by Jamie Sarner, Toronto Realtor and ExpatArrivals Canada Expert.
For an expat that has recently moved to Canada, the issue of whether to rent or buy is a fight of ideologies and wallets. First-time homebuyers and young families are especially prone to finding themselves in the middle of this battle.
Not to mention, the Canadian real estate market offers an immense assortment of options, many of which are rather confounding. And as is the case with other life decisions, an abundance of choice is good only if you know what you’re looking for.
The following points can help you determine if renting or buying property is best for you.
Rules of thumb and statistics
Dean Baker, who established the Centre for Economic and Policy Research (CEPR), suggests a handy measure to determine whether the price of a home or office is reasonable. His method takes into consideration an average yearly rent in a comparable building and a comparable area. The rule of thumb is to multiply this rent by 15, and then compare the resultant figure to the asking price of the home or office. If the price is significantly higher than the accumulated rent, Mr. Baker recommends that the purchase be forgone in favour of renting.
To be quite frank though, you can hardly ever find a property in a big city that is worth buying according to this rule. The yearly-rent/price multiplier in New York, for example, is 32. Toronto houses on the other hand, cost on average 18 times their yearly rent. To elaborate on the Toronto market in particular, the average residential property price reached CAD 452,000 in 2011, while monthly rental prices remained at CAD 2,037. (Remember that you can purchase or rent much cheaper than this in Toronto.)
Those who argue in favour of buying state two solid reasons for this decision. Firstly, your mortgage premiums might be similar to, or less than, the rent. Even better, your mortgage payments will usually stay level (or vary according to a base interest rate), but your rent will almost definitely go up in time. In theory, for as little as CAD 1,600 a month, you could buy a Toronto house worth CAD 370,000 in 30 years. This calculation is assuming a 3.69 percent five-year fixed interest rate and a 5.4 percent down payment (CAD 20,000). It also does not take into account maintenance expenses that you will incur on the way.
Practical financial planning
Even though the resulting premiums in the above example are lower than your potential rent, it is expected that such a house will need significant investment in repairs, will be located in a less-than-popular neighbourhood, and will be at a possibly unfavourable location.
On the other hand, purchasing a house like this will still allow you to start building your equity, and nobody will force you to stay in it for the entire mortgage period. On the contrary, you will be able to move out as soon as you can afford a better home, selling the old home and transferring your mortgage obligations to the new one. When it comes to purchasing a home, the sooner you start, the sooner you’ll own.
Even though it is a great way to build your equity, purchasing a home only makes sense if you have job security and a fixed workplace. The former will ensure that you can afford to pay for the mortgage if you are indeed financing your home purchase this way, and the latter will ensure that you do not have to repeat the entire purchasing process all over again in another town or city soon.
In short, people who cannot commit to one place (because they do not have the right job and/or family stability) will prefer renting. In most cases, it’s better to buy, but making a bad purchasing decision may prove costlier in the end.
Closing a deal
If you feel a little overwhelmed coming to Canada, finding a home to buy or rent is not going to help you relax just yet. On the bright side, there are plenty of qualified realtors in every Canadian city who will be more than happy to assist you with the entire home-buying process. In addition to property market advice, some real estate agents will be able to provide you with mortgage tips and guidance as well. Real estate agents charge a fee that is roughly proportional to the value of the home that you are purchasing. The fee is due upon a successful closing of a home sale. You can think of the fee as a transaction cost or part of the home’s price.
If you’re looking to rent, you may not even need a middleman. There are plenty of websites listing currently available rental properties in Canada, whether you need a house, condo, apartment, studio, or loft. If you need inspiration, simply check out RentHome or RentBoard or search for “apartments for rent” in your city online.
If you’re looking to buy a new house or apartment in Toronto, feel free to contact Jamie Sarner, a Toronto realtor. Similarly, you could get in touch with Jay Banks, an expert on Vancouver houses and condos, if you want to find accommodation or invest in properties in Vancouver. Finally, David Tsegai is an expert on northern Calgary homes and a Calgary property investment advisor.