Mark: you can't go knocking on random people's doors to check if they're nice people before buying a house, that would just be weird Ben: I've actually never bought or rented without knocking on a representative sample of random people's door to develop aggregate personality profiles, then optimized for in-common interests by graphing perceived values against likelihood of shared hobbies
Ben’s op-ed column about this really riled people up in the G&M’s comment section! I feel that people naturally always underestimate the phantom costs of ownership. Great episode!
Really great episode! So many interesting points! Once again proving that “prediction is very difficult, especially about the future”. Will share this with anyone that makes strong arguments in favor/against renting/buying.
Ive ran the math (using PWLs calculator) on several scenarios for studio and one bed condos in the Vancouver between 2016 and 2024 interest rates and buying came out ahead every time even at interest rates around 5 percent for properties below 750k. I imagine renting a 3 million dollar home is far more favourable financially than buying the same property with a conventional mortgage at 4.5 to 5 percent rates. Great episode
I think all this talk about averages is missing the point. It may be true that on average there's only a slight advantage to renting in some areas and slight disadvantage in other areas. However, when you choose a specific home, you could tilt the odds in your favor by making the rent/buy choice customized to the specific rent over price ratio, and by estimating the length of time you'll be staying. If the rent is 2% of price and you'll be staying 3 years - rent. If the rent is 7% of the price and you'll stay 10 years - buy. These are just extreme examples and more variables may be involved.
I've inherited a house starting 2024, 30 minutes away from Capital Federal, Argentina. Home prices are starting to recover so the value of the property is increasing fast, but personally I don't like home reparation stuff that much. Time spent in reparations or asking for budgets... Is just like a part time job to me. Although I am married, we don't have kids (not at present). Maybe my view will change in the future, but the plan is to maintain the property while prices keep adjusting to previous highs (2008), and after that well... We will back to renting, and the money will increase our positions in vanguard-avantis-dimensional etf
Great video! Are you able to look what happens assuming one would sell and buy something more expensive while keeping their leverage at around 5:1 (20% down). Reinvest the growth into a more valuable house to keep the leverage advantage.
Great discussion. Thank you! (Aside: Curious if/how less conventional housing options might factor into an own/rent consideration... for example, owning a manufactured home and placing it on a leased lot, or tiny homes/ADU, full-time RVing, time-share, ...squatting (okay, that's a joke), artist colony, earth-ship, abandoned barge or shipping container, favela...? Maybe it's just the insane levels of homelessness in California, but it seems like more folks are at least discussing the viability of options outside of the current "norms". Would love any rational input.)
Take this with a grain of salt, but I would imagine the renter would have to save as much as (the mortgage principal the buyer pays off) + (the expected appreciation of the house). Ben has used 3-4% annual expected appreciation figures.
I think one general issue missing from this discussion is what happens after the owner pays off the mortgage. At that point, the owner's cost of housing is decreased by an amount equal to the mortgage interest. Moreover, the renter is more vulnerable to longevity risk. He has to keep paying rent until the day he passes, whereas the owner can realistically defer maintenance, use that cost as a buffer against longevity risk, and leave their children to pay in reduced selling cost after he passes away. This option is not available to the renter - if your saving runs out, you won't even have a roof over your head.
"At that point, the owner's cost of housing is decreased by an amount equal to the mortgage interest." At this point, the owner had a lot of capital tied to his house, that's a big opportunity cost for living in said home. If the owner would sell the house and invest the sums, he should be able to afford to rent with the revenues generated by his investments. Plus, in your exemple, you defer maintenance so that would be equivalent to the renter drawing down on his investments. If the renter's saving runs out after a long time, the owners house would also be unlivable in that time horizon if you defered maintenance for that long.
as you gradually pay off the mortgage, you shift from paying interest on the principal to paying the opportunity cost of having your capital tied up in the house. It's possible that the opportunity cost will be less than the interest rate, but it's also possible it will be more. Either way you are paying a cost relative to a better performing asset. The cost of these things is not necessarily as much as rent would be, but when you add this cost to the cost of property taxes and maintenance it may be as much or more than you would be losing on rent. Also, all other things being equal the homeowner will always run out of savings before the renter, assuming the renter has an equivalent amount of capital tied up in the stock market. It is arguably better to liquidate some of your investments and continue renting than it is to live in a run down, owned home.
