“Should I buy or should I rent” articles are all the rage these days. The New York Times has their rent vs. buy calculator, a professor at McMaster University assigns a “rent vs buy” task to his students, and Mr. Money Moustache had a good rant that focused on Toronto and Ottawa.
That last article kicked off a Twitter discussion between me and a couple of other New Westies. Twitter, being a 140-character medium, is ill-suited for prolonged discussion, so I decided to write a blog post about renting vs buying in New Westminster.
And here it is!
The Setup and Assumptions
I’m going to be starting off with a townhouse, since that’s what I live in and am most familiar with. Specifically, a two-bedroom one-bathroom townhouse, preferably two levels, and roughly 900 square feet. It should be close to transit and shopping. Both the renter and owner will have to purchase insurance to cover contents loss and other liabilities. Any utilities will not be included, because I am assuming that what the renter pays for, say, internet access, the owner will pay the same rate.
If the renter ends up spending less money per month than the owner, any extra money will go into a savings fund that earns interest. Same deal if the owner ends up spending less money than the renter.
Both renter and owner will be staying in their unit for 25 years. When renters move it’s likely they’ll end up paying more rent than what the standard increase would be, but when owners move they have to pay all kinds of fees and taxes. I don’t want to get into all of that mess, so I’m keeping it simple.
Thus the numbers I will be looking at are, for the renter:
- renters insurance
- return on savings investment
And for the owner:
- strata owner insurance
- property tax
- strata fees
- property value
- return on savings investment
I am making the following assumptions on how these numbers change over time:
- rent increases at 3.5% per year. British Columbia has a maximum allowable rent increase, and this is the average increase over the past 11 years.
- insurance premiums for both the renter and the owner increase at 2.5% per year. Over the past 20 years the inflation rate in Canada has been about 2%, but I bumped this up a tad.
- the mortgage is fixed at 5% over 25 years. While this might seem high in today’s world of 1.49% 18-month mortgages, the historical mortgage rate is actually rather high (as high as 21% in 1981!).
- the down payment on the mortgage will be 5%.
- property tax stays fixed. I based this assumption on one thing: Twitter. I asked and had a few answers saying that it’s either gone up a very small amount or gone down a bit, so I averaged this out to “no raise in property tax”. I don’t really understand mil rates enough to argue why this is the case, though.
- strata fees stay fixed. I have no idea how accurate this is, but I know that stratas can and do raise and lower the fees, and can occasionally levy special assessments to repair common property. I’m assuming that the strata knows what they’re doing and is putting money into a Contingency Reserve to fund repairs so levies are not necessary.
- savings return is 6.5%. I’m pulling this from the Canadian Couch Potato Tangerine Investment Funds Model Portfolio, specifically the Equity Growth fund, which has a 6.5% 20-year annualized return. No taxes will be charged on any interest gains, as this fund is available as a Tax Free Investment Fund.
- annual property value increases by 1% per year. This is probably going to be my most controversial assumption, but most of the uproar about housing prices skyrocketing in Metro Vancouver have been focused on single-family detached homes. They’ve been going up like crazy. Condos and townhouses? Not so much. In fact, condo values were flat for a few years before 2014, when they were up about two per cent in 2015. And if you load up that page, scroll down to the chart near the bottom, and load up New Westminster, you’ll see that a representative three-bedroom townhouse went down in value by 4.8% between 2014 and 2015.
What does the renter pay?
Now, I live in a housing co-op, and they typically have lower housing charges than market rental rate. However, my housing co-op entered a financial agreement with the [Canada Mortgage and Housing Corporation])http://www.cmhc-schl.gc.ca/en/co/buho/) such that our housing charges are pegged to the average market rate for similar units in the area. That means I can use my numbers as representative for the rental market rate for our area. For a 2br 1ba townhouse in 2015, that’s $1210 per month.
