You had your best-laid plans and then COVID-19 came along and hammered the entire economy. But you’ve got this – if you have the right information. Join Rob Carrick and Roma Luciw on Stress Test, a podcast guiding you through one of the biggest challenges your finances will ever face.
ROMA: Paying rent can feel like throwing wads of cash out the window, especially if you live in one of Canada’s big cities. But there are perks to being a renter with predictable monthly costs.
ROB: We’ve all heard endlessly about the incredible financial gains that Canadian homeowners have made. What we hear less about are the headaches, the massive repair bills, the property taxes, insurance costs, and the never-ending feeling that your house needs upgrades and improvements.
ROMA: All of this can eat away at your savings. With that in mind, we want to talk about how homeownership isn’t the only way to set yourself up for financial success. Welcome to season ten. Yes. Season ten of Stress Test, a personal finance podcast for Millennials and Gen Z. I’m Roma Luciw, personal finance editor at The Globe and Mail.
ROB: And I’m Rob Carrick, personal finance columnist at the Globe.
ROMA: Now, I’m sure everyone has heard the saying that renting is throwing your money away. Rob, why do so many Canadians still believe that renting is a sign of financial failure?
ROB: I think it’s because homeownership is like a club of people who have owned properties that have soared in value. Now, a lot of people who bought recently in the past two or three years have not seen that. But if you’ve owned a house for five, ten, 15 plus years, you’ve made a lot of money and you’re pretty happy about it. And people who aren’t in that club, you must be doing something wrong. Roma, in your world, do you get a lot of guff about renting? Do you hear people slag it all the time?
ROMA: Definitely, and I think that’s one of the most frustrating things when we talk about renting. The reality is that for many Canadians, young Canadians, they’re going to be renters. Those without family help or, you know, people who don’t have extremely high incomes, buying a home is not going to be feasible for them, they’re just not going to be able to afford it. I think the best thing we can do is change the narrative that we have happening in this country and empower renters to embrace the good things about renting. And the truth is that renting, it’s not a sign of financial inadequacy. There are certain steps that people can take to be able to grow their savings and become successful.
ROB: I think it’s really important that in this episode that we help people map out a way to build wealth as a renter. Is it better than owning? Is owning better? Let’s leave that sterile debate aside and let’s talk about ways that renters can build wealth and enjoy a comfortable working life and retirement.
ROMA: After the break, we’ll speak with an investment professional about his financial model that shows renters can accumulate just as much wealth as homeowners.
ROB: Ben Felix is the Chief Investment Officer and a Portfolio Manager at PWL Capital in Ottawa. He co-hosts the Rational Reminder podcast. Ben, let’s get right down to it off the top, can you be a rich renter?
BEN: I think you can and there are studies that have been done on this in both the U.S. and Canada that show that if you look at the numbers properly and if you’ve been a disciplined saver as a renter, which is something that we can maybe come back to and talk about the importance of, yeah, if those things are true, you look at the numbers properly and you assume that the renter saves the cost difference between renting and owning, the wealth outcomes of renters and owners have been and I think can be expected to be comparable. Can renters be as wealthy as owners? I think the answer is yes, given some assumptions.
ROB: Okay, let’s dig into it. Something we hear a lot from guests on the show over the years is that renting is throwing your money away and it’s paying your landlord’s mortgage. Does this view hold up when you look at the numbers?
BEN: Well, it doesn’t. And the reason is that there are costs. So rent is an unrecoverable cost. You pay for the housing and you have no residual value. So that’s why people think renting is throwing money away. And it’s very explicit with rent because you know exactly how much you’re paying and you know you’re not getting anything other than a place to live in exchange for that money. When you own, you also have unrecoverable costs. And I think this is the piece that gets missed in this discussion. Owners have property taxes. They have maintenance costs and they have the cost of capital. That’s the cost of paying a down payment and paying down mortgage debt over time instead of investing in something else like stocks. When you add up all those costs, the total unrecoverable costs of owning are about the same as rent, and the wealth outcomes of renters and owners should be similar if markets are somewhat efficient.