An owned home hedges your future housing costs. That is valuable especially for a retiree. However, the cost of owing a home outright is typically greater than the cost of owning with a mortgage due to a higher cost of capital. It’s not obvious which of those factors comes out ahead in the long run. -Ben
In areas where the rent is not in excess of the net cost, how do landlords make money? If the answer is leverage & house price going bonkers, then don't homeowners also get that? In my area rent costs more than a mortgage (at least it did 3 years ago). My first house a 15 year fixed mortgage was cheaper than renting the same house. That mortgage includes taxes+insurance. Yes there is maintenance, but it's not enough to come close to tipping the scales.
This is a common argument, but who says they’re making money? betterdwelling.com/big-five-banks-back-most-of-torontos-negative-cash-flow-condo-investors/ -Ben
Where rent is not in excess of the net cost, the owner is functionally subsidizing the renter. Or, from the renter's point of view, they are arbitraging their shelter cost by buying cheap rent and selling the idea that it's profitable to do so to the owner. Or from a third-party point of view, the owner is paying market rate for the property's economic value, but ALSO paying market rate for the perceived emotional value. The renter does not pay for the perceived emotional value, so the owner is not compensated for it.
May I ask for any of the three presenter's opinion on private apartment REITs as an investment choice for the renter? You spoke to REIT index funds, but not this more "residential" type investment. The background question is, of course, how risky is a private reit of this type? Many thanks and much appreciation for your thoughts. :)
Excellent analysis! Unfortunately I think your globe article is overly simplified (I know it has to be for a newspaper) and people may not understand the complexity of what has been accounted for.
That article was not about this analysis. 200 enraged comments suggest you’re right though. Only so much can be done in the under 900 words they allow! -Ben
In terms of creating net worth, ownership might come out ahead given Canada's borrowing rules. With every appreciation of my property, I can refinance that and put a down payment on another house, while deducting the rental income from the interest I am paying. But you can't get financing from the gains on your stock portfolio itself.
You absolutely can get financing from a stock portfolio using either a margin loan or using stocks as security for a loan. In both cases the interest rates are low. -Ben
Great session. A part which seems to be missing from this 20-year analysis is that at some point the mortgage will be paid off. The owner then gains lower housing cost, as well as the option to invest the difference. For the renter then rent will never end, and continues to increase. I wonder how different things would look over a more realistic whole-life scenario.
Germany is so unlike North America the comparison is almost meaningless. Single family home is lot less a thing in Germany, but more importantly culturally Germans don't like to go deep in debt.
If you move out of your rental you made the wrong choice. Only if you stay in a rent controlled unit for your entire life did you win. This means kids and partner as future choices become limited.
Mark: you can't go knocking on random people's doors to check if they're nice people before buying a house, that would just be weird
Ben: I've actually never bought or rented without knocking on a representative sample of random people's door to develop aggregate personality profiles, then optimized for in-common interests by graphing perceived values against likelihood of shared hobbies
🤣
Paper: On cross sectional analysis on neighbors habits, values and cultural shared hobbies
Idk, but I just get this impression that the yield curve, and Ben's hair, are both indicators of an impending recession.
If he starts growing a great big bushy beard, I’m gonna start buying plywood and tarps
Ben’s op-ed column about this really riled people up in the G&M’s comment section! I feel that people naturally always underestimate the phantom costs of ownership. Great episode!
Really great episode! So many interesting points! Once again proving that “prediction is very difficult, especially about the future”.
Will share this with anyone that makes strong arguments in favor/against renting/buying.
