Canadian Housing Update 2: June 23rd, 2023

One debate that has crossed people’s minds today is whether it’s better to own or rent in today’s environment. When most people think of buying, they think of one thing, the price you buy for and the price you sell for. The reality is there is far more that goes into it. So, we decided to do an actual analysis of the total cost of buying vs. the total cost of renting comparing apples to apples over a period of time.

Step 1: The individual
Assume an individual is looking to buy or rent. They are single and have saved 20% to put down on a residence or they could rent/lease. They are looking to purchase at about $1,100,000 for a
3-bedroom townhouse or house and that they would like to live in for 10 years. They are open to
renting a similar property if it were to make sense.

Step 2: Two comparable properties
This took a while but finding a recently sold townhouse and a townhouse recently rented, that are close to each other was very difficult. I did need to expand the search to Mississauga to find comparable properties, but this is still within the GTA.

To Purchase: 3337 Eglinton Ave. W.

To Rent: 3418 Eglinton Ave. W.

In comparison, these properties are very comparable. 3 bedrooms, 4 bathrooms, 2 car garage, across the street from each other, finished basement, etc. A very common single family
dwelling. The purchasing house was sold in April 2023 and the renting house was leased in May
2023, therefore the prices are up to date.

Scenario #1: Purchase 3337 Eglinton Ave. W

Let’s look at the entire financial scenario from day 0 to Day 3,650 (selling in 10 years): Purchase Price: $1,171,000

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Day 0 Costs
Down Payment: $234,200
Land Transfer Tax: $39,790
Legal Fees: $2,000
Total: $274,990

Recurring Costs
‍Property Tax: $4,929 (3% increase each year) - $411 monthly
Utilities: $300 monthly (3% increase each year)
Repairs: 1% of the purchase price (rule of thumb), we will assume $11,700 - $975 monthly Mortgage Payment: $5,433 a month (principal plus interest) decreasing to $5,009 a month assuming the rate decreases to 4% in 5 years.
First Month’s Costs: $7,119

Day 3,650 Proceeds
Assuming the property appreciates 2% per year (average since 1982 is 2%) Sell Price: $1,399,453
Real Estate Fees: $69,972 (5%) Legal Fees: $2,000
Remaining Mortgage: $678,725
Net Proceeds: $648,756

Being a home homeowner, this individual made $648,756 on the sale of their home!! This is a large sum of tax free money, but it cost them a large monthly amount of about $7,000+.

Scenario #2: Renting 3418 Eglinton Ave. W.

Day 0 Costs
$0

Recurring Costs
Rent: $3,700 (increasing 2% per year)
Utilities: $300 monthly (3% increase each year)
First Month’s Costs: $4,000

Day 3,650 Proceeds
$0 as there is no house to sell but rather just built savings

Savings Account (5% per year decreasing to 4% after year 5)
*This assumes the difference between your monthly payments in the purchase scenario is saved into the savings account
*Interest on savings accounts is taxable, therefore we will provide two scenarios
*Scenario 2A - Building in a Regular Savings Account, taxed on interest each year
*Scenario 2B - Depositing the interest each year into a RRSP, to offset interest taxes

Day 0
Balance: $274,990

Day 3,650 (Scenario 2A)
Savings Balance: $695,127

Day 3,650 (Scenario 2B)
Savings Account Balance: $561,019
RRSP Account Balance: $240,726
Total Account Balance: $801,745

In both scenario 2A and 2B the savings was greater than the proceeds from the sale of the house in scenario 1. Also, the monthly obligations were far less at $7,000 vs. $4,000 per month.

Conclusion

It is difficult to predict the future and what could happen. This test is a very basic one using static and simple calculations. When comparing the two scenarios it appears that currently in a
10-year scenario, it would make more sense to rent than buy. In a 5-year scenario, this heavily favors renting, but in a 20-year scenario, this is more favored purchasing.

Therefore, in the current environment unless you are planning on staying in the residence for
10+ years then it would make more sense to rent.

There are many variables to consider in this calculation and if you would like to know more please let us know and we can go into more detail.

Justin, Konrad, and Merriel

More articles and information are available at www.lkwealth.ca

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their

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