Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
Affordability gap grows  
" _! T& [% F4 L9 t
Financial Post
; v% a- \! f7 [- t( f, x, oPublished: Wednesday, October 18, 2006

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

A new study from Bank of Nova Scotia says the pendulum has swung back in favour of tenants.

  N! _  Y$ q% w  G: e"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

- k" w% c* _: _3 x( [/ aThe 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.
! ]* F8 R, f" i% w: P' p" b+ z  b
"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.

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.
) [+ m* ~$ g& V
- `) {6 U% c; nMs. 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.
7 {. s* D" p. F; r; f
Generally though, the trend across the country is home ownership costs are rising faster than rental rates.

4 ^! e2 H" W( o. IBetween 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.

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.
0 D1 X# y# _1 V/ f5 F
Ms. 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.
' Z5 A( z1 C0 T- R2 a6 s6 y# C
Real 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.
6 j/ z( U. k+ n
However, Mr. Campbell said apartments are affected by rent controls in many markets.
- s4 h2 U8 v( v  u5 ]1 C( h
3 s# c1 |3 g' t& c6 ^"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 $1,000," he said.
( k: o6 G' |0 f
: W6 V5 ?, b" o- f! Y! b0 {) r2 J! Z
- }$ O( I7 |( ^+ L% V2 @. PDisclaimer: This is just published research data and do not express my position.