Rent or own in Toronto - A 30-year analysis
We took a look at 30 years of data, from 1991 to 2020, to answer the age-old debate about renting or owning a home. There are many reasons why someone would choose to rent or own a home - affordability, convenience, location, etc. However, we wanted to compare a household of two at the same income level to see who would end up with the higher net worth.
We know that maintaining a house is expensive, and there are rent increase restrictions in Ontario. Does this translate into higher savings than the homeowner, and if so, by how much? Also, how does this compare to a homeowner who has accumulated equity in a house?
Before we take a look at the results, we want to talk about our assumptions at a high level:
Our Homeowner: A household of two making the average Canadian income that buys a townhouse** pegged at CREA’s HPI. They already have amounts saved for a 20% down payment. They enter into a 5-year fixed mortgage at bank prime rates, renewing every 5 years at the bank prime at that time. They have home expenses such as property taxes, utilities, and maintenance costs. They pay the same amount for food, transportation and miscellaneous expenses as our Renter. Any amount they have left over, they are diligent in investing it into the S&P.
Our Renter: A household of two making the average Canadian income that rents a two-bedroom apartment rate at the average rate in Toronto at that time. They have the same amount saved that our Homeowner does for a 20% down payment. However, instead of buying a home as our homeowner has, they invested this into the S&P. They do not move from the apartment they rented and take advantage of the rent increase restrictions in Ontario. They do not have homeownership expenses but incur the same for food, transportation and miscellaneous living expenses. They are also diligent in investing their savings into the S&P.
In our analysis, we look at the Homeowner and Renter entering the market with the starting year between 1991 to 2020 and estimate their net worth at the end of 2020.
**We chose a townhouse for our Homeowner because we needed the housing type to be consistent over the 30 years. A dual-income household in 2020 can afford a mortgage at approximately 5x their income.
The result?
Our results show that the Homeowner ends with a higher net worth at 2021 for all of the starting years except for 1991, 2019 and 2020. While many would’ve intuitively guessed homeownership is better due to the recent increase in housing prices, in the table below, we see that the average annual return on the townhouse is lower than the average annual return on the S&P.
We would also like to point out that in some starting years, the Homeowner is not that far behind the Renter in the amount invested in S&P. This is because the S&P dropped significantly in the early years. The headstart that the Renter had in investing in the market is lost.
| Starting Year | Average Annual Return on Townhouse from Starting Year to 2020 | Average Annual Return on S&P from Starting Year to 2020 |
|---|---|---|
| 1991 | 4% | 9% |
| 1992 | 5% | 10% |
| 1993 | 5% | 9% |
| 1994 | 5% | 9% |
| 1995 | 5% | 10% |
| 1996 | 6% | 10% |
| 1997 | 6% | 9% |
| 1998 | 6% | 9% |
| 1999 | 6% | 8% |
| 2000 | 6% | 7% |
| 2001 | 6% | 6% |
| 2002 | 7% | 7% |
| 2003 | 7% | 8% |
| 2004 | 7% | 10% |
| 2005 | 7% | 9% |
| 2006 | 7% | 9% |
| 2007 | 7% | 9% |
| 2008 | 7% | 9% |
| 2009 | 8% | 9% |
| 2010 | 8% | 13% |
| 2011 | 9% | 12% |
| 2012 | 9% | 12% |
| 2013 | 9% | 14% |
| 2014 | 10% | 14% |
| 2015 | 10% | 11% |
| 2016 | 10% | 11% |
| 2017 | 8% | 14% |
| 2018 | 5% | 15% |
| 2019 | 6% | 13% |
| 2020 | 9% | 23% |
Even though the annual average return for the S&P is much higher than the townhouse, the Homeowner has a higher net worth in most instances. This is because the Homeowner has something that the Renter does not… and that’s leverage. The real financial benefit to homeownership is the ability to access an incredibly large amount of leverage at a relatively low cost. To illustrate, if the Homeowner put a $100,000 down payment on a $500,000 home and that home goes up 5% in one year, that is a 25% return for the Homeowner, whereas $100,000 into the S&P with a 5% return would only be $5,000.
It’s also important to note that the Homeowner also benefits from being forced to invest the money into the equity of the home through the mortgage payments. This takes the decision of investing away from the homeowner. Both the Renter and Homeowner will have to be incredibly disciplined to invest their savings into the S&P. Not investing the savings can have a significant impact on the returns from the S&P.
Takeaways from this study
While our scenario has been simplified for the sake of comparison, it does illustrate the following points:
The financial benefit to homeownership is leverage but we need to understand that leverage is a double-edged sword. It can multiply your return when housing prices are going up, but it can also multiply your loss when prices are going down.
A household making an average income in Canada can compound their savings significantly if they diligently save and invest.
The Homeowner’s net worth in the equity of the home is tied up in the principal residence. The only way they can access that is through refinancing or downsizing, which can have an impact on their ending net worth.
In the end, the homeowner wins the rent or own debate in Toronto. Will the future play out the same for a homeowner entering the market today? It is possible, given the current trends in the Canadian housing market.
Sources
Average Townhouse price is taken from CREA HPI report.
Average income is taken from StatsCan.
Overnight prime rates taken from Wowa.ca and applied to bank prime rates.
2011 to 2020 household spending taken from StatsCan. Shelter costs are excluded and calculated separately. Household CPI is used for spending prior to 2011.
Property taxes calculated at 0.60% of property value (HPI) from 5 years ago.
Home insurance data point taken from rates.ca and extrapolated to other periods using CPI.
Houshold operation costs taken from Statscan and extrapolated to other periods using CPI
Historical average rents taken from CMHC.
Rent increase limits from Ontario.ca.
