is in line for some sort of a soft landing involving prices falling gently, on average 5 to 10%. My perspective is that a soft landing will be very difficult for policy makers to orchestrate given the degree to which the Canadian economy has been driven by this current boom.

Comment: No, there is NO consensus as to prices falling. In fact, the consensus truly is that Canadian prices will rise somewhere around 2-3% in 2013 and Toronto prices will rise 3-5%. Outside of a few nut jobs calling for 25% price drops, most everyone in the industry believe that 2013 will end with prices higher than 2012.

But even assuming that prices do fall substantially over the next few years, timing the market is a difficult strategy to pull off simply because the transaction costs alone typically mean that prices need to fall at least 10% to make the move profitable. And that still doesn’t compensate you for the time and headache involved in moving twice.

Comment: No, let’s not assume that. It would be wrong.

There are only a handful of scenarios where it might make sense. Corrections in the housing market are always felt acutely by those who work in real estate-related industries – realtors, mortgage brokers, construction workers, etc. If you are barely keeping your head above water on the carrying costs of housing-related debt and if your income is reliant on the ongoing strength of the housing market, it could make a lot of sense to sell now and consider renting.

Comment: Any scenario the involves dropping prices do not make sense. Think of all the people who are calling for it this year – they said the same thing last year. And prices rose 6%. Do you think they will be right this year after being wrong last year? And the year before that… and the one before that too. And to be honest, if prices fall 10%, I will get more business as more people will likely want to buy. Sure, my average pay per deal will fall 10%, but if I get a few more sales out of it, I am ahead of the game. Same with mortgage brokers. Construction workers get paid by the hour and that rate has nothing to do with the sale price of a house in Leaside.

There are also times when an irrational market gives you a massive gift that’s simply too good to let pass by. I recently met a person in Vancouver who bought a home in 2010, only to have another buyer a week later offer them $1-million more than they originally paid. In extreme cases like this, taking the windfall, investing it wisely, and using the income generated off that portfolio to pay for most of the rent on a comparable dwelling can make a lot of sense.

Comment: I am sorry, I have a lot of trouble believing that. Vancouver has seen prices fall for years now, why would anyone throw that kind of money around?

In parts of Canada where ownership costs command a substantial premium to rents (parts of Vancouver jump to mind), it’s possible to sell your residence, rent a comparable dwelling, and pay rent with the income generated from an investment portfolio built on the proceeds of the home sale. This is, however, a very unusual situation and may present an interesting “arbitrage” opportunity , but it’s certainly not without its risks.

Comment: That only works if you have a lot of equity in your home. I think the average around these parts is some $220,000 or so. I do not think you are going to be able to generate $2,650/month from that to pay the rent on the average two-bedroom condo in Toronto.

Q: Should everyone looking at the housing market right now consider renting?

A: A number of recent articles have suggested that renting is currently a better option than owning a home, given the negative outlook on house prices and the fact that total ownership expenses are significantly higher than rental costs in a number of Canadian cities. From a purely financial perspective, yes, renting is a great option in many cities. But the reality is that monetary considerations are not the only ones at play.

Comment: And those articles have been wrong. The negative outlook on prices is shared by this writer and a few other doomsayers, not the majority of real estate world. It is like saying that evolution is a controversy because a few religious nuts think otherwise. A few dissenting opinions does not change the preponderance of evidence to the contrary.

Many families, particularly those with small or school-aged children, would prefer the stability of ownership and are willing to put their saved capital at significant risk and pay more to own rather than rent a comparable place where they may be forced to move at any time. Keep in mind that in some cities it can be difficult to find suitable rental dwellings, particularly for families looking for detached homes with multiple bedrooms and suitable backyards.

Comment: The average rental for a 3-bedroom house in Toronto is $3,098 (taken from MLS since January 1st, 2013). Compare that to the average price of $576,315 in April. A mortgage at 2.99% with 5% down is $2,659.38 per month. Add in property taxes and utilities and you are at roughly the same monthly cost. So, um, why is renting a better idea?

The decision to purchase a home in these scenarios is perfectly rational, provided potential buyers have a decent-sized down payment (10% as a minimum), have stable jobs, are able to afford the home while still saving for other important goals such as retirement, and have stress-tested their finances in a rising rate scenario.

