Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
Affordability gap grows  
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6 C9 i3 y" |' r% e3 TFinancial Post
9 E( F4 F& P. m2 U, T: qPublished: Wednesday, October 18, 2006

Why own a house when you can rent the same property for a lot less?

; r, i8 j. l3 o7 A. aA new study from Bank of Nova Scotia says the pendulum has swung back in favour of tenants.
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' k  p$ p2 E9 D! _* ]) i8 m1 D"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.
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The 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.
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"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.
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4 B: H7 b4 e6 B& G! K. N# G5 nThe 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.
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Ms. 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.

One 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.
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3 g% W& e; q- C7 P/ T+ r8 n1 U' LGenerally though, the trend across the country is home ownership costs are rising faster than rental rates.

/ n  u1 _6 L7 O6 _! T2 |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.
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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.

+ m7 v7 u% _" E1 lMs. 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.
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; I, S! H2 L( KReal 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.
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However, Mr. Campbell said apartments are affected by rent controls in many markets.
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# d, y( v: V. a! |2 Y% [' L% n"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.


5 R* C9 I0 q' e' e% x9 q, F9 }; PDisclaimer: This is just published research data and do not express my position.