McMaster Students Attempt To Answer Buying Or Renting Question

By: Gary Parkinson on May 17, 2013

Young Canadians in today’s very confusing housing market are faced with the age old question, ‘is it better to rent or buy?’ The number of national home sales is declining, but prices remain stubbornly high as the market cools off. 

A report by the Globe and Mail’s Rob Carrick discusses how the rent or buy question is put to the test by young Canadians in the classroom of McMaster University Professor Frank Tristani.  Every year, Tristani asks his students to determine if buying or renting is the more rewarding option financially.

Over six years, no one has been able to substantiate buying as creating more wealth over the long term.”

Tristani describes the assignment as a way for students to make realistic financial projections based strictly on numbers.  Tristani uses a $400,000 home as an example with a $100,000 down payment, and a locked in 3.99 percent mortgage rate, which over the course of 25 years adds up to approximately $473,000 in total mortgage payments.  In contrast, the rent for a similar home is set at $1,500 a month with an annual rent increase of 1.5 percent.  Over 25 years, a renter can expect to pay an estimated $541,000.

However, Tristani says there are hidden costs that most would-be homeowners often forget to take into account.  Homeowners are responsible for their own maintenance costs, property taxes, and major renovations in addition to paying for utilities, which in the student case study cost 4 percent of the home’s market value.  Over a 25 year period, these total costs add up to over $583,000.

On the other hand, the renter is only responsible for utilities and rental insurance over the same 25 year period, which are forecast to cost approximately $131,000.  In total, the renter can expect to pay approximately $672,000, while the homeowner will pay over $1,000,000 over 25 years.  Based on the numbers, renting seems more appealing than buying, but Tristani stresses that the assignment is about making realistic financial decisions.

“The whole point of this exercise isn’t to say whether buying or renting is better.  I’m trying to get people to think like a finance person.”