Rent or Buy: Which is the Better Deal in Toronto?

Over the last decade, owning property in Canada has been a pretty good move.

But as prices have surged, so has the feeling from certain groups that Canada’s housing market is in a bubble, especially in larger centers like Toronto, Montreal, and Calgary. In these markets, it might even make sense to a prospective homeowner to rent going forward, especially if the market starts to decline.

This is the first of a series of posts looking at Canada’s major cities and answering the eternal question -- is it better to rent or buy? The first city up is Toronto.

The Condo Market

Most millennials in Toronto will likely be looking at a condo, preferably one close to downtown.

In Toronto, the average selling price for a 2-bedroom condo near the downtown core is approaching $600,000, while the median price is approximately $550,000 (All Toronto condo numbers are from this report). The median unit can be expected to rent for approximately $2,600 per month.

For a renter of that condo, that’s likely the only cost incurred. For someone buying it, it’s a much different story.

First of all, the buyer has closing costs. On a condo worth $550,000, those will come to approximately $17,000, once the buyer pays both the City of Toronto and the Province of Ontario to transfer the land, plus takes care of the lawyers’ fees, and the HST on top of all of that. Total purchase price: $567,000.

There’s also the possibility of CMHC insurance, assuming the buyer puts down less than 20%. On a 5% down payment for this condo, the buyer would be required to cough up another additional $16,500 for a CMHC premium, plus HST. That’s an additional $18,690.

The real cost of the condo now increases to more than $585,000. Let’s assume the buyer was able to come up with $60,000 to pay for closing costs and a down payment, leaving him with a mortgage of $525,000. At 2.99% interest over a 25-year amortization, the mortgage payment is $2,481.84 per month.

The buyer has two huge expenses that a renter doesn’t -- condo fees and taxes. Assuming $400 per month for condo fees and $200 per month for taxes, the owner’s cost skyrockets to nearly $3,100 per month, and that’s not including a nickel for maintenance, a cost that is generally assumed to be 1% of the purchase price annually.

For the Toronto condo market, the numbers lead you to a pretty clear conclusion: for prime 2 bedroom units, an owner is looking at spending about $500 per month more than a renter in the same property, even with the benefit of record-low interest rates.

Houses

Instead of crunching the average numbers for a single detached home in Toronto, (which now exceeds $1 million) let me pass on the tale of noted housing bear Garth Turner, who is renting a property in a neighbourhood close to downtown Toronto.

Turner pays $3,800 per month for a property he figures is worth $2 million, which means the owner is getting just a 2.28% return on the investment.

Turner looks at it somewhat differently than you or I would. He has the cash available to buy the house outright, but chooses to invest it instead of having it all tied up as home equity. In 2014, it worked like a charm, generating a 10.3% return, which increased his net worth by $206,000 and easily covered the amount he paid in rent.

Let’s assume a generous scenario for the owner and assume he only owes $1 million on the $2 million house. Based on a 25-year mortgage at 2.99% fixed, the owner’s mortgage payment is more than $4,700 per month. The property taxes are $700 per month, and I’d estimate the house insurance is an additional $400 per month. By the time we factor in just a little bit for maintenance, the owner’s cost of ownership is rapidly approaching $6,000 per month. And that’s just assuming a mortgage only worth half the value of the house!

In Toronto, it’s pretty simple to answer the rent or buy question. In just about every scenario, a buyer will need some serious price appreciation in order to come out ahead of a renter. Since there’s little guarantee that’ll happen, my suggestion to almost everyone in the city would be to rent for the time being.