Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
Affordability gap grows  
0 u  X5 \5 z8 W  Y& C6 l
; T8 a3 Z: G; d" @9 D6 ~Financial Post
1 @# v2 R5 i( c: k' \1 C& APublished: Wednesday, October 18, 2006
8 s$ O* {! H+ E
$ T0 q' G# S' {0 d* O! |. `0 cWhy own a house when you can rent the same property for a lot less?

2 k: g, P( [+ I0 FA new study from Bank of Nova Scotia says the pendulum has swung back in favour of tenants.
) A2 s" G& ~0 Q5 N
/ G& K- E9 c- ~"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

( M. P. L: r' }7 X0 {# n3 tThe study found the average monthly mortgage payment in Canada in 2005 was $1,304 based on a $250,000 house with 10% down payment. That compares with an average rent of $731 for a typical two-bedroom apartment last year. That $573 gap is projected to climb to $800 in 2006.

' }2 c- w: R$ L/ j4 Q3 {8 v"This is a fairly typical pattern that you see in housing. As house prices move up, affordability becomes an issue for first-time buyers," said Ms. Warren, adding renting becomes a more viable option.
" K% c& Z; K5 H) N6 |
The current gap between owning versus renting would be even wider if the Scotiabank report took into consideration home ownership issues such as taxes and general upkeep.
9 T5 Y& g& C1 k0 i% G
Ms. Warren predicts a slowdown in the housing market with a tighter rental market leading to increased rents. "We will see a levelling off of vacancy rates. I don't think we will see landlords offering the same incentives, like free rent for a month," she said.
  o' q2 x: G3 q; l" r* K4 ^
' Y3 N9 G, ~/ k. NOne problem with the national number is it masks major regional differences, she said. The gap between owning and renting varied wildly across the country from a $31 monthly premium in Winnipeg in 2005 to $1,220 in Vancouver.
0 k. w* |8 Q$ Q4 q
Generally though, the trend across the country is home ownership costs are rising faster than rental rates.

0 C: X- O6 I/ P# dBetween 2000 and 2005, rental costs have increased nationwide at a 1.3% annual pace. During the same period, home ownership costs nationwide increased 2.7% annually.

One side affect of declining affordability has been a slew of new mortgage products that have had the effect of lowering the monthly carrying costs of a loan. More and more consumers are buying products that allow them to pay off their mortgage based on a 35-year payment plan as opposed to a 25-year plan, which had been the norm for years.
" C/ g% Q+ Z. ~
Ms. Warren noted that the $1,304 monthly mortgage costs for a $250,000 home with a $25,000 down payment would go down to $1,073 per month under a 35-year plan.
5 F1 c4 t* c) M: P' f# p( Y
Real estate author Don Campbell said there is no question renting has become a better deal for consumers over the last few years. "When interest rates come back down, the pendulum will swing back to the homeowner," he said.
$ i- j2 f* Q: G9 y* O! \
However, Mr. Campbell said apartments are affected by rent controls in many markets.
' [: `& E1 z2 G. t6 {+ _' b+ Z$ D
- ~9 Q& [$ V& V( R' j: a9 U"In markets in the West, where it is not as controlled, rental rates are starting to take off. A two-bedroom unit in a 1970 building in Fort McMurray is $1,500, and that's in the middle of nowhere. Even basic townhouses in Edmonton that rented for $800 last year are up over $1,000," he said.
/ U4 l6 z7 p& {9 U$ p: T. x

Disclaimer: This is just published research data and do not express my position.