Canadians who own their homes can expect to grow wealthier over time than renters, suggests recent research by Tsur Somerville, a professor at the University of British Columbia’s Sauder School of Business.
But in a few Canadian cities, renters can actually outdo their homeowner counterparts in terms of wealth accumulation, as long as they remain highly focused.
In those centres, buying homes may not be quite as beneficial as realtors, mortgage brokers and home builders have made it out to be. Buyers have to pay property taxes on top of their mortgage payments, while renters have the taxes included in their monthly rent bills. Buyers also face thousands of dollars in closing costs. Renters, meanwhile, can invest what they would have spent on closing costs and a down payment in equities, an attractive alternative in recent years.
The study, Are Renters Being Left Behind? Homeownership and wealth accumulation in Canadian cities, compares the result that homeowners achieve by paying down a mortgage with what a renter could amass by investing the down-payment amount and putting the difference between ongoing owner and renter costs to better use.
Somerville and his team looked at nine Canadian cities and created multiple scenarios to allow for variations between the costs of owning and renting, the type of rental properties available and various mortgage contracts on the market. The analysis covers the period from 1979 to 2006.
On average, across all scenarios and cities, renters cannot accumulate the same wealth as homeowners, and the gap grows dramatically when the researchers included factors such as investment fees, the tax-preferred status of homeownership and the fact that mortgage interest is not tax-deductible as it is in the U.S. The social benefits of homeownership may well justify this subsidy, Somerville says, although he finds it striking how much tax policy contributes to the gap between what renters and owners can amass.
Renters, for instance, could not match the wealth of homeowners in the dynamic real estate markets of Calgary and Toronto. Owner wealth accumulation in Toronto has been fuelled by fast-rising house prices, while in Calgary, tenants have had a difficult time catching up with owners as low vacancy rates and relatively higher rents have translated into less of a difference between owner and renter payments.
But, over the next five years, which is about the average amount of time recent buyers remain in their homes, prices in these high-flying regions would have to continue to rise by more than 5% a year for a typical buyer to do better than a renter.
The wealth accumulation gap is not as insurmountable in other markets. Under best-case conditions in Ottawa, Winnipeg, and Vancouver — the last is Canada’s most expensive housing market — renters could accumulate at least as much wealth as owners. In these areas, even though rents have recently jumped, the costs that come with buying a home remain much higher than the costs of renting. As a result, buyers are basically betting that home prices will rise smartly in the near future.
Under the same scenario, astute renters in Edmonton, Halifax and Montreal could accumulate 24% more wealth than homebuyers. Even here, the best-case scenario requires renters to invest more than 80% of the difference between owner and renter payments in equities, at the same time searching out products with low investment management fees.
It is worth noting that the nature of this comparison downplays some of the benefits of renting. First, renters are able to invest in much more liquid assets than owners with little or no sweat equity involved.
For homeowners, accessing housing wealth means either selling their homes, taking out mortgages or setting up reverse mortgages. The first can take months and is extremely disruptive, while the latter involves a significant buildup of debt.
And, second, renters are able to create a much more balanced asset mix. In this analysis, owners have 100% of their assets in residential real estate.
The results of this research show that only renters who are highly disciplined, savvy investors are able to match the wealth that owners can accumulate simply by making their mortgage payments, says Somerville.
Ultimately, he adds, “This suggests that a tremendously significant benefit of homeownership for individuals is that the constraint of making mortgage payments effectively forces homebuyers to save by building equity through the repayment.” IE
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Renters can get richer than homeowners in some cities
But only renters who are highly disciplined, savvy investors can match the wealth that homeowners can accumulate
- By: Gordon Powers
- May 29, 2007 October 30, 2019
- 11:53