Episode 323 - Renting Versus Buying a Home in Canada 2005-2024

22:34I think in Ontario, buildings after 2018, you don't have rent controls anymore, which has caused problems for a lot of people. Residential leases are typically a year. Sometimes people can extend them. So rents will tend to, for a given renter, tend to stay still for at least a little bit. I mean, the rental caps apply after the, well, at least in BC, like even though the rental lease is a year after that, you're on month to month, but I don't believe they can just increase the rent to market rates at that point, right? Like there's still such a caps. Yeah. Yeah. Yeah. You're right. Okay. So primary market rental data cover purpose built rentals with three or more units.

23:09So think like an apartment building that has been built to be rented out. And then secondary market data cover units excluded from the primary rental market, which includes things like rented condominiums. This is someone who goes and buys a condo and then rents it out. That's called a secondary market rental. Then a REIT or something that goes and builds an apartment building and rents all units out, that's a primary market rental. The secondary rental market data are a little bit more sparse. They start in 2007. Sometimes they're a little messier, just fewer data points and things like that.

23:40CMHC comments on the quality of each data point. The secondary market rents were more often of lower quality than primary markets, but they're also generally higher than primary market rents, which is why I wanted to use them. At first I was looking at just primary market. Then I was like, I wonder how different the secondary market rents are. It turns out they're quite a bit different. So I was like, okay, well, I've got to include that information too. Then I weighted it by the number of units. So I have data on how many primary rental market units are available and an estimate of how many secondary market units are being rented out.

24:14So I did a weighted average of the rents based on those two points. Tenants insurance and home insurance, I found estimates of getting those types of insurance in each place today and deflated them back in time based on Statistics Canada, like CPI measure for those costs. The renter's portfolio, so the way the model works is that the renter saves the difference between their housing costs and the owner's housing costs. They invest it, they stick it into a portfolio. So in the initial year, there's the down payment, the renter's investing that. Then every subsequent month, if the renter's paying less in the housing cost than the owner, the cost difference is being invested in a portfolio, which means a lower level of rent relative to the cost of housing results in the renter's saving relatively more.

24:59An important and potentially contentious assumption that I make is that the investment returns are not taxed. I'm looking at a non-taxable account, which means they're either using an FHSA, an RRSP, a TFSA or some combination. The RRSP was available through the full sample. TFSA appears in 2009, FHSA more recently in 2023. But based on the amounts being saved, if you were buying a house in 2005, would investing the down payment in an RRSP be sensible? Did the amounts line up? The highest down payment was in Vancouver,$43 ,220, which based on the median income level at the time would have been roughly four years of accumulated RRSP room.

25:41So I don't think it's crazy. And then the future savings after that would be much lower than the annual accumulated RRSP room. So I think it's reasonable enough. And the average person's not maxing out the registered accounts. So if we did include taxes on investments, and I've done this in other, like in forward-looking analysis and the projection type analysis instead of the historical, adding in taxes makes owning look better and increasingly so at higher personal tax rates because your after-tax investment return becomes lower and lower. That implies that in cases where registered accounts have been maximized, owning a home is relatively attractive, and then increasingly so for high-income earners.

26:19The portfolio I use is 30 % MSCI Canada IMI, gross dividend, and 70 % MSCI, all-country world IMI net div. Net div just means there's an estimate in there for formal holding taxes taken off. And then I net out a 0.25 % fund fee, rebalanced monthly. Now that asset allocation was not available for 0.25 % in 2005. Later in the sample, it is. You could buy VEQT today for a little bit less than 0.25%. I do think that over the full sample, 0.25 % is reasonable enough. It would have been more of a hassle to try and recreate an actual ETF portfolio, for example, or to use different fees over time. There's one other thing I thought about for this, just as a reasonableness test, but the gross of fees returned on the portfolio over the full sample period is nominal 8.19 % annualized.

27:16This is the other thing I thought about. XIC, which is the iShares Core S &P TSX capped composite ETF, was available at the beginning of the sample. Foreign ownership limits in the RSP account were only eliminated in 2005. It would have been reasonable for someone to be all in on Canada back then. A lot of home country bias. It was really in 2013 that a full suite of proper low cost ETFs like what people are used to today became available to build out our target asset allocation. I can imagine a scenario where someone invested in XIC until 2013 and then added more diversification. And if they had done that, Canadian equities outperformed the global allocation until June, 2015.

27:59So in that scenario, they would have been better off than the actual model. Anyway, that's just my mental justification for the 0.25 % fee for the full sample. Any comments before I keep going here? No, I think it's reasonable. The number of people that actually had the exact experience you're trying to describe is probably six, right? And so you have to make some reasonable assumptions to find something to take away from this, right? Yeah. Okay. So the home price data come from the MLS home price index for the apartment benchmark. So the HPI, it's called the HPI home price index. HPI is a hybrid model that merges repeat sales and hedonic price approaches to creating a home index.

28:36I can probably skip over the details of how that works, but basically they create a benchmark home based on what they think is a representative home in each area for a given period of time. And then the index is based on changes in how each of the individual features are valued over time. It accounts for stuff like how many bedrooms you have and how close you are to transit and stuff like that. Those are all incorporated based on other past sales of homes with shared characteristics. They calculate how a benchmark home changes in price over time. It does not account for the idiosyncratic volatility we mentioned earlier because it's a more diversified representation.

29:14That's just an important thing to think about. I didn't try and model that, but I think it's just worth keeping in mind. For transaction costs, I had 2 % for closing costs, which is based on a 2008 paper. And I had a 6 % selling costs, which is based on the 2012 Brockhine Johnson paper. That's what they used. And I think that's pretty reasonable. If people had a lot of real estate transactions, like we model one, they just buy the house. If they had four, they would decrease the owner's wealth because of transaction costs. And that's probably common, right? It's rare that somebody buys one house and never leaves.

