Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
Affordability gap grows  

Financial Post
3 C; `) Z6 O- h' X  v# vPublished: Wednesday, October 18, 2006

- w* a$ \3 R3 R4 {3 vWhy own a house when you can rent the same property for a lot less?
, d8 l8 A0 [8 S7 m" |
A new study from Bank of Nova Scotia says the pendulum has swung back in favour of tenants.
# |- M$ R' }" q
8 `% f& I2 B9 A+ |6 \"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

) G  F+ P- U/ m; [( @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.

"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.
' H# A' @: w! E$ `9 E
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.
$ ~7 j- @0 ]9 r& h2 k
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.

1 p% O% ^' n8 H$ J/ TOne 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.
* ]5 {- F* d8 w. l, w
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.

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.
8 s2 P$ z7 i( q, l) |. p
1 C# i2 i% }/ U# D  HMs. 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.

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.
1 C3 H. O) J* f! K/ \* P5 [+ O
2 u6 r7 a  a# K4 m7 VHowever, Mr. Campbell said apartments are affected by rent controls in many markets.
/ j& e: ]; S$ r. @6 T1 W5 A6 v
"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.
! a- i& l( I/ ?2 E
( s+ [. k/ B* p3 {
3 y" T1 ~1 i" e) o: v: tDisclaimer: This is just published research data and do not express my position.