Every year, Frank Tristani assigns his McMaster University finance students the task of showing whether renting or buying a home makes you wealthier.
As Mr. Tristani scores the results, owning never wins. “Over six years, no one has been able to substantiate buying as creating more wealth over the long term,” he told me in an e-mail.
By necessity, more people are considering renting, at least temporarily, as an alternative to buying in a housing market where sales have slowed but prices have for the most part continued to edge higher.
There will never be a definitive answer to the question of how owning a home compares to lifelong renting, but we can at least dismiss the old “renting is financial idiocy” view as Flat Earth thinking. An analysis supplied by Mr. Tristani suggests a renter with steely savings discipline could actually end up wealthier than a homeowner.
Before we delve into the numbers, let’s look at Mr. Tristani’s background. The 60-year-old spent more than 34 years in the banking sector, managing branches and working in the wealth management and commercial credit areas.
These days, he teaches courses at McMaster on corporate finance for business and accounting students. This is a man who knows his way around a balance sheet and, yes, he owns a home himself.
The buy-versus-rent assignment given to his students is all about teaching them to produce the sort of unbiased, forward-looking financial analysis used in the corporate world. This analysis is about numbers, not lifestyle.
Mr. Tristani’s question to his students is simple: Would you be financially better off buying a home today with a 25-per-cent down payment or renting for the same 25 years you’ll take to pay off your mortgage? Various cost factors had to be identified as influencing the decision.
Mr. Tristani’s own take on this question starts with a $400,000 house in Hamilton, where McMaster is based, bought today with a $100,000 down payment. At a constant mortgage rate of 3.99 per cent over 25 years, total monthly payments would be close to $473,000.
Next, he added maintenance costs set at 4 per cent of the market value of the home per year. This includes utilities, property taxes, maintenance and “accruals,” or lump sums to cover periodic major renovations and upkeep. The total amount for maintenance over the 25 years is $583,348.
Average annual price appreciation for the house was set at the inflation rate, which Mr. Tristani pegged at 3 per cent. The home is worth $837,511 after 25 years, which is close to $319,000 less than the combination of down payment plus mortgage and maintenance costs.
The cost of renting was set at $1,500 per month, which amounts to $541,134 over 25 years if you assume annual increases of 1.5 per cent, plus $131,253 to cover utilities and insurance. On the plus side for renting is an investment portfolio worth $936,789, which is what you’d end up with if you invested the $100,000 down payment plus continuing mortgage and maintenance amounts and made an average 6 per cent return.
As Mr. Tristani calculates it, your investments end up worth better than $264,000 more than your rental payments.
There’s plenty to argue about here. Six per cent returns? Mr. Tristani said he actually discounted the average 9-per-cent historical total return from bank stocks (price gains plus dividends) held over the long term to get this number.
A mortgage rate of 3.99 per cent? It’s high by today’s standards, but a bargain in a historical context.
Be careful arguing the maintenance costs, though. They’re high, but Mr. Tristani said they need to be if you want to get top price for your home when you sell.
A basic argument for owning is based on the idea that paying a mortgage is a forced savings plan. As a renter, you may not be disciplined enough to invest the money you’re saving as a result of not owning a home.
Mr. Tristani, ever the contrarian, says homeowners are demonstrably more undisciplined than renters. Just think about all the people who are using home equity lines of credit to keep up their lifestyle.
Every year, Mr. Tristani’s students start out trying to make a case for buying instead of renting, only to find their assumptions challenged.
Don’t call Mr. Tristani a house basher, though.
“The whole point of this exercise isn’t to say whether buying or renting is better,” he said. “I’m trying to get people to think like a finance person.”