29:44Yeah. I've had trouble finding data on how frequently Canadians turn over their primary residences. In the US, one of these papers has data from, it's a bit dated now, but it's about eight years, a typical holding period for a US owned home. I'm not sure what it is in Canada. Now, the other thing that's important here is that while renters don't have transaction costs, they do have that risk of going from below market rents to market rents if they move. And I think it probably depends on the timing of the purchase, right? Like many people are saving and saving and saving and renting until they're 35, 37, 40 years old and then buying.

30:19So the turnover for somebody who does that, maybe they buy their family home at age 40, whereas somebody who gets into the market at 26 is probably buying a condo and then maybe a townhouse and then a family home. So it's going to be different depending on the timing of the purchase, like in the life cycle. The other thing that I think is kind of interesting that I don't try to analyze and don't even have any comments on my notes on, but I'll mention it, is I think when people buy homes, they'll often buy for their future selves. They'll buy a bigger home than they need now to avoid having to move.

30:46That really just increases your housing costs relative to if you'd rented something more reasonable for your current situation. But just anecdotally, I've talked to people who are like, yeah, I'm thinking about renting a two-bedroom or buying a four-bedroom house. Yeah. Future-proof. Yeah. Future-proof, right? Okay. Depreciation maintenance cost. This one, man, is hard to pin down and it's also, it's another contentious assumption, but I think it's really important. I mean, I know it is because it shows up in the analysis results. So the HPI index we're looking at does not factor in the cost that a homeowner has incurred over time in terms of depreciation and maintenance.

31:20So we're looking at these historical index returns, but they're reflecting money that has been added to the asset over time by the people living in the homes. The depreciation that a specific homeowner might experience from year to year and how well or poorly a specific home has been maintained are both going to affect the home value at the time of sale. but again, the HPA won't necessarily capture that. So we need to make some adjustments to the home price index returns. Buildings are depreciating assets. Whenever I make content on this, people are like, you're crazy. Buildings don't appreciate it.

31:53No, buildings appreciate it. Land appreciates. People look at real estate over time and see it goes up. That's land and money that people are adding to buildings, but the buildings themselves are depreciating over time. There's normal wear and tear, like stuff just getting used. It's consumed. Housing gets consumed. like you need to replace your roof, for example. But then the other thing is obsolescence. My house is built out of ICF insulated concrete forms, but the version of insulated concrete forms that was used to build this house in 2003 are now outdated. So it's therefore less valuable than a newer ICF home, just as an example.

32:25So maintenance spending over time reduces, but doesn't eliminate depreciation. So what number do you use for this? There's a response to a 2006 paper. So it was like a critical response to a 2006 paper on this topic. The critical response suggests a two to 3 % for maintenance and capital expenditure. There's a 2007 paper that looks empirically at US housing, and they find that it depreciates roughly 2.5 % per year gross of maintenance and 2 % net. So people are adding back 2.5 % in maintenance spending, but they're still depreciating at 2%. And then there's a big 2005 paper, the one that estimates user cost, they use the 2.5 % figure to estimate that.

33:05There's another empirical paper that looks at multifamily investment properties, commercial and multifamily properties in the US, a 2016 paper, Bakari and Geltner. They find overall average depreciation of 1.5 % per year, and their estimates range from 1.82 % for properties with new buildings, 1.12 % for properties with 50 year old buildings. Now those are net of maintenance. So like maintenance has been added back to that to reduce how much the buildings were depreciating, which means to find our maintenance and depreciation costs, we would have to add maintenance back. So they don't do that in this paper, but they do note that the N-CREF, which is a real estate index records suggest that nearly 20 % of property net operating income is typically reinvested in maintenance and upgrades.

33:51So all those figures come in. This is of the building value of the home purchase value. Well, so it's technically the building value, and that would be the ideal way to do this, especially in places like Vancouver and Toronto, where the land is an increasingly large portion of the value of a home. I don't make that adjustment because I don't have good data on relative land and building costs. And a lot of these papers don't. A lot of these papers say you just use 2.5 % or whatever of the property value, acknowledging that there's a little bit of a bias in there. And I guess with things like townhouses or condos where there's very little, if any, land value to what you're actually buying, right?

34:30And you're paying like strata fees, which essentially cover a lot of the maintenance and depreciation costs anyway. But I guess the percentage of like a strata cost would be probably in line with the total home purchase price, like two and a half percent of the home purchase price. Whereas a single family residence, like you said in Vancouver, like my property, I think is maybe 25 % of the value of it is the building itself and the rest is land. So you'd have to look really locally at the type of building, like the type of dwelling and geographically at the differences. Yeah. So we are looking at apartments here and I agree that strata fees or condo fees would cover a lot of the costs that we're talking about, but you could also have stuff like a building reserve declining relative to future maintenance costs over time, which will eventually show up as a special assessment.

35:09So these costs can show up a lot of different ways or in resale value because you've got an older building relative to newer buildings that are going up. Statistics Canada uses 1.5 % of the building value. They're explicit about that for depreciation for homeowners when they're calculating how much costs to live in a home. And then they also have an estimate for maintenance. Combining those two together comes out to about 2.1 % of the building value. That's what Statistics Canada is using. But you look across all these studies and stats can, and it's like somewhere between 2 % and 3 % of the property value, maybe more technically the building value is a reasonable assumption.

35:45We use 2.5 % in our model. Then we do some sensitivity around what if it was higher or lower. We use a 25-year mortgage, 20 % down payment, five-year fixed rate. We get mortgage data from the Bank of Canada and Statistics Canada. We use advanced mortgage rates, which is like the rates on actual advanced mortgages. I think the mortgages have actually been issued by banks. What are the average rates on those? When the data are available, but they're not available for the full period. When they're not available, we use posted rates, which tend to be much higher, minus 1.95%, which is the average difference between posted and advanced rates over the full sample.

