Posted on April 18, 2021 at 6:00 a.m.
The question seemed settled 20 years ago, among others with the book A home at my cost Éric Brassard, and yet the myth that buying a house costs less than living in an apartment persists.
“We’ve heard the argument a thousand times: ‘I don’t want to throw my money away.’ Often people mix the qualitative with the quantitative. The arguments become irrational to justify their qualitative preference ”, maintains Éric Brassard, CPA and financial planner at BGY, Integrated Financial Services.
Why is this going on? Because, as a general rule, when you want to move to a more comfortable and beautiful place, there is more to buy than to rent.
Éric Brassard, CPA and financial planner at BGY
The profitability calculation between renting and buying can now be done online. However, you have to enter the right numbers and choose the right calculator, as some are intended to sell you a mortgage. No need to compare a bungalow in the suburbs with a three and a half in Montreal, says Éric Brassard. “It’s obvious that if you have more, it will cost more. ”
> Take the AMF test
We did the math by comparing a 1500 sq. Ft. Townhouse2 in Vieux-Longueuil with a mini backyard posted (not for long) at $ 350,000 and a 1,500 sq. ft. apartment2, also in Vieux-Longueuil, with access to the backyard, displayed at $ 1,600 per month.
We considered a down payment of 5%, a mortgage at 3% over 25 years and then at 5%. For the rent increase, we put 3%, which corresponds to the average rent increase granted by the Administrative Housing Tribunal from 2012 to 2020 with capital expenditures. Excluding expenses, the average increase granted by the Tribunal was 1.7%. We did the test with a yield of 3% and no yield.
Results? If you do not invest the money saved by renting an apartment (down payment, maintenance costs, etc.), it becomes more profitable to buy the house after 12 years when the mortgage rate is 3% . If the mortgage goes up to 5%, it becomes more profitable to buy after 20 years. If the difference saved by renting is invested in an investment at 3% interest, it is after 23 years that it becomes more profitable to buy.
“When people do their calculations, they often only consider the price they paid for the purchase and the resale price, but between the two, there are costs to be borne,” emphasizes Éric Brassard. Whether it’s taxes, maintenance, the roof, windows or a French drain to change, not to mention the opportunity cost, such as the sum locked in in the property that is not invested elsewhere.
If, by renting, you give your money to an owner, by buying you give your money to the bank in interest. By taking out a mortgage of $ 332,500 (house at $ 350,000 with 5% down payment) at a rate of 3% for 25 years, you will have paid in interest $ 139,562. The rate goes up to 5% and you give the bank $ 247,650.
> Calculate the interest
The answer to the initial question therefore stems from emotional arguments rather than a real financial calculation. Wanting a yard for the kids, an incredible view of the river or avoiding being at the mercy of an owner who could evict us, for example.
Recognizing yourself as unruly and choosing to be forced to repay a loan is also a reason that HEC Montreal professor Amine Ouazad calls behavioral economics.
Researchers have shown that households reduce their consumption and work more to pay for their property. It’s like it’s a commitment to save.
Amine Ouazad, professor at HEC Montréal
This reason is in line with the one cited by Paul Cardinal, director of the economic service at the Association des Professionnels de la construction et de l’Habitation du Québec (APCHQ), in an interview with Press. Paul Cardinal argues that the government should create measures to boost homeownership, as homeowners accumulate capital gains and, when they retire, they will need less state assistance.
Avoid being a sheep
The best strategy, although difficult to implement for some, is to avoid doing like everyone else, suggests Hans Brouillette, of the Corporation of the property owners of Quebec.
“When everyone wants something, that desire creates a higher bid. The question you have to ask yourself is: is this really what I need now? What are my needs? When everyone goes in another direction, will I go with the flow? “
If you say: “Everyone is doing it, it must be good”, it is too late. If the world isn’t doing it yet, you are at risk, but you might be earning more too. Like those who had the courage to invest in 2008 in Florida in the midst of an economic slump.
Hans Brouillette, from the Corporation of Quebec Real Estate Owners
Hans Brouillette emphasizes that someone who has been a tenant for a few years is in a very good situation, because his rent does not cost him too much and he can continue to save until the madness of the outbidding of properties in the suburbs runs out of steam. .
The famous added value
Many buyers rely on capital gain. However, the fluctuation in the value of a property varies from one city to another. And while property prices generally follow inflation, this is not always the case.
“In Saint-Bruno, the average price of a cottage [en dollars constants] fell by 22% between 1976 and 1982, only to rise again by 63% between 1982 and 1988, and fall again by 26% between 1988 and 1998. In the end, ownership is worth 7% less than it was 23 years, ”wrote Éric Brassard in 2000.
Between 1976 and 1998, the value of a standard bungalow had fallen by 15% in Sherbrooke, 19% in Sainte-Foy, 12% in Longueuil, 36% in Charlesbourg, but had climbed by 18% in Duvernay and 10% in Beaconsfield.
Facts to consider
“You have to think about the value of the land in relation to the structure,” says Professor Amine Ouazad. If you buy a single-family house, even if the structure is deteriorating, there is still a lot of land which is increasing in value. “
A condo is a bad investment, because there is very little land and a lot of maintenance to be done to maintain the value of the property.
Amine Ouazad, professor at HEC Montréal
What about new homes? “When prices increase on resale, the gap between new and existing narrows. But because of the price of materials, this difference will not take place in 2021 ”, analyzes Paul Cardinal, of the APCHQ.
Rental housing construction jumped 20% in 2020. New housing, however, costs more and is smaller in size. “Because it is more profitable for the builder, but also because of the demand,” says Paul Cardinal, of the APCHQ. Those who built large homes sold them less quickly. ”