Blessed by the Potato

I met a few new people this weekend, and some may now be coming around to check out this site for the very first time. I thought a quick introductory post might help orient you.

About the blog: it’s a personal blog where I write about whatever happens to come to mind, though that’s mostly personal finance stuff the last few years. When the blog first launched well over a decade ago it was focused on video games and school. In-between there are a lot of posts about hybrid cars, fuel efficiency, science, and the internet. But yeah, mostly personal finance lately. I don’t pretend to have any fixed posting schedule, but try to get at least one up a week. I tend towards wordiness and spreadsheets. About me: I trained as a scientist, recently completing my PhD in Medical Biophysics. I have an eclectic skill-set and wide-ranging interests.

Some common topics include:

Housing, in particular the rent-vs-buy debate: whether the market is going to crash or not, you have to live somewhere, and if it’s the biggest expense in your life you should put an appropriate amount of thought and care into the decision. Some posts you may want to check out include:

I’ve created the ultimate rent-vs-buy spreadsheet (with help from Matthew Gordon), with two follow-up posts discussing the factors that affect the outcome, and the sensitivities to changes in the assumptions. After seeing that, Mike asked if he should sell his paid-for house and rent.
There are deeply-rooted tropes and mantras around real estate (like tangibility), and I discuss those generally in this post, and in this one on “mortgage helpers.”
The concept of risk is really important in these discussions: this older post goes into that notion of risk, and this more recent one looks into how people’s risk tolerance (particularly young people) may be higher than generally assumed, so they should be more comfortable with the idea of renting and investing in equities/balanced portfolios.
Going back to first-year economics, I very roughly sketch out some supply and demand curves for housing. And don’t forget the definitions to common terms in the debate like the debt-to-income ratio.
In case anecdotes sway you more than data, consider the case of someone who bought a Toronto condo 3 years ago and sold now — there has been no crash, but did buying get them further ahead?
Or to put it really simply: price matters. Also remember to have a lot of patience.

For retirement, I’ve created a spreadsheet tool to help with the thought process of how it will work. It can be used as a calculator too, but be sure to flip to the other tab to see the calculations, and how the money is riffling through from equities to fixed income to the chequing account, to finally being spent. Be sure to check out the rest of the series on the details of the parameters, and looking at different scenarios.

Oh, and while there are many great sources of information on why you should avoid high-priced mutual funds, salescritters, and become a passive index investor, there’s little out there on how to actually do that. So I wrote a book that is — unlike many of my posts — very short and to the point, even including screenshots for how to put in trades with TD’s e-series through their brokerage arm. I’m currently mulling over whether it’s worth putting in the effort to create a second edition, and looking for feedback on what might be missing.

Into more general personal finance, some posts to see are:

Coping mechanisms for budgeting — the math on budgeting is easy, but how do you make your spendthrift brain stick to it?
Whether to rely on a line of credit for your emergency fund and invest the cash.
Banks don’t seem to push market-linked GICs so much any more, but here’s a post on how to create your own (simply, without using options).
The flat tax fantasy had to be discussed (part 2 has graphs), and then I follow-up with some thoughts on simplifying the tax system.

Freelancing: I don’t push it because I have a full-time day job, but I do take on freelancing projects from time to time. They’re almost all different, and depend on what people need. I’m a writer/editor, a scientist, and also have some skills and interest in personal finance and investing, so just about anything goes. There isn’t much I can display in my portfolio except for these two brochures for GBGHF: local residents edition, seasonal edition (be sure to open them in a PDF viewer like Acrobat rather than Firefox’s built-in one). For those, I did some of the photography*, all the writing/editing, and the layout. Please note that while I consult on several scientific topics (e.g. manuscripts, experimental design) I don’t do grant writing due to potential conflicts of interest with my employer. In select cases where people have sought my expertise, they’ve hired me through my host institution.

* – I’m sorry to say, photography is really not my strong suit as a freelancer.

I could fairly accurately define a mortgage as a loan that represents the very largest amount of money a person can possibly borrow and still expect to pay back. Though they are thought of as the safest kind of lending, when put in this light you can see that there is the potential for risk: the amounts are large and the timescales long.

If I were to try to create some way of predicting who would be a good credit risk, I would probably look at the household budget: how much money comes in, how much do they spend on what, and from there try to figure out how much that household could afford to put towards their prospective house purchase. Then, I’d have a few thousand potential scenarios with a number of important parameters — periods of unemployment, new children, interest rate changes, stock market returns, inflation in other spending categories, house price returns, etc., etc. — and run some Monte Carlo projections to see how likely this borrower would be to pay me back even if stressed.

