In a hot housing market, the most pointless personal finance debate is whether it’s financially better to rent or own.
If high house prices are killing affordability for you, it’s financially necessary to rent. You might choose to buy if you could, but that’s not happening at current prices. So, what are the financial implications?
Renting can be expensive in its own right. But ideally, you can create a track of wealth creation that runs parallel to the property owner’s rising equity. You do this by investing the money you save because you don’t own. Here are seven ways to find the money:
Lower home insurance costs
It’s worth singling out home insurance because it has stealthily become a significant cost of home ownership. A column earlier this week explains it all, but a rise in water-related claims because of climate change has driven premiums higher. Now, there’s additional upward pressure on premiums from a pandemic-driven renovation boom that has ignited demand and prices for lumber and other materials. Renters insurance might run you $200 a year. For a house, you could easily pay five times and even 10 times more.
Lower car ownership costs
It’s normal for rental units to come with a parking spot. Two spots can be a rarity, so there’s incentive for couples to try and get by with a single vehicle. Renters may also be able to afford better locations, that is, near public transportation. Over all, there’s potential for significant savings on gas, insurance and maintenance.
Zero property taxes
Yes, property taxes are factored into rents. But that’s a lot different than being on the hook for hundreds of dollars in property tax a month. Those who laugh at people with rental costs at the same level as mortgage payments seem to forget the owner’s burden of property taxes and home upkeep/maintenance.
Zero upkeep and maintenance
There’s a rough guideline that maintenance and upkeep on a home equals an average annual 1 per cent of a house price, but it seems outdated in today’s pricey market. Is it automatically more expensive to keep an urban home in good shape than a similar property in a small community? No, so let’s amend the rule to between 0.5 per cent and 1 per cent of a home’s value on average a year for owners. Regardless, these are outlays renters never have to worry about.
Zero reno and improvement spending
Renting means accepting that you’ll never have the owner’s ability to customize and personalize your living space with sunrooms, decks, hot tubs, swimming pools, gazebos and other accoutrements. Oh, well. You can spend some of the tens of thousands of dollars in savings to travel to amazing places, and stick the rest in the investment portfolio you mention every time a homeowner drones on about all their equity.
Less debt
You need to own a home to get a home equity line of credit. Sure, that’s a negative for the renter in a sense because HELOCs are the way to borrow at the lowest cost. A HELOC might go for the prime lending rate at banks, currently 2.45 per cent, plus a markup of something like one percentage point. Add on several percentage points for unsecured lines of credit, which means more expensive borrowing.
Less access to HELOCs does offer one big advantage: less opportunity to sink into perma-debt, which is a term for HELOC balances that never get paid off. A 2019 survey by the federal Financial Consumer Agency of Canada highlighted how common this is: About 25 per cent of HELOC holders said they always or mostly make the minimum payment each month.
HELOCs have been used extensively as a supplement to paycheques to help people live beyond their means. With their extra cost, unsecured credit lines just aren’t as practical or tempting to use.
More labour-force mobility
The postpandemic economy will bring a period of adjustment in which people reassess their job situation. They may be asked to resume commuting to the office, or risk having their career sidelined by working at home. Openings for good jobs may come up in other cities for people willing to work on-site.
If you rent, you’re mobile and thus able to move wherever there’s an opportunity for career advancement. Homeowners can certainly move as well, but with 10 times the cost and complication.
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Rob Carrick