Renting vs Owning

4 Minute Read | Author: Roger Balch

We all need a roof over our head but, in a time of sky-high housing prices, is it better to rent one or to buy it? This question has exercised the minds of some of the nation’s top economists. And their considered answer, after much head scratching is: it depends.

One of the most insightful recent studies on the rent or buy dilemma was by economists at the Reserve Bank of Australia.

Two economists at the RBA – Ryan Fox who’s a renter and Peter Tulip who’s a homeowner – took a close look at the financial figures involved in 2014. To be as fair as possible they included all the ancillary costs involved in buying a property, e.g. lawyers’ fees, maintenance, water rates and strata levies.

Their conclusion was: “If real house prices grow at their historical average pace, then owning a home is about as expensive as renting. If prices grow more slowly – as some forecasters predict – the framework used in this paper suggests that the average home buyer would be financially better off renting.”

Following their logic, if house prices in the future were to rise by more than the historic average of 2.4 per cent a year above inflation since 1955 (i.e. by about 5 per cent) you’d be better off buying.

Another paper, by young Melbourne economists Dominic Crowley and Shuyun May Li, comes down more definitively in favour of buying: “Our results suggest that buying was more favourable than renting over much of the past three decades in all Australian capital cities.”

But, as with Fox and Tulip, Crowley and Li are also looking in the rearview mirror and basing their conclusions on past property values. Who knows what property prices will do over the coming decades?

 

Five reasons why it’s better to rent


No need to scrape together a deposit

Saving up a deposit as a down payment on a pricey property will have a significant impact on most people’s lifestyle at a time in their life when it’s natural to want to explore the world, meet friends old and new in the latest bars and restaurants, and stock up on the latest fashions while they can wear them without looking or feeling ridiculous.


More flexibility

Employers are increasingly seeking an agile workforce that can relocate to where the opportunities are, either domestically or overseas. It’s obviously much easier to do this as a renter than a home owner.

And if you are thinking of buying eventually, renting lets you get a feel for an area before you make the major commitment of buying a chunk of real estate there.


Greater choice in where you live

Decades of rising property prices mean that the number of areas where first-home buyers can reach out and grab the bottom-most rung of the housing ladder have dwindled. It may be more realistic to rent in an area that appeals to you.

Freedom from annoying bills

No need to pay stamp duty, lawyers’ fees, repairs, council charges, water bills, strata levies etc. While not being liable for repairs gives you more time and money to enjoy life, it’s also much cheaper to move as you’re not up for major expenses like stamp duty, lawyers’ fees and estate agent commissions.

Wider range of investment options

Crowley and Li say, “If a prospective buyer decided to rent rather than buy, she could invest the difference in ongoing costs into other assets”.

Taking advantage of this opportunity will make it easier to stick to one of the golden rules of investing: diversify the assets in which you invest (to reduce the chances of them all falling in value at the same time). And you won’t need to sell your home should you wish to realise a capital gain.

 

Five reasons why it’s better to buy

Certainty and stability

Providing you keep up your mortgage payments, your home is yours for as long as you want to live there. And not having to worry about where you’re going to live means that you’re free to focus on other important things in life, such as your career and raising a family.

Enforced capital appreciation

Not only is the monthly mortgage payment a great way to force yourself to regularly invest a sizeable sum – and end up with a substantial capital asset once the housing loan is discharged – your returns are also leveraged (i.e. you borrowed money to buy an appreciating asset that would otherwise have been unable to afford).

For example, say you put down $200,000 to buy a $1,000,000 home (i.e. a 20 per cent deposit) and borrow the rest. If that home appreciates by 10 per cent, the home is now worth $1,100,000. But the return on your investment is not just 10 per cent, because you are getting leveraged appreciation. You put only $200,000 into the home, so the $100,000 return is actually a 50 per cent return on your $200,000 investment (i.e., $100,000 is 50 per cent of $200,000).

Make your home more homely

Owning your own home means you have complete freedom to decorate it exactly as you want. And even undertake major renovations (subject to council approval).

Extra ways to save money

Home owners have the opportunity to make their home as energy efficient as possible, thereby helping the environment while also saving on ever increasing energy prices.

Predictable outgoings

Although mortgage rates fluctuate over time, increases are usually telegraphed well ahead of time and are unlikely to be rapacious. And of course, if certainty over payments is paramount, mortgage rates can be locked in.