Where the Good Folk Rent

There is a financial and social utopia on this planet. A place where families safely live in beautiful scenic surroundings, earn good wages, avoid debt, have a tendency to rent, and save gobs of money. Renting isn't shamed: no frowns from your parents or looks of pity from granite-obsessed friends.

Three picture-perfect, highly productive, socially progressive, generally well-governed, and (obviously) Moose friendly countries: Germany, Austria, and Switzerland.

The Housing Situation

In the these German-centric countries, homeownership is not a big deal at all. Less than 55% of dwellings in these countries are owner-occupied. They have, by far, the lowest ownership rates in Europe and the developed world. This compares to a 69% owner-occupied housing rate in Canada.

As Canadians we believe the only people who rent are those unfortunates who can't afford to buy. So you might think the reason why so many GAS folks rent is because these poor suckers can't afford homeownership and all its promised benefits. You couldn't be more wrong.

In Canada, our house price-to-income ratio is 43% higher than our long term average. In Germany and Switzerland houses are historically cheap, sitting just below the long term average. In Austria houses are 24% higher than the average—about half the exuberance we're seeing in Canada.

This is despite extremely low mortgage rates and great household incomes in all these countries. In Germany especially, the average person is often financially much better off buying a house than renting. Despite this, and maybe due to good rental stock and cultural debt aversion, a huge number of Germans still choose to rent.

The Savings Situation

I firmly believe that increased housing prices relative to income and declining savings rates have a direct relationship. In Canada our savings rate has plummeted from the high teens in the 1980s (when it made financial sense buy a house) to less than 5% for the past two decades. That's right, since the late 1990s we're saving just 1-5% of our household income. This translates to terrible financial security.

If the average Canadian household saves 5% of their net income for 40 years they would end up with around $500,000 in retirement accounts. At the 20x Rule, they can draw off $25,000 a year. Enough for a steady diet of mac & cheese dinners with just enough left over for picnic vacations to the pagoda in your own backyard. But at least the house might be paid off...

However, in these Germanic countries the 20-year average savings rates are nicely over 10%. In Austria, where housing prices are relatively the highest, the savings rates are the lowest. Not surprisingly, as prices climbed here over the past few years, household savings have fallen to a low not seen in decades.

Financial Security

It is reasonable to believe the average German or Austrian will be twice as well off in retirement as the typical Canadian. Elderly, rent-loving Swiss folk who on average save 15%+ of their disposable income during their lifetimes, will retire three times better off than old, home-owning Canadians.

Overall financial security matters. It matters a lot more than just homeownership. As we talked about in Part 6 of this series, even having a paid off home costs money. For a regular house, count on maintenance and upkeep alone costing you $400 - $600 per month. Add in property taxes and insurance and you could realistically be spending close to $1,000 a month keeping a "paid-off" house in good shape.

If your paid off house is worth $620,000 (the current average for a detached home in Canada), you could sell it and generate $2,500 a month at the 20x Rule. Moose Math doesn't lie. You are much better off renting and pulling in $31,000 year after year than owning and maintaining an overpriced home in a bloated market.

I think the Germanic folks figured out real security a long time ago! Fat retirement accounts, nice rentals, and less stress is the way to go.

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2 Replies to “Where the Good Folk Rent”

  1. Enjoying your blog. Thx for it. A question regarding this paragraph.

    If your paid off house is worth $620,000 (the current average for a detached home in Canada), you could sell it and generate $2,500 a month at the 20x Rule. Moose Math doesn’t lie. You are much better off renting and pulling in $31,000 year after year than owning and maintaining an overpriced home in a bloated market.

    You are saying to take the 620k, invest and pay rent with that?
    *****But you still have to pay tax on that income you make on the 620k investment, non? So it’s a fair bit less.

    1. Mr. Rich Moose says:

      Sure, you will always pay taxes on investment income. But these taxes are generally at very low rates. Canadian dividends are taxed at negative rates up to $45,000 in many provinces. Capital gains are only half-included for tax purposes resulting in an effective tax rate of 12% or less on the first $45,000 in many provinces.
      In this example, let’s say you invest it tax-smart in a standard investment account (not TFSA/RRSP). If you achieve a 6% return on investments, your $620,000 will generate $37,000 a year. Of that, about $12,500 will be taxed each year as dividends (approx. 2% yield). The rest can be deferred for a capital gains tax bill down the road. However, when withdrawals are made and taxes are triggered, the blended tax rate will often be 10-15%. This low tax rate hardly makes a large difference in the end result.
      The problem with home ownership is most people conveniently ignore the costs of ownership beyond a mortgage. This includes property tax, insurance, and maintenance/depreciation. Things you don’t need to factor in when renting.
      Often times these costs of ownership can run close to $1,000 a month. If you have to spend nearly $1,000 a month on housing costs when you own, the investment return on your tied up equity can easily pay the additional cost to rent with money left over.
      It’s not a big problem where house prices are reasonable relative to rent, but that’s not the case in many populated areas in Canada. If you live in Calgary, Toronto area, southern BC, Ottawa, and maybe even Montreal, you are almost certainly better off investing & renting than owning a house at today’s prices.

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