Is Renting Better for the Economy than Owning?
A careful reading of it will show home buyer preferences and changing unit popularity.
Every year there is an article written that discusses the merits of owning versus renting. I have always been in favour of owning because it is a means of forced savings; homeownership provides security of tenure; and you can capture value by renovating, redesigning and improving your home. But one could ask: which is better for the economy as a whole?
Over the past decade there has been much discussion about the share of homeownership in Canada versus the United States, especially after their housing crash where the rate of homeownership hit a record high. Is 70 per cent ownership too high? Are young Canadians getting into too much debt to own a home? Is it better to invest your savings in something more productive than a down payment on a house?
These are all extremely difficult questions to answer, but when I think about this topic, I look at it from the perspective of allocation and misallocation of a finite asset. Let me explain. In January, CMHC released their annual rental market data which showed that 13.6 per cent of Vancouver CMA rental apartments turned over in 2019, down from 14.1 per cent in 2018. In the Toronto CMA, the turnover rate was a meager 9.5 per cent, down from 11.2 per cent in 2018. One of the big reasons units are not turning over as quickly as they have in the past is because market rents are appreciating much faster than the respective rent control cap in these two metro areas. According to December data from Rentals.ca, the average rent for all property types in Vancouver was up 10.8 per cent annually, compared to 8.9 per cent in Toronto.
Some may view low turnover as a positive thing: people stay in their neighbourhoods and invest and their communities without being forced out by high rents and prices. This is clearly important, but because housing is in such short supply in Canada’s major markets, we need apartments and dwellings to be properly allocated to ensure maximum productivity in the economy. As an example, if a couple is renting a three-bedroom unit downtown and their children move out, we want that couple to downsize and free up that three-bedroom unit for another family or for three or four roommates. Someone is living along transit and is offered a better-paying job in the outer suburbs that requires them to drive to work, we want that person to move closer too that job to reduce traffic congestion, and free up that unit for someone that is going to use transit every day.
Therefore, if someone is paying less than the market rent because of rent control, they’re less likely to downsize, move outside the city, or even take a new job in another part of town. This leads to the misallocation of rental units. But in the same vein, owning your home often does the same thing. There is a land transfer tax in many provinces and municipalities, there are realtor commissions to pay, lawyers fees, and myriad of other closing costs. There are thousands of seniors that are “overhoused,” preventing young families from getting access to larger homes, bigger backyards and top schools. Many of the properties are only used part-time as owners jet off to Florida during the winter, cottage during the summer and numerous vacations. A single person keeping a four-bedroom home so that they have places for their kids to stay at Christmas is a major misallocation of housing, and very bad for our economic productivity and housing affordability. In many older neighbourhoods, the primary schools are forced to close because of a lack of enrolment due to the aging local demographic.
In British Columbia they started taxing empty homes; in Toronto, they’re cracking down on AirBnB: these policy changes were made to ensure that housing is returned to long-term residents and not tourists or second properties for the affluent. It may be only a matter of time before a city implements an empty bedroom tax. Any city that has rent control capped at a rate below five per cent annually should change it: prices and rents help properly allocate housing (but we still want to prevent rent gouging).
Ownership housing has its benefits, but it contributes to our housing misallocation problem. Certainly, the interest from developers in building rental apartments has skyrocketed, and CMHC starts data also shows a national boom in rental construction. Unfortunately, there has been a negative stigma around tenants and renters for too long, but that’s changing as millennials embrace the freedom of renting. The freedom to properly allocate is a very good thing: it will help the economy, and ultimately help improve housing affordability.