ROB: Let’s dig into a little bit more about the costs of homeownership because people understand mortgage and they place that against rent and they often say, ‘Well, mortgage payments are just about the same as rent.’ We could add in property taxes. People have a rough understanding, you have to pay that and then, you know, there’s home insurance. People get that. But it’s the maintenance costs that are clicking by in the background. It amazes me how little that comes up in the housing conversation. Can you talk to us about how that figures into the interplay between renting and owning and how much money you’re making and the equity you’re accruing and the costs of all of this?
BEN: It’s really important. So if you underestimate maintenance costs, owning is going to look really, really good relative to renting. I’ve got a model where I’ve looked at this and you can show that, hey, if you assume maintenance is 0%, owning looks really good. Now, if you look at what you should assume for maintenance costs and these show up in two ways. They show up as explicit maintenance costs. That’s how much you’re actually paying when you go to Home Depot and buy stuff or when you pay a contractor to work on your property. Those are explicit maintenance costs, but they also show up as depreciation. So that’s if you’re not maintaining the home or if your home is becoming older over time and newer homes are just a little bit more attractive to the buyers, that’s depreciation. So you add up depreciation and explicit maintenance spending, and that’s I mean, a conservative assumption is around 2%. I would tend to use closer to 2.5%. Take a million home just so the numbers are easy. So on the million dollar home, we have about $2,000 a month in total maintenance and depreciation costs. Some of those will show up as cash flow expenses. Some of them will not.
ROB: So why do we not discuss the cost of housing? It seems like all we talk about is the good stuff.
BEN: I don’t think anyone’s accounting for the costs, at least not in a systematic way. I don’t think anyone’s keeping a spreadsheet of every penny that they’ve spent to maintain the value of their home. And if you do account for that, it really does decrease the payoff. And I think this is one of the reasons that people think that owning a home is such a great investment because they know how much they paid for it and you know exactly how much you sell for because you see the number when you sell. And again, it’s a big event. Time is difficult for people to think about. Compounding is difficult for people to think about. So they see this big difference. And, you know, ‘I paid whatever, $300,000 and I sold it for $600,000. That seems like a big difference.’ Over a long period of time and when you account for maintenance costs, the returns on real estate have not actually been as good as I think a lot of people imagine.
ROB: I want to throw a phrase at you that I’m sure you’ve heard a million times: owning a house is a forced savings plan, and no one forces you to save when you’re renting. So you could just rent. And if you’re not super aware and disciplined, you may not save. And so you’re missing out on something the homeowner’s getting. Comment on that, please.
BEN: Yeah. So this is one of, if not the most important consideration in thinking about this. And I think it’s true. There is some academic research showing that owners are saving more than renters, even if you hold all else equal. There’s a problem, I think when you look at the statistics and the wealth of owners and renters, renters will always have less wealth than owners. But that’s not because renting is a bad financial decision, it is because renters tend to be younger, they tend to have lower incomes. So that messes things up a little bit. If you control for all that and take people of the same age, same life stage and you look at owners and renters, it’s much closer. But renters do tend to have a little bit less wealth. And the theoretical reason is what you said, that there’s a forced savings with homeownership that you don’t have with renting. When I model this, I’ve got a model right now that looks at renting versus owning in Canada from 2005 until October 2024. Okay, and if I assume 100% of the cost difference between renting and owning and there typically is a cost difference for a similar dwelling, it’s about 50/50. I looked at 12 different Canadian cities, and in six of them, renting beats owning and in six, the other way around. If I relaxed that savings assumption down to even 80%, it flips big time where, in most cities, you’re better off, you would be better off owning over that time period. So that savings assumption is critically important. And I think it’s just a reality that people aren’t great at being disciplined. It’s a lot easier to go on a trip instead of saving when you don’t have a mortgage payment that you have to meet.
ROB: Let’s talk about the discipline of being a renter who is investing and trying to build wealth that will be comparable to home equity. What do you have to do to get that rich renter outcome?
BEN: I think a big thing is automation. You have to automate it. You have to pay yourself first, if we can use that phrase. That’s probably the single biggest thing. And then of course, there is just some good old fashioned discipline where if you know you want a certain wealth outcome and you know how much you have to save, even if you automate it, you have to stick with it. You can’t be flexible around things like major purchases that you may want to make or travel plans. Now, on the other hand, it shouldn’t necessarily be your objective to match the wealth of a homeowner. One of the benefits of renting is that it does give you more financial flexibility. If you do want to spend a little bit more to enjoy your life now, you can do that as a renter and less so as an owner. I think everyone’s familiar with the phrase being house poor, where you live in a great house. We have no money for anything else.