That would probably give me a pretty good idea of who I could lend money to. But it is an absolutely ludicrous practice to think about for the real world. Firstly, there is going to be a lot of uncertainty: what if the borrower wanted to defraud me into giving them more money (or “soft fraud” so they could buy more house sooner) and under-stated how much they spent on food, vacations, and Halloween decorations so it looked like they could handle more mortgage than they really could? How would I ever collect and verify all the information they gave me to go into my model? Secondly, I will likely not be the one out vetting prospective borrowers and collecting their information, it will likely be someone who has a high school education (or a liberal arts bachelor degree) who has never heard of a Monte Carlo simulation working in the customer service part of my bank¹. My “mortgage specialists” likely couldn’t figure out their own detailed household budget, let alone audit a potential customer’s.

So I want something else that is going to be a pretty good predictor of ability to pay that will also be easy to verify and easy to apply by minimally skilled staff. And when you boil it down there are basically two things that are rather good predictors: how much money you’re making (income) and how much money you already have (down payment).

A larger down payment will mean that you’ll need to borrow less, but it also demonstrates that you have the ability to stick to a budget and save (or relatives who at some point did and liked you enough to give it to you). It gives you “skin in the game” — you’re much less likely to walk away from your house after a 20% downturn in prices if you put 20% of your own money into it. 20% is the cut-off, by the way, below which you must have mortgage insurance for a bank to lend to you

More income means of course that you have more money to pay the monthly bills to service your debt as well as keep the house properly maintained, etc. The question though is what criteria do I set for “more income”? There are many options, so we’ll have to think about what aspects of the problem to consider.

We could simply set a threshold of price-to-income: say you can get a mortgage for 5X your income. So if you had a $50,000 income you could only qualify for a $250,000 mortgage. But a mortgage is so long-lived that the interest rate that applies greatly affects your ability to afford it. At 10%, the mortgage alone would be over half your income, while at 5% it would be just over a third. At 20% it would take everything you had. Interest rates are one aspect to somehow build into our metric then.

So instead of comparing to the total mortgage amount, we could compare to something that more closely mirrored income: the debt service costs — which, if you’ve read ahead, you know is what banks currently do. There are some problems with using debt service costs: because they are interest rate sensitive, you might give out too much money during times of low rates. This was only recently (and only partly²) fixed by introducing the concept of the qualifying rate: your loan is tested against an interest rate of 5.4%, even if you’re able to borrow at 3%.

If we’re using the monthly cost, then we just need to come up with a rough average household budget, figure out how much money can go to the mortgage versus everything else, and we can set up a fairly simple multiple test for our front-line bank staff. But there are some wrinkles to iron out: there’s a big difference between how households split their budget. When I was in grad school, almost 80% of my income went to rent. Food, rent, utilities, and transportation were pretty much the only expenses I had — I was dependent on gifts for clothes and entertainment. Clearly, the average household can’t afford to allocate 80% of their income to housing expenses.

If we look at some hierarchy of needs, shelter is up there, and if you don’t pay your mortgage you could lose your shelter. But it can take 120+ days for the bank to evict you if you skip your mortgage payment, and you’re hungry now. So food expenses, the transportation costs to get to work, and certain addictive vices (smoking, drugs, World of Warcraft) may get paid first. So if we say it takes about 15% of the household budget to cover that, then we can say that debt service costs can occupy the next tier of the budget. But not the entire rest of the budget — we want a household experiencing some stress (perhaps one wage earner out of the work force) to still be able to make those basic needs and service their debt — and an un-stressed household will still have other uses for money (vacations, saving, other discretionary spending), so there has to be headroom there.

Exactly how big that tier should be is a good question and I can’t really answer it from first principles. But the banks and CMHC have come up with 32% for debt servicing and that looks to be roughly in the right range.

Then the next question is what do we use to measure income? After-tax income makes a lot of sense: that is, after all, what you have to actually spend. However, it gets back to our initial problem of trying to make the model too good complex: how do we verify after-tax income? If you’re about to buy a house you might be putting as much as possible into your RRSP, with the intention of using the Home Buyer’s Plan. Those contributions make more of your income tax-free, making your after-tax income look bigger. But will that rate of RRSP contributions continue once you buy the house? What of all the other tax credits and deductions?

