Historical article note: This article was originally published on 2018-11-13. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
If a new immigrant plans to live in Toronto for 5 years, is it more cost-effective to rent or buy a house? My child has been studying in Toronto for 4 years, and I have to pay an additional 15% non-resident real estate tax (NRST) when buying a house. Is it cost-effective to buy a house? Is there a way to calculate how long you can live in Toronto and rent an apartment to save money? ...Similar problems can be solved using a calculator. This magical calculator can also calculate how much wealth will be lost if you rent a house for ten years, and why buying or renting a house has become a watershed in wealth for Toronto residents.
I previously introduced you to Genworth, a publicly traded loan default insurance company. Their website has many useful tools and articles. What I would like to introduce to you today is a calculator on the company’s website, which is used to calculate the break even point of buy or rent. Beyond this critical point, you will lose money by renting in Toronto, but you will make money by buying a house. If you continue to rent beyond this critical point, the longer you rent, the more serious the loss of wealth will be. Readers, first guess, how long does it take to rent a house in Toronto before it begins to eat away at personal assets?
In the past month, I have shared this calculator during lectures at several real estate companies. The online link is http://genworth.ca/en/homebuyers/rent-or-buy.aspx or you can find this calculator by typing "Genworth buy or rent" in the GOOGLE search engine. Let’s take a condo in Toronto as an example to calculate how long after renting a house, continuing to rent will cause asset losses. The average transaction price of a one-bedroom condo in Toronto in September 2018 was $548,234. The average rent for a one-bedroom condo in the second quarter was 2,055 yuan per month. Toronto's property tax rate is 0.6355%, so the average property tax is $3,564 per year. The average management fee is 0.65 yuan per square foot. Using the average price of 741 yuan per square foot to calculate that the average living area of a one-bedroom is 740 square feet, the management fee is 481 yuan per month, or 5,772 per year. According to Ontario regulations, landlords can only increase the rent of existing tenants by 1.8% per year. Unless the tenant is replaced and a new lease is signed, the market rent can be settled. The average price of condos in Toronto in the third quarter of 2011 was 333,352 yuan, and the price in the third quarter of 2018 was 555,269 yuan. The average annual increase in the past seven years was 8.32%. Assume that the down payment for buying a house is 20% and the current interest rate is 4%. Input these numbers into the calculator. Note that the management fees and land taxes are added together and then entered into "property tax". A surprising conclusion is drawn: In the above situation, compared with buying a house in Toronto, renting a house for more than one year will result in a loss of wealth. The specific results are as follows:
Rent a house Buy a house
Monthly payment: 2055 2307
Total payment in one year 24,660 37,020
Home appreciation 45,503
Loan principal decreased by 10,474
Paying more for buying a house 12,360
Benefits from buying a house rather than renting 43,617
Conclusion: Buying will save you $43,617. Your total payments are larger by $12,360, however, you will build up equity of $55,978. Buying a house compared with renting a year can earn $43,600 Canadian dollars, or the cumulative real estate equity reaches 56,000 Canadian dollars, but it will cost 12,400 more cash.
Chinese people rarely use the minimum down payment to buy a house, while Canada allows a minimum down payment of 5% to buy a house for properties under 500,000, and a minimum down payment ratio of 10% for houses with house prices between 500,000 and 1 million. The price of buying a home with a minimum down payment policy is loan default insurance. With the minimum down payment and premium payment, you can buy a house early. Is it a good deal? You can also figure it out using this calculator. For a property worth 548,234 yuan, the minimum down payment can be 29,824 yuan, the premium rate is 3.1%, and the loan default insurance premium required is 16,071 yuan. The premium is included in the loan principal. Since GENWORTH is a loan default insurance company, the premium included in the loan principal is automatically calculated by the calculator and does not require manual adjustment. After inputting other data, the conclusion is as follows: Buying will save you $40,485. Your total payments are larger by $17,399, however, you will build up equity of $57,884. Even with the minimum down payment and default insurance premium, you can buy a property worth nearly 550,000 yuan with only about 30,000 yuan. One year after the purchase, if you buy a house for one year instead of renting for one year, you will benefit from about 40,000 Canadian dollars, or the cumulative real estate net value will reach 58,000, but you will spend 17,400 more cash. The lower the down payment, the earlier you buy and the faster the home equity accumulates; the lower the down payment, the more high income is needed to support the monthly payment.
