Rental complex

Following on from my recent post, The case against home ownership, Canadian Business last week published a great article. entitled Rental complex, asking why more Canadians don’t rent – a question equally applicable to Australians.

At over 2,800 words, it’s a long article (but well worth reading). Below are some of the key extracts. Note the clear parallels to the housing situation in Australia.

Over the past decade, as the value of the average Canadian home doubled, and tripled in some areas, rents remained stable or even declined. As a result, it now costs more than twice as much to own that average home as it does to rent it. In May, Ben Rabidoux, an Ontario financial adviser (and an unapologetic renter) who runs the Economic Analyst blog, illustrated the unprecedented gap that’s opened between the cost of renting and owning with a series of fever graphs charting rents and housing prices in seven cities across the country. The lines track more or less in sync until a decade ago, when they diverge as home prices shoot toward the stratosphere, the gap growing wider with each year, like huge jaws swallowing homeowners’ retirement savings and vacation budgets and pushing them further into debt.

Below are some of the charts from the article extracted from Ben Rabidoux’s blog:

Back to the article.

Even before the recent run-up, renting suffered under the perception it’s money thrown away that could be put toward building equity—a myth the surging home values have transformed into a near religion. Fed by this belief, Canada’s home ownership rate rose to eclipse most other rich nations’, up almost 10% since 2000. Today, two-thirds of households live in privately owned homes, rising to 70% in Vancouver and 74% in Calgary. In New York, Paris or San Francisco, that proportion is closer to a third. In fact, in much of Europe, lifelong renting is the socially respectable norm, backed by rent controls and tenant protection laws.

With widespread warnings that we’re approaching the peak of the housing boom, with Canadians more indebted than ever, largely due to their outsize home investments, and with cities like Toronto boasting some of the lowest rents among major world centres, why aren’t more of us re-examining the math? The reasons are cultural and emotional, backed by ill-conceived public policy. This Canadian Dream is an expensive delusion. There’s never been a better time to rent.

Every asset class has standard ways to measure value. For stocks, there’s the price-to-earnings ratio; for bonds, there are different yields. For real estate, the typical valuation ratios are price to income (what you can afford to buy) and price or buy to rent (what you could make in cash flow). According to Ed Sollbach, a Desjardins Securities strategist, the buy-rent ratio for the four biggest Canadian cities is currently above 2 —meaning it costs twice as much to buy as to rent the average home—and 3.1 in Vancouver. That ratio, it bears noting, only compares rent to mortgage costs; it doesn’t include the various expenses entailed in home ownership—taxes, maintenance, insurance—that can more than double the monthly outlay…

While financial gains from home ownership are iffy at best, the opportunity cost is significant. When Alexandre Pestov, a strategic consultant and research associate at York University’s Schulich School of Business, compared buying a two-bedroom Toronto condominium to renting it over the past 25 years, he found that the renter ended up $600,000 richer than the owner if he invested the spare cash in low-risk bonds. Several other studies have reached similar conclusions: renting while you conservatively invest your savings is financially smarter than buying a home…

Still, many people factor in an ownership premium—the amount they’d pay over and above the cost of renting for the freedom, stability and simple bragging rights of having their own place. But it doesn’t take a new homeowner long to discover just how large that premium can be in money and time: the constant outlays on maintenance and repairs (at least 1% of the purchase price per year, experts estimate, and as much as 4%), the chores and DIY projects that eat up weekends, the pressure to keep up with the ever-gentrifying Joneses. In fact, studies find that homeowners are no happier than renters and have higher levels of stress, largely due to the financial burden and greater time constraints.

Your lifestyle suffers, your worries mount—and yet, no matter how much data you throw at people, there’s an ingrained belief that being a homeowner signifies maturity and that renting connotes instability and transience. Moshe Milevsky, a finance professor at Schulich and one of Canada’s best-known home-ownership skeptics, has long argued that for young people with limited means and unrealized career potential, stowing most of their wealth in a single illiquid asset is foolhardy. Today, he thinks just about anyone would be better off renting. “I really wish I could sell my house and rent. Immediately!” he says. “The market is so overvalued. I’d sell to the biggest sucker. But my wife and kids would kill me.” That’s because, for most of us, financial considerations are only part of the equation. “The decision to purchase a house goes well beyond the practical,” says Milevsky. “It’s part of people’s identity”…

Canadians’ attitudes about housing have long been shaped by government policies and the tax system. There is a large discrepancy in taxpayer subsidies for owners and tenants, according to a study released last fall by the FRPO and the Canadian Federation of Apartment Associations (CFAA)… CFAA president John Dickie argues that this situations benefits neither taxpayers nor the economy. “The government should get out of the business of encouraging people to own,” he says.

