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Have Bidding Wars for Rentals Changed the Rent vs. Buy Equation?

July 21, 2021
6 mins
Happy parents admiring their baby while sitting on their couch

For hopeful homebuyers shut out by soaring prices, renting has usually been more affordable.

But that may be changing. Bidding wars, which have been commonplace in real estate, are now happening more and more in the rental market.

“Traditionally, whenever there’s a very heated ownership market, it almost duplicates itself in the rental market,” CMHC economist Dana Senagama told the National Post. After all, people have to live someplace.

Rents have been falling since the start of the pandemic, reaching their lowest level in April. In Toronto, the average rent for a one-bedroom unit fell to a low of $1,810 in April, a plunge of more than 18% from a year earlier.

But demand has come roaring back. June marked the second consecutive month of rising rents. Some of the hottest month-over-month gains were found in Red Deer, AB (+5.8%), Halifax (+4.1%), Vancouver (+3.8%) and Guelph, ON (+2.9%).

Nationally, the average rent rose 0.7% to $1,434.

Does that mean it’s better to buy?

With rents rising and competition fierce, the perennial question returns: Are you further ahead by renting or buying?

Despite a 33.8% rise in home prices over the past year, near-rock-bottom interest rates have made homeownership more affordable than it otherwise would have been. That’s assuming you can pass the government’s stricter mortgage stress test.

Here’s a sample comparison of the monthly carrying costs of renting a one-bedroom apartment vs. purchasing a comparable condo in Toronto, for example.

Rent (Toronto one-bedroom)

  • Monthly Rent: $1,836

Insured purchase (with minimum down)

  • Purchase price: $616,000
  • Down payment: $36,600 (5% of first $500,000 and 10% of remainder)
  • Mortgage amount: $602,576 (includes 4% CMHC default insurance premium)
  • 5yr fixed interest rate: 1.84%
  • Monthly mortgage payment: $2,505
  • Monthly property tax: $313.65
  • Monthly condo fee: $429 (Avg. 1-bedroom condo size at avg. condo fee per square foot)
  • Opportunity cost of down payment: $60.55
  • Total monthly payment: $3,308.20 *

Conventional purchase (20% down)

  • Purchase price: $616,000
  • Down payment (20%): $123,200
  • Mortgage Amount: $492,800
  • 5yr fixed interest rate: 2.09%
  • Monthly mortgage payment: $2,108
  • Monthly property tax: $313.65
  • Monthly condo fee: $429
  • Opportunity cost of down payment: $207.23
  • Total monthly payment: $3,057.88*

*Mortgage rates based on the lowest rates currently available in Ontario for the respective mortgage types. Property tax estimate calculated using the City of Toronto’s Property Tax Calculator. Amortization is 25 years (insured) and 30 years (uninsured). Opportunity cost of down payment assumes a 2% annual return on funds that could have been invested instead of deposited on a home purchase.

Today's Lowest 5-Year Fixed RatesUpdated 14:35 ET on May 21, 2024

Rates are based on a home value of $400,000

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Verico - Fair Mortgage Solutions - Anson Martin
4.79%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Aug 20
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4.79%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Jun 21
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4.89%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Aug 20

While the average monthly rent is still significantly lower than comparable carrying costs to purchase a similar unit, there are a number of other factors to consider.

One is the future price appreciation potential of a purchased unit. While home prices aren’t likely to see the same rocket-trajectory as we’ve seen over the past 12 months, Toronto’s condo prices have averaged a roughly 5% annual appreciation over the last 20 years. If you consider those tax-free dollars going into your pocket, that lowers the effective cost of purchasing that $616,000 unit by roughly $2,053 a month.

Of course, prices can go in the wrong direction as well, a risk you must be prepared for—especially if you’re making a minimum down payment. The last thing you want is to have a home that’s worth less than your mortgage.

Another consideration is the fact that mortgage payments include a principal component, meaning you’ll build up additional equity every single month. That equity also grows faster each month as the interest portion declines.

Mortgage Principal Repaid in the First Year
Total Payments in Year One Principal repayment per month Interest cost per month
Insured mortgage ($602,576) $30,064.01 $1,598.29 $907.05
Uninsured mortgage ($492,800) $25,298.78 $1,265.68 $841.72

On the other hand, interest rates are still near an all-time low. Bond market forecasts, which you should take with a grain of salt, suggest that rates could rise upwards of two percentage points over the next five years. That could eventually boost interest costs when you renew or refinance, but not catastrophically.

There are countless other considerations beyond the finances when deciding whether it’s better to rent or buy. But as it stands right now, renting remains cheaper from a cash flow standpoint.

From a future net worth perspective, however—assuming you can afford the payments and risks and have a long-term holding timeframe—home ownership should put you in a better place long-term.

RATESDOTCA Team

The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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