Renting vs buying: How to make the right choice in Canada’s housing market

Is now the best time to buy a house in Canada, or is it better to continue renting until the housing market cools off?

To many, it may seem as if the high cost of living and rent is topped only by the high cost of buying a house in today’s market. It’s like being stuck between a rock and a hard place.

Both renting and buying have their own prospective benefits and drawbacks. You just need to determine which best aligns with your goals. Below, I’ll discuss Canada’s current housing market and go over some of the pros and cons of renting versus buying so that you can make a more informed decision.

Overview of Canada’s current housing market

The Canadian housing market has been on a rollercoaster ride over the past few years. Prices initially soared, partly due to the pandemic’s low interest rates and increased demand for suburban homes.

In February 2022, the average sale price across all property types was $816,720, according to a market report from WOWA.

Over the next year, the housing market gradually cooled down due to rising interest rates, and the average sale price dropped to $612,204 in January 2023.

Unfortunately, this trend reversed in the following months, as the supply of homes became tighter, driving the average sale price back up to $729,044 in May 2023, eventually prompting the government to place a sweeping two-year ban on foreign real estate investment in Canada.

However, the market appears to be finding a more stable footing recently, and housing prices have cooled significantly since the summer.

Benefits of renting in Canada

If you’re reading this, chances are that you’re currently renting and weighing the pros and cons of buying a house in today’s market. Perhaps you’re tired of dealing with landlords, paying ever-increasing rental rates, and not being able to paint your walls the colour you want.

While it certainly has its share of irksome moments, renting your residence also has some clear benefits:

• No property taxes or maintenance: As a tenant, you’re not responsible for paying property taxes on your home, and most maintenance/appliance costs are taken care of by the landlord, which can save you a significant amount of money each year.
• More mobility: As a renter, you’re free to pick up and move whenever and wherever you want, as long as you complete your lease term.
• Less money down: Although most rentals require a security deposit and the first month’s rent as a down payment, this is usually far less than you’d have to put down on a house. You can expect to receive your security deposit back at the end of your lease if you leave the property in good condition.

Drawbacks of renting in Canada

• No equity in the property: Payments made towards rent don’t buy you any equity in the property.
• Rental rates can increase: It’s common practice for landlords to increase rent each year, usually by around 2%, depending on provincial regulations.
• More restrictions: As a tenant, you’ll have to adhere to your landlord’s rules regarding guests, pets, noise levels, and more. Failure to follow your landlord’s rules could result in fines, eviction, or legal action.

Benefits of buying a home in Canada

• Each mortgage payment builds equity: Unlike renting, you can have peace of mind knowing that each mortgage payment puts you one step closer to fully owning your home.
• You can use your home to generate passive income: If you have a spare room or building on your property, you can list it as a short-term rental on Airbnb or rent it out to a roommate to help cover the mortgage costs. If you go out of town for extended periods, you can also rent your entire home out. This typically isn’t allowed with rentals.
• Fewer rules and restrictions: While you may have to adhere to HOA rules in your neighbourhood, you have a lot more freedom when it comes to your home design, the pets you’re allowed to keep, etc.

Drawbacks of buying a home in Canada

• Lengthy mortgage approval process: Getting approved for a mortgage typically involves a lengthy credit approval process. You’ll also need to show a steady income history and be prepared to put down anywhere from 5% to 20% of the home’s value.
• Property taxes and home insurance: As a homeowner, you’ll need to pay annual property taxes, which can range between 0.5% and 2.5% of the property’s value. If you have a CMHC mortgage, you’ll also need to purchase mandatory home and mortgage insurance, which can increase your monthly costs.
• You’re responsible for maintenance: As a homeowner, you’ll be responsible for maintaining your home and repairing anything that goes wrong. You’ll also need to account for periodic expenses like a new roof, new appliances, etc.
• Less mobility: If you get a job offer in another city, selling your house and uprooting your life is much more difficult than renting.

What should you choose if you’re unsure?

Buying a house is a major life decision and one that shouldn’t be taken lightly, especially in the current economic climate. If your current lease is close to ending and you’re still unsure of what you should do, it may be best to sign another short-term lease and give yourself more time to think, plan, and prepare for homeownership.

On the other hand, if your credit is in good standing, you have money saved for a downpayment, a stable career, and are confident about buying your first house, now could be a good time. Aside from the high interest rates, the real estate market appears to be cooling down and may continue to do so in the coming months.

Whichever path you choose, I wish you the best of luck!

Written for Daily Hive by Christopher Liew, a CFA Charterholder, former financial advisor, and the creator of Wealth Awesome.