06/15/2013 02:19 EDT | Updated 08/14/2013 05:12 EDT

Rent Or Buy? Don't Count On The Banks To Tell You The Truth

Canada's big banks really, really want you to believe everything is fine in the housing market.

The term "soft landing" appears in bank economists' notes so often these days it's beginning to seem like a yogic mantra. "Omm... house prices are stabilizing... omm... mortgage payments are still affordable..."

Of course the banks have a vested interest in making sure they continue to issue mortgages -- it's a major source of income for most of them. So maybe it's no surprise that they would talk up the market.

But the trend is reaching ridiculous proportions, as evidenced by this report from BMO ostensibly advising Canadians on whether they should buy or rent. Well guess what? They think you should buy.

In a report titled "Canadian home prices are not highly overvalued," BMO chief economist Robert Kavcic declares, "We can confidently dispel the notion that Canadian home prices are egregiously overvalued versus rents, but they're not cheap either."

"Not cheap" is an understatement. The Economist estimated last month that house prices in Canada are overpriced by 73 per cent, compared to rental prices, making it one of the most overvalued housing markets in the developed world.

Weeks later, the OECD weighed in with similar numbers, saying that house prices are overvalued by 64 per cent, when compared to renting.

(Story continues below slideshow)

Wildest, Most Expensive 'Cottages' For Sale In Canada

The average rent for a two-bedroom apartment in Toronto is $1,271. These two-bed units are, on average, about 915 square feet in size.

That's very close to the average size of a condo in Toronto, about 920 square feet (though recent builds have been smaller). The average price for one of these average condos is $372,768.

Assuming a down payment of 10 per cent and a rock-bottom interest rate of 2.99 per cent, that average condo gives you a monthly payment of about $1,580. Then add $540 in condo fees (based on the average per-square-foot number), and your monthly housing costs come to $2,122 per month.

Compare that to rent of $1,271 -- a difference of $851 per month.

Considering that in the early years of a mortgage you're mostly paying interest and not accumulating much equity, you would be better off renting and saving that $851 per month -- you will accumulate wealth faster, assuming you manage to save that money.

It's not just Toronto. House prices and rental rates have diverged massively in every major Canadian city, from Halifax to Vancouver.

Strangely, BMO's Kavcic seems to agree at one point, declaring that "renting a Toronto condo is a wise alternative to buying for those with a shorter time horizon."

Wow. That's about as close as you'll ever get to a bank economist saying that now is not a good time to buy a house.

Granted, he addresses only Toronto, and qualifies his statement by saying it applies to "those with a shorter time horizon." But I still credit Kavcic with being able to slip in that much straightforwardness into his report, given the pressure bank economists must feel to keep a positive view of the housing market.

But then it's back to toeing the party line, as Kavcic confusingly declares that "Toronto appears only slightly overvalued compared to historical norms, but not at all at prevailing three per cent mortgage rates."

Make of that what you will, but this contradiction in sentiment highlights just how hard it's become to put a positive spin on a housing market that looks increasingly out of whack with every passing month.

Save for throwaway lines in bank economists' reports, no bank or mortgage broker will tell you to rent. It's just not in their best interest.

Instead, these guys are playing up the "affordability" angle. Thanks to rock-bottom interest rates, they say, affordability is about the same as it has been over the past decade, so the market is stable.

True. Right up until interest rates have to rise. Then all bets are off. That $1,580 mortgage payment for an average Toronto condo becomes $1,947.22 if rates rise two percentage points.

That could easily price a large number of people out of the market, and put house prices on a downward path.

It's precisely because interest rates have to rise eventually that the Bank of Canada keeps warning that the housing market is at risk of a downturn. And it's warning that this would have a knock-on effect on the entire economy, because of the degree that Canada has come to rely on the real estate market for jobs and bank profits.

The banks don't want to see this happen, but their only solution is to keep convincing even more people to buy houses -- which, in turn, could make a future housing correction that much worse.

Of course, this balance in favour of renting may not last. If rental rates go up (as they are doing in some parts of the country), or if house prices come down (as they are doing in some parts of the country), the rental advantage could disappear, and the old adage that it's wiser to buy will once again come into play.

But don't trust the banks to tell you when. No matter how far into the stratosphere the market housing market goes, on Bay Street it will always be a good time to buy.