There’s a broader economic case for encouraging more people to rent. Aside from consumers’ dangerously high levels of debt, having so much money concentrated in housing makes the whole economy less efficient. In his 2010 manifesto Renting the Dream: Housing in America after the Great Reset, University of Toronto professor Richard Florida goes so far as to paint home ownership as a relic of a different time. “Owning your home made sense when people could hope to hold a job for most or all of their lives,” he writes. “But in an economy that revolves around mobility and flexibility, a house that can’t be sold becomes an economic trap,” preventing people from moving to where the jobs are. Studies in both Europe and the U.S. corroborate this argument, showing linkages between high home ownership rates and unemployment.

In the glow of our pride of ownership, we tend to forget that owning your residence is hardly the global norm… In fact, Germany, Europe’s economic engine, has the European Union’s highest proportion of renters, according London-based property research firm RICS. In Berlin, 90% of residents rent; in Hamburg, the share is 80%. And renters aren’t the lower-income contingent: professionals who spend half their earnings on rent are not uncommon. While Germans do want to own, they don’t feel pressed to buy when they can’t afford to, the way Americans, Canadians and Britons do. The difference can be traced to real estate market trajectories: Over the past decade, while housing bubbles percolated through much of Europe and in North America, home values rose less than 3% in Germany. Renting has no stigma because Germans don’t think of home ownership as an investment opportunity of a lifetime.

Readers seeking to better understand the German housing system are advised to read my recent article, How Germany achieved stable and affordable housing. Anyway, back to the Canadian Business article.

European governments are also less in-clined toward home ownership boosterism. In parts of Europe where renters dominate, tax regulations don’t favour owners, rents are tightly controlled, unlimited-length leases are common, and supply of attractive apartments is plentiful. As a result, notes Dickie of the CFAA, European renters don’t move as often as North Americans…

In the U.S., after the fiasco of George W. Bush’s “ownership society,” a shift in mentality has already started. Home ownership has experienced the biggest decline in two decades, and the number of renting households has been growing by about 700,000 a year since 2006. In New York, San Francisco and other thriving cities, brokers are reporting sharply rising demand for luxury rentals, as affluent people who could afford to own decide there’s no cachet anymore in being a homeowner, and lots of risk. Indeed, in a recent poll, 71% of Americans conceded that renting has advantages over buying.

“Renting has become culturally accepted in the U.S.,” says Desjardins strategist Sollbach, who’s tracking the market correction. Ironically, this shift is happening at a time when the plunging prices in some regions make buying advantageous. “But Americans have had such dramatic losses that the whole idea of owning has been drummed out of people’s minds,” he says. “They’ve gone through a life-death experience.” The equity markets have taken notice: the values of American apartment REITs have risen 72% since early 2010…

No one argues that owning a home is, in principle, a bad idea. But today, in this market, renting is a better one. After 12 years of rising real estate, a renter goes against a powerful cultural tide. But even if the housing bubble continues to inflate for months or years to come, it’s high time to recalculate the ownership premium we are willing to pay.

What a superb article, with clear parallels to the Australian housing context. In fact, if you substituted the words “Canada” for “Australia”, and replaced “Toronto” with “Melbourne” and “Vancouver” with “Sydney”, the article would not sound out of place.

I have assembled a comparable set of charts for the Australian market which prove this point  beyond doubt. They will be forthcoming in due course.

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Unconventional Economist
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  1. Well, I am in the category of someone who wanted to ugprade their home and decided to rent instead and keep their home as an IP.

    I am paying several hundred dollars extra for a much larger home, but am breaking even after tax etc. Basically I upgraded for free. This highlights the difference in cost. Why don’t more Australians rent indeed.

    • I would just be weary of the potential capital gains you may have to pay on your ‘investment’ property.

      Otherwise you’re correct. You couldn’t have bought the upgrade for the price. There’s stamp duties, agents fees etc…

    • If he moves back in to his house and makes it his PPOR (principle place of residence) within seven years of using it as an IP, there is no CGT payable if he sells it thereafter.

      So I’ve been told – do your own research (i.e contact the ATO or speak to your accountant).

      • The rental upgrade works well in certain circumstances and the 7 year rule for capital gains should be exploited by more people. Those in RE and Govt don’t really want people to know that one.
        I have a LVR around 62% on my property, was a PPOR and I now rent as an IP. I am slightly negatively geared and have good longer term tenants.

