Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
+ W! I$ {" W/ }Affordability gap grows  

Financial Post
Published: Wednesday, October 18, 2006

! M; v% q7 c$ J; R# s! F" B% ]Why own a house when you can rent the same property for a lot less?
2 F' d$ [" |: u# j& K" I
# o* G# T) L1 U, ]- DA new study from Bank of Nova Scotia says the pendulum has swung back in favour of tenants.

" n# M; P: U0 k* i  Z1 T  t, G"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

4 ?4 D+ z, b- |, NThe 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 $800 in 2006.
# R4 t4 Y6 N: X0 N3 |$ d
"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.
' U9 J+ i% x$ g; G6 h9 d/ h) l  C
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.

8 I" s! f6 c( OMs. 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.

  @; l' E) u: P9 }! V' iOne 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.
( V. t3 I6 k/ g' k2 d! ]
; T0 Q" q6 S- F2 J8 ]Generally though, the trend across the country is home ownership costs are rising faster than rental rates.
, i) v5 r# o9 u1 Y
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.
) n+ C8 [+ [3 {7 q
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.

* `3 A9 k# A- `2 @: ?) aMs. 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.

. f9 |/ }8 w0 i4 Z' N( FReal 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.
) B* @, @9 U! Q* p+ z* G
However, Mr. Campbell said apartments are affected by rent controls in many markets.
; \% E- [0 t/ _; Q: v4 O& ?
"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.
/ Q1 `- k0 G" |3 G" L7 C
6 l8 h9 Q8 H; p
  t( J, H& Y8 m1 e# b8 W% cDisclaimer: This is just published research data and do not express my position.