ROB: Let’s talk about the mechanics of what you might invest in. How do, I mean, it’s going to make a difference. You have to make a smart pick because you’re trying to build wealth. You’re not you don’t want to be gambling. You don’t want to be taking excessive risks. Lay out a sort of a rough plan for taking those regular contributions, those automated contributions to your investment account and putting them to work. What would it be? Exchange traded funds, stocks? What would you think is a good vehicle here?
BEN: Yeah. So I think in Canada, we’ve been pretty fortunate over the last several years to get these asset allocation ETFs that are pretty innovative and they are or they may be in other countries, but they’re, I think, they might be uniquely Canadian in some ways. Like in the United States, they have target date funds, which are a little bit different. We have these nice low cost fixed allocation index fund portfolios. I think most financial institutions have them at this point. So these are globally diversified, low cost index fund portfolios that really let you capture the returns, the expected returns of global financial markets. Those are incredible tools, and I think that’s what people should be using as renters. But this is a really important point as well. So I mentioned the importance of the savings discipline. Another big one is investment costs. So if we assume a 0.25% cost on investment products, which is about what you’re paying for those asset allocation ETFs, that’s where you get that roughly equal outcome between renting and owning. If we put in a 2% or a 2.5% fee that a lot of people are still paying in Canada on mutual funds, all of a sudden renting looks a whole lot worse than owning. And I mean, that’s 2% of mutual funds. If we add in crypto speculation, although recently maybe not so much or picking individual stocks and they don’t perform so well, that makes it that much worse.
ROB: And at retirement, the retiree has home equity and maybe some investments, while the renter ideally has a big investment portfolio. How do these different wealth profiles compare?
BEN: Well, so the magnitude could be similar like we’ve been talking about. In the case of an owner, you have this single relatively concentrated asset that you may want to try and sell and downsize. But the big difference is really going to come down to diversification, where if you own one home in one city in Canada, and that’s where most of your wealth is, as we’ve seen recently, I mean, the last time I updated my numbers, Toronto home prices are down about 20% between March 2022 and I think I have numbers up to October 2024. It’s a big decline, obviously. Now that can happen in financial markets too, but in the long run, when you’re more diversified, I think you’ve just got a much more stable expected outcome. So really the big difference there is going to be you retire with a house, you have one asset. You retire with investments that are properly diversified, you’ve got a much more diversified portfolio.
ROB: Now we have to talk about the tax aspect of things. Explain the tax benefit of having a principal residence.
BEN: Yeah. So in Canada, the big advantage, and I’ve looked at this in my modeling as well, if you have maxed out all of your registered accounts, so you’ve maxed out your RRSP, your TFSA, your FHSA, and you have a high tax bracket, so you’re a high-income earner in Canada, owning starts to look more advantageous relative to renting. And the reason is the primary residence in Canada, the gains are not taxed and that is a big advantage. Now, if you’re investing in your RRSP, TFSA and or FHSA, you’re also not being taxed on your investments. So I think in the case where you have registered account room, I think it’s probably true that a lot of people will be able to do all of their saving and investing in registered accounts. So in that case, there’s no relative advantage to owning a home if you’ve maxing out and you have a high income. Owning a home does get more attractive.
ROB: There’s an emotional aspect to home ownership. There’s security, pride, control. How much do these aspects influence? How much we see houses as investments?
BEN: Oh man, so like, I own a house. Okay. I bought a house three and a half years ago and we do love it. We live in Quebec in a pretty rural area and it’s beautiful and we enjoy it. There is something to be said for not having to worry about what we’re going to do when the next lease is up, which is something we always have to think about as renters. So there are little things like that that I do care about. But again, speaking for myself personally, the pride of the house, I mean, I couldn’t care less. Having to maintain the house is like excruciating for me personally. Now that’s me. Some people love this stuff. Some people do get pride out of making their house really nice. They love doing home maintenance. I talk to people and I don’t get this, but I talk to people who love doing home maintenance. They love, you know, painting their deck and making their garden look nice. If you enjoy those things, and especially if you have skills to do home maintenance, that does make homeownership that much more attractive.
