Generally speaking, in the long term it’s a better plan to purchase a house, however that’s not always the case. There are a lot of circumstances that go into deciding whether a home owner or renter ends up in a better place at the end of several decades.
When comparing the two, it’s important to understand that the only way a renter can come out better than a home owner is if the renter takes the amount they save from renting instead of buying and puts that amount into an investment portfolio. If they don’t do that, then the home owners win without question.
The next step is understanding how you would compare the final asset amount between the two. When a house is sold, the amount it is sold for is tax free, meaning you really get to enjoy the additional value that the home has accrued over the years upon its sale. On the other hand, when an investment portfolio is sold there is still going to be somewhat of a hit that comes in the form of a capital gains tax upon sale.
So which one ends up better? If you’re looking at the numbers, it’s best to start with a report looking at long term Canadian economic trends. This showed that they should estimate a house will increase in value by 3.5% every year while an investment portfolio should be estimated at 7% a year (although as with all things involving investment, there are caveats). Over 25 years the homeowner does come out ahead.
However, there are several situations that can drastically affect this equation.
One of the largest ones for renters is assuming the renter is consistent in putting away the difference between renting and owning into an investment portfolio. If you don’t invest that money but spend it, then having the “extra” money in a portfolio isn’t going to do any good.
Another important point is that this assumes the home owner doesn’t move. Buying and selling a home involve major transaction costs. Moving twice, or even just once, in a couple decades can drastically throw off just how much you save over the long run.
Then there’s the simple fact that real world trends don’t always go in a straight line, which can throw off final numbers. A classic example of this can be shown in a math problem almost everyone gets wrong:
If the market starts out dropping 50% but then gains 50%, where are you at? The answer isn’t where you started. If you had $100 that fell to $50, that 50% increase then only gets you to $75, not your original $100. Understanding this math makes a difference.
Either route can work for long term investment, although if you know you’re going to move a lot it is probably better to rent than own. However if you are going to be in one area, it’s worth thinking about buying a modest home instead of the most you can afford, and then that way you can own and you can save with an investment portfolio at the same time.