36:25And then property tax demand, actually note on that, we're still working on getting some property tax data because it's like literally calling municipalities and saying, hey, your website only has property tax records back to 2018. Can you send us back to 2004. Hamza at PWL has been working on that. I've got detailed data for a bunch of the areas that we're talking about, rougher data for some, but I don't think that the results are going to change much once we get them updated to the actual values. It's kind of close enough right now, but just not quite perfect, just as a note. Okay. The main results, it's mixed, which is interesting because my prior going in is that owning would dominate.

37:00The ending wealth, renting beats owning in seven of the 12 metropolitan areas. And I looked at Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa, Winnipeg, Quebec City, Hamilton, Kitchener, Waterloo, Victoria, and Halifax. Owning wins in Toronto, Vancouver, Calgary, Edmonton, and Waterloo. And renting comes out ahead. Even Edmonton, eh? That's interesting. Edmonton was a really interesting one because the price returns in Edmonton over this period were not good, but rents were really high. So it really shows you've got to look at both of those factors to see who was better off. Rents were really high relative to the cost of owning.

37:36If I take the simple average of all of those areas, the ending net worth difference favors renting by about$15 ,000 at the end of the sample. So not huge, which is what you'd expect if there's an equilibrium of housing costs. Winnipeg was the best place to be a renter, not an owner over that period. Is that right? I'm just looking at the notes that you've posted here. Yeah. Okay. Just just making sure I'm reading the data. In terms of the wealth accumulation. I point that out specifically because there's a guy I talk to almost daily on Twitter who's like a huge landlord in Winnipeg. And I hope he's listening.

38:06And he just loves Winnipeg real estate and just talks about how good he's done in Winnipeg real estate over the past 20 years versus global stock markets. I've always been skeptical that that's necessarily true. And I think a lot of this just comes down to anecdotes and he's not tracking the data correctly. And so I just wanted to very specifically call out that Winnipeg was actually the worst metropolitan area that you looked at for being an owner versus a renter over that timeframe. So if you're listening, gotcha. He still could have done fine though, right? If he's a leveraged landlord, if you look at the, like the rental yields were still pretty high, the capital return was not the highest by any means, but it wasn't terrible.

38:40I have about 2%, 1.85 % real annualized over the period. And then rental yields were high enough that if you're a landlord and your costs aren't too high, it's probably not bad. Okay. So looking at those two factors, like high rents relative to the cost of owning and low realized real estate returns make owning look worse relative to renting. But in other cases, high rents and high realized real estate returns make renters disadvantaged relative to owners. Either one can sway the outcome. You don't have to have both. So the Edmonton example, I thought was pretty interesting where price returns were pretty low, but rents were relatively high.

39:18On average, 6.5 % of the property value in rent was paid by Edmonton renters, which is I think the highest. Yeah, it's the highest of all the places that I looked at. Keeping in mind that we're comparing the total cost of owning each one. In the case of the Edmonton renter, they just didn't have much money to save. They saved their down payment, but then their monthly savings was minimal. Then auto was another interesting one where price returns were kind of high, 2.68 % real, but rents were pretty moderate. Renters actually come out ahead there. The biggest advantage for owners was in Kitchener, Waterloo.

39:50They had really high price growth and kind of high rents. And then for renters, like you noted, Mark, it was Winnipeg, which had lower price growth and moderately high, but not too high rents. And the rental growth wasn't too crazy. I was surprised by Victoria. Price growth was super strong there, but rents were really low. But then Vancouver had even lower rents, but price returns were higher, which gave owners the advantage there. So it's really hard to predict like, you know, oh, this place did better. You have to know the relationship between the relative costs of renting and owning and the returns on the assets over the period.

40:25And even within that period, there was like you said, multiple sub periods that would be really interesting to look at, right? Like in Vancouver, as you pointed out, I think from 2015 on things just went absolutely banal. Like I was looking at Vancouver rents like maybe six or eight months ago because I used to live in Vancouver and we moved to Squamish like five years ago. I was like, I wonder what rents are doing in Vancouver. And wow, it's unbelievably expensive to rent in Vancouver now. Yeah, it is. But it's very expensive to buy a home in Vancouver too. For sure. Yeah. But yeah, so there was somewhat of an inflection point around 2015 where rents and prices just kind of started to go up like crazy.

40:58I didn't look at the full comparison over that sub period. One thing that is worth mentioning, actually, I don't have my notes, but in Calgary and Edmonton, there's this big spike in prices early in the sample and then a big drop. If you bought at the beginning of the sample, you were insulated from that. If you bought at the peak, I think it was 2007 or something, Calgary and Edmonton had this really big bump up in prices that then dropped down. If you bought then, the owners look better in the full period. If you bought then, renters would have come out way, I don't know what that is, idiosyncratic timing risk or something.

41:30That's why I mentioned Edmonton being interesting because I think prices there have barely, if only recently, eclipsed their previous peak, which I think to your point was like somewhere between 2007, 2009 or something like that. Yeah. Yeah. I do have that chart. They have come back at least in nominal terms from that previous peak. Maybe not in real terms though. So investment fees, super important. I had the 0.25 % baseline assumption, but over the sample period, 2005 to 2024, people were paying way more than 0.25 % in fees. Like it was probably 2.5 % on average. In 2022, it was 1.76 % on average, largely driven by active mutual funds.

42:08If I bump the fee up to 1.76%, renting trails owning in 10 of the 12 areas. It matters a lot. Realistically, it's an interesting point where in reality, we're talking about this model, in reality, Canadians over this period were probably better off owning than renting because they were getting hosed on investment fees. Even if they weren't too, they were good luck maintaining a 100 % equity portfolio over that period with discipline. That would have been extremely difficult to do. I agree. Honestly, doing this analysis, it shows that renting comes out ahead in the way that the model is set up, but going through it has made me probably more likely to tell people that they should just own their home.

42:55There's a lot of caveats to get renting out ahead. And it's not that you're biased, right? It's just that a lot of these caveats, Dan, as you point out, like are difficult to actually achieve, like the discipline that it requires to save every dollar between the ownership and rental costs and sitting on your hands through events like 2008 and COVID and everything like, like not making those mistakes, much harder to fire sell your home in 2009 than it would be to fire sell your portfolio, right? Yeah, that's actually a really interesting point because I have made this argument with clients before is that people will panic sell stocks.