Gross income, on the other hand, is fairly easy to verify: an employment contract and/or T4 slip will do it. No fist-fights break out in the bank offices over what should be considered an eligible, sustained deduction, no shoe-boxes full of receipts to dump on the desk. Self-employed people will have trouble with either measure, so forget them for now.

Another advantage of using gross income rather than after-tax income is how it scales: people with higher incomes are able to put more of their budget towards a mortgage if they so choose, because the very basics (food, etc.) are covered by such a small part of what they make, so more of their salary is truly discretionary. They’re also taxed more. If the criteria is 32% of gross income, then someone making $40k and paying an average tax rate of 15% would be able to take on $12.8k/yr of debt servicing costs, and have an after-tax income of $34k to pay that — it works out to 37.6% of their after-tax income. Someone making $200k might have to pay 40% in tax, so their $64k in allowable debt servicing would be 53% of their after-tax income. A fixed ratio of gross income leads to a sliding scale for after-tax income.

Ease of verification, ease of calculation, some prediction of credit risk, and some modest scaling with income actually make the gross debt service ratio a pretty good choice for qualifying people to borrow.

There are still some weaknesses with it, in particular with how interest-rate sensitive it can be. Using a conservative qualifying rate helps mitigate that to a large extent, so I don’t know why there’s a loophole for the most popular kind of mortgage around (5-year fixed). Down payment is a little more straightforward. 20% is, roughly speaking, enough to weather a mild downturn and have enough capital to cover transaction costs if you need to bail. But providing mortgage insurance complicates things: being able to buy with no capital is an accelerating factor for bubbles, and is strongly predictive of default risk[3].

I’ve suggested some simple, easy to apply rules to modulate mortgage insurance: cutting back on the maximum price, scaling back on maximum loan-to-value or increasing the cost of insurance depending on price history, price-to-rent, or affordability metrics could help cool a bubble before it gets dangerously inflated⁴. However, that would require different rules for different cities depending on local economic conditions, and that doesn’t seem to be politically tenable for the CMHC, even though the rules could be made simple and transparent enough that it would be clear that no particular region was being targeted.

I don’t have a time machine or internal CMHC documents to explain it, but that’s my best guess for why GDS is used as the qualifying metric.

1. In this thought experiment I have a bank. I don’t really have a bank; I don’t even have bank stock.
2. A gaping loophole in the qualifying rate is that you get to side-step it if you lock into a 5 year mortgage (or longer), as most Canadians do. Then you get to use your contracted rate. These loans should also be tested against the qualifying rate for conservatism’s sake.
3. In all the research I’ve done, down payment/equity/LTV appears to be the second-strongest predictor of default after credit score.
4. And provide automatic, measured stimulus in a correction. Lean into the wind to introduce some negative feedback (negative is good).

In almost all of my rent-vs-buy comparisons I have the renters invest their capital and ongoing savings, including in my most recent one about the three year condo holding (Toronto Condos: Best Case Scenario). Note that the renters didn’t have to in that scenario: the buyers lost so much to frictional costs¹ and higher ongoing costs² in their short foray into condo life that the renters could have left their cash in a chequing account and still come out ahead. But I had them invest it anyway because that is what you’re supposed to do. It didn’t hurt that doing so helped hammer the point home, making the spread in outcomes so large that you could be especially generous to the buying case (e.g. assume they were prescient about their mortgage needs rather than acting like a typical buyer) and still conclude that renting for 3 years is hardly throwing your money away — it’s the opposite. But that’s not why I chose to: it’s my default recommendation and assumption.

On Twitter, @barrychoi questioned the assumption that the renters would invest their capital. I wondered why you wouldn’t, to which he replied: “for time purposes. Is it worth risking your money if you might need that cash soon?”

Here is the thing, “need” and “soon” mean different things when you’re talking about housing. There are a lot of rules of thumb out there, but the general idea is that equities are volatile, while providing high return expectations. So you should invest money for the long term in equities, but not money you might need in the short term because you could be hit with a market down-turn just as you’re about to take your money out and spend it. The rules of thumb say money you need in about 5 years, or 10 if you’re really conservative, should be in something safer.

This is trying to take a heuristic shortcut to risk tolerance, but risk tolerance is made up of many components. The ability to recover is a big part of it, and it’s closely related to the time you have on your hands, which is where these rules of thumb are derived from. They’re also influenced by the history of the stock market and how long it may take to recover from a typical crash. If your timeline is too short, you could get unlucky and be caught in a crash just as you need your money, and have to eat the loss.

