Home Free: the advantages of swapping your mortgage for a lease

Home Free: the advantages of swapping your mortgage for a lease

After years of crushing mortgage payments and escalating maintenance costs, one homeowner sold her house and signed a lease on a place a few blocks away. Life has never been sweeter

Our last house was a little gem. Few homes in Leslieville are stately or architecturally impressive—it’s a neighbourhood of unremarkable brick semis with the rare Victorian or Tudor flourish—and the one my partner and I owned for two years was no exception. But inside, stripped down to its simple bones, with Benjamin Moore cloud white walls and dark wood floors, a cute IKEA kitchen and mid-century decor from local vintage shops, the place had charm. We bought it for $450,000 in 2007, a deal, if not a steal, for a home on a coveted street less than a five-minute walk from all the amenities required by the middle-class hordes: good coffee, a busy playground, decent restaurants. Soon, however, our house began to make exhausting demands: the furnace needed to be replaced, then the roof; the basement felt damp in the summer humidity, and in the winter our barely insulated bedroom, with its ancient windows, was so cold we had to run a space heater through the night.

There was no money to fix any of it. Our line of credit and credit cards were maxed out. We had two comfortable incomes, but after mortgage payments, utilities, property taxes, car payments, insurance, daycare and groceries, there was little left over. We added up the sums, living expenses against income, on increasingly complicated spreadsheets—it would be years before we would be in the black. Meanwhile, the company I worked for faltered during the recession. First the frills were cut: fewer couriers, no fancy Christmas parties, no taxi chits. Then jobs; I lost mine in early 2009.

We called our real estate agent. Within a week, our house was purged and fluffed, our excess belongings stowed in cupboards and in the trunk of our tiny hatchback. While agents toured our home, we schlepped around the city looking for apartments like modern-day Joads. By the end of the next week, the house sold for a little over $600,000. Our debts paid off, we invested the rest of our profit in RRSPs, index funds and tax-free savings accounts. We’ve been renting a house a few blocks from our old neighbourhood ever since, and spending about a $1,000 less each month in housing-related costs than we did when we were owners.

A few friends have witnessed this transformation with alarm, as if we’d shucked off our grown-up responsibilities for a stop at dorm life en route to freeganism. Our return to renting was weird for me, too, at first. Home ownership is in my DNA; my dad is a striving, self-made man for whom buying a house is the surest sign of arrival into the middle class. But at the time we sold, just after the U.S. housing market crisis sparked the global recession, it was a relief to no longer be shackled to a mortgage. Now, more than a year into this new living arrangement, with money in the bank and little concern about hiccups from the appliances or cracks in the foundation (they’re someone else’s problem, as is the property tax bill), we feel less like kooks and more like visionaries.

To urban-living theorist Richard Florida, the imperative to own property—something that in no small part contributed to the housing collapse in the U.S.—continues to stall the economic recovery south of the border and elsewhere. If they haven’t lost their homes altogether, people in cities and towns hit the hardest are unable to sell their houses to move to where the jobs are. In an opinion piece in The Wall Street Journal, Florida wrote that, “Today’s idea-driven economy requires a more mobile work force that can seize opportunities wherever and whenever they arise.” This means discouraging home ownership except in cities with strong economic prospects and except for those with stable jobs, savings and a solid down payment. It also means regulating against risky lending practices, such as zero-down mortgages and extended amortization periods.

Toronto is, in theory, a city where home ownership should be a wise investment: we have a diverse economy, a seemingly limitless pool of new migrants and a vital creative class—all contributors to a healthy housing market. It would be easy to view an investment in a home here as a sure thing. That is, until you talk to someone who remembers when rapid house-price appreciation in the late ’80s was followed by a crash that turned the market to mush for years. Even the most bullish economists agree that all bubbles eventually burst.

