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Buying vs. Renting: The Debate Continues…

Posted by admin on November 12, 2007 in Real Estate

I decided to post my weekly real estate post on Monday instead of Wednesday (hey, its my blog after all….) on a debate that has been heating up given the state of the real estate market in some parts of the U.S. Mainly, are you better off renting a place or buying a place? Millionaire Mommy Next Door has been running a series of posts supporting renting over buying recently.  Fortune Magazine has an extremely interesting article on what the future holds for real estate values premised partially on increases in rental rates as an indicator of future real estate valuations. In a nutshell, there is a historical ratio between housing prices and rental price increases; when the ratio begins to increase (i.e. housing prices are increasing faster than rental rates), a correction has to occur.

Thus, the pro-rent camp argues that  it makes no sense to buy when real estate prices are appreciating at greater than the rate of rental increases- you can pocket the difference and use the money elsewhere (assuming you have the discipline to do so)- and housing values are out of line so it is not a good time to enter the market (rental rate increases serve as a proxy on how any local market is doing economically- in healthy markets, rents continue to increase in line with housing prices; where housing prices out-strip rental rate increases, the argument is that there isn’t the fundamentals to support the housing prices for long and that housing market will correct).

My comments:

1. The rent vs. own debate really depends on where you live (to state the obvious). In formerly over-priced markets (Miami, Las Vegas), it made more sense to rent and, hind-sight being 20/20, scoop up something on the cheap once the market began to collapse. Locally, I keep thinking of Vancouver- an average household income which is approximately 10-15% lower than Toronto but with higher property values and much fewer head offices than Toronto and Calgary. This would be a place to rent until the market comes to its senses.
2. Fortune makes an interesting point: in cities that are basically bubble proof (think New York City, Chicago etc.)- where a ton of people immigrant to the city year after year because of a very vibrant and diversified local economy- it is harder to create real estate bubbles (harder but not impossible- look at L.A. although L.A. does not have a financial centre such as New York or Chicago). The local economies support the increase in real estate prices (on any given day, there may be 15 million people on the island of Manhattan). In places where property values take off without a parallel growth in the local economy, watch out!
3. If I were to combine comment #1 and #2 together, the analysis would probably be buy something, anything, in large metropolitan areas that historically are major growth centers. I don’t think any Canadian city fits this bill. We don’t have the skill set or political will to nurture sustainable urban growth (for now) and we still tend to see our wealth coming out of the ground rather than out of office buildings.
4. The flip side of the argument is that it makes no sense to invest in real estate to rent out if you are in a bubble real estate cycle. The market keeps moving into buying and no longer looks at renting as a viable alternative.
5. Housing is deeply psychological and emotional. I don’t try bothering debating which is right or wrong with anymore. It is a matter of personal choice but Fortune also makes another interesting point- the increases in property values also means an increase in property tax so be prepared to pay for steadily increasing property taxes as well.

Your thoughts?