Renting v buying – it’s a debate brought into sharp focus by the surge in property prices.
Stats from Mozo reveal the average loan amount for new owner occupiers in June this year is approximately $515,000. This figured has jumped sharply from around $444,000 from July last year.
The median house price in Sydney is a staggering $1,410,133 and Melbourne’s median price is not far behind at either, at $1,022,927, with Canberra also over a million. Sydney’s figure jumped 8.2% in three months before June and the median house price is up an unbelievable 24% since last year.
This is leaving Australian’s unsure of whether they might ever be able to own the home they want to and even more unsure of how to make their first moves into the property market.
Someone in the midst of this classic dilemma is Maya Marcus, a 27 year old renter in Sydney, currently working full time in education technology.
Ms Marcus found herself in an awkward position of being too old to live at home and having a stable income, but not enough savings to buy a property in an area desirable to her.
“I definitely spent a lot of time looking into buying a property but it’s quite overwhelming and exhausting to do while dealing with lockdown, work and everything.”
“I realise I’m fortunate enough to be able to even look at buying a house, but I still don’t have enough saved to put down a deposit in the areas of Sydney I want to live in.”
Ms Marcus also prefers to rent for the time being as she doesn’t know what the future holds.
“Before COVID arrived I was considering the idea of living overseas for a while and my partner and I are yet to decide if we want to have a family or not, so buying property doesn’t quite make sense at the moment.”
Beyond this, Ms Marcus also enjoys living near her friends and work and finds it difficult to put herself through the stress of researching and negotiating a home loan while working full time.
“There’s so much research to be done and different options of what to buy and where and with who that it can be a bit overwhelming while also dealing with the stress and hours of full time work plus volunteering and honouring my other commitments.”
“I’d like to consider other options like perhaps buying a cheaper investment property to get into the market, but I don’t think I have the time required to make a well-informed enough decision.”
Dominic Beattie, the editor of Savings.com.au has seen plenty of users on his website go through this process.
“I believe there’s so many pros and cons to both scenarios you can’t definitively say one is better than the other”
“For example I’ve been happily renting through my 20s but having hit my savings targets I’ve reached the point where I’m keen on the idea of settling into life as a home owner”
“The older you get the debate probably swings more in favour of buying, because you probably don’t want to pay rent in retirement, plus you want to give yourself more time to pay off the mortgage before retirement”
Mr Beattie makes the point that what’s right for you will fundamentally come down to your financial position and what sort of lifestyle you are looking for.
“If you’re a traveller or someone who moves between cities a lot, renting can be much more beneficial, it can be quite flexible as its easy to move out and move in, whereas each time you’re buying a property, you’re paying for agents, you’re paying for stamp duty, the costs of moving can really start to add up.”
“Whereas if you’re someone who’s pretty keen on settling into a set location and perhaps want to start a family, have some kids and have the freedom to do whatever you want to the house, then it’s much easier when you’re a homeowner. The lifestyle is a big thing to consider.”
The dead money debate
A phrase that you’ll often hear in the property buying space is that ‘rent money is dead money’. This is on the basis that your money is not going towards paying off a mortgage or investment but rather simply getting you by.
However, according to Mr Beattie it’s not that simple.
“You hear people say renting is like throwing away money or paying off someone else’s mortgage, but you could argue the interest charged on your home loan is also dead money. As well as other costs of home ownership like stamp duty, council rates, body corporate fees, home insurance, repairs, water bills and so on.”
“That’s why generally you often find your monthly housing expenses as a home owner are often much higher than when you’re a renter.”
Essentially, even if you choose to buy rather than rent, not every cent you spend is going straight to pay off your mortgage, there are a range of other costs that could also easily be considered “dead money.”
The other important thing to consider is that with home owners having higher expenses than renters, this gives renters a surplus of extra cash which can be put into other short and long term investments that can also potentially yield high returns.
