Buying a home is not the answer to insanely expensive rent.
In Toronto, rents are in some cases heading into the same zone as the mortgage payment on a modest house or condo. Renting a condo in a prime location might even cost you more than buying based on a comparison of rents and mortgage payments.
There are no easy answers to the question of how to live in Toronto in 2017 without blowing up your personal finances. More millennials will be moving back home, even if they're working. Some will rent in a godforsaken suburb or find roommates. And some will investigate whether owning can actually be cheaper than renting.
It's not. Owning a home or condo is a higher league of expensive if you look beyond just the cost of a mortgage and rent. This applies not just to Toronto, but any city with expensive housing.
Estimates of average rental costs in Toronto vary a lot – from roughly $1,500 on average for two-bedroom apartments of all types to $2,400 or so for two-bedroom rentals in condo buildings. Let's use $2,000 for this comparison because it's not far off the $2,100 per month payment on a mortgage for a $500,000 property made with a 10 per cent down payment, a five-year fixed mortgage rate of 2.7 per cent and a 25-year amortization.
Let's make that property a condo – there are some two-bedroom condos in the Toronto area for that much. Now, let's look at condo maintenance fees. A quick browse of the Condos.ca website showed $500,000, two-bedroom condos with maintenance fees as low as $369 and as high as $986. Condo fees vary according to factors like a building's age, condition and amenities, and the utilities costs included. Let's estimate $600 per month.
Property taxes might run you $2,500 per year in a two-bedroom condo, or $208 monthly. As an owner, you' probably want to personalize or upgrade your condo. On average, we'll estimate that you spend $200 per month on improvements like this.
Total cost of renting our hypothetical two-bedroom apartment: $2,000 plus utilities. Total cost of ownership: $2,100 plus an additional $1,000, give or take. You might spend less if you're really frugal, or you might spend more if you want to make substantial upgrades or you get hit with a special assessment for the cost of a big project in your condo that can't be covered from regular condo fees.
For years, I've suggested that people rent if they can't afford to buy. But renting, while not as expensive as owning, can still be toxic to your personal finances. There's a rough rule that rent should be no more than 30 per cent of your gross income, but that's a stretch today. It would take an income of $80,000 per year to make that $2,000 monthly rent in Toronto affordable over a year.
This leaves renters in the same position as prospective buyers – making compromises like finding smaller accommodations or moving further away from the city centre. Renters used to be able to say that if they couldn't afford to own, at least they could live in a desirable part of the city and not the suburbs. But expensive housing pushes people into renting, and that in turn causes rents to soar.
Under Ontario's rent control laws, buildings that opened before November, 1991, can only raise their rents each year by an amount influenced by the inflation rate (1.5 per cent for 2017). Newer buildings, notably rented condos, are not bound by this. That's the background behind a story told in my e-mail newsletter last week about a Toronto woman who moved out of her tiny condo after her landlord jacked her rent to by $950 a month to $2,600. She ended up "couch surfing," or staying with friends and family.
We'll have to be careful not to apply the failure-to-launch label on millennials who react to high rents by making the rational decision to move home. In fact, doing so might offer the most efficient route to home ownership. Even if a young adult pays modest rent to parents or help with household expenses, there should still be money left over to save for a house down payment.
It may turn out that rental insanity means some young adults never rent. They'll go right from their parent's homes into their own place, after an extended period of saving.