*This post was created in collaboration with Mortgage Maestro.
Renting has long been the more affordable and accessible way for many Canadians to live. The barrier to entry is much lower for renting than it is for buying. But with rent prices soaring over the recent past, the cost savings that have long been associated with renting might not be as prominent. The cost difference between owning and renting seems to be shrinking. Depending on the size of the home you wish to live in, you may be paying just as much — if not more — in rent than in mortgage payments. For this reason, many would argue that it might be better to buy than rent in Canada.
Is It Better To Buy Or Rent In The Current Canadian Housing Market?
Depending on where you live and the type of home you live in, you may find mortgage payments at par with rent. While rent may have once been the affordable route for many Canadians, it’s now anything but.
The current housing market is out-of-reach for many, especially those in the lower-income bracket. The stringent criteria that mortgage applicants must meet make it very difficult for many Canadians to achieve homeownership status. This has traditionally left many perpetually stuck in the cycle of renting.
But the lending requirements have become even stricter recently, especially with super-high home prices, increasing mortgage rates, and the mortgage stress test. This has pushed many who would have otherwise been able to qualify for a mortgage just a few short years ago into the rental sphere.
In turn, this has strengthened the demand for rentals. This, coupled with low rental housing supply, has pushed rent prices through the roof.
Though it’s true that renting doesn’t come with all the other expenses that homeowners must pay for — including property taxes, property insurance, and maintenance costs — the benefit of renting doesn’t seem to be as strong as it used to be. In fact, it is becoming too expensive for many renters.
Buy Or Rent: Why Is It Better To Buy In The Current Canadian Housing Market?
There are a handful of key reasons why purchasing a home might make more sense instead of renting in the current real estate market. Here’s some reason why it may be better to buy than rent in Canada.
Owning A Home Allows You To Build Equity
Mortgage payments are typically made up of principal and interest portions, with the principal share going toward building equity in your home. That means every mortgage payment you make as a homeowner helps you build wealth and puts you closer and closer to outright owning your home.
Generally speaking, investing in real estate has been a sound way to build substantial wealth over time as the property appreciates in value. Rather than paying your landlord’s mortgage as a tenant, you would be paying your own home loan as a homeowner. If you ever sold the property in the future, you could profit handsomely.
You Can Tap Into Home Equity
If you’re ever in need of a large sum of money, you could access your home’s equity in the form of a home equity loan or HELOC. Perhaps you need the cash to renovate your home, buy a car, or take advantage of a lucrative investment.
Whatever the reason for the need for a lump sum of money, your home’s equity can cover your financial needs. And since the loan is backed by an asset of value — your home — you may find it easier to qualify at an affordable rate compared to other loan types.
Buy Or Rent: It May Be Better To Buy Because Rent Prices Have Increased
The average rent price has soared over the past year in markets across Canada. On a national scale, the average rent price for apartments, condos, and traditional homes is currently $1,984. That marks a hefty 9.7% increase year-over-year.
The average rent ranges for different unit sizes:
|Average Rent Price||Year-Over-Year Change|
The bigger centres in Canada are more expensive to rent than the less densely populated ones. The following are the average rent prices for a 1-bedroom unit in some of Canada’s biggest cities:
|Average Rent Price||Year-Over-Year Change|
Buy Or Rent: It May Be Better To Buy Because Average Rent Payments Are Similar To Average Mortgage Payments
Vancouver and Toronto currently have the highest mortgage payment costs. Buyers in Vancouver are paying an average of $2,886 per month in mortgage payments, while in Toronto, the average monthly mortgage payment is $2,895.
The following chart compares the average rent price for a 2-bedroom unit versus the average mortgage payment from Q3 2022 on a national level, as well as in the two most expensive cities in Canada:
|Average Rent Price||Average Mortgage Payment|
Based on the above figures, you could be saving anywhere from $420 to $750 per month in rent, depending on where you live. Of course, you’ll need to add other expenses as a homeowner that you wouldn’t have to pay as a tenant, as mentioned above. But it’s important to consider the gain in equity over time that you can take advantage of as a homeowner that you wouldn’t benefit from as a renter.
Rent Increases Have Ruined The Benefit Of Flexibility With Renting
Aside from the traditionally lower monthly costs associated with renting compared to buying, there has typically been the added benefit of flexibility that comes with being a tenant. When you rent, you can quickly and easily move when the need arises, as long as you stick to the conditions of your lease contract.
For instance, if you wanted to take advantage of a new job opportunity in another city, you could simply give your landlord the appropriate amount of written notice that you plan to move, find another rental in your new location, and move your belongings.
But today, affordable rentals are difficult to come by, especially in more densely-populated cities like Toronto or Vancouver. In fact, even moving to suburban areas can still be costly.
Existing renters tend to pay a lot less in rent than new tenants. That’s because landlords can set the rent as they please with a new lease. But they have rent caps they must adhere to with existing leases.
If you’re currently paying a relatively affordable rent, odds are you won’t find a lower price if you move to a new rental, depending on where you’re planning to move. As such, you may be stuck where you are if you don’t want to risk paying more monthly rent.
Why Has Rent Become So Expensive?
There are a few specific reasons why rent prices have shot up so quickly over the recent past:
The Recent Health Crisis
The COVID-19 pandemic prompted many city dwellers to move to more suburban centres in search of more space as lockdowns continued for months. Others may have moved back home as a way to save money following an onslaught of job loss.
But once the pandemic started to fizzle, a return to normal life began. People started to get their jobs back and others who moved out of the city decided to move back. Those who couldn’t yet afford to take out a mortgage chose to rent, as is commonplace in downtown areas. In turn, this spurred significant demand for rentals.
The influx of people back to the city core caused the demand for rent to soar, as mentioned. However, rental inventory has been unable to keep up.
As is the case in a high-demand, low-supply situation, the average rent price spiked along with the demand for rentals. In this scenario, landlords had the upper hand in terms of the types of rent prices they could charge. When a large number of renters are competing for a few rental units, prices tend to jump.
Increased Cost Of Homes
Landlords are paying more for their investment properties today, which means they must charge more in rent to cover these growing costs. In addition to the sky-high cost of buying real estate, mortgage interest rates are also much higher today than they were just a few short years ago. Plus, landlords are also paying more in carrying costs, including property taxes and insurance.
Renters who aspire to become homeowners one day are finding it more difficult to save up for a down payment. With higher rent prices eating up their budget and home prices up, renters can’t save as quickly as they used to. They’ll need more time to save for a down payment.
But by the time they may be ready to buy a home, prices may be out of their reach. Unless they can find a cheaper rental unit or get a significant raise at work, many homebuyer hopefuls may never be able to save enough money for a home purchase.
Is It Better To Buy Or Rent?
The end goal for many Canadians is to buy a home. As mentioned, this will give you an opportunity to build equity and wealth, and even tap into your equity if the need for cash arises at some point. However, buying should be an objective only if it makes financial sense for you. Consider speaking with a financial advisor who can help you crunch the numbers to see if it is better to buy than rent for you.