Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
Affordability gap grows  
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Financial Post
Published: Wednesday, October 18, 2006

% X) v/ Y) V, u$ |( }Why own a house when you can rent the same property for a lot less?

A new study from Bank of Nova Scotia says the pendulum has swung back in favour of tenants.

2 x1 E0 p' a- q: p6 z. g+ N! ~"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

2 R* k0 p6 r6 I, |. z+ r3 Z, [$ ?The 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.

9 ^- S" ~, l- q"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.
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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.
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' G. x/ E( O2 G' w- }+ O& {/ c$ G& WMs. 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.
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One 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 $1,220 in Vancouver.
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Generally though, the trend across the country is home ownership costs are rising faster than rental rates.
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+ O+ ~$ q+ j, l" ^. P) F9 BBetween 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.
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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.

: ^4 s  h8 P* O' QReal 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.
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; _5 M# `1 d8 M: {! lHowever, Mr. Campbell said apartments are affected by rent controls in many markets.

; u; F7 S- r- M$ c  ~"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.

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* P- S. p/ ~- p# Z, d  J' i$ l: QDisclaimer: This is just published research data and do not express my position.