To Buy Or To Rent. That Is The Question.

The concept of housing affordability generally refers to the relationship between what you spend on housing and your household income. 

The guideline is between 28% to 36%. 

This means that if you’re spending more than 36% of your income on housing, then you’re spending too much and you need to look at making a change. 

The simplest benchmark measure of housing affordability is the median house price-to-income ratio. 

News Flash!

If you look up the median house price-to-income ratios and the median rent-to-income ratios for Toronto, Vancouver, Montreal and Calgary, you’ll see that both ratios are significantly higher for Vancouver and Toronto. 

But regardless, you’ve still got to live somewhere and an important life decision for most people is whether to rent or to buy. 

The price-to-rent ratio

One element of your decision is the price-to-rent ratio where you divide the approximate price of real estate you’re considering by the annual rent you’d pay otherwise. 

When the ratio is high, it means prices are high compared to rent. 

This means it’s more beneficial to rent than own. Most real estate investment firms suggest that the tipping point for this ratio is 20. 

For example, if the condos you’re considering cost around $400,000 and you’re currently paying $2000 per month in rent, your ratio is about 17 (400,000/24,000), so that factor indicates you would be wise to buy a condo rather than rent. 

A detailed analysis of the rent versus own decision would require other information such as other housing expenses, interest rates, the amount of down payment you have, and the time horizon of your real estate investment.

Let’s say you’ve concluded that you’re going to rent rather than own real estate, but you still want exposure to the real estate market as an investment – how do you do this? 

Real estate investment trusts (REITs)

One way is to invest in real estate investment trusts (REITs), which are companies that buy and hold real estate properties for rental income. 

There are hundreds of REITs traded on stock exchanges, some focusing on specific property types such as office buildings, industrial complexes, retail centres, multi-family apartments and so forth, and you can buy units of REITs like you would for any other stock.

To learn a bit more about real estate, download and read my Free Guide to Personal Finance.