Rent-or-own question answered
Disciplined and sophisticated tenants can do as well as land owners
Ashley Ford, The Province Published: Tuesday, February 20, 2007
It's one of those eternal real-estate questions: Is it better to rent or own?
The Sauder School of Business at the University of B.C. has finally answered it . . . sort of!
In Are Renters Being Left Behind? Homeownership and Wealth Accumulation in Canadian Cities, business professor Tsur Somerville says city-dwelling Canadians who own their homes become wealthier over time, on average, than those who rent.
How much wealthier depends on the city you live in. Perhaps surprisingly, Vancouver is as good for renters as it is for owners.
Under best-case conditions in Canada's most-expensive housing market, renters can accumulate at least as much wealth as owners, the study says.
The "best-case" scenario would require a renter to invest 100 per cent of the difference between owner and renter payments in the Toronto Stock Exchange and pay very low investment-management fees.
"It's not that renters cannot build wealth similar to that of owners," says Somerville, the study's lead author and Sauder's Real Estate Foundation of B.C. professor in real-estate finance.
"But it requires a level of discipline and sophistication in investing that most North American households have shown themselves unable to achieve."
Ultimately, says Somerville, homeownership offers a unique opportunity for households to accumulate wealth.
"The significant benefit of homeownership for individuals is that a mortgage effectively forces them to save and build equity through mortgage payments."
Somerville's study compares the wealth homeowners can achieve by paying down a mortgage with what a renter could amass by investing an amount equal to a home down payment and the difference between ongoing owner and renter costs.
The study's research concludes that "for renters to accumulate the same amount of wealth as owners, they must be extremely diligent savers, invest in a high-yield instrument, do so with minimal fees, and have the good fortune to live in one of the cities where the right combination of low rents and/or low house price growth allows them to invest more in a relatively higher return asset."
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© The Vancouver Province 2007
The Schacter Team - Langley Real Estate