Vancouver and Toronto still have average home prices around $1 million, necessitating a substantial down payment.
What has changed?
Thanks to the Bank of Canada’s decision to drop its key rate, borrowing is now slightly cheaper, making mortgages slightly more affordable. Those considering buying a home may be tempted by the prospect of lower monthly mortgage payments.
“People who are considering getting into home ownership may find that that’s more affordable, but at the same time, it’s also likely to bring out people who’ve been sitting on the sidelines, which could end up pushing prices up,” Desjardins economist Kari Norman said.
How do I calculate if it is more costly to rent or buy?
The five-per-cent rule is a helpful tool when considering the costs of renting versus owning. According to this rule, if a year’s rent is less than five per cent of a comparable home’s value, renting is financially attractive. If it’s more, owning might be better.
For example, if you’re renting a one bedroom plus den condo for $2,000 a month, your annual rent totals $24,000. Dividing this amount by 0.05 gives you $480,000. If a similar condo in your area costs more than $480,000, renting may be the smarter financial choice. If it costs less, buying might be more advantageous.
Another way to determine if it’s more costly to rent or buy is by calculating the price-to-rent ratio for a particular area. This ratio is obtained by dividing the median home price by the median annual rent. While the price-to-rent ratio does not provide a comprehensive view of overall affordability, it can offer insight into the relative value of different property types compared to rental rates.
A price-to-rent ratio of 21 or higher means buying is more expensive than renting. A ratio below 16 suggests buying is cheaper. A ratio between 16 and 21 indicates renting may be more favourable.
What are the price-to-rent ratios across Canada?
According to a Zoocasa report released in late May, investing in a condo may be wise in cities with low price-to-rent ratios, such as Edmonton at 9.7. Calgary and Winnipeg also have low ratios, at 10.8 and 11 respectively. Vancouver, Kitchener-Waterloo, and London have condo price-to-rent ratios under 16, indicating high rental costs compared to owning.
Halifax-Dartmouth offers favourable conditions for buying a detached home with a ratio of 12.9, despite two-bedroom rental prices rising 15.6 per cent year-over-year. Burnaby and Vancouver have the highest ratios for detached homes, indicating buying is much costlier than renting.
Why are people still hesitant to buy right now?
Lower interest rates make buying more appealing, but high home prices and substantial down payments remain major barriers for many prospective buyers.
“While a third of Canadian adults are currently renting, and there are families who are perfectly content doing so, the desire for home ownership remains strong among a large portion of this segment of the population. Our latest research reveals that a material number of renters wish to transition to home ownership. Understandably, the greatest barrier to entry is the ability to drum up the initial capital for a down payment,” Phil Soper, president and chief executive officer of Royal LePage, said of the survey’s findings.
In the same example, the down payment is the initial amount paid upfront by the homeowner. For a $703,446 home, a 10 per cent down payment equals $70,344. This reduces the mortgage amount to $652,727, which the homeowner will repay over 25 years. In addition to a hefty downpayment, closing costs can run a homebuyer three to five per cent of the purchase price of a resale home.
On the other hand, renting avoids these hefty upfront costs and exempts tenants from property taxes, maintenance, and major repairs, making it a more financially accessible option for many, even if rental prices in major Canadian cities like Vancouver and Toronto often exceed $2,000 per month for a one-bedroom apartment. And while renting can be more affordable month-to-month, it doesn’t build equity like homeownership does.
However, Norman points out there’s no guarantee home values will appreciate as much as they have in the past.
So what’s the verdict on renting vs. buying?
The national average rent for a two-bedroom condo is $2,236. To purchase a home at the national average price of $699,117, a buyer needs at least $48,938 saved up for a seven per cent down payment, plus $26,007 for CMHC insurance. Aside from all the additional costs associated with buying a home, this means the minimum monthly mortgage payment would be $4,206 at a 5.70 per cent variable rate.
For renters, the $2,236 monthly rent is subject to annual increases, while a homebuyer’s variable mortgage rate can cause their payments to increase or decrease. Unless the renter relocates to a cheaper property or changes their living situation, it’s unlikely their rent will ever go down.
Still, despite the recent interest rate drop, buying and owning a home remains costlier than renting in most parts of Canada.