Blessed by the Potato

As a housing bear I often get the recency bias retort: bulls rule, bears drool, look how much housing was up over the past few years; how can you even show your face after being “wrong” for so long?

Looking in the rearview mirror is not a good way to make decisions, and in cases where random chance has a large role, a particular outcome working out does not necessarily mean the course chosen was actually the best one. Today let’s just say “whatever” to all that logic. People like history and anecdotes so let’s take a look at how “wrong” renting turned out.

Yes, the past three years have been unbelievable for Toronto real estate. Absolutely blow-the-doors off amazing couple of years for detached houses (condos less so, but still), even the bulls didn’t see it coming that “good”. Low rates that got lower, bidding wars, HGTV and animal spirits. But you know what? It hasn’t exactly been terrible for the rent-and-invest-the-difference crowd, either: rent inflation was basically nothing, and the stock market was on fire. To take my case as an example, from late 2011 (when we last moved) to now, an equity index portfolio was up over 15%/yr, and actual rent inflation was 1.1%/yr. The average Toronto (416) detached house was up 9%/yr according to TREB figures, and that more-or-less meshes up with sales in the neighbourhood that we’ve been watching over the years.

While the rent vs buy calculator was built to look at the future based on estimated rates and figures, we can over-ride the future estimates in the calculations with the actual historical figures to see how the comparison played out. And as you might expect, buying a detached house would have been better in the recent past… but perhaps by less than you would think. In fact, if you had bought in 2011 and wanted to sell now to lock in the amazing gains you made over renting, you’d only come out with about twenty-two grand more^# in your pocket after the transaction costs despite seeing the sticker price on your house swell by $228,000. Still you may fairly say, that’s a win for detached houses.

What’s more amazing is how segmented the Toronto market has become and how dependent that result was on picking a detached house. If instead you had bought a semi-detached, townhouse, or condo^* — which about 65% of the people buying in the Toronto market did at the time — the equivalent renter would have come out ahead, despite the complete absence of a crash, correction, or soft landing. Far, far ahead in the case of the average condo buyer who only saw appreciation of 3.2% and would be likely to be facing a move after just 3-4 years.

Now, it’s just as unfair to put 15% in for stock returns going forward as it would be to put in 9% for house price appreciation — the future is looking much bleaker for both asset classes, and just given how much faster it moves we’ll likely see a stock market correction before a housing one (though we’ll also see the recovery first in equities). Using some reasonable estimates for what will come, it’s hard to make the case for owning unless you believe this incredible luck will strike twice. In beta right now, Preet has a new spreadsheet that will do a Monte Carlo simulation of multiple outcomes for the rent vs buy comparison in case you need a second opinion.

Looking back, I still think I made the right choice given what I knew at the time, and the situation looks even more skewed towards renting now so it’s nice to be able to stay put. And that opportunity cost came with a lot of convenience and freedom. So that makes it very easy to be comfortable staying with the choice to rent going forward, because I really don’t think we’re going to see another three years of 9% annual price growth in Toronto RE.

* – at the same price:rent and rent inflation, which is a bit harder to verify as I didn’t live it.
no marker – “good” in scarequotes because higher prices are not intrinsically good.
# – for clarity: the difference is relatively small because the renter also sees their net worth increase by over $150,000 through those amazing equity returns and the ongoing cost savings. [note added after publication]