ROB: For generations, owning a home has been seen as the Canadian dream. I hate to use the word dream, but it’s so often used. How do you think that dream is changing, especially for younger generations? Do you think people are waking up to the possibility of renting?
BEN: Somewhat. I mean, it’s a popular topic where if you say renting can be a good option, I think a lot of people hear that and they’re relieved. They’re relieved to know that they’re not throwing money away, that they’re not making a bad financial decision. However, if you look at some surveys I’ve seen, I haven’t seen really reliable data, but some surveys still suggest that a lot of Canadians do have this dream of owning a home. And if you talk to people anecdotally, a lot of people do still want to buy a home. So I don’t think that we’ve solved that. I think that there is still a strong desire for a lot of Canadians and younger Canadians to buy a home, to own a home. But I also think that they’re very receptive to the idea that you don’t have to be a homeowner to have a good financial outcome.
ROB: But I think one thing we have to discuss before we close out here is the usefulness of home equity versus the usefulness of having a big investment portfolio. When you’re retired, having a lot of home equity doesn’t pay any bills. You have to tap into it by borrowing again. I wonder if you could elaborate on this, tell people that home equity isn’t this Swiss army knife to solve all your financial problems?
BEN: Well, you’ve got to live in the home. Yeah, so you can do things like reverse mortgages. Maybe if you have a home equity line of credit from when you had income, you can still use that to draw down some of the equity. Yeah, I agree. It’s a lot simpler to draw down on an investment portfolio to fund your retirement. The home continues to be, even if it’s paid for, the home continues to be a liability because you’re still paying for property tax, you’re still paying for maintenance costs. And this is a really interesting piece that I don’t think most people realize, when you have a paid for home -- making that assumption that once someone’s retired, they’ve got a paid for home, which may not always be true -- when you have a paid for a home, the cost of capital, which is one of the biggest costs of owning a home, will tend to be higher than it was when you had a mortgage, because mortgage debt tends to be a relatively low cost of capital source of funds. When you have equity in a home that could alternatively be invested in something like a portfolio of stocks and bonds, the opportunity cost on that is enormous. So the cost of owning a fully paid for home can actually be quite a bit higher than the total cost of owning a home with a mortgage.
ROB: This is kind of an existential question, Ben, but do you think people will be happier owning or renting, giving everything we’ve talked about? We can we can assure them that on the rent side, you can still have a degree of wealth, but how are people going to be happiest?
BEN: So I did a video on this. I found a whole bunch of studies, including one that looked at Canada specifically. And when you control for all of the factors that could affect happiness and isolate renting versus owning, there’s no difference. And so, really, when you look at that, I mean, it’s hard, right? Because if you ask someone, are you happier as an owner, people who own are going to say yes because they may think that they are. Well, they may actually be. They may self-select as people who really like owning a home for whatever reason may be the ones that own homes. But when you look at the data, when you step back and just look at the aggregate data on are people who rent any less happy than people who own controlling for other stuff that could affect happiness like income levels, the answer is no. There’s no statistical difference.ROB: After the break, we’ll hear from that supposedly rare breed, the renters who could buy a home but chose not to.
ANDREW: My name is Andrew, 34 years old, living in Vancouver.
ROMA: Andrew makes about $120,000 a year working as a project manager. He rents a 450-square-foot apartment near Stanley Park and pays about $1,500 a month in rent. He saved about $220,000 over the past four years, and he has no plans to use that for a down payment.
ANDREW: If I were to buy an apartment even this size, you’d be paying a million bucks or, you know, $800,000 or something like that. So to me, any purchase, even not even in my neighbourhood, but say it’s, you know, $700,000 or you got strata fees on top of that maintenance, just your overall expenses go up. So financially, it just doesn’t. The only incentive would be ‘Oh, I own this piece of property’ and, you know, equity and all that. So, you know, you could build equity into your apartment. Say you buy an apartment and it goes up $200,000 over the course of ten years. Well, in the course of ten years, I could save well over $200,000. So I could either own a home and not save a lot or I could not own a home, have a better apartment and save more. Financially, it just doesn’t make any sense. It makes more sense to rent.