43:28Nobody panic sells homes. In fact, they do the opposite. If you own a home and housing prices plunge, I mean, almost everybody says it doesn't matter because it only makes a difference when I'm ready to sell and I'm just going to hold onto it. Well, it would be great if you applied that same discipline to stocks, but people don't. On the savings efficiency, 100 % is the base assumption where owning comes out ahead in five areas out of the 12. I had 90 % savings efficiency. That's saving 90 % of the available cost difference between renting and owning. It's seven out of the 12 areas. We bumped up from five owning being better to seven.

44:05Then if I drop that down to 80 % savings efficiency, 10 out of 12 areas, you're better off owning than renting. To your point, Dan, it really highlights the importance of discipline. 80 % is a lot. It's probably more than most people are saving. That's why that term forced savings is used all the time, because it's very good description of what it's like to own a home, right? People don't elect not to make mortgage payments, but they sure as heck elect not to save in a given month. And so. Especially in an emergency too, right? Like the last thing you will stop paying is your mortgage. And the first thing you will stop paying is your savings plan.

44:42Yep. Right. Total opposite ends of that decision matrix? The maintenance cost assumption, which I mentioned is often contentious. So the base case again is five areas owning was better at 2%, seven out of 12 areas favor owning. And at 3%, which is still within the range of sort of the academic recommendations for what to use here, only three areas favor owning. So that assumption about how much you're going to spend to maintain your home and how much will it depreciate over time is super important. At 2.2%, I just looked at kind of where's the break even in terms of the number of areas at 2.2%, six out of the 12 areas still favor owners.

45:20That's an interesting number two though, because it's pegged to the value of the home you said, whereas if you own literally the same structure in a expensive market versus an inexpensive market, presumably the maintenance costs are going to be pretty similar in dollar terms, but the percentages are going to be thrown way off based on that, right? Like home maintenance isn't more expensive in Vancouver than it is in Winnipeg, I don't think, but the same house would have a very different price in those two markets. Yeah, yeah. That's definitely true. We talked about that, Ben, I think a few weeks back when you were first starting to look at this and I was trying to wrap my head around the maintenance cost issue.

45:58And Dan, that's the exact thing that I was stuck on is if I took my house and lifted it up and put it in a rural place in Manitoba, the cost would be 30 % of what it is here. And squamish so as a percentage it wouldn't make sense which is why i think and again i know that that is hard to find but the maintenance cost as a percentage of the building value probably makes more sense right because if i transpose my house into rural manitoba the building cost presumably doesn't change that much it's the land value cost that's going to be reduced significantly but as a percentage and as a dollar value the maintenance versus the building cost likely doesn't change in those two locations yeah but the data is impossible to get on that it's like right yeah yeah not so easy to get the data and keep in mind it's maintenance and depreciation not just the explicit maintenance costs how much less does a building appreciate in one area versus another based on the building being slightly owned or less well maintained and that that may make more sense where an older place in vancouver would sell for proportionally less does that make sense i don't know i don't know there's a place in downtown vancouver there's like one single family house like in downtown Vancouver and they just refuse to sell.

47:08And I just, when I drive by it sometimes, I'm like, that thing must be worth a hundred million dollars now because it's the only single family house. Like there's towers everywhere. And it's this one little house, I think they're just holding out. Right. I don't know why. Maybe it's just principle at this point, but I wonder what it's worth or I wonder what developers have offered them. That's a good example where the building's probably worth like nothing. Yeah. Basically The location of everything. Yeah. Yeah. This is a quick addendum to the discussion on maintenance costs. I'm recording this the day after we recorded the rest of the episode.

47:40I really wanted to get this in because I think it's important. Mark and Dan made the valid point that maintenance costs in, for example, Vancouver are not going to be twice as high or whatever the number is as maintenance costs in say Winnipeg or Edmonton, just because prices in Vancouver are higher. We had talked about different ways to account for that, like looking at maintenance costs as a proportion of the building value. In any case, I wanted to figure out a better way to model it. I split out maintenance and depreciation. I'm now applying depreciation to the eventual sale value of the building.

48:17Then I've got maintenance as a separate cost. Figuring out what to use for a maintenance cost is tricky, but I realized a pretty good source is just looking at condo fees. They're called maintenance fees for a reason because they're a large part of the cost of maintaining a condo building. What I did is for each city that we're looking at historical data for, I went and pulled 12 current real estate listings. There's nothing magic about 12. That's the number of listings that realtor.ca shows on a page. At least that's the standard number of listings. I opened up realtor.ca, went to each city, pulled the first 12 listings that I saw, I took out duplicates and stuff like that.

48:58I recorded the price and the monthly condo fees for all 12 of them. And then I took the average. I made sure that the average listing price was close to the final month benchmark price for that city in the model. And then I used the average of the maintenance fees as the cost of maintenance plus 10%. I added 10 % because condo fees are not 100 % of maintenance costs. So I've got 110 % of that average condo maintenance fee figure as the final month maintenance cost in the model. Then I reduce that through time. I deflate it through time using the inflation rate of the home maintenance and repairs index in the CPI for each province.

49:40It's reported at the provincial level, not the municipal level by Statistics Canada. That's what I used. The effect is for lower price cities like for Edmonton and for Winnipeg, maintenance costs as a percentage of property prices went up a lot. And then for higher price cities, like for Vancouver and Victoria, proportionally, maintenance costs went down. In dollar terms, they're now more consistent across all the different cities. In Toronto, I think maintenance costs actually went up relative to the proportional model because I guess, I hope this isn't just sample bias from the random 12 that I picked, but it seems like condo fees in Toronto are relatively high.

