[Renting is increasingly becoming the best option for many seeking out a new home.]
Moshe Milevsky has noticed a change of attitude in the 20-somethings he teaches in his finance class at York University’s Schulich School of Business in Toronto.
“I have 90 students in the class and I was discussing home ownership. They view [it] as something unattainable. It’s almost as if they’ve sort of given up on that idea,” he says.
With semi-detached houses in Toronto averaging close to $800,000 and detached going for $1.2 million, it’s not surprising that young Torontonians might have trouble envisioning getting into the market at any level.
The sympathetic would include other wanna-be homeowners who have watched the affordable pockets of the Greater Toronto Area (GTA) close up as the city’s home prices have risen more than 15 per cent over the past year alone, and roughly doubled over the past decade.
Many opt for the commuter approach, buying in Pickering, Markham, Newmarket, or other ‘G’ areas of the GTA where you can still have a yard even if you don’t carry a stethoscope to work. And even condos are getting beyond the point of affordability, before factoring in the maintenance fees that can rise with little notice.
You could be forgiven for thinking the dream of middle-class home ownership in the 416 is dying fast.
Milevsky is one of many recommending the merits of a different route: renting for the long term.
“I encourage people to do it for as long as they possibly can,” he says.
Paying a landlord may not tick all the boxes on the picket-fence dream, but the rules are different in Toronto, even if you aren’t gunning for an estate on the Bridle Path.
“In certain areas of Toronto we’re seeing rents explode, because people are effectively priced out of the (housing) market,” says Greg Romundt, president of rental apartment developer Centurion Asset Management.
It’s why companies like Romundt’s are financing the building of purpose-built rental apartment buildings, something that was largely ignored during two decades of condo development in the city.
“The market is really not providing an alternative for people that want (to own) a house. The only choice they have is to move out of the city,” he says.
Of course, it’s possible the current run-up in home prices could hit a wall at some point and start to come down, which would change the math on ownership. But until that happens, would-be buyers are faced with some hard numbers.
For instance, the ratio of average home prices to household incomes in Toronto sits at around eight times the median household income in the city, up from 4.3 in 2001.
At the same time, the path to getting a home has gotten trickier. Banks that used to roll out the red carpet for anyone who could prove a modest income now take a more cautious approach to giving out mortgages. Under current rules, homebuyers have to come up with a down payment of at least 5 per cent on the first $500,000 and 10 per cent on the portion of the house above that. For a $500,000 home, which is an increasingly rare find in the city these days, that’s a $25,000 down payment.
For a Toronto-average $800,000 semi, it would work out to a $55,000 down payment, and a monthly mortgage payment of $3,155, assuming a rock-bottom interest rate of 2 per cent. Compare that with average Toronto rental prices of $2,230 for a two-bedroom apartment or $2,193 for a three-bedroom townhouse.
By not owning, you do miss out on the benefit of the appreciating value, but that also gets chipped away by other costs, such as property tax, utilities, regular maintenance costs, and the cost of renovations.
“There are implicit expenses that people don’t necessarily understand, whether it’s property taxes or maintenance or heating costs of property insurance,” says Milevsky.
And then of course there’s the big question of where prices are headed. The nightmare scenario is buying now, after 15 years of outsized increases, only to see the market turn.
“If prices start to decline you may not be able to renew your mortgage, you may have your home equity disappear,” he says.
And, if you decide to want to move, you can add on real estate commissions of probably 5 per cent, which means your mobility is limited.
With a rental, you have the flexibility to pick up and leave if you need to with little financial consequence.
Of course, there’s the old saying about rising tides lifting all boats, and there are signs that the silliness of the housing market is spilling over into rentals. Milevsky says he’s now hearing stories of renters bidding on apartments auction-style.