ROMA: When Andrew first moved into his apartment about six years ago, he paid 50% of his income on rent. His salary has since risen. Now his rental expenses are about 20% of his gross income. He doesn’t own a car, so his only other big cost is groceries.
ANDREW: I have like a squirrel-away kind of mentality. I’m used to not having money, so I just behave as I always have, of not having money. So, geez, I don’t know, $2,000, $2,500 bucks a month just kind of gets put aside.
ROMA: Over the past five years, Andrew has managed to save about $220,000. He estimates that about 75% of that is principal and 25% investment gains. He divides his savings among three accounts a TFSA, an RRSP, and a first home savings account. Even though he doesn’t intend to be a homebuyer.
ANDREW: It’s just an extra account to have. I mean, it’s only, well, this is going to sound ridiculous, but only $40,000, let’s say. What’s that four years worth or that it’s maxed out. And then that’s that. It behaves exactly like an RRSP. And then you carry on and put money into something else.
ROMA: He invested savings into equity funds and what he calls boring stocks. His ultimate goal to save for retirement.
ANDREW: Somebody told me that you needed a, and this was, you know, somebody who was twice my age, that you need a million bucks to retire. And they thought that was a really high amount of money back in like the 80s or the 90s or whatever. But now if you look at it, I don’t know, it’s probably, I was looking at it, it’s probably 2 million bucks or something like that. So that’s the end goal. It’s not to own property, it’s just to have like a, I would say just in case, but you can’t work forever. You can only depend on yourself. So that’s just kind of how that, how that works.
ROMA: He’s happy with his current apartment, but he’s considering moving to a bigger place now that he can afford one. ANDREW: So this year, 2025, might be the moving year. My refrigerator runs pretty noisy. It’s in a separate room. How many meters is that? Let’s go with 5 to 8 meters from my bed. So a room with a door, that would have been pretty nice last night. But yeah, no, definitely motivated to look to move probably in 2025, just to kind of, I’ve been here for six years. It’s been pretty good. The new places that we’re looking at seem to have dishwashers, so there’d be a little bit, little bit different. You don’t know how much you miss a dishwasher until you don’t have one for like ten years.
ROMA: He’s not remotely tempted to buy real estate in pricey Vancouver.
ANDREW: I was looking at real estate listings. It’s kind of the same thing where, the house sold for $250,000 in 2003. Then it goes up to like $800,000 in, you know, 2024. So then if I were to buy that house, like, you’re supporting the frenzy. So I just don’t want to participate in it. Like, it just, it doesn’t make any sense. It just goes against everything in my, every bone in my body to facilitate that frenzy. It just reminds me of, well, I was going to say before, a friend of mine who bought a brand new, I don’t know what it was, Silverado or something like that. This is in 2008 and he bought a brand new truck and it was everything that he wanted it to be. It was all shiny, had all the fun toys in it. He got a new job. He was starting to be an electrician. And then he found out that all his money in his fancy new job went towards his car and he had no money. So all I picture is people buying, say, that house. What’s that? House poor, where you put all your stuff into your house and you got no savings. All your savings went into your down payment. And that doesn’t sound very desirable. Like with a rental, yeah, I could like, I can move back to Edmonton any day. Like I could move out of this building into another building, like I can just pick up and go. So if I were to buy into a non-frenzied market, I’d buy in Edmonton in a heartbeat if I worked there. That would make sense. I’d buy a full house with a front and back backyard and a detached garage for, I don’t know, $300,000, $400,000 bucks. No problem. But yeah, I’m not going to buy a condo here and waste my money.
KRISTI: My name is Kristi, I’m 31 and I live in Parkdale.
ROMA: Kristi is a grant writer. She lives with her wife and dog in a rent-controlled apartment in Toronto. Their combined income is about $180,000, and they plan to stay put.
KRISTI: It’s in a high rise. It’s a two-bedroom, one-bathroom apartment. It’s just under 1000ft² and it has a balcony, which is great. I think one of the other things that drew us to our apartment building was that we were really interested in living amongst a community that had also like strong tenant rights and tenant advocacy. And so, in our building, we also really appreciate the fact that it’s a very intergenerational generational building. There are older folks, there are younger folks, children, folks that have been living in the building for 20 plus years and the entire tenant committee and other folks are invested in keeping them in that building for as long as possible.
