Buy vs rent guide
Inflation and buy vs rent: what actually changes
People often say inflation helps homeowners because a mortgage payment stays fixed while everything else rises. There is something to that, but in a buy vs rent comparison inflation works through several separate channels, and most of them show up in other inputs. This guide separates them so you can test what inflation really changes.
Three channels, not one
Inflation reaches a buy vs rent comparison in three places. Keeping them apart avoids double counting.
The first is the direct cost of running a household: insurance, utilities and similar bills rise with prices. The second is the value of a dollar later, which matters when you compare what you will have in ten years with what you have today. The third and largest is indirect: inflation tends to travel with rent growth, home price growth, investment returns and interest rates, but not in a fixed ratio.
- Direct: insurance, utilities, special assessments and similar running costs grow with inflation.
- Measurement: inflation shrinks the purchasing power of future net worth (see real vs nominal dollars).
- Indirect: higher inflation usually shows up in the other assumptions, so moving inflation without moving them can be misleading.
What the inflation input does on its own
In the calculator, the inflation input grows the costs that are tied to prices, and it is used to restate results in today's dollars. It does not secretly change rent growth, home price growth or investment returns, because those are separate inputs.
That makes it easy to test inflation in isolation. The base case is a $600,000 home with 20% down at 4.5%, a 25-year amortization, 3.5% yearly appreciation, $2,300 rent growing 3% a year, a 5.5% investment return and a 10-year stay in Alberta. Only inflation changes below. These are planning inputs, not current market data.
| Inflation | Buyer minus renter (nominal) | Buyer minus renter (today's dollars) |
|---|---|---|
| 1% | +$43,420 | +$39,308 |
| 2% | +$41,686 | +$34,197 |
| 3% | +$39,861 | +$29,660 |
| 4% | +$37,942 | +$25,632 |
Why bundling matters more
If you believe inflation will be higher than the Bank of Canada's 2% target, you probably also believe that rents, home prices and investment yields will be higher in nominal terms. A fair test moves them together.
Here are two internally consistent worlds on the same base case. In the lower-inflation world: 1% inflation, 2% rent growth, 2.5% appreciation and a 4.5% return. In the higher-inflation world: 3% inflation, 4% rent growth, 4.5% appreciation and a 6.5% return. The mortgage rate is left at 4.5% in both, which is a deliberate simplification explained below.
In the lower-inflation world the buyer finishes behind by $11,789. In the higher-inflation world the buyer finishes ahead by $100,628, which is $74,877 in today's dollars. The gap between worlds is far larger than any single-input test of inflation, because every channel moved in the same direction.
The fixed-payment argument, tested honestly
The idea that inflation erodes a fixed mortgage payment is correct as far as it goes. With 2% inflation the engine's year-10 dollar is worth about 18% less than a year-0 dollar (home value of $846,359 nominal equals $694,309 in today's dollars). A payment of $2,657 a month is therefore a smaller real burden later.
But the benefit only lasts through the term. At renewal the mortgage rate resets, and lenders price in expected inflation, so higher inflation often arrives together with higher mortgage rates. A comparison that raises inflation, rent growth and appreciation while keeping the mortgage rate at 4.5% for ten years is flattering the buyer. The risk is covered in mortgage renewal risk and interest rates and buy vs rent.
Test the combined effect by raising the renewal rate as well. A high-inflation story that also includes a high renewal rate can erase much of the buyer's advantage.
How to use inflation in your own comparison
A reasonable approach is to treat inflation as a label for a scenario rather than as a lever:
- Pick a low, middle and high inflation story.
- For each, choose rent growth, home price growth, investment return and a renewal rate that fit together.
- Run the comparison for each story and note whether the winner changes.
- Read the result in today's dollars, so you are not impressed by large nominal numbers.
What this does not capture
Inflation can affect your income too. If your salary rises with prices, a fixed payment gets easier to carry in both nominal and real terms; if it does not, the opposite is true. The comparison above holds household budgets constant, so it does not capture that.
It also does not capture changes in policy. Property tax assessments, rent rules and tax thresholds respond to price levels in ways that differ by province and change over time. Use the figures as a structured way to think, then see scenario analysis for building complete stories.
Questions people ask
Does inflation favour buying or renting?
Alone, it changes the result only slightly. What matters is how rent growth, home prices, investment returns and mortgage rates move with it, so test them together.
What inflation rate should I assume?
The Bank of Canada targets 2% as the midpoint of a 1% to 3% control range, which makes 2% a common planning anchor. Test lower and higher cases as scenarios, not forecasts.
Is a fixed mortgage payment protected from inflation?
Only during the term. At renewal the rate resets, so a longer view should include a range of renewal rates.
Should I compare results in nominal or real dollars?
Both are useful. Nominal is the number you would see on a statement; real adjusts for the lower purchasing power of future dollars.
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.