But when you’re talking about buying a house your timeline is not generally short: in the example David Fleming provided that inspired the previous blog post, the couple had been in a condo for ~3 years, and was looking to rent a slightly larger condo for another year or two before buying. Close enough to the 5-year rule of thumb to go investing the capital. In general, at the very least you’ll be signing a lease for a year, with a likelihood of renewing and maybe even having another rental stage before ending in your “forever house.”

Even if you’re not a housing bear³ and are just renting for a few years to avoid the ruinous transaction fees or until your career settles down enough that you have some certainty you won’t be packing your bags for the other side of the continent, you’re going to have a few years to play with. Just because the rule-of-thumb is 5 years doesn’t mean you’re insane to invest with a planned 3 ahead of you. Because if you are unlucky, you don’t need to buy a house on August 15th, 2016 like your plan says — you won’t vanish into a cloud of pixie dust and parental disappointment if you still have a lease on Tuesday — you can chill and rent for a few more years if you need to. Plans can be fluid that way, and that kind of flexibility is what gives you the risk tolerance to invest in equities.

Your plans are not set in stone, and the ability to defer your purchase date adds to your risk tolerance.

Aside from not needing to buy on a certain date, you don’t need a specific, immutable downpayment. If you invest a $100k nest egg, you expect that, with a 6% return, you’ll have $126k after 4 years when it might be time to buy. It could be better than that⁴, or it could be worse; uncertainty is something to deal with rather than fear. If you are unlucky and in four year’s time there is a terrible correction and you’re down 25%, well, you just lost $25k and it stings, but it’s not going to ruin your life. You take the reasoned gamble that you’re more likely to be up money by investing in equities for the next few years — and that, in advance, you’re not sure whether “next few years” will turn out to be 3 or 10. In many scenarios you will be proven right and be better off. But even if you do lose that bet, it’s not like you can’t buy a house at all, you just have to settle for less house or more leverage. Your original $100k (plus accumulated savings) might be enough for 20% down on a $500k place, but if you come to the table with only $75k you can still buy a house — with CMHC you can even still buy the $500k one from your twentysomething dreams. The risk to your life plans is not that large: it’s not a life-altering risk you’re taking, but a manageable financial one.

If you’re a housing bear like me and have recognized that with crazy price-to-rent metrics it just makes more sense to rent, then you’ll be doing so for as long as it takes. Housing corrections take years to play out. And a housing bust is almost never a “V-shaped” event, where you only have a few weeks or months to swoop in on cheap prices: once the excess comes out (which itself will be a multi-year correction event even in a crash with numerous accelerating factors like in the US), the market will very likely stay in “fair value” range for a few years. As a bear you may be living in a rental house that would sell for⁵ $500k in today’s bubbly climate. One day, if prices make sense, you might like to own a similar house, but it’s 30% over-valued. So you rent, invest, and get on with your life. But if the conditions have changed so that it’s time to buy then that house has likely come down over $100k in price — you’d still be way ahead even if you were unlucky in equities and lost $25k of your downpayment. And, if you want, you can keep renting for another few years to see if equities recover, knowing the house likely won’t. And conditions might not change: in which case your “downpayment” fund is really your “retirement fund” in a soft-landing world for renters.

Of course you invest it if you’re a housing bear.

So when you’re talking housing, you generally have some long timescales to play with. Maybe not the 10+ years needed for the chance of a negative outcome to go to nearly zero, but enough that investing in equities is not some wild, undisciplined gamble. Even a 3-year holding period has something like an 80% chance of beating cash. I think too many people are too afraid of uncertainty, particularly young people who have a lot of ways to recover from loss at their disposal⁶. Risk tolerance comes from many sources: you can be flexible with your timelines if needed, or adjust your expectations/budget. And you need a downpayment, not the downpayment you started with — ending up unlucky and losing a portion of your downpayment is generally a survivable event.

My dad taught me at a young age that you only put in the stock market what you can afford to lose. But the market doesn’t go to zero even in a bad crash, and the amount you can afford to lose is generally not zero even when you’re house-horny. So with that in mind I take acceptable risks to try to invest my money in a way that maximizes my expected value.

Plus I know that the risk I’m taking as a renter with equity investments is way smaller than the risk a buyer in today’s market is taking (both financially as well as to my future lifestyle and mobility options).