50:20Another interesting one was Montreal where condo fees are actually pretty low. I think maintenance cause there went down. Overall, directionally, the results didn't change much. Victoria is the only one that flipped from being advantageous for renters to being advantageous for owners over the sample period. It wasn't by much. It wasn't by much when it was advantageous for renters and it's not advantageous for owners by much now. The average ending net worth difference went from favoring renters by$15 ,000 to favoring renters by$22 ,000. Pretty immaterial overall. I think that that commentary from Dan and Mark was valid to the point that it was eating me up inside and I had to improve the model, which I've done.

51:03Then I felt guilty leaving listeners hanging for a couple of weeks. So I'm hoping that adding this into the episode makes the overall discussion that much more useful. I also looked at mortgage down payments and amortization. So 25 years is kind of a typical amortization used by Canadians. At a 15-year amortization, so that means you've got higher payments and less debt. Owning a home only beats renting in three of the areas. And renter wealth exceeds owner wealth by$78 ,000 on average. So that assumption makes a big difference. And a 35-year amortization, which would require a 20 % down payment, which is what we're modeling anyway.

51:41Owning beats renting in six areas and owner wealth exceeds renter wealth by just over$15 ,000. So that's an interesting finding. You're saying it's not really an argument for paying off your mortgage more quickly, is it? No, no, it's not. Yeah, it's the opposite for sure. Yeah, which most people would think common sense, pay off your mortgage as soon as you can afford to do it. But the leverage is clearly working to your advantage here. Yep. And a lot of people point this out. When I talk about renting versus owning a home, people say, well, you can't get a mortgage as a renter. Mortgages are amazing.

52:10And they don't necessarily make owning better, but you can see from that short example there that the mortgage definitely has an effect. Down payments matter too. So 50 % down payment, renters come out ahead in nine out of 12 areas and renter wealth exceeds owner by$59 ,000. And then at a 5 % down payment, the kind of baseline result holds with renters coming it ahead in seven areas, but the average wealth advantage drops to just under$12 ,000, which is lower than the base case. Again, same thing where leverage is good for homeowners, at least over this period. In line with at least those two past studies that we mentioned, we found in our analysis that renting and owning were both perfectly reasonable approaches for paying for housing in Canada over the period 2005 to 2024.

52:56There was no clear dominant approach, even with house price appreciation being kind of crazy and rent inflation being kind of crazy in Canada, especially in the second half of the period. I think it suggests that renting is a reasonable option to pay for housing. But as we already talked about, I think it also highlights the importance of discipline, which a lot of people don't have, and low investment fees, which a lot of people don't pay, which kind of makes owning look pretty good. It's like what that 2007 UBC paper said, that renting looks pretty good in our model, but it takes a lot of stuff to happen or to go.

53:27People have to do the right things at the right times, not panic sell, pay low fees, be disciplined with their saving. If any one of those things falls apart, it makes a big, big difference to the outcome. Like I mentioned earlier, I think going through this analysis made, even though it showed that renting comes out ahead in the model, I think it actually shows that in a lot of ways, owning is a pretty sensible decision for a lot of people. Renting is a viable option though. If someone wants to rent and can be disciplined and will have low fees and so on and so forth. I think that's great. This shows that you can be successful as a renter, but for the average person, I don't know, owning is probably pretty compelling.

54:03I think that's a great takeaway from it, which is not that, oh, the model shows that renting is preferable. It's that the model clearly demonstrates that the idea that renting is throwing money away is just simply not true, unless you assume you're inclined to throw your money away. In other words, if yes, lots of us struggle with discipline and pay high investment fees and et cetera. But for those of us who don't, renting is a perfectly viable option. And to suggest that you're going to end up further behind if you choose that method is just simply not true, unless a whole bunch of other things are also biasing that.

54:43Yeah. It's less of a mathematical decision than a behavioral one, it sounds like, right? So you shouldn't approach necessarily this problem as a math problem. That's an interesting question too. And I have no idea if there's any data on this, Ben, but do we know whether as a group, renters are happier than homeowners or the reverse? Because I can certainly see it in both ways. And I've been both. there's something about renting that is extremely liberating that you never have to worry about, you know, the leaky basement and the other things that keep homeowners awake at night. But there's also great pride of ownership, satisfaction.

55:25So it can work in both ways, but I don't know in aggregate, whether we know which group is happier. Yeah. There is a bunch of research on that. Actually. I just wrote an article on this for the Globe and Mail. There's even one paper that looks specifically at Canadian data. It's a 2021 paper from a guy at I think Thompson Rivers University. Overall, I think the evidence kind of shows that owners are not happier than renters. They're not less happy, but it's pretty neutral. The Canadian paper specifically showed that owners at lower income levels are less happy. Mortgage debt makes people less happy.

55:59So even in some samples where homeownership makes people more satisfied with their housing, the fact that they have mortgage debt kind of neutralizes the effect on their overall life satisfaction. What else was there? One study showed that female homeowners specifically, which is a sample they were looking at, are less happy. And it's largely due to time use where they spend less time on active leisure activities and more time on housework. And that negatively impacts their overall happiness. There's a bunch of papers on this though. It's a super interesting topic because that's one of the criticisms that I get when I talk about and keeping in mind that we're just saying what we just said, that renting is not stupid.

56:34But I'll say that and people are like, yeah, but renting is miserable. Like renters are so unhappy and they're always worried about their landlord coming into the bathroom when they're showering. I'm like, what? No, I've rented. It's not that bad. But anyway, a bunch of research on this and it's kind of, I would say fairly neutral in terms of happiness with maybe a slight tilt toward owners being a little bit less happy because of their time use constraints. And then Dan, just anecdotally, when I was a renter, I felt the same sort of liberation. And I think it's easy to say that in hindsight now as a homeowner, and it's not that obvious when you're a renter.

