Everyone has an opinion on this one. The usual arguments FOR renting include: the overall lower monthly cost, low/no maintenance, no taxes, fixed (or all-in) utilities, no renovations and no risk to interest rate increases. On the homeowners’ side you will hear the following arguments FOR owning: tax-free asset appreciation, the ‘value’ of ownership, no landlord, low-cost borrowing (from equity held), protection from rental cost increases, and the forced savings that comes from having a mortgage.
Many mathematicians and economics classes have tackled this and generally renting wins 9 out of 10 times. However there are more than a dozen assumptions that must be made over a long timeframe to determine the ‘winner’, and debates often end with a stalemate on interest rate assumptions, inflation on rent and maintenance costs.
Where the rubber really hits the road in my opinion though, is the discipline required for the renter to ‘save the difference’. If a life-long renter is able to save what the owner is incrementally spending on their home, then I would tend to agree that the calculations lean more in favour of renting. However, I have met many renters, and not unlike their owning counterparts, there isn’t money left at the end of the month to save.
We are programmed to live a lifestyle that we think we deserve. This is influenced by who our peer group is, where we work, where we live, what we aspire to, and the advertising we are exposed to. Most aspire to the next level of affluence, which means we are vulnerable to those offers that help us get there easily. Enter banks. Ease of access to credit (think credit cards and lines of credit), allows us to afford things that we normally wouldn’t be able to afford with cash.
And once you’ve started down that slippery slope, it’s hard to change direction.
Back to the discipline piece. If renting is so much better, then we should have significant affluence among our renting population. No StatsCan report suggests this is true. Unless the difference between renting and owning is calculated at the onset of the decision, and the renter decides to save the difference, the renter is doomed. The owner will be paying a mortgage for, say 25 years. And after that time, they will have built up hundreds of thousands of dollars in equity – because of the forced savings habit that comes from a contractual mortgage payment. If the renter isn’t putting away several hundreds of dollars every month, the owner will win hands down.
Discipline is the reason. There is nothing like a forced savings schedule to get you to do something you wouldn’t naturally do. Short term thinking often rules because, for most people, it is far more rewarding and fun to enjoy dinners out, entertainment or spending on oneself than to give a bank a mortgage payment.
‘Paying yourself first’ happens with your automatic RRSP contributions, or your group retirement plan. A mortgage is another great forced savings plan. Put another way, a mortgage is a great way to build up net worth that most renters can’t force themselves to do.
So, should you buy or rent? At the end of the day it’s a personal decision, and if you value home ownership it’s rarely a bad call to jump in. If you have a renters’ mindset and don’t value some of the subjective elements of ownership, the math may be on your side. But remember, the math is only on your side IF you have the discipline to save the difference.