To rent or to buy?:
The decision is one of the thorniest a family can make

Is home ownership a good thing? The question seems outrageous. Even debating it can suggest that the questioner hasn’t the right understanding of what life is all about.

But ownership tends to mean subsidy, so owning is about tax subsidies. In the U.S., home ownership is subsidized by mortgage interest deductibility. There is no such subsidy in Canada, though we have provincial subsidies for repairs, insulation and furnace upgrades. The federal Home Buyer’s Plan allows you to take up to $25,000 from your RRSP for use in home purchase, often to make a down payment, on condition the money is repaid over 15 years starting the second year after withdrawal.

The problem in building home ownership on the commercial, tax-deductible-loan model is that as an owners’ equity in their property falls, their willingness to pack up and move out in hard times rises. U.S. foreclosures are highest in states such as Florida and Nevada, which had the highest ratios of subprime mortgages, that is, loans given to people who could not afford them. Some were also negative amortization loans. In these cases, people can "own" a house even though their mortgages allow them to pay less than interest actually generated by their debts. Their total debt then increases. Confronted by rising interest charges and falling equity, a sensible owner will often bolt. No one should be surprised that subprime negative-amortization loans turned out to be disasters.

Foreclosure and abandonment are a spreading disaster. Whole streets, neighbourhoods and even condo high rises wind up abandoned by their overly-leveraged owner/debtors. It would be less likely to happen if it were possible to sell a piece of a condo or a few rooms of a house to pay off some debt. It isn’t, and owner-occupied housing is thus what one may call a sticky asset. Ownership is an all or nothing deal that makes or breaks family finances.

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Fear resides in what is owed. Most people buy their houses via mortgages. They put up a quarter of the price for conventional mortgages or as little as 5 to 10 per cent for high-ratio mortgages. They are then 75 to 90 per cent short on their largest asset. In the stock market, 50 per cent is regarded as a limit for the typical margin loan. The only hedge is that the home provides a place to live while the owner slaves to pay off the debt.

It’s an unbalanced contest. If things go well, the owner ends his short position and gets a house clear of debt. If things go badly, the owner runs away and the lender winds up with a lousy asset

Homeowners can be passive beneficiaries or victims of neighbourhood change for better or worse. If a neighbourhood improves, the house price tends to rise. This is a gain in book value in contrast to the situation of a renter who, if the neighbourhood is gentrified, may find the landlord demanding higher rents. Over a period of years, benevolent neighbourhood change adds equity and makes a mortgage an even better investment. If the neighbourhood changes for the worse, the process becomes perverse.

For Sale signs can spring up as owners try to sell before property prices drop even further. Then existing owners, especially those with high-ratio mortgages, may feel they have little incentive to stay. In condos, a rising rate of abandonment tosses more costs for common areas and general maintenance on a declining number of owners. Those rising costs push out even more owners. The condo corporations can then go bankrupt. The risk is quite real.

On balance, is it worthwhile owning a home? For the individual owner, I’d have to say yes. Housing is about the only potentially appreciating capital asset you can buy with 5% down. Note that car loans, even with zero interest, involve depreciating assets. The homeowner takes on a huge risk and duties of asset maintenance, neighbourhood change for better or worse, and can be chased by creditors for failure to maintain mortgage payments.

Yet in the present mortgage market, in which interest rates are at historically low levels, ownership is incredibly cheap. The rent or own comparison, in which one tries to balance the cost of paying a landlord vs. the risk of paying a bank, tilts heavily in favour of paying a lender over a landlord. An owner who can transfer a low-interest-rate mortgage to his own buyer can add to the value of the home. For now, at least, ownership has never looked better, even if it is a risky adventure into leveraged finance.