Thanks for the addition at 1hr. I could tell that question had you thinking, but needed a spreadsheet to answer
Ive ran the math (using PWLs calculator) on several scenarios for studio and one bed condos in the Vancouver between 2016 and 2024 interest rates and buying came out ahead every time even at interest rates around 5 percent for properties below 750k. I imagine renting a 3 million dollar home is far more favourable financially than buying the same property with a conventional mortgage at 4.5 to 5 percent rates. Great episode
I think all this talk about averages is missing the point. It may be true that on average there's only a slight advantage to renting in some areas and slight disadvantage in other areas. However, when you choose a specific home, you could tilt the odds in your favor by making the rent/buy choice customized to the specific rent over price ratio, and by estimating the length of time you'll be staying. If the rent is 2% of price and you'll be staying 3 years - rent. If the rent is 7% of the price and you'll stay 10 years - buy. These are just extreme examples and more variables may be involved.
Ben is now 7’2”
I've inherited a house starting 2024, 30 minutes away from Capital Federal, Argentina. Home prices are starting to recover so the value of the property is increasing fast, but personally I don't like home reparation stuff that much. Time spent in reparations or asking for budgets... Is just like a part time job to me.
Although I am married, we don't have kids (not at present). Maybe my view will change in the future, but the plan is to maintain the property while prices keep adjusting to previous highs (2008), and after that well... We will back to renting, and the money will increase our positions in vanguard-avantis-dimensional etf
Great video!
Are you able to look what happens assuming one would sell and buy something more expensive while keeping their leverage at around 5:1 (20% down). Reinvest the growth into a more valuable house to keep the leverage advantage.
Great discussion. Thank you!
(Aside: Curious if/how less conventional housing options might factor into an own/rent consideration... for example, owning a manufactured home and placing it on a leased lot, or tiny homes/ADU, full-time RVing, time-share, ...squatting (okay, that's a joke), artist colony, earth-ship, abandoned barge or shipping container, favela...? Maybe it's just the insane levels of homelessness in California, but it seems like more folks are at least discussing the viability of options outside of the current "norms". Would love any rational input.)
What about renting and using the difference to invest in dividend stocks?
Now we talking !!!
Real RR episode is here !!
We have a Greenbelt policy that was put in 2003. The price gains in GTA will be muted going forward, now that the policy has been priced in.
How much would a renter need to save to offset the equity he could have built as an owner? It'd be nice to have a rough guideline.
Take this with a grain of salt, but I would imagine the renter would have to save as much as (the mortgage principal the buyer pays off) + (the expected appreciation of the house). Ben has used 3-4% annual expected appreciation figures.
I ran some numbers and it seems the renter has to invest about half the amount of the rent to keep up with owning.
I would love to see how this analysis changes in micropolitan amd rural regions vs. the metropolitan areas included in this study
I think one general issue missing from this discussion is what happens after the owner pays off the mortgage. At that point, the owner's cost of housing is decreased by an amount equal to the mortgage interest. Moreover, the renter is more vulnerable to longevity risk. He has to keep paying rent until the day he passes, whereas the owner can realistically defer maintenance, use that cost as a buffer against longevity risk, and leave their children to pay in reduced selling cost after he passes away. This option is not available to the renter - if your saving runs out, you won't even have a roof over your head.
"At that point, the owner's cost of housing is decreased by an amount equal to the mortgage interest."
At this point, the owner had a lot of capital tied to his house, that's a big opportunity cost for living in said home. If the owner would sell the house and invest the sums, he should be able to afford to rent with the revenues generated by his investments. Plus, in your exemple, you defer maintenance so that would be equivalent to the renter drawing down on his investments. If the renter's saving runs out after a long time, the owners house would also be unlivable in that time horizon if you defered maintenance for that long.
Agreed. I have no interest in selling to rent after it's paid off. Let the kids live in rent free and explode their networth as well.
as you gradually pay off the mortgage, you shift from paying interest on the principal to paying the opportunity cost of having your capital tied up in the house. It's possible that the opportunity cost will be less than the interest rate, but it's also possible it will be more. Either way you are paying a cost relative to a better performing asset. The cost of these things is not necessarily as much as rent would be, but when you add this cost to the cost of property taxes and maintenance it may be as much or more than you would be losing on rent. Also, all other things being equal the homeowner will always run out of savings before the renter, assuming the renter has an equivalent amount of capital tied up in the stock market. It is arguably better to liquidate some of your investments and continue renting than it is to live in a run down, owned home.
