Buy vs rent guide
Buy vs rent in a falling housing market
Most buy vs rent comparisons assume steady yearly price growth, which hides the scenario people actually worry about: buying and then watching prices fall. This guide runs that stress test with a clearly labelled example, to show how big the damage can be and what changes the outcome.
The stress test we are running
The calculator accepts a different appreciation figure for each year. For this page the home price path is -8%, -6%, 0%, +3%, then +4% a year for the remaining six years. It is a made-up path chosen to illustrate a sharp early drop followed by a recovery. It is not a forecast, a prediction or a description of any market.
Everything else is the usual illustrative base case: a $600,000 home with 20% down at 4.5%, a 25-year amortization, $2,300 monthly rent growing 3% a year, a 5.5% investment return, 2% inflation and a stay of up to 10 years in Alberta. These are planning inputs, not market data.
What happens to value and equity
After the first year the home is worth $552,000, and after the second year $518,880. The buyer put $120,000 down. By the end of year 2 the equity (value minus the remaining mortgage balance) is $60,760, about half of the down payment, even after two years of payments.
The table shows the buyer minus renter net worth if the household had to leave after each year, with selling costs deducted. For comparison, the last column shows the same stay length under steady 3.5% growth.
| Years held | Home value | Equity | Buyer minus renter (falling path) | Buyer minus renter (steady 3.5%) |
|---|---|---|---|---|
| 1 | $552,000 | $82,697 | -$99,207 | -$33,105 |
| 2 | $518,880 | $60,760 | -$143,938 | -$26,452 |
| 3 | $518,880 | $72,452 | -$156,392 | -$19,514 |
| 5 | $555,824 | $134,402 | -$141,288 | -$4 |
| 7 | $601,180 | $207,089 | -$128,687 | +$11,268 |
| 10 | $676,245 | $327,998 | -$94,348 | +$41,686 |
Paper loss versus realised loss
A fall in value hurts differently depending on whether you sell. If you do not need to sell, a lower market value is a paper loss: the mortgage balance and the payments are unchanged, and you still live in the home. If you must sell during the trough, for a job change or a life event, the loss becomes real and the selling costs (commission, legal fees and any mortgage penalty) are added on top.
This is why the stay length matters so much in a downturn. The same drop is manageable for a household that can wait and costly for one that cannot. See time horizon and renting vs buying flexibility.
Nor does the renter win automatically. The renter's side depends on investments, which can also fall. In this example the renter's investments grow at a steady 5.5%, which is itself an assumption. A downturn that hits both housing and investments would change the picture.
A smaller down payment makes it worse
Leverage works in both directions. With a five-year stay on the same falling path, the buyer minus renter result is -$141,288 with 20% down, -$159,506 with 10% down and -$165,690 with 5% down. The smaller down payment carries a bigger loan, more interest and a mortgage default insurance premium, so there is less cushion.
Equity can also turn negative if a high-ratio buyer faces a fall larger than their down payment, which is a particular concern in a quick drop. See leverage in buy vs rent and CMHC insurance and buy vs rent for how the insured structure works.
Probability when the average is below zero
The calculator's Monte Carlo view adds random yearly variation around the stated path. With the same falling path as the average and assumed yearly volatility of 6 points for home values and 12 points for investments, buying finishes ahead in about 26% of 1,000 simulated paths, compared with about 61% on the steady base case.
That means a poor start is not a certainty of a poor finish, but the odds shift a lot. The number is a feature of the assumptions, including the volatility, so read it as a way to compare scenarios, not as a prediction.
A different path for comparison
A different path (-10%, -5%, 0%, +2%, then +3% a year) has a deeper first drop and a slower recovery than the first one. Its 10-year result is -$140,045, compared with -$94,348 for the first path. The shape of the recovery matters as much as the size of the drop.
If you test your own scenarios, vary three things: the depth of the drop, the length of the flat period and the speed of the recovery. Then compare against the break-even for your own horizon with the break-even tool and the home appreciation tool.
What to check if you are worried
A downturn test is a prompt to examine your own resilience, not a reason to panic or a prediction:
- How long can you realistically stay? A longer commitment makes a dip easier to ride out.
- How large is your cash buffer for repairs, payments and a bad renewal?
- Is your job or income tied to the local market?
- Would a lower purchase price or a larger down payment improve your cushion?
- Could you rent out part of the home, as in buy vs rent with a rental suite?
Questions people ask
Does a falling market mean I should rent?
Not necessarily. It means the outcome depends heavily on how long you can stay and how deep and long the fall is. Test your own horizon and a cautious price path.
Is the -8%, -6% path a prediction?
No. It is an invented stress path used to illustrate how a quick early drop affects the result. It is not a forecast of any market.
If I do not sell, is the loss real?
It is a paper loss while you stay, but it matters if you later sell, refinance or need to renew a mortgage on a lower value.
Why does a smaller down payment hurt more?
It means a larger loan, more interest and a default insurance premium, with less equity cushion if prices fall.
Official references
Educational information, not financial, tax, legal or mortgage advice. Rules and rates change; confirm current details with an official source or a qualified professional.