To buy, or not to buy? That is the question plaguing many Torontonians these days. As our hot real estate market stays sizzling year after year, young people are questioning whether it is more profitable to save up a sizeable down payment and build equity in a home or invest that money elsewhere and free themselves from the burden and responsibility of home ownership.
Many people who call Toronto home grew up in an era where real estate was the smartest and safest bet you could make. It was accepted wisdom that owning a home is an investment and renting is simply throwing money away. In today’s super-inflated Toronto real estate market, is the old wisdom still as wise?
A first-time home buyer today cannot necessarily expect the same return on investment that the baby boomers enjoyed. The housing market has changed dramatically, yet many of our attitudes and emotions about the market haven’t changed along with it. The dreaded term “bubble” has often been used to describe the real estate market in Toronto. We are often told that the market is overdue for a “correction”. So far, the bubble hasn’t burst. Even with the slight cooling of housing prices, and bidding wars becoming less common, the market continues to rise.
People often feel that the value of real estate only moves in one direction, that real estate prices will always go up in value. There are a great many factors that contribute to the cost of house and condo prices. The location of the building and the age and condition of the building are important factors to consider. When all factors and expenses are considered, including inflation, maintenance costs and all the rest, the actual value of many homes and condos can remain relatively stagnant or even drop over time. It’s been a long time since real estate values decreased in the GTA, but that doesn’t mean it can’t happen. It means a decrease is overdue.
Toronto is in the midst of a condo boom. The cranes that dot our skyline are a sign of the constant construction our city is enduring. With more product on the market every day, condo owners looking to sell and buy a larger home may find themselves outpaced. Condo prices simply don’t rise as fast as those of detached houses.
When you choose to rent rather than buy, your monthly expenses are lower. Investing that money in a diversified portfolio means that you could build your wealth at about the same rate through compounding interest, rather than building equity in your home.
The average price of a 2-bedroom condo in Toronto is roughly half a million dollars — according to the Financial Post. The new lending rules in Ontario means buyers must pass a ‘stress test’, meaning in order to qualify for the mortgage, applicants must prove that they can afford to make the payments if interest rates increase. This makes borrowing more difficult and is simply pricing many people out of the market. To qualify for that average mortgage you would require a six-figure income.
A minimum down payment of 5% is required to qualify for a mortgage. If you are putting down less than 20% you are required to purchase mortgage insurance for the full amortization period. That can mean an additional few hundred dollars a month over the next 25 years — not to mention rising mortgage interest rates. Then there’s your closing costs and home insurance to factor in. Property taxes, utilities as well as maintenance and repair costs are expenses that stay with you and increase, even after your mortgage is paid off.
Let’s take a look at some rough numbers. A 20% down payment on a $500,000 home works out to $100,000. If you only have the minimum of 5% to put down, that leaves you with a mortgage of $475, 000. That translates into a mortgage payment of approximately $2500 per month at the current average interest rates. Add in all of the additional expenses and you could be looking at a monthly payment of roughly $3500. The average price of a 2-bedroom rental suite is about $2500 per month but without all the additional expenses. That’s a savings of about $1000 per month. What could you do with that extra money?
Buying in a city like Toronto is like playing a game of real estate roulette. You’re putting your hard-earned money down on red or black, to rent or to buy. Saving every penny you can for a decent down payment, plus keeping on top of ownership responsibilities, maintenance and unexpected repair costs means most of your money may be tied up in one place, leaving you more vulnerable to the market and its corrections and fluctuations. The first thing you learn in money management is to diversify. Keeping all your eggs in the real estate basket may make for a fragile financial future. It’s all about opportunity cost. The money that is freed up by renting could be invested in a diversified portfolio to help protect against the ebb and flow.
But your life isn’t just about money, is it? Opportunity costs aren’t exclusively financial. In addition to freeing up money to be invested in areas other than real estate, renting also frees up your life. If you are absolutely certain that you are going to live in the same home for a decade or more, and you are reasonably confident that the real estate market will outpace inflation over the same time period, then buying may be the right choice for you.
If you hoped that travelling, or living for a time in a different city, or even the same city in a different home, was in the cards for you — then renting is tough to beat. Renting can buy you more freedom. The freedom to move, the freedom to travel, or the freedom to work fewer hours in order to upgrade your skill set, continue your education or simply spend more time doing things you love.
Life, as well as markets, can be unpredictable. The unknown can be positive or negative. An illness in the family or a job opportunity in another city can change your life circumstances quite considerably overnight. Renting gives you the freedom and flexibility to adapt to whatever unexpected or unavoidable situations life throws your way.
Ultimately, everyone must decide what is right for them, at this moment. How much are you willing to bet on the housing market? What is your freedom and flexibility worth to you?
Greenrock Property Management Limited wants you to enjoy all the freedom, flexibility, comfort and convenience that you can. For information on Greenrock Communities in Toronto, including Greenrock at Davisville Village (77 Davisville Avenue, 45 Balliol Street and 225 Davisville Avenue) and Village Green (50 Alexander Street, 40 Alexander Street and 55 Maitland Street), please visit our website.