RelativeRealty | Toronto, Ontario

Rent or Own By The Decades Part 2

Have you ever wondered if it has always been better to own or rent? We take a look at the decision to Buy vs rent at the start of each decade going back to 1980, outline some of the financial implications, and compare how things look today to decades past. Part 1 of this post showing 1980 and 1990 can be viewed here

2000s

Clearly the pendulum swung too far, at the start of the new millennia purchasing looked like a no brainer. The premium you were paying to purchase vs rent was minimal, and when you factored in the principal you were paying down, it seemed downright advantageous to own. As rates dropped throughout the decade, owning was made even more affordable and appealing as your low risk investment alternatives failed to offer compelling returns.  

Although rent increased by a moderate 27% over the decade, it was still an increase and was another advantage to owning. The overall cost outlay to own vs rent turned out to be similar throughout the decade. However, those who chose to purchase benefited from home price appreciation. Owners saw their leveraged asset increase 73% and came out almost $170,000 ahead of renters, reinforcing the idea that homes are likely to have good appreciation potential when rent and ownership costs are similar. When you factor in how much of your monthly ownership payments are going to pay down the principle, it’s tough to justify renting for a prolonged period in similar conditions. 

2010‘s

At times, owning a home in Toronto in the 2010s made you feel like you had access to your very own ATM. In peak appreciation years, Torontonians experienced numerous months where their home appreciation exceeded their income. Low rates made owning a home in the 2010s very affordable. While home prices increased, rates stayed low maintaining or distorting affordability throughout the decade. Rates were low to start the decade and essentially stayed that way. The challenge for those starting out became less about the monthly costs and more about the ability to come up with an adequate down-payment, when purchasing in one of Canada’s largest cities. Low rates limited the interest portion of mortgages and allowed home prices to outpace disposable income. The decade saw a strong demand for homes and the average home price increased by 135%. This overall increase was in spite of new regulations and taxes such as the stress test and Foreign Buyer Taxes, which was introduced and slowed demand by mid 2017. 

While rates made owning extremely beneficial, rent steadily increased by 44% from 2010 to the end of 2019. As rents increased and rates stayed low, many renters ended up paying more to rent a home over this decade than it would cost to own. When you factor in home price appreciation and the amount owners were able to pay down in principle, the average owner likely netted out a whopping $600,000 ahead of the average renter.  

2020‘s

The 2020s have presented one of the most volatile times for Toronto Real Estate in recent history. Just when demand seemed to reignite at the start of 2020, COVID brought new and unexpected challenges for Toronto’s housing market. Dramatic swings in demand and prices were felt on both the rental and ownership sides. 

Home prices rose aggressively numerous times during this 4 year window and have also seen demand fall off a cliff on at least 3 points as the fallout from COVID or the reality of interest rate increases set in. 

Rent prices dropped at the onset of COVID giving renters a rare reprieve and even discount on their rent, but rent quickly rebounded with double digit annual increases throughout most of 2022 and 2023. Despite COVID causing rent to drop for 18 months, overall they have increased 47% in just 4 years which exceeds rent increases experienced over most decades.  

It seems everyone is paying more to house themselves today as the ultra low rates we experienced at the heart of COVID have since spiked at record speed. New cost realities are being passed on to both owners and renters. Despite home prices coming off their peak on multiple occasions in this 4 year window, owners have still managed to come out on top of renters as price appreciation has been high enough to offset increased financing costs. Those who chose to buy instead of rent in 2020 today are ahead by about $150,000.        

The premium to own vs rent has also increased from 12.5% in 2020 to 15% today, trending in a direction that has made buying less appealing than how we started the past three decades.

-Key Takeaways:

• It’s not 1990: For those that think we are in for a 1990s style correction, this analysis indicates otherwise. While Buyers are willing to pay a premium to own, the premium to own vs rent is nowhere near what buyers were paying in 1990. However, the market is also not offering the opportunity that we started past decades with. In 1980, 2000 and 2010, the appeal to buy vs rent was stronger than it is today.  
• Rental rates and ownership costs have both risen rapidly in recent years causing affordability constraints for both owners and renters; Indicating – much like food costs these days –  we may need to expect to pay a higher portion of income towards shelter, whether we rent or own.
• When the opportunity to own at a discount vs. renting is available, Toronto home values have shown strong increases in the time period to follow.   
• Future Rent: Anticipating what you may be forced to pay in future rent should be part of your financial planning.

Influences to Consider this year:

• Rates: Lower rates will make buying more appealing provided price increases don’t offset the equation. If you expect lower rates, Buying before they occur allows you to benefit from the home appreciation that might be caused by the lower rates. The inverse is also true.  
• Immigration: Immigration will continue to put pressure on the demand for shelter, leading to higher rental prices and more competition amongst Buyers, provided we don’t find near term solutions to boost housing supply.
• Mortgage renewals: As more owners and investors renew into higher monthly costs more will choose to sell and this should help with resale supply.  
• Affordability constraints: Household size can be adjusted to make shelter more affordable.  Adding additional residents to your home or downsizing occurs when economic conditions impact affordability this can reduce rental and ownership demands.

Home Buyers today are showing a willingness to pay a premium to own instead of rent. What premium should you pay to own a home? The answer really depends on the Buyer. A family looking for stability and a home that could last over a decade should be willing to pay a higher premium to own, than a young single Buyer looking for a condo that they expect to sell within 5 years. It’s certainly interesting comparing what premium owners have been willing to pay and how that may have impacted their shelter costs and investments over the years.