57:05I think it's a grass is always greener type of situation where you want to be an owner and then you become an owner and you're like, man, renting was really easy and I could pick up and move. And there's a flip side to that, right? But there is a lot of psychological benefits or stress related benefits to renting in my anecdotal experience. Yeah. And it really comes down to, I think if you're going to talk about happiness that comes from home ownership, the presumption is you bought a home that you like and that you can comfortably afford. Because if you bought too much house, which was incredibly common over the last decade or so, that's not a recipe for happiness.

57:40That is a recipe for stress for sure. So I think most people who can buy a house and comfortably make that mortgage payment, it's great. But if you're stretched every single month and you're constantly worried if interest rates go up, I'm going to be in big trouble. That is not a recipe for pride of ownership. And some of this is just so outside of your control too, right? Like we love our neighborhood and a lot of it's because we have two young kids. We have a single family house and kind of a cul-de-sac type of area. And there's like 20 other kids within a hundred houses. And so on any given day, especially in the summer, my son can just open the door, go outside, there's 10 kids to play with.

58:17And we didn't necessarily know that before we moved here, right? You can't knock on people's door and say, what's your family like? We want to move into the neighborhood. But if a bunch of those neighbors moved, or if that wasn't the case, I bet our happiness with this location would be less. And so a lot of that just comes down to luck, right? Or they were going to build a development right through the forest next to our house, which we didn't know about until about two years after we moved into this house. So they were going to punch like a gas line through, not quite our backyard, but like 100 meters from our backyard in the forest.

58:45and so there was uproar about it and it ended up falling through but had they gone through with that that's just bad luck that would have led to a reduction in happiness for us for sure interesting i've always surveyed the neighbors whether renting or buying i've gone around and knocked on the doors and like hey you would you're moving in here what do you think the neighborhood always got good information from doing that we actually had something similar where we bought our house there's a massive forest kind of in our backyard called the 100 acre wood it's like literally 100 acres of just forest with a bunch of beautiful hiking trails.

59:16And developers were about to buy it. And so a bunch of people in the area raised money through a charitable organization, which we ended up donating a bunch to. And I just kind of thought, you know what? This is going to be part of the cost of buying our house because we want to maintain the forest. And so the community group ended up buying the forest. So now it's a conservation land. Pretty good. But like your point, it could have worked out differently where that became a massive housing development, which is like we moved out here to not be near that. Yeah. And it can affect the prices too, right?

59:43Like values of homes here might've gone down as a result because they were less desirable if they'd done that. I don't know. Yeah. One of the things, Mark, you mentioned how renters imagine they'll be happier as homeowners and then they look back and kind of think, wow, renting was pretty good. There is one paper that I looked at for that happiness thing using German data. And it found that people, they show that homeownership does make people more satisfied with their lives a little bit, but they dramatically overestimate how much happier they're going to be. So it does make them a bit happier, but not nearly as happy as they expected when they made the decision to buy a home.

1:00:15Like most things that we think will make us happy. I was going to say. Yeah. It does link it to extrinsic motivations. People in the study who are more extrinsically motivated had the worst bias in terms of overestimating how happy they would be when they bought a home anyway.

1:00:35Okay. Let's move on to the topic Dan has here, which is economists are predicting this is a client question that we've paraphrased, but it's a great question. Dan's got a great answer. Economists are predicting more rate cuts in the near future. Should we switch into longer term bonds to take advantage of falling interest rates? It is a really good question. It's one that we get a lot. I can remember years ago when we were in the opposite situation where everybody expected interest rates to rise, we got the inverse question, which is again, perfectly reasonable. So let's start by acknowledging that central banks do sometimes telegraph their next moves, right?

1:01:12I mean, they try to keep type lit, but I think we can all agree that the consensus is the next few interest rate moves are likely to be down rather than up. So let's unpack the concept a little bit. I think it's important to start with just a reminder of two important ideas here. And the first one is that bond prices and yields are inversely related. So I always ask people. Just think of it like a seesaw. If yields go up, prices go down. If prices go down, yields go up. And we know that when interest rates rise, bonds will lose value. I mean, we don't have to go back too far. 2021, 2022, brutal years for bonds in a rising interest rate environment.

1:01:52And it's of course the opposite. So if we expect interest rates to fall, then we would hope or we would expect bond prices to rise. So the second part of this, though, is that bonds with longer terms are generally more sensitive to interest rate movements than those with shorter terms. So they're likely to rise in value more sharply in response to declining interest rates. And that's why our listener is asking if it makes sense to move to longer bonds in this kind of environment, because you would expect that if rates do go down, the longer bonds will outperform short term bonds over that period.

1:02:27Now, I don't want to get too technical, but I think it is useful to talk about a concept in fixed income called duration. Duration is a measure of how sensitive a bond or a portfolio of bonds is to changes in interest rates. And the actual calculation, unless you're Ben, is very hard to do. But the good news is you don't have to do the calculation because it can be boiled down to a single number that is easily distilled. you can just go on the website of any bond fund and it will have the duration expressed. So let's use an example here. It always helps. So let's look at the BMO Aggregate Bond Index ETF.

1:03:03The ticker is ZAG, very common broad market bond fund. It holds bonds of all maturities, and it's got about 30 % in long bonds with terms between 10 and 30 years. The average for the whole portfolio is right around 10 years. And if you go on this ETF's webpage, you can learn that the fund has a duration of 7.3. So what that means is that if interest rates were to fall by one percentage point, you should expect the ETF's price to increase by 7.3%. Okay, now let's compare that to the BMO's short-term bond ETF. The ticker is ZSB. That one is bonds only from one to five years maturity. The average is about three years, so quite a bit less than ZAG.

1:03:48And this fund has a duration of 2.7. So if interest rates were to fall by one percentage point, then you would expect the ETF to rise in price by about 2.7%. So when you see that, you can see why it's tempting to want to shift your bonds from shorter term to longer term, because if interest rates go down, those long term or technically long duration bonds should be expected to outperform. But now this is where we get into the problem, because duration, it's a very useful concept when we're talking about bonds and fixed income, but it's theoretical, right? Because it describes what would happen if all interest rates moved up or down by the same amount, what we would call a parallel shift.

