Real quick before I start, I will never send you an email and definitely not from a Gmail address. Please don't get scammed by whoever is doing this. Last year, I wrote an article for the Globe Mail detailing why renting a home is not always a bad financial decision, despite the common perception that it is. That article received hundreds of comments from readers, many of them exemplary of what people get wrong about the rent versus own decision for housing. People tend to assume that homes are great investments. They're not. that mortgages are a wealth-b buildinging hack. They help, but not as much as people think. That paying off a mortgage lowers your housing costs. It actually raises them. And that owning a home makes people happy. It might, but don't count on it. I'm Ben Felix, chief investment officer at PWL Capital, and I'm going to tell you what people get wrong about the rent versus own decision for housing. [Music] One of the worst ways to make the rent versus own decision is comparing the monthly cost of a mortgage payment to the monthly cost of rent. A mortgage payment is not the cost of living in a home. I hope that will become clear as we proceed through the video. Homes are generally terrible investments. Yet, a lot of people believe that they could not have found a better investment. One reason is salience bias. the tendency to focus on information that stands out, whether due to its prominence, emotional impact, or vividness, often at the expense of other less noticeable or less emotionally charged details. Buying a home is a big emotionally charged purchase. And the final price is likely the result of emotional negotiations with a seller. The same goes for selling a home. This leads people to focus on those two numbers, how much they bought the home for and how much they sold it for. If you bought a home for $40,000 in 1974, did some upsizing, and eventually sold for $2 million in 2024, you would probably feel pretty good about the decision. But there are two big problems with this evaluation. One is that compounding is hard to think about. 50 years is a long time. The compound average growth rate to get from $40,000 to $2 million over this period is 8.2%. Don't get me wrong, that is a great return. This example does come from Vancouver, after all, and from a comment on the internet from an anonymous person arguing that owning a home is great. I did find an example of a home in Vancouver that listed for $51,900 in 1974 and sold for $1.65 million in 2024. That lowers the compound growth rate to 7.16%. Still great, but here's some context. Over that period, the MCI World Index, an index representing the global stock market, returned 10.2% 2% annualized in Canadian dollars and the TSX, an index representing the Canadian stock market, returned 9.44%. Clearly, homes are not the only way to compound wealth, even in a market like Vancouver. It is important to reiterate that Vancouver is an extreme example. The returns to housing in Canada and around the world are generally lower. The price return on housing Canadawide from 1974 through 2024 was 6% before inflation and inflation ran at 3.76% annualized over that period, meaning a real housing return of a little over 2%. Data from around the world going as far back as 1870 show inflation adjusted returns to owned homes as a little over 1 percentage point on average, while stocks have outpaced inflation by about 5 percentage points. The economic reality is that homeowners bear the cost of having their money invested in a lower expected return home rather than higher expected return stocks. This is called an opportunity cost. To be conservative, I think 3% is a reasonable figure to use as the opportunity cost of having money invested in a home rather than in stocks. The other issue is that the salience bias hides the total costs of owning a home. If you buy a house for $51,900 and then sell it for $1.65 $65 million many years later. Your return on that asset is not the 7.16% compound growth rate. The reason is simple. Owning a home costs a lot of money. Between regular maintenance spending to keep the house running, spending to make up for depreciation of the building, like the roof deteriorating, renovation spending to improve and update the home, which many people do, and property taxes. It's not uncommon for people to spend 2 to 3% of the home value per year on average just to live there. A good example is that 1974 listing that I found. It was completely rebuilt in 2012 before selling for $1.65 million in 2024. The rundown 1974 structure would be unlikely to have sold for the same price. Homes are depreciating assets. People get really upset when I say that, but it's true. Land appreciates. Homes, buildings degrade and decline until, in many cases being torn down and rebuilt. Those depreciation, maintenance, and renovation costs need to be included in the calculation of the return on the home. People that disagree with that 2 to 3% per year number have probably never owned a home. But I didn't just make that number up either. Academic research and data from Statistics Canada support figures in that range. I'll link sources in the episode description. For one example, in National Accounts