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July 27, 2007 Kathy Flaxman Globe and Mail
Rent or Buy: The calculations must include many factors
The notion that, financially, home ownership always trumps renting is somewhat
of a misconception.
Christopher McKie personifies the great Canadian dream of owning your own home.
Some people plan long and hard for homeownership, but Christopher McKie is having it thrust upon him.
The professional photographer has been renting a one-bedroom loft condominium in Toronto's east end for nearly two years. He loves the aerie-like suite, where light streams in through the trees whatever the time of day. But recently, it was put up for sale, forcing him to choose between buying it himself or renting another place.
He chose the former, but is buying the right move for Mr. McKie?
"It's good to be in the property market," he muses. "If prices continue to rise, it might be hard to get in later. I like the idea of a condominium because if, say, the roof leaks, I'm not alone in the responsibility. I envision being able to rent my unit and go to England for the summer. This would make an interesting place for a visitor to stay."
Obviously, if he didn't buy his cherished home, he would lose it. But on the down side, his monthly payments will be more. The unit is selling for $240,000. If he takes out a mortgage of $228,000 at 7 per cent, as he is considering doing, he would pay about $1,600 a month, plus condo fees and hydro. Right now, his monthly rent is $1,200.
If he didn't grab it, he would be forced to leave his cherished loft. Also, the extra amount he might be paying out could be viewed as a kind of forced investment, one that he might not make otherwise. And another plus is that money from the sale of a principal residence is not taxed.
But according to Steve Parker, Ottawa-based managing partner of Parker Prins Seel Chartered Accountants, the notion that, financially, home ownership always trumps renting is somewhat of a misconception. It a renter invests the difference between the rent and what the mortgage payment would have been, it's likely that, over time, there would be very little difference in the result.
He adds, however, that it's questionable whether the renter would actually make that investment.
"Very few people take the money they would save by renting and invest it," Mr. Parker says. "However, if they would do something like maximize their RRSP contributions every year, they would likely end up as well off as with home ownership. Traditionally, the stock market and the housing market have had similar results over time."
He also notes that rents have not risen the way housing prices have, which can make renting somewhat of a bargain right now — at least a relative bargain.
An example in an upscale area of the city is a two-bedroom, two-bathroom unit in a fourplex on St. Clair Avenue near Yonge Street in Toronto, complete with finished basement and parking. It's currently for rent at $2,200 a month, not including hydro. The listing agent, Jack Hill of Harvey Kalles Real Estate Ltd., says a comparable two-bedroom condominium at Yonge and St. Clair might be selling for $500,000, and there could be a fee of up to $800 a month on top of the mortgage.
With 10 per cent down, a mortgage at 7 per cent and a 25-year amortization, and figuring in other factors, the monthly payment on the condo would be about $4,100, according to a Citizens Bank of Canada calculator.
But potential renters of the unit in the fourplex, at $2,200 plus, would be a well-heeled, select few.
People who are transferred to a city such as Toronto by large corporations often rent, Mr. Hill explains, for just the time it takes to get to know the city or for the duration of their stay.
"A lot of people like to rent," he adds. "Some people will invest their money elsewhere, or perhaps they have a cottage up north. Some people just do not want to make the big investment in a home, or you will get a few students going in together on a place. Some people have sold their home and are renting while they assess what do to, on a long-term basis."
In Toronto's Moore Park, renters in one of the area's many duplexes and apartments can enjoy the same parks, ravine trails, tennis courts, shopping venues, restaurants and public transit as those owning million-dollar homes. Their children can attend the outstanding local schools there, too. Nearby Rosedale also has a good stock of rental accommodation in addition to its mansions and lavish estates.
Al and Marlene Parker (no relation to Steve), for example, rent a 700-square-foot, two-bedroom apartment there for $1,700 a month. They own a home in Muskoka but still seek the pleasures of downtown Toronto.
Having just returned from hearings on new taxes at City Hall, a 15-minute trip for him, Mr. Parker says, "There's an energy in the city — my wife and I are enjoying life here.
"We're like tourists. We're both 65 now and retired. Life is stages, and at this stage we are not sure what we want to do. Driving between two homes isn't feasible and we rented our Muskoka place for July and August.
