Is buying a home the good investment it once was? Why some are choosing to build wealth as lifelong renters instead

“Unless you have family help or dual income, it’s very difficult to enter (the real estate market),” says Toronto realtor Tom Storey.

And because home ownership has been so profitable for past generations, there are expectations that “everyone should do it” and “you’d be crazy not to,” says personal finance expert Preet Banerjee.

But in today’s market, it’s not so obvious what the best approach is, he says.

Home ownership may not generate the massive returns it once did: about seven per cent of all Toronto homes sold in the first half of the year sold at a loss, according to recent data from HouseSigma.

It’s true that generations of Canadians have had success investing in real estate or setting themselves up for retirement with home ownership, but the shifting landscape now begs the question: to rent or to own?

Renting and owning each have their positives and negatives, but some experts say renting for life could pay off in the long run.

Is home ownership still the lucrative investment it once was?

Storey notes home prices are high, and “based on the information that we have in front of us right now,” they’re unlikely to rise at the rate that they have over the past few years.

There are a few reasons for this, he explains: interest rates are up from their historic lows, population growth is down due to tightened immigration policies, and there’s a foreign buyer ban, all decreasing demand and causing home prices to soften.

That means people hoping to make a profit from buying and selling a property might be disappointed.

Additionally, due to higher interest rates, some landlords may not be able to charge rents high enough to cover their increased mortgage costs.

For Francine Dick, financial adviser and author of “Enjoy Your Latte,” a home is, first and foremost, a home.

“People who buy a home as an investment — they can get really dinged, as we’re seeing now,” she says.

What if you just want a long-term home?

A big reason someone may choose to own a home, even if they don’t see it as an investment, is the security and stability it brings, Dick says.

Renting comes with the risk of eviction, even if you haven’t done anything wrong as a tenant. For instance, someone renting a condo could be forced to leave if the owner wants to move in. (However, someone living in a purpose-built rental apartment wouldn’t have to worry about that, Dick notes.)

Storey adds that renters — especially those whose landlords are large corporations — are likely to get yearly rent increases, and since anything built after November 2018 is not rent-controlled in Ontario, the increases could be high. 

“They’re not going to forget that, after a year, they can increase your rent,” he says.

On the other hand, Dick says, someone may prefer “the freedom of renting” if they like to travel and don’t want to worry about maintaining a property, or if they want to be able to “pick up and leave” for a job.

That’s certainly the case for Banerjee, a lifelong renter who recently moved to the U.K. after living in Toronto for about 10 years.

Renting allows for more job mobility, while homeowners are less likely to move, he says.

Additionally, given Banerjee’s busy schedule and his dislike of home maintenance, “the idea of just having one singular payment and not having to really worry about anything else is fantastic,” he says.

You’re ‘renting money’ when purchasing a home

There are several costs involved with home ownership: a down payment, monthly payments, property taxes, home insurance, repairs, and maintenance fees, if you live in a condo.

“One of the many reasons why people like buying regardless of the growth in the asset is that it’s essentially a forced savings plan,” Storey says.

The mortgage payment is split into two categories — principal and interest — and as you pay it off, “a certain percentage is going essentially into your own pocket, or your own net worth or wealth,” he says.

With rent, meanwhile, none of the money goes back to you; it’s simply going to your landlord, he says.

Banerjee notes, however, that “when it comes to home ownership, you’re renting money, so you’re still a renter, even if you’re a homeowner, until you’ve actually paid off that home.”

A couple of years ago, some people had interest rates so high “their mortgage payments didn’t even cover principal — it was just covering interest,” Banerjee says, and “it was a much higher obligation than they had bargained for.”

Dick adds that having a mortgage paid off “frees up a lot of cash flow,” but it still leaves other costs, such as property taxes, utility bills and maintenance fees.

Homeowners might also spend money on renovations — “both necessary and desired” — which can come with hefty, sometimes unexpected, bills, she says.

Additionally, Dick says she’s seeing many people heading into retirement with a large mortgage, in which case, “you have to look at your mortgage as rent.”

The cost of renting for life

On average, given the many costs that come with home ownership, owning a home is more expensive per month than renting, Storey says.

To determine whether renting or owning is better for you, Banerjee suggests using a framework — which he credits to personal finance blogger John Robertson — in which you imagine two identical homes side by side, but one is for sale and one is for rent.

The home for sale is priced at $1 million, while the home for lease is one dollar a month. In this scenario, “it is clear to everyone that it would make more sense to rent.”

However, if the home for lease was priced at $1 million to rent, “it is clear” that you would buy the house next door for $1 million.

“If you agree with those two scenarios, then you agree implicitly that there is some crossover point where the ratio of price to rent makes renting more attractive, or it makes home ownership more attractive,” Banerjee says. 

In some markets, home ownership is the obvious answer, but in others, like Toronto, it’s not that clear, he says.

While some see renting — where all the money goes to the landlord — as a “sunk cost,” Dick says she disagrees with the notion because “people have to live somewhere” and tenants have more freedom than owners.

Why renting with ‘financial discipline’ can put you ahead

Mortgage payments are typically higher than rent prices, and someone who has the “financial discipline” to regularly invest while renting could set themselves up to be in a good position financially, Storey says.

For example, someone who can afford to buy but chooses to rent could be “further ahead” if they invest the difference between the cost of renting and the cost of owning, he says.

“For most Canadians over the last 30 years, it’s been clear that buying has put them in a good position because of the growth of the asset,” Storey says. But “if the asset price doesn’t go up,” perhaps that money would generate better returns in the stock market.

Dick adds that if a renter were to invest the money a homeowner might spend on renovations — say, $50,000 on a bathroom — in an RRSP or TFSA, “you can build on that and build that cash to support you in retirement.”

Banerjee says when he moved into his condo years ago in Toronto, the difference between rent and a mortgage for a unit was so big that it was a “no-brainer” he should rent while investing in the stock market.

“I’m an example of how it can work even in a market like Toronto where housing has done so well during that time,” he says. “Stock markets did pretty well, too.”

For renting for life to pay off, it’s important to invest “in a prudent manner over a long period of time,” says Banerjee.