Signs for apartments available for rent in Toronto on Jan. 28, 2021.Fred Lum/The Globe and Mail
Soaring mortgage rates have blown up a foundational argument for owning a home versus renting.
No longer is a monthly mortgage payment comparable to the cost of renting a place. Renters, even in expensive urban markets, are saving hundreds of dollars over owning.
Low rates made mortgage and rental payments roughly comparable in some markets, a point that was cited endlessly in arguments why renting was misguided. Comparing rent and mortgage costs alone is simplistic and likely to give buyers a falsely positive view of owning. But a generation of young adults were raised on the idea that when owning goes up against renting, the house always wins.
The national average rent last month for all types of accommodation was $1,888, according to Rentals.ca. Let’s add an extra $800 to $1,000 to reflect the higher cost of renting something larger than an apartment or condo with one to two bedrooms. Maybe a townhome or smaller-size detached home.
Now for the cost of owning. Using the May national average resale home price of $711,000, a 25-year amortization and a fixed five-year mortgage rate of 4.59 per cent, we get monthly payments of $3,685 with a 10-per-cent down payment and $3,177 with a down payment of 20 per cent. By at least $300 or so per month, owning is more expensive now than renting.
Rents are soaring. So how are people dealing with the rising costs?
A year ago, conditions were much more favourable for those who drew the faulty conclusion that you might as well own because rents and mortgage payments were pretty much the same. Better to build equity than pay your landlord’s mortgage – that was the reasoning.
Rents 12 months ago were cheaper at around $1,710 on average for all types of accommodation, or an estimated $2,500 to $2,700 for larger rentals. Meanwhile, paying a mortgage was dramatically less expensive.
The average home price in May, 2021, was $687,595 and a rate on a five-year fixed rate mortgage might have been 2.25 per cent. Monthly payments would have been $2,779 with a 10-per-cent down payment and $2,396 with 20 per cent down. Back then, average rents and mortgage payments were almost at parity.
We don’t want to dwell on the comparative cheapness of rent today because it’s a dead end. Average rents in urban areas are recovering fast from a pullback in the pandemic and rental costs in smaller communities are stretched as a result of the house price growth of the past year. Small towns have less rent stock to accommodate people priced out of ownership.
But as interest rates rise, renting is getting to be a lot less of a burden than paying a mortgage. Expect this trend to continue, even if the recent decline in house prices from their February peak continues. It takes a very hefty price drop to offset the affordability drag of higher mortgage costs.
A lot of popular assumptions about housing are falling apart right now. For example, we now see that housing isn’t insulated from broader economic trends. This seemed to be true when prices increased well in excess of income growth, but no longer.
Another assumption is that low interest rates were a permanent feature of our economy. We had a dozen years of marvellously low borrowing costs, but the pandemic has created spectacular disruptions in the economy that are pushing rates steadily higher.
The idea of rent and home ownership costing the same on a monthly basis has also been cancelled, but then it never stood up to close scrutiny. Renters pay rent, and they’re done. Owners make their mortgage payments, plus property taxes and costs for upkeep and improvements.
When home prices were rising fast, who really cared about the real-life costs of owning versus renting? Owners got rich on rising equity, while renters got rent increases and eviction notices. It wasn’t a fair fight.
Renting’s no bargain today, and it’s still a precarious way to live for those with landlords who jack up rent or “renovict” tenants. But the argument that renting is the same cost as owning is over. No more pretending.
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Rob Carrick