In Hong Kong, the locals are fanatics when it comes to property. Everybody has an opinion and knows the smallest details – from the average price per square foot of a luxury condo to the bank with the lowest mortgage rate. I thought returning to the West would give me a respite from this mania. I´ve been proven wrong. The number one question I get in Toronto – after “do you have a publisher?” – is: “do you rent or do you own your condo?”
The fact is I would never buy a property anywhere until I’ve done my research and fully understand the dynamics of the market. I haven´t completed my homework yet on Toronto and even if I had, I wouldn´t offer an opinion here. I´ve got no interest in writing about the Toronto property market outlook. There´s no upside for me in entering this debate. But there is one thing I want to get off my chest that annoys me. To all those people who always argue in favor of buying and flat out tell me that I am throwing away money by paying rent instead of owning. To them I say, “You don’t know what you’re talking about.”
The decision to buy – or rent – should be based on “opportunity cost,” a term I learned back in Finance 101. Opportunity cost measures the returns you would generate if you did something else with your money. For example, to measure the opportunity cost of buying a condo, you need to calculate what else you could have done with that money — if you hadn’t bought the condo. Yes, it is true that if you don’t buy the condo, you will have to pay rent. But it is also true that you would have excess cash that would otherwise have gone into the property purchase. This money could be invested in bonds, the stock market or even a business. You should always consider the returns you could generate on this money, before you make a purchase decision.
Take my apartment for instance. The apartment next door – identical in every respect – sold two months ago for $370,000. I am currently paying $1,600 per month rent. So let us assume for simplicity’s sake that I have $370,000 in the bank and instead of renting, chose to buy my unit at the same price. Would that be a smart move? The table below spells it out.

At first glance, it appears I would save $61 per month by buying rather than renting. To reach this conclusion, I assume that — as a tenant —my $370,000 earns a miserly risk-free rate of 4 percent per year and I pay the typical 30 percent tax rate that the average Canadian would face. I then subtract my rental bill. This leaves me short $690 per month. On the ownership side of the equation I add up the recurrent expenses – property taxes, management fees, home insurance – that arise from home ownership. This adds up to $629 per month. The difference between the two — $61/month — is what I lose by renting.
In this analysis, I have not included the one-off costs associated with the purchase of a condo – land transfer costs, legal fees and renovation – which would easily exceed $7,000. Nor have I taken into consideration maintenance or back-end costs – like an agent´s fee – that will arise should I sell this property in the future. All these other costs easily outweigh the $61 monthly deficit I face as a tenant. And let’s not forget that I estimated a 4 percent return on my money when, with a little risk, I should be able to earn more. So all things being equal, it appears buying has no financial advantage over renting, more so the opposite.
The table above assumes no mortgage. But if I do need a mortgage then the calculations argue more strongly in favor of renting. For example, in the case of a 70 percent mortgage –all things being equal – renting would save me $406 per month. And that´s before factoring in the one-off costs of ownership I discussed above!

I keep saying “all things being equal.” By this I mean that I assume nothing – including property prices – changes going forward. So, if I buy a condo and property prices don´t change over the next five years then I will have a property worth $370,000 at the end of five years. But if I were to rent the condo, then five years from now, I will also have $370,000! I may not have $370,000 equity in a home, but I do have $370,000 equity in my bank account. I also have the costs/savings that come from renting that I discussed above.
The reality is that all things are rarely equal. Obviously, if property prices continue to rise then I will regret not buying my condo. That is, if prices rise enough to offset the rental savings I discussed above. A couple of percentage points per year is all it would take. But they do need to rise. Of course, I also need to consider the outlook for rents, and of course interest rates, too. There’s a lot of things to consider before I can make an informed decision. But a snap judgment that buying is always better than renting is the wrong conclusion. Not until I’ve considered all the factors.
A lot of people will not bother with estimating opportunity cost because “property has historically been a great investment. The Toronto market has been rising for years. And only fools do not participate.” But while the Toronto market may well continue to rise, only a true fool would ignore the fact that no market is a sure bet and that all markets ultimately reflect their underlying fundamentals — which are not always apparent at the time of the purchase. Just ask a homeowner in Florida or Las Vegas who bought two years ago when everybody was screaming “buy.” Alternatively, you could continue to talk to fellow Toronto property owners – who will tell you how savvy you are. And if you need a tenant for your new condo, feel free to talk to me, unless my own homework on opportunity cost tells me otherwise.