It’s an age-old question that’s become more relevant as house prices across the east coast of Australia continue to rise: is buying a house better than renting?
What makes more economic sense? Does buying a house make you financially better off?
The Benefits of Renting
The idea that renting is throwing money away is a bit of a misconception. It isn’t a waste of funds if you’re getting somewhere to live. The most obvious advantage to renting is flexibility; as a tenant you can freely relocate from home to home and area to area once your lease expires.
When you pay a mortgage, you hope to eventually own your house outright, but there’s always a danger it won’t be worth what you’ve spent on it when you come to sell.
What’s more, if your savings are tied up in a mortgage, there’s an “opportunity cost”. That’s the opportunity to put your cash in a high-interest savings account or shares instead.
The Disadvantages of Renting
Tenants have very little say in how long they occupy a rental property.
Ultimately this is up to the landlord, who can ask you to move once your lease expires and can also terminate your lease early for a number of reasons. When you rent, your property manager and landlord can come into your property at any time, as long as they provide sufficient notice and have good reason, such as regular inspections which can happen as frequently as every two or three months.
You also cannot make any changes to the property to improve your living space or even put pictures up on the wall without the landlord’s permission.
The Benefits of Buying A House
There is, of course, a reason owning a home is such an attractive prospect. Bricks and mortar is usually a solid investment. In most cases, eventually your home will appreciate more than you’ve paid in mortgage, interest, taxes, and maintenance, so you’ll be free from payments in your retirement and may start making a profit.
If you choose wisely in terms of property and location, that could happen sooner rather than later. Plus, you can offset some costs with tax benefits or first-home buyer incentives.
When you buy a home however, you have a certain sense of stability. You choose how long you wish to live there, as long as you make your repayments, and can make improvements to your living space and potentially add value while doing so; creating a wonderful thing called equity (the value of your home minus the amount you owe the banks = your equity).
The Long Term Benefits of Buying A House
Something you may not have considered is what you’ll do in retirement if you’re a long-term renter.
“One of the most important issues is that on the income support system, you can’t afford to be a renter when you retire,” Terry Burke, professor of housing studies from the AHURI Research Centre at Swinburne University of Technology, said. “If you’re on a single pension of $23,000 and rent for a one-bedroom home is $18,000, you’re left with $5000-$8000 to live on.
“Even for a couple getting $35,000, rent for a two-bedroom place would be $25,000, leaving you $10-15,000 to live on. That’s well below the poverty line.
“You could be in real trouble if you haven’t decided to buy.”
This is true even if you’ve invested your extra funds. If you can afford a mortgage, Prof Burke believes it’s typically a better place to put your money than in savings.
For example, a home in an outer suburb of Melbourne or Sydney might cost $500,000. If you rent, you might pay $450 a week. If you buy, your mortgage could be $580.
“If you saved that $130 and invested it in a compound interest account for ten years, you’d have $85,000. But if you paid $580 with three per cent capital gains, which is quite low, you’d have about $90,000.”
Australia’s central bank, the institution that has done most to fuel the spike in Sydney house prices by keeping interest rates low, made an effort to help quantify some of these unknowns in a widely publicised research paper published in 2014.
The paper, by Reserve Bank economists Ryan Fox (a renter) and Peter Tulip (a homeowner), laid out a formula to help prospective homeowners assess the real costs of buying a home.
Fox and Tulip devised estimates of those elements of buying a property that are often easy to ignore – repairs, taxes, water bills, strata and lawyers’ fees. They set these against the cost of renting a comparable property.
In their framework, once the extra costs were added together, the key factor determining if it was financially worthwhile to buy or rent was how much you could expect your property to appreciate in price. If you expected your property to rise more than 2.4 per cent a year above inflation – so, about 5 per cent a year all up – you would probably be better off buying, on Fox and Tulip’s numbers.
By coincidence, that 2.4 per cent above inflation has also been the long-term average for property price rises across the country since 1955.
Buying A House? A Third Option
There is a third option – the renting investor. In this scenario, you can choose to get into the property market by continuing to live in rental accommodation and purchasing an investment property. This is most commonly a trend followed by young people.
They do this for a number of reasons:
– Home ownership in the lifestyle suburbs they desire is too expensive, so they rent in beachside or inner suburbs where there’s a café culture, restaurants, nightlife, entertainment, recreational facilities and easy access to work and instead buy an investment property where they can afford to.
– They’re living at home rent free with their parents, enabling them to save and get a foot in the door of the real estate market.
– Their lifestyles are still transient, they’re still planning to travel or they’re not sure where they’ll settle, so it doesn’t make sense to plant their roots in property yet.
– They don’t see the burden of a large, non tax-deductible mortgage on their home as the best use of their money.
What is the choice you’ve decided to make? Renting, buying a home, or becoming a renting investor? At Darling Downs Conveyancing, we can help you to buy or sell your property. Contact us today!