Most people believe that renting means throwing your money away. Not so, says Vince Brescia, head of Ontario’s biggest rental-housing advocacy group. He ran some numbers comparing renting to owning over a 25-year period and came up with a surprising seven-figure windfall:

ASSUMPTIONS: House appreciation rate of 2%; inflation rate of 2%
1. Based on August 2011 average GTA home price of $451,663, with a 20% down payment and a 5% interest rate
2. Lost investment returns on funds tied up in the home, and on any excess annual costs of owning compared to renting. Investments are assumed to yield 4% annually
3. Assumes average GTA monthly rent for a three-bedroom apartment of $1,312 (utilities included)
4. Funds available to renter to invest in other assets

We—as individuals and as a nation—can’t afford the houses we own. But we continue buying. In August 2011, the average price in Toronto was $451,663, up 10 per cent from the previous year. With the Bank of Canada expected to keep interest rates low until at least 2013, there are no obvious speed bumps in this scenario. (The central bank’s summer review does, however, propose raising the minimum down payment as a way to reduce risk.) Meanwhile, the median household after-tax income in Toronto has declined from $61,800 in 2001 to $60,900 in 2008 (in constant dollars).

Given this climate, renting can be a more sensible financial choice than owning, and it’s a growing trend among young families like mine, as well as empty nesters who are divesting themselves of the big family home for something smaller and more manageable in their retirement years. The idea that renting is tantamount to throwing your money away is a myth, one that ignores the fact that home ownership involves some very steep outlays of its own. There are all the costs associated with closing, maintenance, renovations, property tax and mortgage interest. The latter cost is essentially the same as paying rent, except rather than giving money to a landlord, mortgage holders are renting money from a bank.

The smug bias against renting made very little sense when we realized its benefits: we didn’t have the stress of maintaining a place, and the secure state of our finances meant we were able to take some risks and have more fun. I freelanced for several months before finding a permanent job, while my partner took a three-month leave of absence from work. We travelled more, and I reduced my work hours to spend time with our son. And should we decide to move to another neighbourhood or city, we don’t have to watch the market to make sure we’re selling at the right time. A strong rental market makes our city a more attractive and dynamic place to live; some of the most healthy, creative and economically vibrant urban centres (think New York, San Francisco, Seattle) have a high number of renters. Even in a real estate mad city like Toronto, nearly half the population rents. Many renters come from the expected demographics—lower income people, students, new immigrants, the recently divorced—but with a new market in high-end residences, such as condos that were bought as investment properties, more middle-income earners and empty nesters are renting.

In the last few years, low interest rates have sent people scurrying to buy homes, creating vacancies and more favourable rents. Rents have risen recently, however, as the rental market has shifted from traditional apartment buildings to pricier condos. This summer, average rents for one- and two-bedroom apartments were up by four and five per cent, respectively, compared to 2010. Still, the average rent on a three-bedroom apartment in the GTA was $1,312 ($1,931 in the city proper). Compared to a monthly mortgage payment (and the cost of interest), plus property taxes, maintenance costs and so on, renting is still much more affordable than owning in Toronto.

And then consider the opportunity cost of owning a home. Vince Brescia, president and CEO of the Federation of Rental-Housing Providers of Ontario, points out the significant investment returns homeowners forego in hanging onto a property. “If you do the math,” Brescia says, “the only saving grace of ownership is the prospect of future capital appreciation. And that’s not a sure thing.” Making your home your sole investment gives you the kind of undiversified, eggs-in-one-basket portfolio that financial advisers warn against.

Even the social benefits of ownership are debatable. Common wisdom has it that homeowners are more connected to their communities and more careful with their finances. But renting is the standard in countries such as Germany, the eurozone’s biggest and most prudent economy, where people tend to rent long-term. There isn’t even much of a personal advantage to owning. A study by the Wharton School’s Grace W. Bucchianeri discredits the perception that ownership generates feelings of stability and security and creates safer, stronger societies. In fact, she found that homeowners in the U.S. were no happier than renters. More strikingly, owners experience more house-related stress, and spend less time on leisure activities and with friends. It follows, too, that renters, with their extra money and leisure time, are contributing to their communities and the economy in other significant ways. They may not be bolstering the housing market, but they do have the disposable income to spend on travel and entertainment.

We no longer bore people at dinner parties by droning on about contractors, and we’ve relaxed about money

Owning didn’t offer us security or happiness—just a lot of anxiety and expense. In the last year, as renters, my partner and I have travelled with our son to Spain, Vancouver Island and Chicago; we’ve stopped worrying about raccoons getting into the roof or termites in the walls; we’ve finally admitted that we hate gardening; we no longer bore people at dinner parties by droning on about contractors; and we’ve relaxed a lot about money, which is nearly impossible to do with a mortgage. It’s a life that may appear untethered, but it suits us far better than the one we had before. Oddly enough, by selling our house we finally feel at home.