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Saturday, August 14, 2010

Renting vs. Owning

A few days ago I posted an article by Steve Lafleur on home ownership. Here is Mr. Lafleur talking about his article on Fox Business:

Posted by Hugh MacIntyre on August 14, 2010 | Permalink


This isn't a new argument, I'm surprised that the Fox News commentator is crediting Lafleur with this theory. In fact, in this thread from the WS back on June 14th, I said:

"A lot of unemployment is created by the relative labour immobility in the United States which is an artifact of the high home ownership in the US. This is sometimes known as the "housing trap".

People often get stuck in areas of the country where their skills are not in demand, but they also can't sell their house to move to somewhere where the are, because of a poor real estate market that ties them down."

In another thread over at UrbanToronto.ca, I made this argument almost a full two years ago!

And by saying this, it isn't to say that I came up with this theory. No. In fact, the labour mobility problem associated with high home ownership has been well understood by economists for pretty much ever.

So I find it amusing that these business news commentators are treating a pretty simple concept like this as a revelation.

Posted by: Mike Brock | 2010-08-14 9:51:09 AM

Mike, it isn't a new argument. As I pointed out in the article, Richard Florida has been saying this for awhile. Of course, it really isn't rocket science. Having said that, the housing industry is subsidized to the tune of (at least) billions annually. Challenging the mythology of home ownership may seem pedantic, but it is extremely important.

Posted by: Steve Lafleur | 2010-08-14 9:55:49 AM


I wasn't criticizing you for trying to take credit. I didn't think you were. I was criticizing the foolish Fox Business host who was acting like this was some sort of radical, new theory.

As for criticizing the culture of home ownership, I think I'm with you there, as in this previous post I wrote two days ago: The American dream.

I guess for me it's just so ridiculously stupid these, so called "financial experts" are.

Posted by: Mike Brock | 2010-08-14 10:01:58 AM

Yes, owning a home is more of a risk, but on the other hand, there are rewards—namely increased independence, privacy, and the freedom that goes with both—that a libertarian should especially appreciate. Not to mention the fact that, unless an area enters a long-term slump, á la Rust Belt, property value generally appreciates in the long term, and you'll have built up sizable equity besides.

In a way, owning a home is like owning a business. You assume more risk, but if done properly, the rewards are greater. A renter gets a home, but it is never his, and he can be evicted at any time; a salaried worker gets a paycheque, but owns no stake in the company, and can be dismissed at any time.

So, the way I see it, saying that home ownership is an unwarranted risk is like saying opening a business is an unwarranted risk, best left to someone else. The problem with that is that if everyone follows that course, there will be no property available for rent, and no jobs either.

Posted by: Shane Matthews | 2010-08-14 11:14:49 AM

I've owned 4 houses, and lost money on all of them. That's the nature of a job with mobility. You move to an area when it's booming, and leave when things slow down. I always seemed to be on the wrong side of real estate prices.

Renting would have been just as good for me as owning. The problem with renting was the same as buying. When I moved to an area, it was already into a tight market, and rental properties were almost impossible to find.

Truth is, constantly moving to find work is a terrible way to raise a family. I wish I'd focused more on my life, than on making a living. I'm only 54, and I'm just about worn out. I know guys who took low paying government jobs, never had to move, never had to work hard, had a stable family life, and have just about as much money as I have. One of the main reasons is they waited for the right time to buy houses, and stayed in them long enough to build huge equities. However you want to look at it, moving is expensive.

Posted by: dp | 2010-08-15 6:19:44 PM

Rent and you own nothing. At the whim of landlords , rent increases and no control over your own domain. No chance to increase your equity in the primary financial outflow of your paycheque.
Sure, it gives you greater mobility options but at the end of the day you will own nothing of value. Lose your job and you will lose your home, whether you rent or purchase. At least if you purchase and the gods have been kind, you will have built up some equity that can be used to see you through the hard times.
I puchased a home on property in 92 for 115M. It is now worth more than 750M. The most important point is that it is paid for. That gives me far greater spending power,security and options that I would never have as a renter even if I had invested wisely.
Mind you, there are a few absolutes. Stay married if at all possible. Don't leverage your equities if you can avoid it. Live within your means and hope like hell your employer stays solvent.
For me the gods have been kind on all counts. Some are not as lucky.

