Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
; ^) A* p: q$ U! N  `/ L: u2 _Affordability gap grows  
0 F) c  F, k% @% }
Financial Post
Published: Wednesday, October 18, 2006

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 W7 Y- T# X7 i9 I
# ]2 x9 a/ u. P2 q) S3 Z"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.
. l7 v6 Z5 N- l! @/ A
% U1 ~% y) ~1 m: |8 B* NThe 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.

"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.
$ G. u$ f( M0 S& ]8 u: o- `9 }! B6 }
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.
6 o) Z4 N% w* j/ j
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.

/ j2 I$ h! i- Y- E) rOne 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.

Generally though, the trend across the country is home ownership costs are rising faster than rental rates.

Between 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.

9 y7 y- q( @" X; `7 a8 MOne 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.

& m' M& ~: O! d5 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.
1 X: e! f  j- z* g# x* \* y# v, v
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.

3 Z  T( C" Q/ B: d. g; SHowever, Mr. Campbell said apartments are affected by rent controls in many markets.
& b0 }) F; o3 D& K/ t
"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 $1,000," he said.
0 S6 y+ y$ Y$ B5 P4 Q* C) `7 E! K
7 h2 t% r( T% l- Q* }3 b
/ H) }- g2 W# I, P8 n9 q) EDisclaimer: This is just published research data and do not express my position.