data, Statistics Canada reports average maintenance and repair costs of 0.81% 81% as a proportion of net residential housing stock over the last 50 years and renovation spending of 2.35%. This implies that there is more than a 3% average annual contribution to the average increases in home values that can be attributed to costs incurred by home owners. Even if we take the lower end 2% removing that from 7.16% results in a return of 5.16% for this Vancouver home. There are, of course, costs to invest in stocks, too, but they're typically much lower than 2 to 3% per year, as long as you're not investing in the highest fee actively managed mutual funds or segregated funds. Renters do also need to cover their housing costs since you can't live in your tax-free savings account. The interesting thing here is that when you add up all the costs of living in an owned home, the ongoing maintenance, depreciation, renovation costs, property taxes, and the opportunity cost of investing in a home rather than stocks, you typically end up with a number pretty close to what you would pay in rent. Take 2% in estimated ongoing costs and a 3% opportunity cost for having money in a home rather than in stocks. That is 5%. With these numbers, theoretically, rent should cost around 5% of the value of a home. If either renting or owning were materially more expensive overall, it would be reasonable to expect people to shift between the two options until their costs converge. If rent is cheap, more people will switch to renting up until the point where rent stops being cheap. The interesting thing is that this ends up being a pretty good model for rents in Canada. The national average price for buying an apartment in Canada in March 2025 was $512,300. multiplied by 5% and divided by 12 to get a monthly number, we get $2,134 as the implicit cost of owning the average apartment in Canada. The national average rent for apartments is $2,119, almost identical to what my simple model here predicts. This means that in this example, you are approximately financially indifferent between renting and owning the average apartment in Canada. The math doesn't always work out like this, but this thinking lets you gauge whether owning or renting is relatively cheap or expensive. For a long-term perspective, including the effects of mortgage debt, which I'll come back to shortly, you can use the free rent versus own calculator on PW Capital's website to see that long-term wealth outcomes in this case are comparable. I'll link this example preloaded with these values in the video description so that you can play with it. I used national average data here, but you can plug in numbers for your specific city to compare projected outcomes. In some cases, rent might look cheap, and in some cases, it might look expensive. I should say a few words about how this model works. It is comparing the long-term outcome of buying a home to the counterfactual outcome of renting. In the first year of the model, the owner buys a home. They pay a down payment and closing costs. The renter instead invests the down payment and closing costs in a portfolio of stocks and then pays rent which increases 1% per year above inflation in the model. The total cash flow costs of owning a home, including property taxes, maintenance costs, and mortgage payments are assumed to be the total cash flows available to both the renter and owner. If rent costs less than the owner's cash flow costs, the renter is saving and investing the difference into a portfolio of stocks. If rent costs more than the cash flow costs of owning, a common scenario with the mortgage paid off, the renter funds the cash flow shortfall from their portfolio. This scenario assumes that the renter is investing in their RRSP, TFSA, and FHSA, which are not taxable. But I will come back to the implications of taxable investing later. To come back to the main points on home ownership not being such a great investment, salience bias leads people to focus on what they bought their home for and what they sold for, ignoring the ongoing costs of living in the home and especially at long horizons, overestimating the compound returns on their home. Properly accounted for, the returns to housing are typically not special and similar financial outcomes can be achieved by renting and investing in stocks. There are multiple academic studies based on Canadian and US data showing this to be true. Let's move on to the value of mortgage debt. I'll come back to forced savings and tax treatment later. Mortgage financing is one of the most favorable forms of financing available to most people. It is generally low cost and does not get called when the home value drops like a margin loan for stocks can. Borrowing early in life to get exposure to assets is arguably a good thing and mortgage debt is a great way to do that. It's also a double-edged sword. Many people in Canada were squeezed financially when mortgage rates increased after the pandemic and they can be a burden if your property value declines and you want to move. The main point I want to make here though is that a mortgage is not a silver bullet for owners to build more wealth than renters. Take an example where a home