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Why renting a home may be a better option than you think: study

Renting a home may be a better option than you think: study
A for sale sign displays a sold home in a housing development in Ottawa, on July 6, 2015. (THE CANADIAN PRESS/Sean Kilpatrick)

With the average price of a detached house in major cities, such as Vancouver and Toronto, reaching sky-high numbers of $1.68 million and $1.02 million respectively, homeownership has become a pipedream for a large number of Canadians.

For many, the goal of owning a downtown condo or suburban escape to call their own stems from the fear that they’re wasting money on rent.

But, according to a new study out of Scotland’s University of Stirling, these financial benefits may be overblown — at least in countries with deflation.

The author of the research, professor Isaac Tabner, said in a press release that many homebuyers overlook expenditures that are included in rent, such as building insurance and property maintenance.

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The study found that in periods of deflation or zero inflation, conditions that Japan and some countries in the Eurozone are facing, renters are better off financially than homeowners.

Furthermore, the study found that even when economic conditions are favourable, it could take as long as between five and 10 years before transaction costs are balanced out and homeowners start to see returns from their purchase.

However, increases in inflation and imputed rent, or how much a homeowner would pay a month to live in their own home, “tip the balance in favour of ownership.”

Canada’s inflation rate was 1.2 per cent in November, but the Bank of Canada has set a target of 2 per cent in 2017.

In particular, prospective buyers who are in lower-income brackets, as well as those who aren’t looking for a long-term property, are faced with greater drawbacks.

“It is often thought that buying a house makes more financial sense in the long run. However, renting is frequently more worthwhile than buying for financially constrained households, as well as households likely to relocate within 10 years,” said Tabner.

“As well as a reduced ability to recover transaction costs, households relocating within a few years face a higher risk that medium-term prices will move against them, thus reducing or eliminating their equity, while financially constrained households face much higher mortgage costs.”

With mortgage rates and interest rates low, many Canadians may be tempted to enter the real estate market.

The Canada Mortgage and Housing Corporation offers resources on how to decide whether you are financially ready for homeownership.

Renterseeker.ca has also produced calculator to help Canadians decide which option is better suited for them.