Let’s use this calculator to calculate the amount of asset loss for tenants who have rented a house from 2011 to the present. Seven years ago, loan interest rates were below 2.99%. In the third quarter of 2011, the average condo price was 333,352 yuan, the average rent was 1,600 yuan per month, the local tax rate was about 0.75%, the management fee was 0.45 yuan per square foot, and the area was still calculated based on 740 square feet. Result (Buying will save you $99,795. Your total payments are smaller by $16,150and you will build up equity of $83,645.) tells us that the cause of poverty among renters has been found: If you have been renting a certain bedroom condo in Toronto for the past 7 years without changing the house, compared with someone who bought a house 7 years ago, you will benefit from buying a house to live in nearly 100,000 yuan, or the accumulated housing rights will reach 83,600 yuan, and you will have to spend 16,000 less cash.
A non-resident international student has lived in Toronto for 4 years. Assuming that he does not get a tax refund from the government in the end, is it more cost-effective to pay 15% NRST to buy a house or rent a house? Use this calculator to calculate again: the house price is 548,234 yuan, the non-resident real estate tax NRST rate is 15%, the cost of buying a house is 630,469, the down payment is 40%, and the interest rate is 4.3%. The calculation result is that after 4 years of living, Buying will save you $62,850. Your total payments are larger by $21,650, however, you will build up equity of $84,500. If non-residents pay a 15% real estate speculation tax and the interest rate is higher than that of local residents, after living in Toronto for 4 years, buying a house will benefit 63,000 yuan compared to renting a house, or, you can accumulate housing rights of 84,500 yuan, but you will have to spend 21,700 yuan more in cash.
The monthly rent for a one-bedroom condo in Toronto increased from 1,600 yuan per month in 2011 to 2,025 yuan in 2018, an increase of 28.4%. During the same period, the central bank interest rate increased by 1.25%. It is strange that some people are worried about the affordability of homeowners, but no one is worried about the affordability of tenants. From the above calculation, the only advantage of renting is that the cash flow is better than that of homeowners. If you live for a long time, the actual expenses will be much greater than that of homeowners, and you will lose the opportunity to accumulate property rights. Tenants cannot offset the loss of wealth from renting unless they invest the cash they save with a very high return. The above example is only a one-bedroom CONDO building. If you add someone to the family, you will need to rent a two-bedroom unit. The market rent for two-bedrooms in September 2018 was as high as 3,475 yuan a month, which makes it prohibitive for many families. In addition, the vacancy rate in Toronto CONDOs was 0.7% in the second quarter of 2018, that is, only 0.7 of 100 houses were vacant. Tenants have almost no choice and room for bargaining, and can only rent houses through bidding.
Some people hail the decline in housing prices in Toronto, but if they are not living with their parents, families who are renting can deeply feel the huge pressure of rent, experience the dilemma of living in one room for a long time and being unable to afford improvements day after day, and the fear of letting rent continue to drain their assets. Renting in Toronto has become an increasingly difficult pit to get out of. A Ryerson University report shows that 20% of renters in Toronto live in houses with insufficient bedrooms. Insufficient means that according to the living conditions of a civilized society, children of the opposite sex over the age of 6 should have separate bedrooms. A family of four with children of the opposite sex needs at least 2 bedrooms. In addition, research also shows that 43% of tenants in Toronto are overburdened with rent. "Overburdened" means that more than 30% of their monthly pre-tax income is spent on rent. The difference in median annual income between renters and homeowners in Toronto has doubled. In 2016, the median annual income of renters was 41,000 yuan, while the median annual income of homeowners was 88,500 yuan. As time goes by, not only the income gap, but also the wealth gap will become larger. Choosing to rent or buy a house is to choose poverty or wealth. The public’s eyes are sharp. The latest potential buyer survey conducted by CMHC in 2018 shows that 80% of potential buyers believe that buying a house is a long-term investment. When I was working at the New York Branch of the Bank of China, I knew that I would immigrate to Canada in the future, so I asked a local Chinese from the credit department of the branch for tips on buying a house. He answered with two words without thinking: "Buy early." It is these two words that will benefit me throughout my life.
What is the difference between renting and buying a house? This is a problem that can be solved in 3 minutes. If it takes half a lifetime to solve it, it will not be a mathematical problem, but a psychological problem.