1: Realtor commissions, CMHC premiums, mortgage break fees, and possibly land transfer taxes (or the burning the opportunity to use the first-time buyer exemption later on a more expensive property), legal fees, inspections, and the inevitable over-spend on customizing (or as is often the case for new condos, finishing the job the developer botched).
2: The higher monthly costs to own (condo fees, interest, property tax, etc) that add up to more than rent, a renter can save in this market.
3: Why are you not a housing bear? Have you seen my spreadsheets? You must live in Hamilton… or non-waterfront Gravenhurst.
4: Indeed, I was more confident being fully invested in 2009/2010 coming out of a huge crash — with the valuations and recovery it seemed unlikely that a second major crash would take us yet lower. If, as in the previous example, someone had listened to me then but with $100k they’d have hit the $125k mark in just three years. Also, I’ll add down here in the footnotes that if you’re close to the CMHC threshold then the potential gain of going over the 20% mark might provide an added incentive — though the downside is there as well.
5: I refuse to say “worth”.
6: Again those are dodge, dive, duck, dip, and dodge… er… Wait, it’s: defer, earn, save, change expectations, leverage, and run crying to mommy.

Rob Carrick posted about a Toronto family frustrated by the high cost of housing and wondering what to do. There were over 100 responses from the community: some suggested renting, some moving away to more affordable cities, others accused them of being spoiled and entitled for thinking that a house in Toronto should be anything other than a crushing financial burden. About 10% of responses said that they should buy a house with a basement suite (“mortgage helper”), and that renting it out would solve all their affordability concerns.

Some quick math for all those who think “just get a place with a mortgage helper” is somehow a magic solution.

Assume they can rent out the basement for about $1000/mo inclusive. There are some added insurance and utilities costs, so say the real gross is $800/mo. Apply some reasonable rate of return — say an 8% gross yield, which might work out to a 4-5% cap rate — and that $800/mo income basically means that they can buy $120,000 more house than they would otherwise. So the $700,000 house they were looking at would effectively “only” cost them $580,000 — yet they’d have to deal with tenants in the basement, lose out on a 2nd or 3rd washroom, all the storage space, a ready play room for the kids, and quite likely share their parking and back yard. In other words, they lose a good portion of the benefits of paying up to get a detached house in the first place, without the lower cost of a true attached property.

Plus, the prevalence of this analysis-free HGTV presents Income Property-type thinking means that the house with a basement apartment roughed in usually costs more than the comparable true SFH in the first place! All those risks and drawbacks, in the end to only be a few hundred dollars per month ahead, if any at all. I don’t know how “mortgage helper is axiomatically good” became such a prevalent meme*, but playing amateur landlord to the basement-dwelling crowd** is not the solution to a young family pressured by high house prices.

* – though we can guess: most people probably think that the suites build and maintain themselves, with no additional cost, that the full $1000 cheque comes every month without default or vacancy, and that it is entirely profit because accounting is hard.
** – no offense intended towards basement-dwellers, who are 96% of my readership.

David Fleming says that (gasp!) renting is not throwing your money away in a recent blog post. I’m always amazed at how close he can come in his arguments to seeing the bearish light and yet not quite cross over. As usual he has his realtor I-work-in-today’s-market blinders on: “That was then, and this story takes place now.”

Though renting may not be throwing money away, he concludes near the end: “Is it worth living in a rental for three years? I don’t think so.” Now conveniently, he provides a backwards-looking example of a couple that bought for just about three years rather than rent. These past three years — two of which represented some of the strongest, hottest Toronto real estate markets they could ever wish for. This was as close to the best case scenario as you can come as a condo owner for three years. Let’s even go back and revisit that choice — was it worth buying for those three years?

One criticism people like to make of bears like myself is that the analysis for rent-vs-buy says how distorted the market is, yet it irrationally keeps going up anyway. The timing is hard — irrational prices are irrational — so it’s all too easy to say “if you had listened to Potato back in 2010 you would have missed out on an incredible market!” My thinking is that you have to make the best decision with the information you have available at the time. Taking a bad bet and having it pay off does not mean it was a wise, justified move, it just means you got lucky despite the math. Considering and accounting for risk moving forward is how I have to live my life, and when I take extra steps to avoid a calamity that does not occur I don’t consider the steps “wrong” any more than I consider paying for car insurance wrong even though I’ve never been in an accident. But let’s say that you are swayed by backwards-looking logic, and run the numbers for David’s clients and see just how worth it it was to buy a condo for just 3 years in one of the best possible appreciation scenarios.

So far he hasn’t provided the full details so we’ll have to make a few extrapolations/work from an average couple over the same timeframe.