Posted by: peterj | 2010-08-15 10:24:06 PM


Buying a home isn't always the best option. You bought when housing prices were very low as opposed to renting. Imagine being an American and buying in 2007. You would have been better off renting. It's all a matter of timing. Furthermore, you may have been better off saving money by renting and investing the balance in ... oh ... say commodities.

Posted by: Charles | 2010-08-16 6:47:01 AM

As I said, Charles, provided you live in an area with a diversified economy, real estate prices tend to appreciate in the long term. You are right, however, in that it makes sense to wait for opportunities. If we'd bought our house in 2007, we'd have been creamed. Buying last year probably knocked a good hundred thou off the price, maybe more.

Posted by: Shane Matthews | 2010-08-16 8:48:27 AM

I think there's a serious problem here and Peter and Shane are falling victim to it.

That problem is that the last 20-30 years or so are quite unique as far as real estate prices go. Previous to the 1980s, for about 190 years, real estate prices pretty much tracked inflation. Meaning, that housing only became a "good investment" as it were in the last twenty or so years of the twentieth century.

Many real estate refuseniks like myself believe that this 20-30 real run-up in real estate valuations at levels in exceeding inflation is really just a 20-30 year, slowly inflated housing bubble. And that, it's ultimately unsustainable.

That isn't to say that many people haven't benefited from this. It seems that you have. That's the thing about bubbles. People who get in early, get really rich, while the people who get in really late get absolutely destroyed.

It's all comes down to the greater fool theory.

When you consider that wages relative to inflation were pretty much flat between 1990 and 2005, and real estate prices were going ballistic, you have to ask yourself, where is all this money coming from to pay double, triple, and quadruple what they were paying four houses a decade ago, when they're maybe making 10% more relative to inflation that they were making a decade ago?

Naive people, like real estate investors will say that it's everyone's "collective wealth" in their home equity that's making up the difference. But that's nonsense and plays to the whole greater fool theory. Your house is worth more than you paid for it for no other reason than a person more foolish than you is willing to pay you more than you paid for it.

This idea that housing prices go up every year as being some sort of law of nature is one of the most silly economic principles I see people prescribing to.

All of these people who are saying that this "slow down" in the Canadian housing market right now will only result in stable prices, followed by a return to price increases in six months are completely full of shit.

Housing sales have fallen 40% since the same time last year. And market analysts are saying it's not bad news because housing prices rose 1% in the last month. They think this last point is evidence that the "rising price theory" holds true. No, all it means is that houses are staying on the market longer and holding out for high prices, and they're fighting the trend. But six months from now, housing prices will be falling as sellers start getting desperate to offload their properties.

Canadian consumer debt is at an all-time high, mortgage debt is at an all time high. Unemployment is still pretty bad. And people think we can just keep committing larger, and larger percentage of our incomes into real estate?

Considering I do study the real estate market, and accurately called this real estate slow down last October. Right on schedule, too.. I said on Twitter on October 23rd, 2009 and I quote: "By Fall of 2010, it will be clear to everyone the real estate bubble has popped".

It wasn't hard for me to see this coming. I've been watching time-on-market averages increase, price-to-rent ratios steadily increasing in every urban market in Canada. In many cases to the point where financing rates on average 20 year, 25%-30% down mortgages, were showing carrying-costs exceeding the market rental prices -- always a sign of over-supply.

And now that I've had another 10 months or so to watch the data further, not only do I think I was 100% bang-on, but I think the collapse in the Canadian real estate market is going to be far worse than I initially feared.

Posted by: Mike Brock | 2010-08-16 9:07:49 AM

And this theory that renting is throwing away money is nonsense. The average renter pays about $1000/month, and the average mortgager pays about $2300/month of their income to their home, not including taxes, maintenance, and closing costs.

For the first 17 years of your average 25-year amortized mortgage, almost 100% of your payment is interest. You're renting your house from a bank. The $150,000 of interest on the $300,000 investment , is rarely factored in by people when they calculate how well they did on their homes.

I make well of six-figures, and I'm a proud renter. And all my extra cash-flow goes into inflation-hedging instruments and high-yielding investments (stuff that pay me like 11-12% yearly yields). We'll see who's better off in 3 years. Me? Who avoided real estate like the plague and used the savings in carrying-cost to build up a well-hedged, high-yielding investment portfolio, or the guy who bought his house in 2005 and is dumping 60% of his monthly income into his house?