is bought in cash by a homeowner. The counterfactual renter invests the cost of buying the home, in this case the full price of the home plus closing costs in stocks and then pays rent. The owner doesn't have a mortgage, but they do still have some costs like maintenance costs and property tax, but their cash flow costs are much lower than the renters, meaning the renter in the model has to draw from their portfolio to cover the difference. The thing is, the expected returns on the renters's investment portfolio are more than enough to make up for the difference. The owner is paying a large implicit cost by having so much home equity relative to the renters's large stock portfolio. After 50 years, the renters's wealth exceeds the owners by $2.2 $2 million. Next, consider the same case, but instead of paying in cash, the owner puts down a 20% down payment and finances the remainder of the purchase with a mortgage. Now, the owner has large cash flow costs because in addition to property taxes and maintenance, they have a mortgage payment. The renter initially invests the smaller down payment into a stock portfolio and then saves the monthly difference between the owner's higher ongoing cash flow costs and their rent into an investment portfolio. The net worth difference after 50 years in this case is $467,000. Financing with a mortgage was more financially advantageous for the owner than paying cash, but the renter was still able to come out ahead without borrowing any money. The owner's relatively high cash flow costs allowed the renter to save more into their higher expected return portfolio, all else equal. The next misunderstanding I want to cover is that people who own homes are wealthy because they own homes. It is true that the average net worth of a homeowner is significantly higher than that of a renter. Both in Canada and the United States, but this is not because owning a home is an automatic path to wealth. Renters tend to be younger, have lower incomes, and spend more of their incomes on housing costs, making building wealth by any means more of a challenge. Buying a home would not solve these problems. And some research shows that home ownership could actually negatively impact the happiness of low-income households due to the financial burden of home ownership. A 2017 paper, a revision of the American dream of home ownership, seeks to answer the question of why owner households tend to be wealthier than renters. The authors find that it can be attributed to choices within the scope of the individual, like how much the renter saves, rather than through the impact of exogenous market variables like housing or stock market returns. They showed that households that failed to reinvest the cash flow difference between renting and owning accumulate less wealth. And importantly, they find that property appreciation plays only a minor role in the results for homeowner and renter wealth differentials. This analysis shows, as I have already said, that renting and owning can theoretically have similar financial outcomes, but this requires renters to save and invest the cash flow cost difference between renting and owning. In some cases, this is simply not possible due to limited financial resources, which is why a lot of people rent. A problem owning a home rather than renting would not solve. Whether renters with sufficient cash flow available to save will actually be disciplined savers is a valid concern, and I will come back to that later. Next is one of the most misunderstood aspects of home ownership, that a paid for home reduces your housing costs. This seems like it has to be right on the surface because once your mortgage payment is gone, your cash flow costs are much lower. You still have some ongoing costs like property taxes and maintenance, but mortgage payments tend to be the largest cash flow cost for owners, making owning feel cheaper than renting once the mortgage is gone. The problem here is mental accounting bias. Separating cash flow and capital into separate mental accounts. When both capital and cash flow are considered, the reality is that paying off a mortgage actually increases housing costs. Because for most people, the opportunity cost of having home equity rather than other investments exceeds the cost of borrowing money from the bank. We saw this play out in the earlier example of paying cash for a home. To be clear, there are lots of benefits to having a paid for home. It reduces risk, reduces cash flow costs, which do matter for people who are cash flow constrained, and it feels great. But a paidoff home is counterintuitively more expensive to live in than a mortgage financed home due to the large opportunity cost of home equity. The opportunity cost is smaller or even negative in some cases for people who would alternatively be invested in very conservative assets like guaranteed investment certificates or cash. The last misconception I want to cover is that homeowners are happier than renters. I'm not going to go through all of them here, but in another video I reviewed multiple academic papers showing that owning a home is unlikely to increase your life satisfaction. And if it does, it probably won't increase it as