Rent or Own By The Decades
There is a common piece of financial advice out there that your home is not an investment. While I understand the theory behind this advice, I ultimately disagree with this statement. Shelter is a necessity and an expense you can’t escape. What could be more important than investing in a place to provide shelter for both you and your family for decades to come? It’s true there are drawbacks to investing in a home purchase such as mobility and cash flow; however, owning a home provides you with a level of control that can’t be gained by investing in stocks, bonds, or riskier investments. Why not take an investment perspective with homeownership when it impacts your finances and living arrangement for the foreseeable future?
Understanding how rent increases over the years and how that might impact your retirement is sensible. Rent in the GTA seems to have increased an average of 40% every 10 years since 1980, an expense that can have a significant impact on your finances. It’s worth noting that although it’s been infrequent in Toronto, rent can also decrease. Most landlords and renters discovered this in 2020 and 2021 thanks to Covid. Financing a highly leveraged home purchase when homes may be overvalued can also be a bad recipe as you will see in our analysis below.
Given that our shelter options are rent, buy, or couch surf (my dog is a pro at this); we decided to do a generational dive and compare what it has been like to rent vs buy at the start of each decade. The reality is we all need shelter and should expect to pay something for it. The goal of this rent vs buy analysis is to help add some perspective. Understanding how this decision looked in the past may help you make better decisions going forward.
Metrics
For our comparison we used the average rent for a 3 bedroom apartment and the average home price. The three metrics we wanted to highlight were:
Monthly Costs: This is the estimated cost to rent at the start of the decade. The monthly cost to own includes your monthly mortgage payments, property taxes, and your monthly maintenance/replacement costs.
Premium to Own vs Rent ((Months cost to own less principal portion) – rental cost) / rental costs): This is a measure on how much the market is willing to pay to own in relation to renting. It’s a bit like a Price to Rent ratio, but is more robust as it factors in the impact interest rates have on owning and investing.
Balance at the end of the Decade: For renters it takes all the rent payments you would have made over the decade and reduces that amount by the potential investment gains you could have achieved by putting your down payment and purchasing costs along with your monthly cash flow savings from renting into a GIC.
For owners it shows how much equity you would have in your home after owning for 10 years with a 25 year amortization less what you would have spent on mortgage payments, home maintenance, property taxes, down payment and purchasing costs.
1980
| Rent | Own | |
|---|---|---|
| Monthly Costs (start of decade) |
$940 | $886 |
| Balance After 10 years returns (home app or GIC gains – payments) |
-$81,800 | $104,000 |
| Premium to Own vs Rent in 1980 (mortgage cost with principal portion removed – rental cost) / rental costs) |
-2.26% | |
In hindsight, purchasing a home in 1980 made sense. The extra monthly cost to buy vs rent in 1980 was minimal and when you remove the portion of your mortgage payment that was paying down principal you were actually paying a small premium to rent. Home prices skyrocketed from 1980-1989 rising a meteoric 285% leading a leveraged real estate investment to incredible returns. Those who chose to rent in 1980 saw rent increase 50% showing the double edged sword that renting can sometimes be. Most boomers will tell you that the 80s were not an easy decade to own as these homeowners were stretched to the limit with high interest. It wasn’t exactly the most inviting time to tie up money in an asset that wasn’t producing income or very liquid.
However, in the end, home buyers in 1980 came out ahead by about $180,000 as the decade wrapped up. Those that cashed out at the end of the 80s would have been the true winners as homeowners didn’t fare so well in the years ahead.
1990
| Rent | Own | |
|---|---|---|
| Monthly Costs (start of decade) |
$1,263 | $2,499 |
| Balance After 10 years (home app or GIC gains – payments) |
-$7,615 | -$313,615 |
| Premium to Own vs Rent in 1980 (mortgage cost with principal portion removed – rental cost) / rental costs) |
74% | |
The 1990s were a rare reckoning for home owners and those choosing to rent in the late 80s and early 90s were financially way better off. The premium home owners were paying for the privilege to own vs rent was over 70% of rent costs. The rapid value increase in the 1980s made carrying costs for owners look very unappealing by 1990. While rents increased from 1980-1990, it wasn’t enough to offset the home price increase.
Rates in the 90s also started the decade high and gave you a safe alternative investment option, helping to offset your shelter costs. Those who chose to rent vs own in the later 80s and early 90s would have benefited to the tune of hundreds of thousands of dollars,going far beyond offsetting the benefit of owning seen in the 1980s.
So the 80s was the decade to own, and the 90s was the decade to rent. What about the 2000s and how about today? My next post will show how today looks in comparison to decades past.
For Part 2 Showing 2000, 2010, 2020 and today Click Here
Limitations :
-This analysis has not included sales costs as it’s assuming those who chose to buy are still occupying the home. When selling homeowners would have an additional cost burden to factor in.
-It’s a snap shot comparison of purchasing at the start of the decade a purchase at mid or later in the decade would have a different result.
-The analysis focuses on rent vs buy dynamics and does not factor in influencers that might have influence such as affordability and income, immigration, supply levels etc.
-TREB Data is subject to jurisdictional changes which can distort data over longer period comparisons.
-Limited rental data for 1990 and lack of data for 1980 caused challenges to comparing and forced extrapolation and estimation and averaging between TREB data, CMHC, and CPI .
-The comparison of 3 bedroom apartment rental vs the average home price were deemed to be somewhat representative comparisons but would have a level of variance.
