Bryan P. Furman

604-789-7126
 

After completing my Diploma of Urban Land Economics at UBC this article was published in a local real estate guide.  This is just a brief snapshot of considerations when owning a home vs. renting.

 

Are you as financially prepared to own a home as you think?

 

Compared to residential tenancies, the ownership of a home is more expensive beyond that of its basic financial coverage, i.e. mortgage. Other additional financial costs which affect the true value of owning a home will include initial legal fees, transaction costs, opportunity costs to seek out the property, annual fees to the municipality for property taxation, water and sewer rates, GVRD taxations for transportation and parks and fees for property improvements that require building permits. As well, there are significant costs of finances and labour to maintain the land, including fencing, shrubbery, lawns, decks and patios, snow clearing, outbuildings/storage, walkways, driveways, utilities access and pest managment.  Building improvements on the property will require routine and regular maintenance with associated financial and/or labour costs for deferred maintenance, repairs, and replacement of functionally obsolescent or worn features. Compared to a rental home, this time and cost is borne by the owner alone, rather than being deferred to the Landlord. There are also costs associated with negative externalities, such as industrial odors, and long-term disagreeable neighbours, which may or may not be outweighed by positive externalities for children to play in a safe, private yard area.

 

There are financial, time and opportunity costs associated with the disposal or sale of real property, as well as for its acquisition. There are opportunity costs for not having investments of owner’s time, talent, finances and travel distances used for other purposes or goods rather than utility of property ownership. These comments can not explain all of the costs of owning a home, but nor can it explain all of the benefits or inherent utility to owning a home on land in fee simple. Pride of ownership, privacy and security, personal creativity and control, as well as residual value from increasing property values as the city expands with population growth and demand for housing increases over time, are desireable.

 

Property rights are not entrenched in the Charter of Rights and Freedoms in Canada, but legal protections are established to ensure right of use, control and enjoyment of land to benefit the owner.

 

When a home is purchased at today’s prices, it represents the present cost of a future value to that home, including potential rental income. Once the mortgage is paid out after its amortization period, these user costs have been gradually reduced to a point far less than the benefits or utility of ownership. Benefits now outweigh costs. As a property’s mortgage value decreases, the marginal rate of substitution also shifts to give the owner choice to either satisfy the household’s desire for other goods, or to increase land holdings. 

 

Initial costs of ownership are high but if the household budget constraint remains constant or increases, financing costs will eventually decrease to create more utility for other goods. As household income increases, this will shift the budget line up and outward, providing a different level of utility. That is, you can buy other things when you have less to pay on your home.This cannot happen with land rental, as these usage costs will continually rise with public rental demand. The Landlord will inevitably pass a portion of his increasing costs of ownership, or desire for market income, to the tenant in the form or rental increases. With rent, the value of all improvements and future benefits will accrue to the Landlord.

 

Bryan

2013/11/12

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Categories: Property Economics