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Rent or Buy? Your Best Toronto Real Estate Strategy for 2015

Rent or Buy? Your Best Toronto Real Estate Strategy for 2015

Jan 26, 2015
Posted in
2015 may be your year to buy a Toronto condo . But with so much speculation about the fate of the Toronto real estate market, a lot of first-time buyers and clients who are in-between properties are questioning should I rent and wait for home prices to drop? In short, no. And here’s why.

Should You Rent or Buy When, In the Current Toronto Real Estate Market, House Prices Are Rising Much Faster Than Salaries

The average buyer’s annual earnings will never increase in proportion to the average increases in Toronto home prices. The price of properties across the City including Toronto condos rose on average by 8% in 2014 over 2013. Keep in mind that’s an average. We’re seeing significantly higher growth with single-family homes in hot neighbourhoods and in condos for sale in Toronto in hot buildings with real cache.

It’s true that 2014 was a particularly strong year and so that rate of increase may drop (likely not until 2016). However, prices are still going up. It’s just that the rate of increase may be more moderate in future and likely still above the average cost of living wage increases. So unless you’re anticipating a sizeable salary increase (a promotion, change of job, etc.), the longer you wait to get into the Toronto condo market, the more difficult it will get.

The only exception we’re seeing to this is with pre-construction Toronto condos for sale that are significantly overpriced to start with. Many pre-construction condos are not a wise investment and investors may have a rude awakening come re-sale. In other words, you still have to make smart, informed purchasing decisions at the outset. Making money in Toronto real estate is not a guarantee; people do get burned but usually because they made a bad investment decision to start with.

Prices Could Go Down but Likely Not Enough

If you believe that home prices will drop then you can argue against the above. But only if they drop significantly, for example 10%, and relatively quickly. Otherwise you’re continuing to “lose” money while you’re not in the game. Everything we’ve seen and heard is calling for a moderate price correction over time with condos for sale in Toronto and we agree.

If you’re renting simply because you believe you’ll get a better deal by waiting, you’re taking a huge gamble that any future price drops are going to more than make up for the annual home value appreciations that you’ve lost out on in the meantime while you’ve been waiting on the real estate sidelines. You can’t win if you’re not in the game.

 Because You Want to Take Advantage of Low Rates While You Can

Here’s the only thing that’s certain about mortgage interest rates. They never stay the same for long. We’re seeing incredible rates right now and thanks to the Bank of Canada’s announcement last week about a 0.25% cut to prime, mortgage rates are bound to get better still. It’s a great time for those thinking of buying a condo , providing that you don’t go crazy and keep your debt : income ratio within check. A lot of buyers agree. 2014 was a near record-breaking year for GTA home sales – 92,867 homes and condos were sold in 2014 which was just slightly under 2007’s record.

Based on historic patterns after BoC changes to prime, this low rate should hold for at least a year if not longer but a rate hike will come at some point. Your best financial bet is to get in the market ASAP to take advantage of this record-low credit for as long of a period as possible.

If you believe that Toronto condo prices will drop and you should wait to buy, you need to do some speculative math on what that really means to your bottom line if mortgage rates are a few percentage points higher than they are now when you do buy. Even a 1% increase can have a big effect on your monthly payments as well as the total interest owed over the duration of your mortgage. So you may not actually be better off by waiting.

Toronto Rents are so High That you May not be Saving

The idea behind renting before you buy is to squirrel away the difference between your monthly rental costs and what you’d be paying as a homeowner (mortgage, maintenance, property tax and bills). It’s difficult to say without the specifics of the property profile you’re looking for whether this is a solid strategy or not. But the truth is that in most cases, it’s not even feasible.

There’s no such thing as cheap rent in this city. For most clients, the difference between monthly homeownership costs and rent is somewhere in the $100-$500 / range. While that’s not insignificant, you’d have to be really disciplined about saving every penny of that and even then, it would take over a decade to save enough for a 20% down-payment on a $400,000 starter condo. By that time in your life, you’re likely not going to want a small box in the sky.

Build Equity Now Using the Bank’s Money

Real estate is one of the best ways to grow your wealth. Why? Because it’s more stable than stocks, you need a place to live anyway and, most importantly, you’re not just earning on your money, you’re earning on the bank’s money.

For the majority of individuals, the best return on investment you can hope for in the stock market is 8-10%. And most investors don’t hit these numbers. We’ve all heard rumours of the wise few who consistently earn 12% or higher but unless you’re a genius investor and you’ve found a reputable lender willing to loan you substantial money to play around with, then we’re skeptical.

With Toronto real estate, you would’ve seen around 8% appreciation this year (we’ve seen as high as 15-20% increases in some areas). But even at a more modest 5% annual value appreciation, here’s the real beauty of it – you’re earning not just on your cash base but on the bank’s mortgage loan to you.

If you have $100,000 cash, you can invest it in stocks and maybe make $8-10k (minus fees) if you’re really lucky or you can put that same $100,000 down on a Toronto house or condo, secure a $400,000 mortgage, and start growing your equity on the full $500,000 by $25K or higher each year. True, you’re paying interest to the bank which makes that figure less dramatic until you’re at the stage where you’re paying off principle. But most buyers need a place to live anyway and living costs money. So why not earn money on your home rather than pay down someone else’s mortgage with rent?

Stop Fretting and Start Living

Perhaps the most important reason to buy rather than rent is an emotional one. At the end of the day, we can speculate, debate and fret about the real estate market and the larger economy until the cows come home but nobody really knows what’s going to happen. Not just in the market but in our own personal lives. And if home ownership is important to you and you’re in a position to make it happen financially, then just do it.

When Renting Makes Sense

There are some exceptions to our “buy don’t rent” rule. Renting may be a better strategy than buying in a few situations:

If any of the above profiles sound like you, the good news is that there’s a large inventory of condos for rent in Toronto this year. Remember, one of our Pros can help you find the right condo to rent.

Lead image © iQoncept from Shutterstock.