Episode 323 - Renting Versus Buying a Home in Canada 2005-2024

Episode Summary

Executive Summary: The episode compares renting versus owning a home in Canada using historical data from 2005-2024 across 12 metro areas, finding no universal winner: renters ended ahead in more cities, but outcomes depended heavily on rent levels, home price appreciation, fees, discipline, taxes, and housing-market timing. The second segment explains why bond investors should not chase rate forecasts by switching maturities, emphasizing that central banks don’t control all yields and that portfolio design should match goals, not predictions.

Main Topics: Renting vs. owning in Canada: historical comparison (Priority: 5/5): Ben presents a data-driven model using actual Canadian rent and home-price data to compare a hypothetical renter and owner from 2005-2024 across major metro areas. Housing costs, hedging, and housing as an asset (Priority: 5/5): The discussion frames housing as both a consumption good and an investment, highlighting that owners hedge local rent inflation but also take on concentrated asset risk. Model assumptions and sensitivity analysis (Priority: 5/5): The group examines how results change with assumptions on savings discipline, maintenance/depreciation, investment fees, amortization, and down payment size. Behavioral realities: discipline, fees, and forced savings (Priority: 4/5): A major conclusion is that renting can work financially only if renters reliably invest the difference and keep fees low—conditions many households fail to meet. Bond duration and interest-rate forecasts (Priority: 4/5): Dan answers a client question about shifting into longer bonds ahead of expected rate cuts, arguing that duration is not a forecast tool and that bond markets already price in widely known expectations. Professional community and industry updates (Priority: 2/5): The after-show includes a plug for the Financial Planning Association of Canada, Rational Reminder community moderation needs, and an Ottawa meetup announcement.

Key Arguments: Renting is not “throwing money away”; both renters and owners pay housing costs, but they do so in different forms. Long-run housing outcomes are driven mainly by two variables: the cost of housing and the return on the asset used by the household. Actual historical Canadian data show no single dominant approach; renting beat owning in more metros, but owning won in others. The biggest practical challenge for renters is behavioral: they must save and invest the monthly difference consistently and avoid high investment fees. Ownership offers a hedge against local rent inflation, but that hedge is specific to the home/location and does not eliminate house-specific risk. Maintenance and depreciation assumptions materially affect results and are hard to model precisely because the relevant cost is tied more to building value than land value. Bond duration is useful for describing sensitivity to parallel rate shifts, but it is not a reliable way to trade interest-rate forecasts. The Bank of Canada controls the overnight rate, not the entire yield curve; long-term yields are influenced by market expectations and may already reflect anticipated cuts. Trying to rotate bond maturities based on widely known forecasted rate moves is unlikely to add value in efficient bond markets. Investors should choose fixed-income maturity based on time horizon and risk tolerance, not on predicted policy moves.

Data Points: Canadian housing share of consumer spending: More than 28% - Statistics Canada estimate of typical Canadian housing spending in CPI context Analysis period: 2005 to 2024 - Historical Canadian rent vs. buy model timeframe Cities analyzed: 12 metropolitan areas - Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa, Winnipeg, Quebec City, Hamilton, Kitchener-Waterloo, Victoria, Halifax Cities where renting beat owning: 7 of 12 - Base-case model outcome using historical data Cities where owning beat renting: 5 of 12 - Base-case model outcome using historical data Average ending net worth advantage: Renting by about $15,000 - Initial model average across the 12 metros Updated average ending net worth advantage after maintenance model revision: Renting by about $22,000 - After splitting out maintenance and depreciation using condo-fee-based maintenance estimates Highest down payment cited: $43,220 - Vancouver down payment amount used to justify registered-account feasibility Gross annualized portfolio return: 8.19% nominal - Return of the renter’s assumed investment portfolio before fees Portfolio fee assumption: 0.25% - Base-case investment fee used for renter’s portfolio Historical average investment fees in Canada: About 2.5% - Fee reality over the sample period, much higher than base-case assumption Investment fees in 2022: 1.76% average - Driven largely by active mutual funds Savings efficiency base case: 100% - Renter invests the full monthly cost difference versus ownership Savings efficiency sensitivity: 90% and 80% - Lower renter discipline increases the number of metros where owning wins Maintenance/depreciation base case: 2.5% of property value - Used in the model, with sensitivity analysis around 2% and 3% StatsCan maintenance/depreciation estimate: About 2.1% of building value - Statistics Canada’s combined estimate for homeowners Mortgage structure: 25-year amortization, 20% down payment, 5-year fixed rate - Baseline owner financing assumptions Short amortization sensitivity: 15-year amortization: owning wins in 3 of 12 areas; renter wealth exceeds owner wealth by $78,000 on average - Shows higher payments/less leverage favor renting in the model Long amortization sensitivity: 35-year amortization: owning wins in 6 of 12 areas; owner wealth exceeds renter wealth by just over $15,000 - Shows more leverage improves ownership outcomes High down payment sensitivity: 50% down payment: renters ahead in 9 of 12 areas; renter wealth exceeds owner wealth by $59,000 - Less leverage can weaken ownership outcomes Low down payment sensitivity: 5% down payment: renters ahead in 7 of 12 areas; renter wealth advantage just under $12,000 - Lower down payment increases leverage benefits for ownership but not enough to reverse base results ZAG duration: 7.3 - BMO aggregate bond ETF example used to illustrate interest-rate sensitivity ZSB duration: 2.7 - BMO short-term bond ETF example used to illustrate lower rate sensitivity Bank of Canada overnight rate example: 0.5% to 1.5% - 2017-2018 period used to show that short-term rates rose even while longer bonds outperformed Real annualized return in Edmonton: 1.85% - Used to explain why Edmonton’s ownership outcome was weak relative to rent costs Average rent burden in Edmonton: 6.5% of property value - Highest rent burden among the cities discussed Winnipeg outcome: Best metro for renters over the sample - Highlighted as the strongest renter-favorable market in the analysis

Pivotal Quotes: "“renting is throwing money away”" — Benjamin Felix: Used to challenge the common belief that renting is inherently wasteful "“the Bank of Canada does not control those longer-term rates”" — Dan Bordolotti: Core explanation for why moving into longer-duration bonds based on expected rate cuts is not a reliable strategy "“It’s less of a mathematical decision than a behavioral one”" — Dan Bordolotti: Summarizes the idea that discipline and execution matter as much as the rent-vs-buy arithmetic

Implications: Listeners should treat renting vs. owning as a trade-off shaped by behavior, fees, leverage, and local market conditions—not a universal rule. Bond investors should avoid tactical maturity bets based on consensus rate forecasts and instead align duration with their own time horizon and risk tolerance.