To get an insurance value, I went to TD Insurance and got a quote for fairly basic insurance. I set the building type as “Townhouse/Row house”, the exterior as “Aluminum/vinyl/stucco/metal”, and set my contents replacement value at $75,000. Electric baseboard heating, with no fireplace or stove. One smoke detector and no alarm system. With all of this the quote for renters insurance came out to $853 per year. That’s actually nearly twice what I’m actually paying, but we’ll go with it to make comparisons with the owner fair.
Over 25 years, the renter will have paid a total of $630,583.45.
What does the owner pay?
I managed to find a fairly good match for a townhouse for sale. If you don’t want to load that up, it’s a 900 square foot 2-bedroom 1-bathroom townhouse in downtown New West for $322,000. The monthly strata fees are $255 per month. At a 5% downpayment and a 5% 25-year mortgage, that gives a monthly mortgage payment of $1779 (go do the calculation yourself with a $305,900 mortgage).
I got an insurance quote in exactly the same way as for the renter, with the same numbers (plugging in 1999 for the building build year), and I got an annual cost of $954 per year, $100 more than for a renter. That strikes me as really odd. I should mention that even though the property I’m looking at has a gas fireplace, I did not include that in the insurance quote (doing so didn’t change the quote, though).
The property tax on this townhouse is about $1800 – in 2014 it was $1810.62 and in 2015 it was $1778.54. I got these numbers from the City of New Westminster Property Inquiry site.
Over 25 years, the owner will have paid $715,760.
What does the renter gain?
With the above numbers, the renter pays less per month than the owner does until 2033. As the renter deposits this money monthly and gets the above rate of return, at the end of the 25 years the renter will have $440,359.87
What does the owner gain?
The townhouse continues to gain value, and at the end of the 25 years the townhouse will be worth $412,943.10.
From 2033 to 2040 the owner pays less per month than the renter, and deposited monthly, this money grows to a total of $39,561.99.
With the above assumption, the renter wins.
The renter has paid out $630,583.45 while having final assets worth $440,359.87. This leads them to a net loss of $190,223.58.
The owner has paid out $715,760 while having final assets worth $452,505.09. This leads them to a net loss of $263,254.91.
But do they really?
Well, yes and no. After 25 years the renter will need to continue to pay rent. After 25 years the owner stops paying a mortgage, freeing up nearly $1800 per month. Of course, the renter is sitting on $440k, so they could just write a cheque for that amount and buy an equivalent unit to what the owner has, which would leave the ex-renter with $27,416, which is pretty close to the cash that the owner has ($39,561).
The renter does have an advantage with liquid assets. A sudden job loss or emergency expense is easier to handle if you have some cash put aside, which is what the renter would have. Tying up you wealth in illiquid housing makes it a little more difficult (although mortgage payment protection or job loss insurance is available for a pretty small fee).
And the owner has an advantage in that they can do whatever they want with the unit (to a limit, since it’s not a detached house). New flooring? Go for it. Bathroom remodel? Go for it. You can’t do that in most rentals.
The take-away is this: for a modest townhouse in New Westminster, it doesn’t really matter if you rent or buy. The renter ended up “losing” less money than the owner did, but they both ended up in the same place in the end.
I guess it depends on who you want to throw your money at: a landlord or a bank.
One more thing…
If you want to challenge my assumptions and use numbers of your own, I’ve made my rent vs buy spreadsheet public to view. Feel free to copy it to your own spreadsheet and fiddle with the numbers. Here are some tips:
- the percentage increases for rent, insurance, house value, and investments are located in cells C30 through C33.
- change the values in row 2 (where applicable) and the changes should propagate through the entire document.
- the cells you want to pay the most attention to are K28 and N28. These are the amounts “lost” by the owner and by the renter, respectively.
If you find an error in there, please do let me know and I’ll fix it right away. There’s a hairy formula for calculating the investment amount (columns N and O) that I’m pretty sure I got right, but it could be wrong. The numbers end up looking right, though.