ROMA: They pay about $3,000 a month for rent, parking and utilities. That’s about 30% of their after-tax household income. They considered buying but realized they wouldn’t be able to afford something they wanted in the city. That wasn’t the only reason they decided against buying.
KRISTI: The idea that we would be putting ourselves in debt for 20-plus years, more like 30, probably 35, probably 40 years, felt like something that was difficult to swallow. And that’s kind of incompatible with how we view our working lives. One of the things that we really like and have been able to do is like save up a bit of money and then be able to take some time off of work. I think that there is this idea that you can like keep working and saving and saving and saving until retirement when you’re older and then you finally have the chance to enjoy your life in a way that is a bit more free. And I think for a lot of people that’s great that that they find a lot of happiness in that. But for us, I think we were taking a sort of like longer scope of our life and we were like, You know what? Like we want to be able to not work at younger ages too, and be able to experience like what that feels like. And that we realized, you know what, this is something that we don’t have to sign up for. It’s not something that’s required of us. It’s not something like no one’s like demanding that we drain our savings account and put it into a piece of property. And so we sort of just realize that we have free will in this aspect. And while homeownership works for a lot of people, it’s it doesn’t necessarily work for us.
KRISTI: Kristy and her wife are big savers. They try to sock away around $3,000 a month. They also recently started investing.
KRISTI: So when we realized that we weren’t saving up to buy a home, we did a bit more research into, okay, does investing make sense for us? How does all of this work? What is going to happen if the markets go down? What is like a long-term scope versus a short-term scope? And really like, really, really needing to sort of research and over research that. And becoming like hyper-fixated on something and reading Reddit posts until one in the morning and then waking up and like thinking about what an ETF is. And I feel like that’s generally how I undertake a lot of new hobbies.
ROMA: They have an emergency fund in a high-interest savings account and invest in low-cost ETFs mainly in their TFSA, but they don’t have a magic number they’re trying to hit.
KRISTI: I think that there is a lot of focus on this idea of capital accumulation and sort of like dying with intergenerational wealth. And I think that that is a concept that is extremely, A, limiting, B, sort of entrenched in free market capitalism and this idea of resource hoarding and C, really, really not relevant, especially for folks that are not planning to have kids, that are not like trying to sort of like build wealth, quote-unquote, in that way. The idea of building wealth has never been and will never be a goal for us. Like, there are only so many things that obviously you can do to resist against capitalism in a capitalistic system. And I think that our goal is like to die with zero money. So like, we’re not trying to like, reach $2 million by the time we’re 65. We’re trying to, like, have enough money to live and then like peacefully pass away. And I think that, like a lot of the financial advice is surrounded around this idea that you must have X million dollars. When actually, like, if you calculate how much you need to live every year and you think about like, yes, like you might live a couple of years longer. So build in that safety net, but you know, you don’t need to be only living off of interest, I think.
ROMA: The Canadian ideal of owning a home runs deep. We hope these stories will remind you that being a renter doesn’t have to hurt your investment goals. Rob, what are your takeaways?
ROB:
1. Renters always pay less money in total per month than owners. It’s vital to put some of those savings into investments that will grow over the long term. This wealth is your version of rising home equity.
2. houses have historically appreciated a lot in price, especially in major markets. But if a home is all you have in retirement, it can be hard to access that money to finance your life, especially if you don’t want to move.
3. Remember the other economic benefits of renting. You can move easily for better job opportunities and you have more time for career and leisure because you’re not looking after a home.
ROMA: Thank you for listening to Stress Test. This show was produced by Kyle Fulton, Emily Jackson and Zahra Khozema. Our executive producer is Kiran Rana. Thank you to Ben, Andrew and Kristi for joining us.
ROB: You can find Stress Test wherever you listen to podcasts. If you like this episode, please share it with your friends.
ROMA: Next week on Stress Test, the cost of university is going up faster than the salary you can expect to earn with a degree. We’ll discuss whether a post-secondary education is still worth it.
ROB: Until then, find us at the Globe and Mail dot com. Thanks for listening.