Property owners in Vancouver and Toronto who have reaped massive real-estate gains in recent years might not buy in, but there is a strong argument that wealthy Canadians are better off selling their homes and renting instead.
Indeed, they might even be better off financially in the long run. That's the premise of long-time commercial real-estate analyst Alex Avery's book The Wealthy Renter. His thesis: Renting is lower-risk than owning, and your capital can grow faster in something outside your principal residence.
The topic has been much debated (for a counterpoint, click here).
Even with evidence showing that renting can be less expensive than owning, those who can afford to buy that massive home in the city or affluent suburbs usually do just that. It is a tiny minority of well-heeled Canadians who can resist the urge to do so, Mr. Avery said.
"I have met a number of wealthy people who do rent homes instead of own them," Mr. Avery said. "Ironically the ones I know who do that are actually in the home building business."
In Mr. Avery's well-to-do Toronto neighbourhood, many multimillion-dollar homes are being rented to executives transplanted from other cities or countries who have sought to avoid the hassle and expense of buying. "When you run the economics on that renting, generally you are getting a fabulous deal. The rents are so far below the reasonable rent for the opportunity cost of the capital."
He gives the example of $5-million homes in tony Toronto neighbourhoods that might be rentable for $8,000 to $10,000 a month.
A renter in this circumstance would essentially be paying less than it would cost to own and maintain such a property.
He describes home ownership as "a cult and a big business" that includes the government, which sweetens the pot through a capital-gains exemption on the sale of a principal residence, mortgage guarantees and protections as well as land-transfer tax rebates for first time buyers. Add in financial institutions benefitting every time a new mortgage is taken on, irresistible interest rates and the "bank of mom and dad," and it's easy to see why markets seem bulletproof against economic headwinds. (Alberta being a current exception to that rule).
Since his book came out last year, Mr. Avery has been contacted by wealthy people who "had no idea" that so much of their capital was tied up in their home.
He recalled one woman who sold her 9,000-square-foot house for $5.3-million after her husband died and her children moved out. "She was spending more than $30,000 a month to live in this house but only saw monthly cash expenses of $4,000 or $5,000 for utilities, taxes and upkeep."
How does $5,000 a month translate into $30,000?
It's the opportunity cost of $5.3-million generating steady returns. If that money yielded 5 per cent annually, for example, it could earn her roughly $250,000 a year, or more than $20,000 a month. "You can actually do better than that on a lot of publicly traded REITs, for instance," Mr. Avery said.
In the end, the woman sold her house and rented a sumptuous apartment for around $8,000 a month. "Her cash housing costs went up, but she put $5.25-million in investments generating probably $30,000 a month in income."
While he is sticking to his argument that renting is better for the wealthy than owning over the long term, he is not betting on a sudden downturn in the Toronto market. He believes that the Ontario government's recent efforts to cool the country's largest market will have as much effect as those attempted by authorities in Vancouver. In other words, not much at all.
"They don't really address the underlying issue … there is a limitation on the ability of the market to supply single-family homes."
Deciding to avoid owning a home when you can afford it comes with its own challenges, however.
"I have a guy who has deliberately avoided buying for the last eight or 10 years," said John DeGoey, a certified financial planner and portfolio manager with Industrial Alliance Securities. His client, a mid-40s lawyer in Toronto who is a good saver and investor, thought the housing market "was ridiculously high" when he made his decision to sidestep home ownership before the Great Recession.
Considering how Toronto home prices have soared since 2010, he may be regretting that decision.
On one hand, he has "a largish six-digit investment account. But he is renting," said Mr. DeGoey. "He has now had to stick to his thesis, because it only became more true because prices only became more goofy over time. As a result he said, 'I have got to double down now.'"
More wealthy millennials may decide to rent rather than own even as most of their generation struggle to buy into the Canadian dream or are subsidized by parents who want home ownership for their children.
Janine Rogan and her husband, two Calgary-based accountants who could easily afford a home, have consciously decided to rent a condo apartment in the city's downtown and believe that their capital will do better in the stock market than it will tied up in a principal residence.
"We're big investors in the stock market and we have enjoyed fairly decent returns," she said.