        Wanting a larger home to accomodate a growing family I have opted to rent a property that is around $50/week above the rent I am getting on my IP.IF I were to sell my prop and buy the new one it would costs me around $150,000 including the excessive transactions costs. (Stamp Duty ect)
        I would need to borrow that $150,000 and push my LVR to 71%. Interest payments on the borrowings would be approx $200 per week more so $50 a week extra in rent makes more sense. I am exempt from capital gains tax for 7 years as the IP was a PPOR. I get get the benefits of an IP, the IP being tax deductible and I maintain a smaller loan. ( less interest rate risk and risk in general) I can then use any excess funds to invest elsewhere and diversify my portfolio.
        The Govt, the RE industry and social norms question my decisions. We all know why here on MB. Financially I would be crazy to sell and buy to upgrade.
        The only winners with that strategy would be the
        -RE companies getting a hefty commission
        -The Govt getting there cut in Stamp duties etc
        – other associated parties like solicitors.
        What would I GAIN???
        I would get a larger mortgage, an non deductible debt, a less diversified portfolio, increased interest rate risk, more stress and the only thing I gain is the bragging rights to my new larger home.

        Sorry, the bragging rights costs too much!!!

      • Good tip, but at this stage I have no plans to ever sell, for much the same reasons espoused by romish.

  2. Hi Leith,

    I see people in Sydney open their eyes wide when they realize what size of a loan they can get by the payments they make in rent. It is much smaller than they think, always.

    Renting is by far cheaper in Sydney. Having said that, if you have enough of a deposit so that your mortgage payments and other costs of ownership (council taxes, maintenance, strata fees, etc.) equal your rent payments, then I can see a business case.

    That happens when the LVR is very low, lower than 60% in most cases.

    What the extracts of the article fail to touch on is the risk of renting vs. the risk of owning. There are risks to renting in Sydney that are well over the risks of owning in Germany. That has to do with the differences in the regulatory and policy environments.

    The strategy that makes the most business sense to me is to buy a property out right. Thus eliminating the risks of renting and accepting the risks of owning. Then the equity can be used to finance investments in low risk bonds as the article talks about. As such, the cost of finance is tax deductible.


    • I’m a little confused at to why you would borrow to invest in low risk bonds – surely the interest rate you are paying on the loan is higher than the income paid by the bonds?

      e.g. The Australian Fixed Interest Index Fund has returned just over 6% p.a. over the last ten years.

      Or is this some strange negative-gearing play that I’m yet to hear of?

      • It is common in the US at least for government/municipal bonds to be tax exempt on their interest. Many people overlook this – 3% tax free is sometimes better than 6% with tax owing etc.

        I would say in this case they are saying that by intesting all that money in a tax free vehicle you are minimising your tax.

      • Hi AB.

        Good point. I woudn’t do it in Australia.

        I am invested in 3 properties in Ottawa (Canada) and the cost of financing there is half what it is here. The US is even better.

        But I was referring to Sydney Australia. I think the best play is to get to the LVR that matches your cost of renting, maybe a bit higher (depends on your attitude to ownership/renting risks). Then assuming RE keeps up with inflation over 10 or so years, every payment you make to principal is a return of 7% (today) after taxes. For the person buying the median property in Sydney that is a return of 13% before taxes assuming no more risk than what you already accepted when you decided to own the property.


    • It’s nice in theory (buying outright), but unless Gen X or Y borrow large amounts of money from their baby boomer parents, getting the deposit to make the LVR worthwhile, or buying something outright is out of the question with the current property values.

      I have done many feasibilities and spreadsheets with many variables (for my personal situation) and it doesn’t ever make sense for me to buy unless my LVR is close to 50/50. Not everyone has baby boomer parents with truckloads of money and in the current climate it doesn’t make sense to put all your life savings into a deposit.

      Compare the difference in ‘cost of loan’ vs ‘renting’ and putting at least 75% of the difference into a flexible interest account. Factor in the possible capital gains from the property and I can’t make a case for buying property.

      • I compiled a chart of median price to median anual rent ratio in Sydney. I will send it to Leith to see if he wants to publish.

        The price to rent ratio is analogous to the PE ratio to value equities. The ratio tells you how many years it would take to make up the property assuming no cost of ownership. As a rule of thumb equities that are below 15 tend to be in the good value category.

        Take a guess at what that ratio is for Sydney as of the March quarter?


      • I agree.

        One of the biggest issues I have with the whole “get on the property ladder” story, is that what is sold is a sound future through putting all your eggs in one basket. Generation X, Y and Z, like no other generation in 100 years is going to have to largely fund their own retirement, not to mention those of the baby boomers. They should not be ploughing all of thier savings into an overpriced “asset” that will generate no returns for them for a very long time. It will only take a few rungs in the ladder to come loose and the game is up.

        I’m not anti-property, anymore than in late 2007 I wasn’t buying shares, but I wouldn’t touch property with a 10 foot pole at the moment.

  3. IMHO if you are renting then it’s worth looking at opening a First Home Savers Account and chucking in up to $5,500 in it each year. The government kicks in an extra 17% co-contribution (up to the $5.5k deposit). My wife and I are taking advantage of this account as one day we would like to buy a place of our own if for no other reason than the very poor tenant rights in Australia and the lack of long term stability. That and the fact that landlords think that they own you

    • I did this with my wife and I got a letter from ME telling me that my savings can now be released. We both contributed the maximum for 3 years (it was 5K when it started).