1:04:30So in other words, let's imagine the yield on two-year, five-year, 10-year, 20-year bonds would all need to rise or fall by the same amount in order for that duration number to work. So in other words, if all interest rates fell by 1%, then you would see that 7.3 % bump in a fund like Zag. Now, there are periods when rates will generally move in the same direction, but it's never that tidy. There's no period where all interest rates are going to move in parallel by the same magnitude. Now, sometimes we will see short-term rates will move, longer-term rates don't. Sometimes they both move in the same direction, but not to the same degree.

1:05:15And occasionally you will even see short-term rates move in one direction and long-term rates move in the opposite direction. So duration, unfortunately, as interesting as it is as a concept, it doesn't really have much predictive power when it comes to diversified bond funds that hold a mix of maturities. There's just too many variables. And that really is the key lesson here. And that is, it's misleading to talk about the Bank of Canada raising or lowering interest rates, plural, because they don't really have control over all interest rates. They really only directly control the shortest of short-term rates, what they call the overnight rates, the rate that banks use when they lend to each other.

1:06:01And that rate is very important because it directly affects what you're going to pay on your variable rate mortgage, your line of credit. But it really does not directly affect the yield on 5, 10, 20-year bonds, right? There's some influence for sure, but it's not control. So I thought it would be helpful to have a real-world example because as I was saying earlier, I remember getting this opposite question back when we were in an environment where everyone expected that rates were going to go up. So let's go back to 2017. The Bank of Canada had indicated that rate increases were going to be on the horizon.

1:06:37So at that time, this is like summer 2017, the overnight rate was only 0.5 % and it had been stuck there for two years. And you guys probably remember this, right? For roughly 10 years, people said interest rates have nowhere to go but up. And eventually they were right. And everyone was expecting that rates would go up. And so people were asking, well, maybe we should move from long bonds to short bonds, because if rates go up, those longer term bonds are going to get hit hard and the short term bonds are going to outperform. Well, as it turned out, the forecasts were bang on. The Bank of Canada did raise the overnight rate.

1:07:12In fact, it raised it four times in the next 12 months. So it went up from 0.5 % to 1.5%. And what happened? Well, there was these four well-publicized rate increases. We all saw them coming and bond funds with longer terms actually outperformed. It was the exact opposite of what people predicted. And the reason again, is that the Bank of Canada does not control those longer term rates. And what happened at the time was that the rates on long-term bonds barely moved, but the rates on short-term bonds went up. And so it was short-term bonds that got hit harder. So I looked at this actually, I have a friend, Kevin Prince over at BMO ETFs.

1:07:56He's a good source for things like this. And he sent me some data of interest rates going back 25 years. And you could look over that period for periods of time where the yield curve was flat or inverted. So that means that short-term rates and long-term rates were either very similar, or you even had some periods, which we've had very recently, where short-term rates were higher than long-term rates. It's not a normal environment. One would expect that over time, that curve would normalize and the longer-term bonds would move to a place where their yields were higher. And what happened was if you look back during all those periods, when the yield curve did normalize, it was not because long-term rates went up.

1:08:42It was because short-term rates went down. And so in other words, if you expect short-term rates to go down, it would be reasonable to expect that long-term bonds could stay the same. At least historically, that's been the case. And so when our listener says more rate cuts are going to happen in the future, he's probably right about that. That isn't what we're arguing here. But just because the Bank of Canada is lowering its own key policy rate, it doesn't necessarily follow that yields on longer-term bonds will also come down. And therefore, the long-term bonds are not necessarily likely to outperform, even though that seems like a logical place to go.

1:09:23So I do think it's worth talking a little bit, and I'm interested in your opinion on this too, guys, is like, okay, if we acknowledge that the central bank can influence but not directly control long-term bond rates, what else affects those bond yields, right? It seems to be it's market factors, right? It's expectations. It's people think interest rates are going to go up or down. And so therefore they do. There are concerns about inflation, concerns about market volatility and safe havens that bonds might offer. So these kinds of things are market driven. And as always, if you believe markets are mostly efficient, that stuff is probably already baked in.

1:10:04I mean, the way I like to put it, if everyone is expecting short-term rates to fall, the bond market knows that. And then the longer-term rates have probably already fallen because of that expectation. So there's no opportunity here to exploit something that's already widely known. Yeah. I think a lot of people don't realize how big and liquid bond markets are either, right? Like we talk about stocks because they're exciting and they're flashy and bonds maybe people think maybe they're easier to exploit because they're just less sexy, right? Like who cares about bonds? So maybe there's pricing and efficiencies there.

1:10:36But the bond markets are absolutely massive. They're super, super liquid. They're super competitive. So to your point, Dan, if something like that is widely available to the point where I can literally just go on the fact sheet of the ETF and find out what the duration is, like it's right in your face. There's probably not an arbitrage opportunity available there. Yeah. And if you want to talk about market efficiencies, I don't think there's any more efficient market than liquid bonds, right? Because their pricing is mathematical. I mean, obviously it is affected by market sentiment and things like this, but duration and these sorts of things are just math.

1:11:11If interest rates do go up, the bond will be adjusted by a known amount, right? So there's much less room, certainly for a retail investor, there's zero room to exploit mispricings of bonds, right? Totally. I think another really interesting point just on the Bank of Canada idea and should we be responding to what we think they're going to do. Fama has said possibly in our podcast, but he's for sure said elsewhere, including in a paper that the Fed, not the Bank of Canada, but that the Fed follows the market, doesn't lead the market. When the Fed's changing rates, it's doing so in response to the market, it's not telling the market what to do.

1:11:46I think that further strengthens the point that you're making there. It's very tempting. I always say to people, If you know something is coming, and we don't know rate cuts are coming, but I think we can have a fairly high level of confidence about that. And if that's the case, there's no opportunity to exploit it. I wish it was that simple, but it's very similar to stocks when people will talk about sort of good company equals good stock. This company is likely to make a lot of money in the future. Therefore, it's a good stock to buy. I wish it was that simple, but alas, it is not. And so I think the take home here is stop trying to adjust your portfolio based on forecasts because the market has already incorporated all of these into the prices.

