For some readers, this week's Georgia Straight feature story [ Gimme shelter ] may revive one of the oldest questions in real estate: is it better over the long term to buy a home, or is it smarter to remain a tenant?
Each person will make up his or her own mind, depending on a range of factors, including income, career plans, and family status. However, if you're purely interested in accumulating wealth, it's hard to beat homeownership over the long term, according to a discussion paper completed earlier this year by UBC real-estate professor Tsur Somerville and student research assistants Li Qiang and Paulina Teller.
The paper, "Are Renters Being Left Behind? Homeownership and Wealth Accumulation in Canadian Cities", examined data on house prices, rents, annual ownership and mortgage costs, interest rates, and investment returns in nine Canadian metropolitan areas between 1979 and 2006. The starting point was three years before housing prices crashed in Vancouver and the beginning of a great bull market in stocks.
The study concluded that only the most "highly disciplined, savvy investors" who were renting could match the wealth that homeowners could accumulate by making their mortgage payments in Vancouver, Ottawa, and Winnipeg. In Calgary and Toronto, renters could not replicate the accumulation of wealth that came from homeownership over the period studied. Only in Edmonton, Halifax, Montreal, and Regina could renters' investment returns exceed the gains of homeownership.
"While achieving the same wealth as owners is possible in seven of the nine Canadian cities, it is not easy," the researchers reported. "In those cities where it is even possible to accumulate more wealth than owners, renters must be extremely disciplined. They must invest on average nearly 80 percent of the difference between the annual cost to owners and the cost to renters."
They noted this is approximately equivalent to nine percent of a person's gross income. If renters saved only half of the difference between the annual cost of homeownership and renting, they would have cumulatively generated only 67 percent of the wealth accumulated by the homeowners in all of the cities. However, the study noted that in every city, there was at least one period over which disciplined renters would have accumulated more wealth than homeowners because of declining residential real-estate prices. (The discussion paper, prepared for the Centre for Urban Economics and Real Estate at the Sauder School of Business, is available at cuer.sauder.ubc.ca [PDF] .)
"Households who bought houses in Vancouver or Calgary at the height of the boom in 1981-82 did not see real house prices [after discounting inflation] return to that level until 2005, so that their growth in equity came from paying down their mortgage, not the growth in house prices," the study stated. "Households who purchased housing in Montreal or Toronto in 1989 would experience falling real house prices through 1997. House prices have shown enough volatility that real returns over any given time period are far from given."
The paper noted that renters are disadvantaged by the tax system, which is a major reason homeownership often generates more wealth. For example, homeowners enjoy a one-time exemption on paying taxes on profits on the sale of their principal residence. "In one scenario, 60 percent of the difference between renters and owners is because of taxes that affect investment gains but not the returns from a primary residence," the paper stated.
Canada Mortgage and Housing Corporation reported that the vacancy rate in the region was 0.7 percent last fall, and 0.9 percent in the spring. But the rates are lower in certain categories. For instance, there was a zero percent vacancy rate for bachelor private apartments last fall and two-bedroom private apartments in the West End last fall. The same was true last fall for one-bedroom and two-bedroom private apartments in Kitsilano–Point Grey. The average price of a two-bedroom apartment across the region was $1,045 last fall, but it reached $1,483 in the West End–Stanley Park zone and $1,529 in the downtown area. With a large enough down payment, buyers could find themselves paying less than that in monthly mortgage payments, and they could also enjoy the benefits of any rise in real-estate prices over the longer term.