This week, I will take a look at buying versus renting. And why long term, it almost always makes sense to buy your own home.
Is it better to buy or rent?
With house prices moving quickly, and rental growth relatively subdued, it may be tempting to consider renting, or otherwise remain as a renter. While renting has its purposes, long term, buying is almost always the better option.
Why is buying better than renting?
Long term, it always makes sense to own your own home, particularly at retirement when a fully owned home puts you in a vastly different financial situation than a renter. Paying market rents once you are on a retirement income, versus having a fully paid off home, is a major expense differential.
Renting can be cheaper than buying in the short term but over time, this does not generally hold true. Effectively when you buy, you are locking in repayments at the price you paid. Obviously, this will fluctuate according to interest rate changes but ideally over time you pay down your mortgage reducing this sensitivity. If you rent, then you will always need to pay market rent.
A good example is if you bought in Newtown in Sydney 10 years ago. Your repayments on that loan would have likely remained constant, or more than likely reduced over time given interest rates have declined. Rents however have increased a lot and hence you would be paying a lot more. If you bought, you would have also benefited from capital growth in an asset you own.
Leverage is another reason. Even small increases in the value of your home can lead to a much bigger financial gain than putting a deposit into alternative investments. As a very simple example, consider someone (let’s call him John) with $100,000 saved. John is considering whether to use his savings to get a mortgage and buy a $1 million home or put his deposit into a share portfolio instead. Both shares and housing are seeing the exact same capital growth of five per cent per annum. If John doesn’t buy a home, he will pay rent instead of paying off a mortgage.
After just one year, you already have a vastly different scenario. If John bought the house, the value of his home has increased by $50,000. Alternatively, the value of his shares would have increased by $5000, 90 per cent less than the capital gain of the house. Obviously there are other costs that need to be considered such as stamp duty, potential cost differences between rent and mortgage repayments etc but over time, you can see why the idea of getting on to the “property ladder” is a reality.
Certainty of tenure is also problematic with renting. The owner of a rental property may decide to sell, which could mean that you also have to move if an owner occupier buys the property. This can be particularly challenging in tight rental markets where it may be hard to find another suitable property.
Does renting ever make sense?
Renting does have its purposes. When you are young, getting a deposit together takes time, particularly given how expensive housing has become in Australia over a prolonged period. Renting makes sense until a deposit can be saved.
In some very expensive suburbs, saving for a deposit in a reasonable time frame can be out of reach and if you want to live in these suburbs, renting may be the only available option. If you move a lot for work, renting makes sense as it allows you to move in or out of a home more quickly than if you had to sell or buy a property.
Changing personal circumstances can also make renting a better option. For example, people that are recently separated may need to rent until financial situations are sorted out. People on very low incomes may also not be able to get to a situation where they can get a deposit together. More generally, getting a deposit together is a big hurdle for many buyers.
Practically, renting can be a good experience. Frequently the landlord pays for maintenance and also organises repairs. Something you would need to do yourself if you owned a home. More recently, rents have declined in many suburbs, particularly for apartments in high development areas and this would have put you in a pretty good negotiating position.
What should people be considering when they’re weighing up whether to buy or rent?
Ultimately it does depend on your personal situation as to whether you buy or rent. Buying makes sense long term but can be difficult given how expensive housing is. If you want to live in a very expensive suburb, buying may be permanently out of reach, with renting the only option.
If you do want to buy, consider the following:
· If you want to or need to live in an expensive suburb or city, consider rentvesting. That is, buying somewhere cheaper but renting where you want to live.
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