      I started when the scheme was introduced and the funds are ready to release now (4 fiscal years, 2 calendar years). If you time this properly it can work very well.

      The rules have been relaxed lately so that the money doesn’t get locked into Super if the vested period is not done.

      Another benefit is that the interest gets taxed at the rate of superannuation contribution. seems to be private but I found it has accurate easy to understand info and a very clean site altogether.

  4. Canada and Australia are both migrant societies in a way Germany is not.
    Disenfranchised Asian Chinese and European migrant communities
    become stake holders in these countries by owning property. They know how their ancesters lived as rent seekers in Feudal systems and it wasn’t pretty.
    As long as countries like Canada and Australia promote the ideal of property ownership through appalling lack of rental rights and perverse incentives to buy property will always remain overvalued.

    • The_Mainlander


      Mate I say Pish Tosh.

      “As long as countries like Canada and Australia promote the ideal of property ownership through appalling lack of rental rights and perverse incentives to buy property will always remain overvalued.”

      History proves this in Melbourne and I am postive history does and will repeat.

      Love the Human construction that is ‘time’ and time will prove us all rightin the long run!

      But I still say pish tosh Lucdulec!

      History here: 1880-1890’s crash!

      It was massive…

      “In 1891 the inevitable happened: a spectacular crash brought the boom to an abrupt end. Banks and other businesses failed in large numbers, thousands of shareholders lost their money, tens of thousands of workers were put out of work. Although there are no reliable statistics, there was probably 20 percent unemployment in Melbourne throughout the 1890s.

      Melbourne had 490,000 people in 1890, and this figure scarcely changed for the next 15 years as a result of the crash and subsequent long slump. Immigration dried up, emigration to the goldfields of Western Australia and South Africa increased, and the high birthrate of the mid 19th century fell sharply and the city’s growth continued, but very slowly.”

      God bless Wikipedia… or Gaia or which ever deity suits you best 😉

      and bubbles galore here:

  5. “It’s very [common] for renters to go to a barbecue and feel sheepish when they speak to the brother-in-law or colleagues. And if you claim online that you can afford to buy but choose not to, you’re jeered as clearly lying.”

    I can definitely relate to this. When I tell people I rent it’s as if I have cancer. They give me a pitiful look, put a hand on my shoulder and tell me to hang in there and save up a deposit 🙁

    The fact that I own equities, foreign currencies, PMs, bonds etc seems lost on them.

  6. Im a Gen Y and ill give you some of my experience with other Gen Y’s & their attitude to investing.

    The problem with our generation is we dont know any better than to invest in property. It is portrayed to us by our parents that is a safe and “smart” investment. Graduating from school in 2008 i did business & economics. Throughout the curriculum it did not touch on investing/saving/property or super funds (if it did it was very lightly). (I have friends with 4-5 super account because they either cant be bothered to fix it or are just too lazy)

    A friend of mine who has saved an impress amount of money by Gen Y standards says he wants to buy an investment property this year to get on the property ladder. He works hard and is quite intelligent but thinks the usual, “property doubles every 7 years”. There is no guarantee’s in investing but to dedicate all his savings into one asset at our age is taking a large risk.

    What im trying to get at is our education system is based on teaching us how to obtain a high ATAR & how to get into uni, not the necessary skills to strive and be successful in life. You could also point the finger at the parents for not teaching their children sound financial advise. In the end i see the problem of Australia’s infatuation to housing being an education problem.

  7. I currently have a fantastic little apartment, brand new, luxury fit out, in an luxury community on the gold coast. $350 per week! and given the facilities around body corp has to be a minimum of $100 per week! Based on current ‘depressed’ developer valuations the holding cost of buying this same unit is at least 10% pa (before purchase costs, rates & general maintenance). Rent = 5.35% (obviously inclusive of rates and maintenance). Despite its quality, this apartment is at the lower end of the price scale, hence the margin between owning and renting is far narrower than more expensive apartments. These same apartments were 25-30% more expensive (to buy) just 2 years ago and the rents were not much higher than today. Imagine the yield gap then! Our place prior to this in another luxury gold coast suburb was renting on a 2.8% yield net of BC costs, that’s after a 45% valuation hit!! off the plan = ouch ouch ouch!

  8. With the way the world economic system is going one wonders if risk free bonds really exist and whether one can make good money in securities or other financial entities. The only way to make real money is; inherit it, win it, steal it , or be a business owner who is lucky enough to strike it rich.

    And I would much prefer to pay $300 rent wk to an owner(which fully owned the property) which goes towards putting his children through school and uni and thus contributing to helping society than giving my money to bankers to spend on outrageous incomes and bonuses, which we will bail out anyway in 5-10 yeas more time! Never give bankers money. Give the young adults the money, care for your next generation.