Buying scenario: The couple bought in mid-2010. The average 416 condo price was $340k in May 2010. David says that their mortgage is $1500/mo. Most likely they took a discounted 5-year rate, which at the time would have been 4.1%, suggesting a 30-year $310k mortgage. On purchasing they would have had to pay $6700 in land transfer tax (or burned their first time buyer credits), and with just $30k down would have had to pay $6820 to CMHC/Genworth. Pretty typical scenario for a young couple. Assume they also paid about $1000 for legal and inspection, and another $3k either up front or over the course of their time there in maintenance/remodelling. So their starting capital would have been $47.5k — money they could have invested as renters.

Their annual cash flow would break down as: $18k for mortgage, $5.4k condo fees, $2k property tax; total of $76.2k paid out over the three years (some of which went to principal which will come out below). They would have some additional costs over renting as well in terms of insurance, but we’ll let that slide.

Upon selling they are delighted to see that the “bears were wrong” and they can now sell their condo for $357.5k in August of 2013. They pay Dave his 5% commission ($17.9k), the bank it’s mortgage break fee (IRD of $7.5k), and they are free and clear, ready to move up to something bigger. At the end, they have had a condo to live in for 3 years and, after paying the remaining $293k on the mortgage, are walking away with $39.1k in their pocket.

Renting scenario: The couple, after reading my blog and doing the math themselves (this is back in 2010 before the spreadsheet calculator was out), find that the Toronto condo market is kinda, well, insane. So they take their $47.5k and stick it in an ING Direct Streetwise account and decide to rent the very same condo and get on with their lives. A comparable unit runs them about $1525 in 2010 (a price-to-rent multiple of 222X). The landlord hits them with a 3% rent increase in 2011, and in 2012 after reading a ridiculous Condonation report summary in the Star, hits them with a shocking 10% increase. Over three years, the renters pay $57.9k in rent.

After the end of the three years, their initial capital has grown at 7.83% per year net of fees in the ING Streetwise growth account, giving them a nest egg of $59.5k. They saved an additional $18.3k, which let’s face it, I don’t even have to pull out the spreadsheet to trickle into an investment account because renting knocked it out of the park. Their total capital is north of $77.8k.

The renters are $39k further ahead — after just three years, in what has been a relatively good real estate market (keeping pace with inflation, no signs of a crash anywhere, naysayers defied… at least according to the news). Even if you’re more generous to the owning case (or as I would call it, less realistic) and ascribed no value to burning up the first-time exemption to the land transfer taxes, started with more capital to avoid mortgage insurance, assumed that the buyers were prescient enough to go with a variable-rate or 3-year mortgage, or that the investments wouldn’t have done quite as well: it’s not a good outcome. And it could have been so much worse if a correction did occur in those years and they ended up underwater — as could still yet happen.

At these price-to-rent multiples it really doesn’t make sense to buy. Even at more normal price-to-rent multiples it wouldn’t make sense to buy for only three years: the transaction fees are killer. When you’re 24 and just slogged through a two-year MSc, or are barely into your career after a four-year undergrad, three years seems like forever; how are you to supposed to be able to plan what your space needs will be that far out? It really makes more sense for people in that situation to rent: both projecting forward as well as looking at the past few years. Add in the current extreme prices and there is basically no scenario where it makes more sense to buy — this is the era of the renter.

Note some important real estate mantras shattered by the short timescale:

1. Renting was not throwing money away, it was the wiser move here. Even if they were poor budgeters with little savings discipline — people who “should” buy for “forced savings” — and spent the ongoing savings from renting on enjoying life more, just the growth in their nest egg and not blowing tens of thousands of dollars on transaction fees still put them ahead (though just barely in that case). And though I would not recommend that scenario, such a couple would have been able to go on more trips or eat out more or whatever it was that they spent the money on not being house poor.
2. Buying did not build equity. With such a short holding time and such steep transaction costs, they walked away with less capital than they started with. And that’s with decent growth in average prices over those three years and low mortgage rates.
3. There is no such thing as a “property ladder” and if there is, they were not climbing it. With the reduction in their capital base they ended up further away from being able to afford a detached house in 2013 than if they had rented and built up a downpayment through savings and investing. This was exacerbated by the different growth rates in the property types: while Toronto condos were up about 5% over the time period, the average detached house was up more than 13%.

2010-2013 were a couple of pretty decent years for the economy and real estate, and yet for this pair renting was still the better move.