Lecture Notes: Rent vs. Own Decision in Housing

Introduction

• Speaker: Ben Felix, Chief Investment Officer at PWL Capital
• Purpose: To address misconceptions about renting versus owning a home.

Common Misunderstandings in Home Ownership

• Homes as Investments:
  • Homes are often seen as great investments, but they generally offer lower returns compared to stocks.
• Mortgages as Wealth-Building Tools:
  • Mortgages help build wealth but are not as effective as perceived.
• Owning Reduces Costs:
  • Paying off a mortgage doesn't necessarily reduce housing costs due to opportunity costs.
• Happiness from Home Ownership:
  • Owning a home may not increase happiness as expected.

Economic Analysis

• Salience Bias:
  • People focus on purchase and selling prices but ignore ongoing costs.
• Compounding Returns:
  • Example: $40,000 home in 1974 sold for $2 million in 2024 with an 8.2% CAGR.
  • Global stock market (MSCI World Index) returned 10.2% annualized.
• Opportunity Costs:
  • Owning a home involves investing in lower-return assets compared to stocks.

Costs of Home Ownership

• Maintenance and Depreciation:
  • Regular costs include maintenance, renovations, property taxes.
  • Home structures depreciate, requiring investment to maintain value.
• Real Returns on Housing:
  • Real returns on housing are low (2% in Canada from 1974-2024).

Renting vs. Owning: Cost Model

• Average Costs in Canada:
  • Average apartment price in Canada (2025) = $512,300.
  • Implies rent cost of $2,134/month, nearly equal to average rent $2,119.
• Rent vs. Own Calculator:
  • Tool available for comparing long-term outcomes of renting vs. owning.

Mortgage Debt

• Benefits of Mortgages:
  • Favorable financing, allows early asset exposure.
• Drawbacks:
  • Financial squeeze with rising rates; not a silver bullet for wealth.

Wealth and Home Ownership

• Net Worth Misinterpretation:
  • Homeowners wealthier due to factors like age, income, not simply owning a home.

Psychological and Behavioral Aspects

• Happiness and Mental Accounting Bias:
  • Owning doesn't guarantee happiness, can increase stress and time spent on maintenance.
• Behavioral Benefits of Owning:
  • Forces savings through mortgage payments, hard to panic sell.

Conclusion

• Not All Arguments Favor Ownership:
  • Homes aren't necessarily better investments than renting.
• When Owning Might Make Sense:
  • Tax benefits, specific housing needs, and forced savings.

Final Thoughts

• Disciplined Renting:
  • Renting requires discipline to save and invest cash flow differences effectively.
• Room for Renting:
  • Renting can be financially comparable to owning when executed with discipline.

Call to Action

• Engagement:
  • Inviting viewers to share their views in the comments.

---

End of Lecture Notes