"Meanwhile, do we want to buy something? I'm worried that the bubble may burst in the housing market."
So while renting may not be the great Canadian dream, it can put you in an excellent location for less than the cost of buying a comparable home. And an accommodating landlord will take care of shovelling snow, cutting the grass and unclogging the toilet.
"Raising a family, people do tend to want to buy homes," Steve Parker says. "But a house is a high-maintenance proposition. Even at the end of the mortgage, when the equity and the value will be at their best, the home will probably need a lot of work. Real estate is not a foolproof investment."
July 26, 2007 Travia Grant Globe and Mail Update
The Canada-U.S. housing divide
The contrast between the Canadian and U.S. housing markets has never been starker.
U.S. existing home sales sank to a near five-year low Wednesday while prices continue to slide. In Canada, however, home sales continue to defy all expectations, breaking records for the last three months.
“Such a divergence between the Canadian and U.S. housing markets is unprecedented,” said Marc Pinsonneault, an economist at National Bank Financial, in a note to clients.
More bad news landed with a thud Thursday, with a report showing U.S. new-home sales plummeted 6.6 per cent in June — twice as much as expected.
As the nation's housing market continues to struggle, spiraling foreclosures are shaking not only homeowners and realtors, but also lenders and investors on Wall Street.
Generally, economic growth in Canada tends to mirror the ebbs and flows of its next-door neighbour. That's not the case nowadays, for several reasons.
High energy prices are underpinning growth in Alberta, and sending national housing statistics higher, Global Insight (Canada) chief economist Dale Orr said in a report earlier this month. The swift rise in U.S. interest rates is another factor, and so is the fact that the Canadian housing market has been more steady in recent years.
Much of the difference may stem from exposure to the once-booming sub-prime mortgage market in the U.S. Over the past several years, low-interest mortgages were offered to many people with poor credit histories or low incomes. When borrowing costs sharply rose, however, new homeowners got squeezed.
The result has hammered U.S. economic data, corporate earnings and, this week, the stock market.
Today's results, combined with Wednesday's data show “the U.S. housing slump is far from over,” said Benjamin Reitzes, economic analyst at BMO Nesbitt Burns Inc. “At some point falling home prices will affect the consumer, the only question is how far do prices have to fall? Housing continues to weigh on the economy with no end in sight.”
In Canada, meantime, the economy is expanding, jobs are being created and interest rates remain at a historical low.
A report Wednesday found U.S. existing homes tumbled 3.8 per cent in June from May to the lowest level since November 2002. Second-quarter average home prices, meantime, are 0.6 per cent lower than the same quarter a year ago.
In Canada, the number of existing homes sold in Canada has broken records in each of the last three months.
“Most importantly, this was true not only in the booming provinces of Alberta and British Columbia, but in the rest of the country as well, notably in the largest city Toronto,” Mr. Pinsonneault said.
Sales in the second-largest metropolitan area, Montreal, were at record levels during each of the last two months.
Canadian home prices have climbed almost 10 per cent over the last four quarters, quite a difference from the 0.6-per-cent drop in the same period in the U.S.
July 11, 2007
Bank of Canada raises rates
The Bank of Canada raised its key interest rate to 4.5 per cent, the first increase in more than a year, and said more rate hikes may be needed to dampen inflation. The central bank boosted its overnight lending rate Tuesday from 4.25 per cent, as expected. The move swiftly prompted some of the major banks to boost their mortgage and prime lending rates.
(Please note that the Bank of Canada Rate is now 4.50% and the Prime Rate is 6.25%.)
In a lengthy statement, the central bank said more “modest” increases are likely after inflation topped its expectations. Core inflation, which strips out the most volatile items in the consumer price index, has been running ahead of the bank's 2-per-cent target for the past 10 months.
We are expecting another 25-basis-point rate hike in the prime rate on September 5th, 2007 to 6.5 per cent, followed by a brief pause to gauge the effect of both the higher interest rates and the recent appreciation of the Canadian dollar .
The next rate announcement takes place on Wednesday, September 5th, 2007.
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