Is Owning really better than Renting?

In 1906 Toronto fireman Alexander Gunn bought his first house in Toronto’s Riverdale neighbourhood for $1,200. The same house sold in November 2011 for $825,000.

Now obviously that suggests a healthy profit. Except Alexander Gunn is long since dead and the house has changed hands 4 times to his descendants.

In the GTA house prices have doubled in the last ten years. We're overdue for a collapse in house prices. Conventional wisdom says that now is a good time to sell, before such a collapse does come. (If you're watching the debt crisis unfold in Europe its difficult to say when this might happen, sooner or later.)

However when you adjust for inflation, the cost of maintenance, government land taxes, insurancea... the cost of owning a house vs renting isn't that much of a difference. Its more peace of mind than a financial investment.

Yes, houses go up in value over the years. But how much did the Gunn family spend on maintenance? How much did they spend on taxes? When it was purchased the three-storey house in what is now known as Riverdale was brand new, part of a development on what had been fields where locals grew food to sell at market. The new house promised good luck: A shamrock had been crafted into its soaring gable, most likely by Irish immigrants who helped build these turn-of-the-century subdivisions.

Gunn's annual income at the time of the purchase was $1000. Today the average price of a house in the GTA is $465,000 (October 2011 numbers) and the average household income $82,000, according to the Canada Mortgage and Housing Corp. So buying a house is now roughly 5 times the annual income of the average family.

Whereas Gunn was single when he bought the house in 1907. He paid it off pretty quickly, on a mere firefighter's salary.

The house only appreciated in value by about 3% per year. That is roughly the same as the Toronto Stock Exchange.

“A house is not a good investment. It is a roof over your head,” says James McKellar, director of the real estate and infrastructure program at York University’s Schulich School of Business.

These days, homeowners in hot markets like Toronto and Vancouver may feel they have hit the jackpot: Most Toronto homes have virtually doubled in price over the last decade and in Vancouver they have almost tripled.

But buying a house isn't meant to be an investment. Its meant as security. Its an asset that comes with a maintenance price tag.

When you factor in the other costs — interest on the mortgage, new kitchens, bathrooms, furnaces and electrical updates, “you’re lucky to make anything,” says James McKellar. Studies have shown that it’s $800 a month cheaper to rent a 1,000-square-foot home than to own it, he notes.

“By any empirical study, houses do not inflate. They are a cost. But we all have to live somewhere."

“Calling a house a good investment is a process of rationalization. The last thing you want to admit is that, ‘I bought the house because I fell in love with it.’”

“The big drawback of renting is that it doesn’t give you the emotional satisfaction of owning,” says McKellar with just the slightest chuckle.

“At the end of the day, when you go home and make dinner and relax, the numbers really don’t matter.”