I'm spending about 20% of my monthly income on rent. And I live in a luxury apartment in the financial district of downtown Toronto.

People always obsess over rent being "thrown away" money. They fail to see rent for what it is: a very useful service to pay for: shelter. And they fail to account for the lost opportunity cost of having the extra cashflow for higher-yielding investments.

Posted by: Mike Brock | 2010-08-16 9:17:42 AM

Sorry for the typos and bad grammar. I typed the above on my iPhone.

Posted by: Mike Brock | 2010-08-16 9:19:57 AM

Mike, we bought the house, first and foremost, to live in it. We don't consider it an investment, although the equity we build in it will probably come in handy later in life. We realized that, in a closed system, the demand for, and therefore the value of, housing would likely decline as the baby boomers died off.

However, with Canada importing 300,000 immigrants a year, housing will likely remain scarce, and therefore valuable, for as long as this policy lasts. This is especially true in Metro Vancouver, which is hemmed in by an ocean, an international border, and a mountain range. The potential for sprawl compared with an inland city like Toronto is very limited; therefore prices are higher. A mild climate, stunning geographical setting, and abundant amenities and opportunities for recreation are also assets.

Yes, housing prices are currently in a bubble, one that has already broken in the U.S. and which will probably deflate, albeit less spectacularly, here in Canada. But for the reasons I've given above, real estate, in Vancouver at least, is likely to still increase, or at least not profoundly decrease, in the long term. Property values do not generally drop in fast-growing communities, and Surrey is the country's fastest.

Moreover, I don't know what prices are like in Toronto, but that mortgage cost you quote is awfully high. We don't pay that much for a 2500-square-foot home in Fraser Heights, one of Surrey's most desirable neighbourhoods (in the "poor" section, granted). And renting a comparable house would cost you a lot more than $1000 a month. We could get $800 a month for the bottom floor of our house perfectly easily.

Oh, by the way, Mike, one more thing. Not all of us are childless yuppies, and that's the primary subscriber to your particular lifestyle, if not the only one. As someone who has lived both without children and with, I can assure you that it's a much more satisfying existence to have your own slice of land in a quiet neighbourhood. You can boast of your financial prowess or of fortunes not yet made all you like, but it's hard to forget that you admitted to once approaching bankruptcy. Perhaps you like the dizzying highs and despondent lows, but I'll take the creamy middles, thank you.

P.S. We only pay about 20-25 percent of our income on mortgage, too, and we're putting $300 a month directly on the principal because, as landowners, we get to charge rent. It is infinitely better to receive rent than pay it. Especially in a city that, unlike Toronto, is not a spent force in economic terms. But, never mind. We'll soon see if all that anticipated wealth can buy you happiness. I think we both know the answer to that one.

Posted by: Shane Matthews | 2010-08-16 11:07:24 AM


My wife and I are parents. In fact, many of the families living downtown have children. Something people crowding into elevators with baby strollers constantly can attest to.

There's been a definite trend among younger couples to start their families downtown, instead of in the suburbs.

There was even a few articles written in various newspapers and magazines on this trend in Toronto. But it's a surprising misconception that the downtown crowd are DINKS. Far from it.

Posted by: Mike Brock | 2010-08-16 11:12:35 AM

Furthermore, you may have been better off saving money by renting and investing the balance in ... oh ... say commodities.

Posted by: Charles | 2010-08-16 6:47:01 AM

There are a vast number of people who have lost their shirts on investments of all types as well as the housing market. Everything in life is a gamble and it would be a boring world if we all had the same expectations out of life. For me (personally) I find the idea of home ownership far more rewarding than I did in my pre marriage days of renting. Like Shane, I too enjoy the "creamy middle".

Posted by: peterj | 2010-08-16 7:31:25 PM

Yes, Mike, I’ve heard of it. A “definite trend” that urban planners (read: social engineers) “insist has legs.” I saw the articles, too. The reasoning of the yuppies for staying downtown sounded forced, scripted, and self-righteous (less damage to the environment, closer to transit, same old tired-Left talking points). What they really mean is they’ve not yet outgrown the partying lifestyle.

