More Clarification Regarding the Changes to Mortgage Qualification
Comparing the cost of renting versus buying in today’s Edmonton Real Estate Market
We have discussed, and compared renting a home vs buying a home with a mortgage in the past, however, in today’s economic climate, the discussion is all that much more relevant. When comparing home ownership and renting, there are 2 primary factors to take into consideration:
1. Cost Comparison
2. Long Term Investment Strategy
1. Cost Comparison
The cost of home ownership versus tenancy has been the single most important metric for demonstrating the advantages of home ownership -even with a mortgage. The idea is simple: if it costs less money each month for me to own my own home than to rent, and pay my landlord’s mortgage, then owning is a good option.
Here is a very quick cost comparison, illustrating the cost of renting a $2,000/month home vs owning a $350,000 home with a 5% down payment with a 2.15% interest rate:
OWNING | RENTING | ||
Item | Monthly Cost | ||
Mortgage Payment** | $1,477.27 | ||
Property Tax*** | $250 | ||
Total Monthly Payments | $1,727.27 | Total Monthly Payments | $2,000 |
In simple dollars and cents, owning a $350,000 home in a flat real estate market with a mortgage is $272.73 cheaper every single month compared to renting a $2,000 home.
Let’s take this discussion one step deeper though. Mortgage payments are actually made up of interest payments, AND principal payments. The principal payment portion of a mortgage payment is actually just the portion of your mortgage payment that is being used to pay it down. Using this same example, let’s look at the total net cost comparison.
OWNING | RENTING | ||
Item | Monthly Cost | ||
Mortgage Payment** | $1,477.27 | ||
Property Tax*** | $250 | ||
Total Monthly Payments | $1,727.27 | Total Monthly Payments | $2,000 |
Principal in Mortgage Payment | $ (865.51) | ||
Net Monthly Cost | $ 861.76 | Net Monthly Cost | $2,000 |
When factoring in the principal payment that accompanies each monthly mortgage payment, the cost savings of home ownership vs renting jump to $1,138.24/month.
This comparison shows that in a flat residential real estate market, owning a home will put $13,658.88 into your pocket every 12 months. Over 5 years, those savings add up to $68,294.44 in your pocket, compared to renting a $2,000/month home.
In a normal market, this simple comparison alone would provide enough evidence for prospective homeowners to become actual homeowners, because they can see that they are losing $1,138 each and every month that they continue to rent. \
In a market where property values are increasing by 1.5%/year, the difference grows even further:
OWNING | RENTING | ||
Item | Monthly Cost | ||
Mortgage Payment** | $1,477.27 | ||
Property Tax*** | $250 | ||
Total Monthly Payments | $1,727.27 | Total Monthly Payments | $2,000 |
Principal in Mortgage Payment | $ (865.51) | ||
Property Value Increase | $ (437.50) | ||
Net Monthly Cost | $ 424.26 | Net Monthly Cost | $2,000 |
When adding in property value increases of 1.5%/year the cost of renting suddenly jumps to being $1,575.74/month higher than owning a home with a mortgage. But, being that 2015 has seen property values in Edmonton remain flat(and in some cases drop), let’s compare a situation where property values dropped by 1.5%/year(Edmonton has seen a 3.3% increase in average property sale price in Edmonton from July 2014 to July 2015):
OWNING | RENTING | ||
Item | Monthly Cost | ||
Mortgage Payment** | $1,477.27 | ||
Property Tax*** | $250 | ||
Total Monthly Payments | $1,727.27 | Total Monthly Payments | $2,000 |
Principal in Mortgage Payment | $ (865.51) | ||
Property Value Decrease | $ 437.50 | ||
Net Monthly Cost | $ 1,299.26 | Net Monthly Cost | $2,000 |
Even in a market with property values dropping, you can see that each month you are putting $700.74 into your pocket by owning a home with a mortgage, when compared to renting a home for $2,000/month.
2. Long term investment strategy
Day traders look at the headlines when selecting stocks to purchase, and dump. By comparison, long term investors look for solid companies that have, and will perform well over the course of 5-20 years. Most homeowners believe that their homes would be classified as long term investments, and therefore, homeowners should look at larger, long term trends when purchasing real estate –instead of focusing on today’s newspaper and television “pundit” sourced headlines.
In particular, the larger factors that affect real estate values over the long term are:
1. Net migration – how much demand for housing is there/will there be caused by new residents. Edmonton has seen an influx of residents since the early 2000’s, and CMHC forecasts continued net immigration of over 20,000 residents/year for the next few years. This influx of residents will continue to fuel the demand for housing.
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2. Employment Growth – how many jobs with there be for all the existing a new residents. While jobs have been hit by low oil prices so far in 2015, CMHC forecasts continued job growth of about 2%/year in the Edmonton area for the next few years. |
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| Looking at the Edmonton real estate market in particular, the long term pattern of home sale prices shows an upward trend for nearly 15 years through both high, and LOW oil prices. Below, you can see the price of oil between 1988, and August 2013, along with the average mls sales price in Edmonton from 1990 to 2013. Over that period, even as the price of oil followed peaks and valleys, Edmonton Real Estate Values continued to increase due to net migration, and job growth. When looking at investing in the Edmonton Real Estate Market, it is important to look at these long term trends, as opposed to focusing on the day to day newspaper headlines. Over time, the Edmonton Market has shown strength.
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In conclusion
The cost(s) of home ownership are apparent: mortgage payments, property taxes, and home improvements abound. However, even when taking those costs into consideration, home ownership provides an excellent investment opportunity to all Edmontonians.
For more information about purchasing home, and qualifying for a mortgage, call Alberta Mortgage today.
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I don’t understand this comparison. Why would anyone with the intention of renting would purposely pay $2000/month vs. owning at $1727/month. Also If I knew I could own a house with only a $1477/month mortgage payment, I would look for a place to rent that was either equal to or a cheaper alternative than that.
There is no mention of fees that commonly come with house ownership, especially older homes, also the realtor fees if one decides to sell at the end of the 5 year term. What about when the mortgage term comes up in 5 years and the owner instead decides to keep the property, the likely hood of interest rates staying at an all time low for over 5 years is not realistic.
I would assume most people choose not to own because rent is a more attractive and affordable option. This comparison doesn’t benefit anyone who’s trying to make the rent vs. own decision because we’re comparing apples to oranges in monthly payments and ignoring all other costs of ownership that a renter does not have to pay.
Those of us that are home owners know that there are many more costs outside of a mortgage payment and property taxes. Once I see those factored into this comparison, along with a more realistic dollar for dollar comparison, I’m going to have to advise people to ignore the context of this article.
Hi Travis,
After reading your comments I completely understand what you mean, however, the comparison is of the cost of ownership for a similar property. A home with a value of $350,000 would rent for anywhere from $1,800 – $2,100 right now, and therefore we are comparing the cost of a similar living situation. I would certainly agree with you that homeowners do face costs that renters do not (ie: repairs and maintenance), however, those costs can vary greatly between individuals, and homes. Even so, we have now updated the content of this blog entry to state that home ownership costs have not been included in the calculation, and that someone should also factor in those costs when making this comparison.
If you are looking for some more in depth information, we have another blog post that is more Edmonton specific here: https://www.albertamortgagecentre.com/rent-vs-buying-in-todays-edmonton-real-estate-market/
If you’re looking for some more in-depth discussion, we have another post