1:12:32And so your job then as an investor, when you're building a fixed income portfolio is match it to your risk tolerance and to your time horizon and longer term bonds versus shorter term bonds. Those are important decisions. If you're holding your bonds in an RRSP, you don't plan to make withdrawals for 10 or more years. include a fund that has longer term bonds, right? If you are retired and you're drawing down your portfolio now, and you would prefer less volatility in your fixed income, hold shorter term bonds. Just don't try to switch back and forth because that's where you run into trouble and build a portfolio that makes sense for you and your situation, not for what you think the market conditions are going to be.

1:13:15Timeless advice. Great stuff, Dan. Awesome. Great question from your reader or client. yeah uh all right should we go into the after show let's go to the after show

1:13:29we're here we're here how many people listen to the after show now i think cameron said there's four people now i thought we were up to six we're up to six incredible 50 increase five years of doing this we were up to six after show listeners incredible work much we talk about i want to give a shout out to the financial planning association of canada So this is a relatively new organization founded in, I want to say 2020, 2021, somewhere in that neighborhood. And it's really kind of a grassroots organization still at this point, but we're gaining a lot of steam. And this is what I would consider to be the home for anybody who takes this career path seriously as a profession.

1:14:03And when I say career path, I mean financial planning. It was founded by some incredible planners. The caliber of members that are involved in this is just blows my mind. in my opinion some of the smartest people in financial planning and tax planning and estate planning and retirement planning in this country are not only members but they are active members of fpac the financial planning association of canada there's a forum that you get access to as a member and that forum alone is absolutely priceless like if you have a financial planning question as a practitioner and it's a real safe space and you can just go on that forum and say like hey how does this work and you will get answers from the brightest people in this country within minutes.

1:14:41It's an unbelievable resource. And had something like this existed when I was just getting started, it would have accelerated my learning, my knowledge, and likely my career path by at least a decade. So I want to give a shout out to anybody who's listening, who's a Canadian financial planner, who wants to join FPAC. Absolutely without consideration. Reach out to me if you want to talk about it. If you want to talk more and learn more about it, Ben, I think you're a member as well. The other cool thing is they just launched a student tier for membership and$30 annually for any student of either a financial planning designation, like if you're studying to be a QAFP or certified financial planner or any sort of financial planning designation, or if you're a student of an undergraduate program that is finance adjacent, right?

1:15:22So business or economics or finance. Basically, if you're looking at a career in finance and you want to be part of this, it's 30 bucks a year. Absolutely a no brainer to join. I agree. So important for planners to have that kind of community. I mean, we have a tight group here at PWL, but we're, a lot of us kind of go in with the same mindset, I think, and we can learn a lot from each other, but sometimes it's very useful to just have a completely different perspective from people who work with a different client base too, right? Like that's one of the things that you definitely notice when you train as a financial planner, A lot of it is based, I think, on let's call them sort of middle income, modest net worth people.

1:16:07And we don't necessarily get a lot of opportunity to work with people in those situations. If we have a minimum portfolio size, for example, how often are we dealing with people who are in a lot of debt or struggling with cashflow? Like most of them would not be clients if they were in that situation. And so working with people who have different set of experiences, you get a much different philosophy and sometimes specific strategies that maybe we wouldn't have encountered as often. Yeah, it's a great point. I think in this industry, it's very easy to become siloed and it's a very top-down industry.

1:16:44So like there's advisors, I know they've been doing this for 30 years. They can't kind of break out of the molds that they were trained in from their mentors. So to your point, Dan, being exposed to different ways of doing things, people with different experiences in the industry is huge. And I will say your network in this industry is really, really important. And developing a network of other like-minded professionals gives you not only more opportunities, but also a bit of a kind of a social safety net in some respects, right? Like just myself from posting online for the past few years, and Dan, I'm sure this is the same and Ben, you're the same.

1:17:15We're relatively well known, I think, at least in Canada in the financial planning space. And so that creates a lot of safety for us, right? Like if Cameron said, you know what, I'm firing all three of you guys tomorrow, we're probably going to be okay. Like we know enough people. We have, I think the respect of our colleagues and we could probably find something to occupy our time. And so networking with other professionals and gaining a bit of a reputation through groups like the Financial Planning Association of Canada is really, really important. And the earlier in your career you do that, the better.

1:17:42So if you're a student for 30 bucks a year, again, no brainer. Yep. I agree with all that. Super interesting discussion. I did want to mention that we're looking to add more people to the Rational Reminder community moderation team. It's a volunteer role. All the moderators that are in there now are people who are just like immersed in the community. I mean, like people who literally read every post, which is nuts, but they do it. And I think the moderation in the community is one of the things that makes it special and moderation from people who are really engaged in the community. But as the community grows and there's more and more activity, the moderation team has voiced that they need help.

1:18:15If you're in the Rational Reminder community and enjoying it in there, there's a post I think that Angelica pinned that you can fill out a form. If anyone's interested, we would appreciate the help. There is a meetup in Ottawa, September 25th at 5 p.m. at Beyond the Pale, a Rational Reminder meetup. I expect a bunch of listeners to come. Last time, we had, I don't know, 30 people that came out, I think, and it was just great. It's always interesting to meet people in real life that listen to the podcast and are part of that community mark you'll be there i will be there mustache and full effect i'm not shaving until after that meetup that's my target mustache release date yeah so hopefully we get to see lots of people out there i thought you were gonna say hopefully we get to see your mustache and i was like yeah you will well it sounds like we will you just kind of guarantee the choice it's coming okay i don't have anything else for the after show anything else from you guys I don't think so.

1:19:08All right. Let's wrap it up then. Great episode. Thanks for listening.