Rentals cheaper as mortgages climb, study finds

dave2004

Rentals cheaper as mortgages climb, study finds
% W/ v6 R: H5 P) h4 w# nAffordability gap grows  

Financial Post
* D+ o2 T3 Q6 N1 HPublished: Wednesday, October 18, 2006
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: i% u9 w- Z8 \6 G4 BWhy 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.
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"The affordability gap between renting and owning is at its highest level since 1990," said Adrienne Warren, senior economist with the bank.

3 s" V. h7 J! W& @& ]7 l: FThe 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.

- [: z& T6 D7 ]& c5 F- 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.
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: Z1 H& F* J7 F. ^  B3 kThe 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.

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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  }. O2 X& d! |2 SGenerally though, the trend across the country is home ownership costs are rising faster than rental rates.

0 n" J% \- Z$ V8 b; ?7 [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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5 A  [& h! }5 Y/ r4 |+ Y* XOne 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.
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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 $1,073 per month under a 35-year plan.
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' F( i9 h# @1 p$ r/ ^4 j& ^) IReal 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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4 ^8 `1 d+ ?. t  HHowever, Mr. Campbell said apartments are affected by rent controls in many markets.

' P. q# N, T# x1 \8 T* S"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.

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2 [& p; |* G( @/ \7 qDisclaimer: This is just published research data and do not express my position.