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home buying

Condominiums in downtown Toronto in February, 2013.Fred Lum/The Globe and Mail

As house prices go up and incomes stagnate, renting is become more attractive.

One of the culprits? Low interest rates. They affect buyers and renters in different ways. As a buyer, every $1,000 a month might have qualified you for $150,000 in mortgage principal at 7 per cent. At 3 per cent mortgage rates, all of a sudden your $1,000 per month can get you roughly $200,000. That's a 33 per cent increase in what you can afford to buy - all because of a change in interest rates. But as a renter, your $1,000 monthly allotment to rent doesn't rise or fall based on interest rates.

Let's take a look at a condo being built in Toronto, a market routinely cited as one of the most dislocated in Canadian real estate. Similar units in the same building are selling for $550,000 – or renting for $2,200 a month. Assuming a 5 per cent down payment of $27,500, and after adding up the land transfer tax, lawyer fees, and all the other ancillary expenses, the initial amount needed is closer to $45,000. Add in the condo fees and property taxes and the monthly payment would be north of $3,300 per month. If you're surprised how much higher the truer up-front cash requirement is for a purchase, has a calculator that can help you do this math.

On the surface, an $1,100 monthly difference is hard to ignore. One way to look at it would be to compare the growth of $1,100 a month (plus the down payment) placed into a savings or investment portfolio against the growth in equity of the condo. But that's a double-edged sword, in part because few people would actually save the savings. A mortgage, on the other hand, must be paid regularly. Many people consider housing a forced savings program and their primary net-worth driver.

On the other hand, almost $20,000 of the initial cost of buying the condo is lost to fees and taxes.

But just as saving the savings is more of a theoretical advantage, so is the notion of staying put in one condo for 10 years. The condo I am basing my math on is surrounded by nine cranes constructing other condo developments. Over the next five years, a lot of things are going to change: population density, views, and a potential stagnation or even decline in real estate values.

Anecdotally, I know many people who are buying houses or condos and are moving well before the five year mark. Many of the people in this building were in their thirties, right around the time when they get married, have babies, get divorced, or get jobs for which they might have to relocate. Real estate agent fees and land transfer taxes create a serious drag on returns for the owning versus renting debate. The more you move, the better renting looks.

Renting versus buying is a hotter topic than ever in some locales. Both can make sense, but only when you take time to run the numbers and be honest about your particular situation. Will you actually save the difference? How long will you stay put under one roof? I'm currently an owner, but looking to move back into the city which I haven't lived in for almost 10 years. While I figure out where I'd like to put down roots, renting for me is a no-brainer.

Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at and follow him on Twitter at @preetbanerjee.

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