An owned home hedges your future housing costs. That is valuable especially for a retiree. However, the cost of owing a home outright is typically greater than the cost of owning with a mortgage due to a higher cost of capital. It’s not obvious which of those factors comes out ahead in the long run.
-Ben
In areas where the rent is not in excess of the net cost, how do landlords make money? If the answer is leverage & house price going bonkers, then don't homeowners also get that?
In my area rent costs more than a mortgage (at least it did 3 years ago). My first house a 15 year fixed mortgage was cheaper than renting the same house. That mortgage includes taxes+insurance. Yes there is maintenance, but it's not enough to come close to tipping the scales.
This is a common argument, but who says they’re making money?
betterdwelling.com/big-five-banks-back-most-of-torontos-negative-cash-flow-condo-investors/
-Ben
Where rent is not in excess of the net cost, the owner is functionally subsidizing the renter. Or, from the renter's point of view, they are arbitraging their shelter cost by buying cheap rent and selling the idea that it's profitable to do so to the owner. Or from a third-party point of view, the owner is paying market rate for the property's economic value, but ALSO paying market rate for the perceived emotional value. The renter does not pay for the perceived emotional value, so the owner is not compensated for it.
May I ask for any of the three presenter's opinion on private apartment REITs as an investment choice for the renter? You spoke to REIT index funds, but not this more "residential" type investment. The background question is, of course, how risky is a private reit of this type? Many thanks and much appreciation for your thoughts. :)
I’ll do a video on it.
-Ben
1:08:25 NIMBYism at the best, Canadian housing is never gonna crash, yah!!!
Excellent analysis! Unfortunately I think your globe article is overly simplified (I know it has to be for a newspaper) and people may not understand the complexity of what has been accounted for.
That article was not about this analysis. 200 enraged comments suggest you’re right though. Only so much can be done in the under 900 words they allow!
-Ben
@@rationalreminder yes absolutely... 900 words is nothing. Comments section very unfortunate.
In terms of creating net worth, ownership might come out ahead given Canada's borrowing rules.
With every appreciation of my property, I can refinance that and put a down payment on another house, while deducting the rental income from the interest I am paying.
But you can't get financing from the gains on your stock portfolio itself.
You absolutely can get financing from a stock portfolio using either a margin loan or using stocks as security for a loan. In both cases the interest rates are low.
-Ben
Great discussion!
Great session. A part which seems to be missing from this 20-year analysis is that at some point the mortgage will be paid off. The owner then gains lower housing cost, as well as the option to invest the difference. For the renter then rent will never end, and continues to increase. I wonder how different things would look over a more realistic whole-life scenario.
Things look worse post-mortgage. Leverage helps the owner a lot.
-Ben
Great episode
Germany is so unlike North America the comparison is almost meaningless. Single family home is lot less a thing in Germany, but more importantly culturally Germans don't like to go deep in debt.
Can you share the model? For informational purposes? Dm is of course fine? I know he worked a lot on it but it could be good marketing
I probably won’t post the Excel, but we have made it into a web app that we will consider releasing.
-Ben
If you move out of your rental you made the wrong choice. Only if you stay in a rent controlled unit for your entire life did you win. This means kids and partner as future choices become limited.
This is simply not true, and not how the analysis was done.
-Ben
What about high earners ($500k+) annually... Who are single with no kids?
Owning is increasingly attractive for high earners with maxed out registered accounts.
-Ben
My takeaway is you're probably not making a big mistake either way you go.
I agree with this.
-Ben
Unless your are undisciplined in which case a forced savings vehicle may be the way too go…
I would love to see how this analysis changes in micropolitan amd rural regions vs. the metropolitan areas included in this study