Rent vs. Buy
By Rich Harvey, CEO and Founder www.propertybuyer.com.au
The vexing question of whether to rent or buy has been around for decades and will continue to perplex would-be buyers of real estate. With interest rates now at historical lows, mortgage repayments may be lower than renting in many suburbs around Australia. RP Data has recently identified 388 suburbs where it is currently cheaper to buy than rent.
Money isn’t the only factor contributing to a person’s decision as whether to rent or buy. Buying a home can brings sense of security and stability. Paying off your own mortgage will always be more beneficial than paying off someone else’s. It helps build your wealth position. As the property appreciates in value you build equity and are on track to having a secure financial future. Property ownership allows you the freedom do what you want with the property. Whether it be hanging a picture up or adding a swimming pool or redecorating the living room.
But perhaps you’re not in a financial position to buy or you don’t have a deposit to get into the market. Maybe your job will take you interstate or overseas. There are plenty of good reasons to rent too.
Let’s look at some the key questions to guide your thinking.
What portion of people rent vs. buy?
- Australia wide - 30% rent vs. 35% with a mortgage vs. 32% who own their properties outright
- Sydney - 32% rent vs. 35% with a mortgage vs. 30% who own their properties outright
- Melbourne - 27% rent vs. 37% with a mortgage vs. 33% who own their properties outright
At what point is buying better than renting?
Buying would be considered the better option if the mortgage repayment is similar to the weekly rent payable. With falling interest rates and ever increasing rents, buying is looking to be the more appealing option.
This gap between rent and mortgage repayments is closing due to the reduced cost of borrowing. When a property is considered to be neutrally geared or better, then the option would be to buy as opposed to rent. Any person in the predicament should however take note that there is more to buying then just meeting repayments. Other costs such as the initial deposit, loan establishment fees, property maintenance, strata/council costs must all be factored in, only then can a true judgement be made as to whether it is more beneficial to buy rather than rent.
RP Data has completed an analysis last year across all suburbs and found that there were around 238 suburbs nationally where it was cheaper to buy than rent.
How “affordable” are property prices now compared to a decade ago?
Housing affordability is at its highest level since 2009. Housing now looks to now be more affordable compared to a decade ago. In 2003 the median house price in Sydney was $460,000. The median annual wage during that time was $42,811 meaning that the median house cost 10.7 times the median wage. By December 2012 the median house price had grown to $656,415, with the median wage $69,990, which would indicate that currently the median house costs 9.3 times the median wage.
Although this is an improvement, Sydney’ residential housing market is still considered as one of the most un-affordable places to buy, ranking 3rd on a recent survey completed by Demographia International Housing Affordability Survey. Melbourne is considered slightly more affordable with a ranking of 6th in the same survey.
What are the key advantages of renting?
- You don’t have any maintenance worries (that’s the landlords problem)
- You can live in a more “up-market” area where you may not be able to afford to buy
- You can move homes more frequently
- The weekly rent is usually much cheaper than mortgage repayments
- Buying and selling costs are expensive, but when you rent, you just have to pay removal fees not thousands in stamp duty and legal fees
What are the key advantages of buying?
- Stability – you are in control of whether you move or not. The psychological security of owning (paying off) your own home and achieving your “great Australian dream”.
- Wealth building – by paying off a regular mortgage with both principal and interest, you are building equity and increasing your net worth. At the end of your working life, you will have nil equity from renting but stacks of equity from repaying a home loan! The home loan does have a finite life 15 to 25 years whereas you could keep renting forever.
- Rents keep going up with inflation. Sometimes rental shortages mean it’s hard to get into a certain area.
- You are not subject to regular inspections, the threat of eviction or rental increases.
- You generally can’t renovate a rental property, but you can renovate and redecorate your own home to your heart’s desire.
Renting can make a lot of financial sense if you decide to commit to a budget and then use your surplus income to invest in a property. That way you are “in the market” and benefiting from capital growth from your investment property – and you could consider the rent you are paying as the equivalent interest you would be paying on your own home.
Buying outright on the other hand gives you the benefits outlined above. There is no right or wrong answer here – it will depend on your individual circumstances and financial position. I encourage you to search the market and get independent advice that’s right for your situation. If you are looking to buy my team of buyers agents would be delighted to help you find and negotiate the ideal property for your budget. Please call us on 1300 655 615 to discuss your specific requirements. Or send us an email email@example.com with your request today.