Comment: Wrong. The minimum down payment is 5%. I always wonder why these facts are incorrect in so many negative articles… is it on purpose or do they just not know?

The bottom line here is that I believe most Canadians will be better served financially by renting a home in most Canadian cities at this point in the market cycle. But I’m fully aware that there is much more to consider than just the raw numbers.

Comment: My friend’s financial advisor though the market had peaked two years ago. He decided to sell and rent. In the past 2 years, his property has risen about 12% in value. So, being worth around $600,000 then, he has lost roughly $70,000 in value. Plus, he has paid rent, over $2,000 a month, in the meantime. So he has lost about $100,000 in property value and wasted rent over the past two years. Needless to say, this person is no longer my friend’s financial advisor.

Q: Are there certain markets in particular where it makes more sense to rent?

A: As a very general rule, when a house costs more than 200 times the monthly rent it generates, it starts to make a lot of financial sense to rent rather than own. While every Canadian market is different, there are certain areas where house prices and rents are so out of balance that first-time buyers would be wise to consider renting.

Comment: So if the average rent is $3,098 then 200x that is $619,600, which means that the average property in Toronto ($576,315) makes more sense to buy. The average semi ($595,398) makes more sense to own, the average townhouse ($433,710) makes more sense to own and the average condo ($379,266) makes more sense to own. Even the average detached home, priced at $852,090 is only 177x higher than the average rent of $4,814 for a detached home. So this argument supports buying NOT renting.

This becomes particularly compelling in areas where there is a well-stocked, stable rental market. This is, in fact, the case for condo markets in most large Canadian cities.

Comment: Unlike Toronto where vacancy rates are close to 1% and there are bidding wars for rental units. We do not have a well-stocked rental market at all.

Many newer condos in Toronto and Vancouver command a purchase price that is over 300 times the monthly rent they generate. Once taxes and strata fees are factored in, the carrying costs of a fully-financed condo unit are substantially higher than renting a comparable unit, making renting an attractive option.

Comment: Not too sure about that. Let’s take CityPlace, a hive of rental and resale activity. Plus, a fairly new crop of condo towers. The average selling price of a 1-bedroom condo in April was $361,569 and the average rent for the same month was $1,576. While the ratio is over 200, it is only 229 – far from being higher than 300. And for those who buy them to rent them out, they have to put down 25% as they are investors, so they are not fully-financed. But for a first-time buyer putting down 5%, it would cost them more to buy. But they have an asset. If they leave 5 years later, they can sell and make money. The renter leaves with nothing.

Despite some well-publicized anecdotes of rapidly-rising rents in parts of Toronto, the reality is that every measure of rental prices show muted gains in rents. Coupled with the fact that Toronto condo rental listings rose 25% year over year in the first quarter, and the fact that there are nearly 60,000 condo units under construction in Toronto , the condo rental market will be well supplied and rents are unlikely to rise rapidly.

Comment: Rents have stagnated, somewhat. But with the tighter market now and bidding wars on rentals, prices are rising. I do not believe, either, the recent stories. Some people may get rude rent increases, but most do not. Where are the stats showing rental listings rose 25%? On MLS? On Kijiji? On Viewit.ca? A claim like that is meaningless without a source. And we have had 20-28,000 new condos completed year after year – and yet here we are with a record low vacancy rate.

Most large Canadian cities currently have record high MLS condo listings and sales that are substantially lower than previous years, raising the likelihood that condo prices will fall. That makes it a perfect time for first time buyers to rent a condo and see how things play out over the next couple years.

Comment: Sales are low because of the new mortgage rules, nothing else. I thought we had all figured that out by now. By fall you will not be able to use that argument because we will be comparing months with the same rules and the 17% drop all the doomsayers love so much will disappear. And since we do not have the numbers you refer to for MLS condo rental listings, I cannot prove it wrong.

The decision to buy or rent a home is never one-sided. Even “bearish” housing observers, like myself, recognize that there is more driving the decision than simple monetary considerations. That said, the numbers are tilted decidedly in favour of renting over buying, particularly in Canada’s larger cities. For families who can find a rental that meets their needs, there have been few times when renting made this much financial sense.

Comment: I think I have used actual data to prove that renting is NOT the better option. I leave it to the readers to decide, numbers or opinion…

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.

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