Comparing monthly costs is a bit misleading. There are a whole bunch of less-direct costs and benefits to ownership. A bunch of these depend on your estimation of future economic conditions and of your future desires.
1) If you own a house, you’re incurring the risk that you have to move for personal or professional reasons, and then can’t easily sell. Landlords typically don’t have to sell on short notice—it’s perfectly possible to be an absentee landlord. Not an absentee resident.
2) As a landlord, you can potentially hold the house as one asset in a portfolio. As a homeowner, you’ve locked up a lot of your potential capital in that high-risk illiquid asset; you’re much more exposed if property values go down.
On the flip side:
1) Residents with a mortgage get a tax break that landlords don’t.
2) Being an owner means you don’t have the risk of future rent increases, and can profit if property values go up.
3) Being an owner entitles you to make structural or other changes—repainting, say—that a tenant can’t easily.
Being an owner means you don’t have the risk of future rent increases...
That is true, but as far as I can tell, rent increases don’t follow soaring house prices during real estate booms. Rather, the price to rent ratio tends to go out of whack. (Check out these graphs—I can’t vouch for the accuracy of their numbers, but they are consistent with what I observe on the ground. Since I’ve been renting my current house, my rent hasn’t gone up by a single cent, not even to compensate for inflation, while the house prices where I live have gone up by something like 40%.)
Moreover, the standard ways in which mortgages are done leave one exposed to the risk of future interest rates increasing, and they can go up much faster and higher than rent. (And as far as I can tell, one must pay a huge premium to get a permanent fixed rate and avoid playing this financial equivalent of Russian roulette.)
In the US, the large majority of mortgages are fixed rate. Until about 10 years ago, virtually all were. I think mortgages are a lot more popular in the US than in Europe. I’m a bit surprised that fixed rate mortgages haven’t spread into Canada simply by proximity. Maybe they’re propped up by Fannie Mae.
I have no idea what the ultimate reasons for it are, but in Canada, I don’t think it’s even possible to fix the rate for more than ten years. When Canadians speak of “fixed rate,” they typically mean fixing it for only five years or so.
All Canadian banks offer up to 10-year fixed rate terms, none do longer. “A typical mortgage in Canada has a 5-year term with a 25-year amortization period.” Not sure what is so scary about that...
Regarding 1… can’t a resident of a home, should the need arise to move on short notice, become an absentee landlord on the same property? If the monthly costs of renting equal or exceed the monthly costs of owning, presumably the rental income covers the cost of owning the property, and the former resident can go rent property wherever they happen to need to be.
I would add to your second list: 4) Owning the property means I get more upside if property values go up. 5) Renting the property means I am subject to the owner’s whims in addition to my own.
Comparing monthly costs is a bit misleading. There are a whole bunch of less-direct costs and benefits to ownership. A bunch of these depend on your estimation of future economic conditions and of your future desires.
1) If you own a house, you’re incurring the risk that you have to move for personal or professional reasons, and then can’t easily sell. Landlords typically don’t have to sell on short notice—it’s perfectly possible to be an absentee landlord. Not an absentee resident.
2) As a landlord, you can potentially hold the house as one asset in a portfolio. As a homeowner, you’ve locked up a lot of your potential capital in that high-risk illiquid asset; you’re much more exposed if property values go down.
On the flip side:
1) Residents with a mortgage get a tax break that landlords don’t.
2) Being an owner means you don’t have the risk of future rent increases, and can profit if property values go up.
3) Being an owner entitles you to make structural or other changes—repainting, say—that a tenant can’t easily.
That is true, but as far as I can tell, rent increases don’t follow soaring house prices during real estate booms. Rather, the price to rent ratio tends to go out of whack. (Check out these graphs—I can’t vouch for the accuracy of their numbers, but they are consistent with what I observe on the ground. Since I’ve been renting my current house, my rent hasn’t gone up by a single cent, not even to compensate for inflation, while the house prices where I live have gone up by something like 40%.)
Moreover, the standard ways in which mortgages are done leave one exposed to the risk of future interest rates increasing, and they can go up much faster and higher than rent. (And as far as I can tell, one must pay a huge premium to get a permanent fixed rate and avoid playing this financial equivalent of Russian roulette.)
In the US, the large majority of mortgages are fixed rate. Until about 10 years ago, virtually all were. I think mortgages are a lot more popular in the US than in Europe. I’m a bit surprised that fixed rate mortgages haven’t spread into Canada simply by proximity. Maybe they’re propped up by Fannie Mae.
I have no idea what the ultimate reasons for it are, but in Canada, I don’t think it’s even possible to fix the rate for more than ten years. When Canadians speak of “fixed rate,” they typically mean fixing it for only five years or so.
Wow. Yeah, signing up for a mortgage I expected to pay off over thirty years would frighten me with that arrangement.
All Canadian banks offer up to 10-year fixed rate terms, none do longer. “A typical mortgage in Canada has a 5-year term with a 25-year amortization period.” Not sure what is so scary about that...
Regarding 1… can’t a resident of a home, should the need arise to move on short notice, become an absentee landlord on the same property? If the monthly costs of renting equal or exceed the monthly costs of owning, presumably the rental income covers the cost of owning the property, and the former resident can go rent property wherever they happen to need to be.
I would add to your second list:
4) Owning the property means I get more upside if property values go up.
5) Renting the property means I am subject to the owner’s whims in addition to my own.