Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
$ z- o/ Y: Q/ ~; O6 ?Affordability gap grows  
  k3 R7 u! s6 N8 c) p& ^
6 B& a- @% z( mFinancial Post
+ M; w' N- j9 M( r+ TPublished: Wednesday, October 18, 2006
# U: h+ M3 q+ Z: K/ ^" W
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.
7 x0 q; ?. a3 |
) o4 b- g: Z0 }! C# L2 ~* h"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

! W3 L1 n/ O/ n: _  d' Q- LThe 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.
1 h0 T  c+ V, T0 Z6 V
( l2 s7 \; F' Z: N" k# F"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.
0 Q6 ^) U5 ?4 w3 `
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.
& q( O: N1 P+ w' J) v: M& \8 m! O
# N, `2 l2 X' H% l% E% J4 A8 dMs. 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.

Generally though, the trend across the country is home ownership costs are rising faster than rental rates.
* K- n" l1 R% g0 D5 q
9 L* G% z4 m, e& ]1 s& B- b- ]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.

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.
$ B7 c, ?8 r0 u/ y$ m, |
7 X' h% l; \+ _, r; sMs. 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.
5 K, F! R/ u8 a4 u
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.
# b  T/ O: r8 U% V  X4 t1 ]
However, Mr. Campbell said apartments are affected by rent controls in many markets.

"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 $1,000," he said.
, n5 G* m$ X. Z& u% g$ o0 w

Disclaimer: This is just published research data and do not express my position.