The fact is that big cities have been hemorrhaging families for years, and many large American cities (especially in blue states) are actually losing overall population to the suburbs. Young couples may start their families in a downtown condo, but once the little ones are past the toddler stage, most of them head for the 905 belt. It’s safer out there, with fewer gun-toting gangsters and not so many used syringes and condoms on the bus seats, and a whole lot of things parents of children (as opposed to barely-mobile infants) appreciate.

The suburbs also provide a lot more bang for your buck, which is important as the kiddies get older and their stuff gets more expensive and they need more room to play. If you’re as clever at numbers as you claim, you’ll recall that not everyone makes six figures a year, nor does everyone work in a Bay Street or Howe Street office. That’s why you still find more DINKS downtown than anywhere else; with rare exceptions, only they can afford the lifestyle. If you’re still living downtown when your kids hit their teens, I’ll be a very surprised man.

My mother once told me that once I was a little older the “pulse” of the city would get old and I would appreciate the quieter life a suburban home provides. Being only 24, I didn’t believe it then. What a difference fifteen years makes.

Posted by: Shane Matthews | 2010-08-16 8:42:59 PM


I can tell you the reality on the ground shows it's more than a made up social engineering ploy. Living downtown without a car is not quite as expensive as you think as long as you're willing to give up the car.

Also, the crime rate in the downtown core is pretty much the lowest in the city.

The idea of losing two hours a day to the commute like my father sounds totally unappealing. I like walking where I go. Neither my wife or I party.

The one thing you give up is living space. You need to learn to cope with 1100 sq.ft.

Posted by: Mike Brock | 2010-08-16 10:33:28 PM

My sister is in a similar situation as Mike. She and her husband have a two year old and the live in a downtown condo. She tells me that there is actually a lot set up for young children in the area. There are plenty of parks for my nephew to play in and young mothers can meet other young mothers at community centres.

Posted by: Hugh MacIntyre | 2010-08-17 2:46:11 AM

I've owned eight homes at various times. Now I own a home and a chunk of a Vancouver condo. I have had a mortgage rate of over 20% in the past, the early 80s to be precise. My advice to the young: go for owning. If you don't own, you will be sucking hind tit forever. And your landlord will not be living in your part of the world. This is not primarily a question of economics; it is more a question of freedom over dominance.

Posted by: Agha Ali Arkhan | 2010-08-17 3:04:59 AM

It's true, Mike; when I lived in the West End of Vancouver, I couldn't imagine the need for a car. If I also worked downtown (walking distance!), I wouldn't even have needed a bicycle or the bus, much less a car.

But in downtown Vancouver, you are just seven blocks from the country's worst slum, and the only hospital that serves the downtown, St. Paul's, is constantly overflowing with drug addicts. Panhandling is endemic and the air stinks from where these derelicts have urinated in the street.

Also, I don't work downtown anymore. The reality is the great majority of people don't; most businesses find the rent too expensive. Instead, I work in Burnaby, which is just east of Vancouver, and my commute lasts only twenty minutes. And while I did cope with 1200 sq. ft. for thirteen years, six of those with children, I cannot express how much happier we all are now that we have a house, a yard, our own private garage, a laundry room big enough for full-sized front-loading machines, and a street quiet enough for the kids to play in.

I'm not knocking downtown life; I've done it. But with two growing boys who need lots of space, and a father who likes to hunt and needs a place to stage out and dry out his tent after a trip, the burbs sure are nice. I'll add that a libertarian especially would probably find the extra privacy and freedom very appealing.

Posted by: Shane Matthews | 2010-08-17 6:34:00 AM

P.S. Commuting is way more fun if you drive stick.

Posted by: Shane Matthews | 2010-08-17 7:45:05 AM

Well, Toronto has no real equivalent to the Downtown Eastside. If you look at the Toronto Police Services crime map, you'll not the crime hot spots in Toronto are in the northeast and northwest parts of the city -- both about a 4 hour walk from where I live.

Toronto's really only major slum downtown, Regent Park, has just been bulldozed and is being redeveloped.

I've lived a lot of places in the US and Canada, and I can say I feel a lot safer in downtown Toronto than in most suburban settings I've lived. And the actual crime data speaks for itself on this.

Posted by: Mike Brock | 2010-08-17 8:10:35 AM

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