Transaction costs offset many months of rent
The reality of buying and selling real estate today is the many costs that are unavoidable. From real estate commission, to legal and land title fees, and even mortgage prepayment penalties, these costs can be significant. With the high value of housing today, particularly in the desirable parts of the inner city, transaction costs on a typical half million dollar property can run higher than 5% of the value of the home. The biggest beneficiary here are the estate agents, as they enjoy large lump sum fees for every deal, despite the disproportionate amount of effort spent to sell a home compared to how long it takes a new owner to gain equity via making mortgage payments. A general rule of thumb is to avoid moving within five years, otherwise transaction costs can offset much of the value of paying down the mortgage. Are you really ready to commit to living in the same place for five years? If so buying can make sense, just make sure you wont need to do any costly renovations as that could eat into your savings.
inner city land values and construction costs are very high
The cost of land in Calgary has increased enormously over the past decade. As the City layers on more fees and costs for builders, the end result is more cost is passed on to the buyer. As a potential renter, rental rates don't necessarily reflect the high cost of the land the building sits on. As a buyer, you must pay the entire purchase price for land and improvements up front. As a renter, you are only paying for the actual time spent in the property, and costs in Calgary today are less to rent than buy an identical property. Affordable rental rates allow a smart tenant to store cash and invest it for other purposes rather than outlay a large mortgage payment each month where the bulk of the payment is interest, not debt reduction.
Freedom from maintenance and repairs
No Down payment required
Do the math
Are you the type of hands-on high energy person that wants to shovel snow, mow grass, water plants, make repairs and save money for a new roof? If the answer is no, you may be better suited to leasing vs ownership. Do you like to travel, and prefer the flexibility and peace of mind that allows you to leave without worrying about a property? If so renting is also a good idea.
Another advantage of renting is the lack of down payment needed. With less than a 20% downpayment on a new home, the buyer will need to pay mortgage insurance. That adds a lot of cost to the house because the mortgage insurance is added to the principal. Plus the mortgage insurance is for the bank, not to protect you, the buyer. And who wants to give the bank even more money? On a typical inner city townhouse selling for $600k, the buyer needs $120k down to avoid the penalty. The problem is that $120k can no longer be invested in financial assets, it has been spent on the house!
New house purchasers must also pay GST while renters do not pay any GST. This is a big savings because the GST on home in Calgary will cost at about $30k for a nice townhouse. Just the GST savings could pay for 12 months of rent. Rent is one of the few services you can buy in Calgary not subject to tax.
Cost of rent $2750 (thats everything except utilities, the same in both examples).
Lets take a typical townhouse, again valued at $600k. Down payment needed is $120k. That money was formerly invested in a safe bank stock and earned on average 6% per year, or $7200. So now the loss of that investment is going to cost the buyer $600 per month of income. That hurts.
Lets get to the math on the mortgage.
Mortgage Balance - $500k (remember $120k was spent on the down payment).
Monthly Principal and Interest (25 year, 5% loan rate) - $2900.
Cost of lost investment income per month - $600
Cost of condo fees - $300 (remember the rent includes these fees, so the cost there is 0)
Cost of property tax - $300 (remember the rent includes the tax, so the cost there is 0)
Cost of repairs - $0 - you just bought a new place. Realistically this is a lowball, but lets try and make ownership a little more attractive. Over 25 years this figure will definitely not be 0.
Cost of ownership $4100 (this is the true monthly cost, for 25 years! depending on rates of course)
Summary - owning vs renting the identical home costs $1350 more each month in this typical example. Is it really worth paying that much more just to have the same occupancy in a property?
But wait, the owner gets the principal on the loan paid off, so reduce that and the equation is now tipped in favour of the buyer? Not really, over a five year term, principal pay down is $57k, interest is $117k, if the property is sold after year five, most of the principal pay down is lost to transaction costs. Beneficial ownership of a property appears to be partly contingent on appreciation, another unpredictable input to the equation.
