Why make this choice? And Why should you not choose the alternative?
At a certain point in a young adult’s life, they come to point where they have a sufficient amount of savings, and they must decide what their next step in life will be, should they rent or buy a home? In the past, the decision was not about if one should rent or buy, but if one should buy a condo or house. However, times have changed, and in today’s economy it is in the individual’s best interest to rent a home. Renting offers the tenant many benefits and freedom that a house just cannot. When an individual chooses to rent they have the freedom to choose where they live once their lease is done. Whereas, with buying many people get tied down for years. Additionally, renting allows for no maintenance and repair costs, property tax, sizeable down payment and a decrease utility costs. Whereas, if one was to purchase a home, they would have to face all of the previously mentioned costs and the profit that is made once the home is sold is would be very small once all outside factors are accounted for.
How does this choice affect the economy? Directly? Indirectly? And Where Does it Affect the Economy?
According to CNBC in the last year, the monthly cost to own and operate a home has increased by 14% in the past year. If more people chose to rent homes instead of purchasing, this would have a tremendous impact on the housing market. Many building firms are now building single family homes that are made specifically for renting instead of buying. It also decreases the demand for new houses. If fewer people are willing to take on the burden of a down payment for a home it, in turn decreases the value of that home. In 2016, 88 000 homes were put up for rent after not being able to sell in the UK. In the GTA, the average property price fell from $920 000 to $785 000 in little over a year, and overall transactions decreased by 40% in the GTA and 30% in the GVA. This dramatically affects the psyche of owners as many owners use the equity built up in their homes to take out loans. Since ? of Canadian households own their homes and the home accounts for 36% of their overall wealth, uncertainty starts to creep in and owners become more cautious with their spending. This, in turn slows down the economy. According to Statistics Canada, the average Canadian household has $1.67 in debt for every $1 in disposable income and a good majority of that debt is mortgaged if values of homes decrease due to the demand in the housing market this could potentially throw Canada into a recession. In the past the housing market has contributed a significant amount to Canada’s GDP; as a result, the decrease in the number of transactions will have a direct hit on Canada’s GDP. Additionally, families that can afford to purchase homes may feel uncomfortable living in traditional suburban neighbourhoods where homes are mostly rented. This will lead to many families looking at more of an urban setting to live. Overall, if more people choose to rent instead of buying this will directly impact the housing market and the national GDP, It will also indirectly impact the wealth of Canadian households and their spending habits.
What are the opportunity costs? And What fallacies are involved?
When considering renting vs buying a home there are opportunity costs for both. For starters, if an individual chooses to rent a home, they will forfeit their right to the ownership of the land that they live on. In the future, this can have an impact on the individual’s overall wealth as many people view owning a home as an investment that will make them money in the future. However, if an individual chooses to purchase a home instead they will forfeit a significant amount of their savings at once and go into debt for many years. The money the individual is spending on the down payment can be used in other avenues of investment such as stocks and mutual funds. According to the Canadian Real Estate Association, the average annual gain for property owners between 2004 and 2013 was 5.4% and for stocks, during the period it was almost 8%. Additionally, if one is to rent a home they surrender the right to let themselves get creative to make the home theirs. Because the landlord has control of what significant changes can and cannot occur within the home. On the contrary, if one chooses to purchase the home they can add their personal touch, but, whatever issues that arise will have to be paid for by them since they are the owners of the property. Lastly, if one chooses to purchase a home they lose out on the extra money they would have each month since, they would have to pay for utilities, property tax and various other costs. Whereas, for renters, it is all paid for by the landlord. Besides opportunity costs, the one major fallacy that is ingrained into North American society in regards to buying or renting a home is, the Fallacy of Single Causation. Many people believe that buying a home is the safest investment and a sure-fire route to a healthy retirement. However, throughout history, this has been proven to be false and in such a risky housing market like Toronto, it is far from the truth. One can look at the real estate crash in the 2000s, people would often use the equity of their homes to take lines of credit for other investments but, when the housing prices dropped they could not afford to refinance the home, as a result, they ended up losing their homes. Additionally, after accounting for all the expenses of a home, inflation and closing cost the actual profit that is being made is insignificant to what the owners believe they are making.
Who else is affected? (Locally, Nationally, Internationally)
The decisions that people make within a free market society do not only have direct implications for the individual, it also affects the rest of society. If an individual chooses to rent a home, the monthly cost for housing should be considerably cheaper. The extra disposable income one has because of this helps the local economy. Since the chances are, the extra money will be spent on local goods and services. However, the increase in the demand for renters has a massive impact on the national and local economy. The demand that landlords face when many people want to rent has led to many greedy landlords raising the rent. For example, in BC the demand for rental properties is through the roof, as a result, many landlords are increasing the monthly cost every 12 months and the government is not doing the tenants any favours as the percent they are allowed increase by is only getting higher.
The chart above shows the maximum increase in rent each year
In the following year, tenants will be allowed to raise the rent by 4.5% every 12 months. This increase will take more money out of the pockets of the tenants that can be spent in the local economy and since people have less disposable income they do not have the same access to resources to further their overall wealth. This, in turn, hurts the local and national economy. The high demand for housing in Canada has a significant impact on the international economy. Foreign nations see the demand in certain parts of Canada and take advantage of this through foreign investment. However, it is starting to become very difficult to do so. In 2016, Chinese investment in Canadian real estate was valued at $3.05 billion but, decreased to $1.47 billion in 2017. Foreign investment in Canadian real estate has a dramatic impact on the local, national and international economy. Chinese investment into Canadian real estate increases rents and drives up prices for homes and as a result, the housing market becomes very volatile.
Where do you see these choices being influenced? (Link economic theorist)
The concept of rent was initially expressed by David Ricardo and his, theory of rent. Ricardo defined rent as,”that percentage of the production of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil”. Demand of land either increased due to higher bids or decreased due to lower bids. Ricardo originally used this theory in agriculture industry.
A graph showing the relationship between the supply, demand and rent per acre
The supply of land always stays constant since one cannot create more land. However, the demand varies and has a downward slope because, as the rent per acre decreases the demand increases. Where the supply and demand intersect is where equilibrium is achieved. The point of intersection would be the price that would have to be paid for the demand to equal the supply. If rent increases past E demand would be less and if it decreases under E they would demand more land. Ricardo applied this theory as early as 1817 to the agriculture industry.