much as you expect. In some cases, owning a home may even decrease happiness by soaking up your active leisure time with home maintenance tasks and saddling you with a big pile of debt. As a former renter and current homeowner, I can tell you that the psychological weight of owning a home rather than renting is significant. I think it's important for people to understand those misconceptions, but there are definitely distinct benefits to owning a home. In Canada, increases in the value of your primary residence are not taxed. We do have tax sheltered investment accounts that allow investments like stocks and bonds to grow tax-free, but their contribution room is limited. For someone who has filled up all of their registered savings accounts and is investing their savings in a taxable account, the opportunity cost of home equity is a lot lower because the after tax rate of return on counterfactual investments is lower. Revisiting the example from earlier that showed the renter coming out ahead in the long run, making their investments taxable puts them at a disadvantage relative to the owner. And that disadvantage gets larger with an increasing tax rate. An important note here is that this does not mean that owning is always better than renting for taxable investors with high incomes. But it does mean that the equilibrium rent, the rent that makes renting and owning financially comparable, is lower. Instead of $2,119, this renter would need to find a place for $1,700 to have a financially comparable outcome to an owner. This is a good argument for buying a home in some cases. taxable investors with high incomes who want large and more expensive homes may be better off owning. Probably the strongest argument for owning is that owned homes, especially without a mortgage, hedge the costs of living in a specific home. A hedge means that it increases in value when housing costs increase and decreases in value when they decrease. This is very useful to you if you want to stay in a specific home for a long time. Rising housing costs in an area could result in renters being priced out and having to move and being unable to afford buying a home in that area. Owners are protected because they already own the home. Rising housing costs and home values don't really affect them. They're hedged. To be clear, a hedge can come both ways. More recently in Canada, we have seen falling rents and home prices. An owner who never wants to move is unaffected by falling prices, but an owner who decides to relocate may have to absorb a loss in the value of their property. The other thing to keep in mind is that it can be hard to find certain types of rentals. I bought a house in the forest during the pandemic after renting for my whole adult life because I could not find a rental in the forest. Finally, possibly one of the biggest benefits of owning a home is behavioral. A mortgage on an owned home is a powerful commitment device. It forces savings, and a home is a lot harder to panic sell in a down market than a portfolio of stocks. When I model long-term outcomes for renters and owners, I typically assume that the renter is saving all of the difference in cash flow costs between renting and owning. If they're not doing that, the financial comparability of renting and owning falls apart quickly. This means that financially successful renting requires extreme discipline to match the wealth of owning. Most people won't skip a mortgage payment, but they might defer contributing to their RRSP. Discipline extends to investing, too. It is well known that investors tend to trail the returns of the assets they invest in due to behavioral errors like buying high and selling low. These points are extremely important and honestly they make me think that most people should probably buy a home if they can afford to. To be clear, the nerds watching my channel are not most people. Disciplined and informed renters can have good financial outcomes. Many of the common arguments in favor of home ownership are wrong. Homes are not great investments. Home ownership is not the causal factor in making people wealthy. Wealthier people can afford to own homes. Mortgages are not a wealth hack. Having a mortgage-free home does not reduce your housing costs, and homeowners are not happier than renters. This does not mean that renting a home is superior to owning, but it does mean that renting deserves more credit than most people are willing to give it. That said, there are cases where owning a home makes sense. favorable tax treatment, the ability to hed the cost of living in a specific home, the lack of availability of certain types of housing for rent, and behavioral benefits can all be important in the long run. A disciplined renter who matches their rental cost to the total cost of owning a home, saves the cash flow cost difference between renting and owning into higher expected return investments like stocks, and doesn't make costly behavioral errors with their investments, can expect to accumulate comparable wealth to a homeowner. Thanks for watching. I'm Ben Felix, chief investment officer at PWL Capital. Tell me what you think people get wrong about the rent versus own decision in the comments.