“There’s the opportunity cost to consider, for example with more money going into the home you’ll have less to invest into potentially high returning assets such as shares.”
“You do hear some renters end up wealthier than home owners over the long term, there was an RBA study about 6 or 7 years that actually found that some renters get ahead of owners over the long term. However, that’s dependent on a huge range of factors and not all of those can be controlled.”
“For example one factor you can control is how much you’re saving and investing so renters would need to ensure they’re diligent at investing their spare cash in high growth assets rather than splurging it.”
“Then other renters might see their healthy bank balance and just get tempted to go out and buy something really nice for themselves.”
However, Mr Beattie warns that even with these potential advantages, in the current climate renters could still be at a disadvantage, dependent on individual and external circumstances.
“Even with this strategy of investing and saving, renters can still fall behind owners in a market where house prices are consistently booming and interest rates remain low as they are now. Meanwhile investments such as shares can have wildly varying returns as we’ve seen recently, but then at the same time, some properties perform better than others so it can be hard to make generalisations about which strategy is better.”
Another way into the market?
Reinvesting refers to an investment and home-owning strategy where you rent a property that’s appropriate for your lifestyle, while owning an investment property that’s within your budget.
For example, if you live in a metropolitan area but can’t afford to buy property there, you could buy a regional property as an investment while continuing to rent in the city.
Tom Godfrey, a consumer advocate for Mozo, a leading personal finance platform has seen reinvesting prove successful for a number of people.
“Reinvesting is worth considering. It allows you to jump onto the housing ladder and have the potential benefit of any capital gain you might get over time. But it’s not without risk and it’s important to make sure the numbers stack up for you.”
“For example, with an event like COVID, your rental property could remain vacant and you’d still have to make mortgage repayments without any incoming rent to offset that cost so you might find yourself under significant financial pressure.”
However, Mr Godfrey warns of biting off more than you chew in order to force your way into the property market.
“Don’t over commit yourself, make sure you can afford to meet repayments. It’s highly likely that in the future interest rates will rise, so you need make sure that given your current level of income, if interest rates do rise and you’re forced to make higher monthly repayments, you’ll be okay to do that.”
Mr Godfrey believes it comes down to separating emotion from your decisions and being patient where you need to be.
“I think the critical thing when you’re trying to make these decisions is decide what level of risk you want to enter into. With property it’s very easy to feel FOMO, there is very much a desire for a lot of people to want to jump on that property ladder but it’s important to remember that property is just an investment and your decision needs to be based on your financial situation and not emotion.”
If you’re really in the thick of considering what’s best for you, then you’ll really want to know what to pick to come out on top. Here’s a deep dive into some of the numbers of renting v buying a property.
Let’s say you’ve borrowed a bit over the average for your home loan and you’ve borrowed $600,000. Mozo lists the average variable home loan rate for owner occupiers as 3.18% but let’s say you’ve done a little bit better for yourself and got yourself 3% for a 30 year mortgage.
Using the government’s Money Smart home loan calculator this leaves you with $2588 repayments per month for 30 years, totalling $931,767, meaning $331, 767 of this is interest.
This equates to $921.58 of interest per month.
However, this is just the beginning of the costs. A stamp duty calculator says that stamp duty on a property worth $700,000 equates to $10,697.73.
According to Canstar Blue the average quarterly water bill in Australia is $90.76 a month, conveyancing can cost between $1200 to $3000, so let’s split the difference and say $2100, Finder calculates average home insurance as $137 per month.
We can gently assume $1000 a year/$83.33 a month for local council rates and then get to calculating.
Another important thing to note in calculating is that the average tenure of an Australian home is closer to 10 years, but for simplicities sake, lets say you live there for the full 30 years of your mortgage.
This comes out to total monthly costs of $2904.49
Monthly mortgage repayments = $2588
Monthly water per month: $90.76
Home insurance per month: $137
Council rates per month: $83.33
Conveyancing split into monthly costs: $5.4
Total monthly costs: $2904.49
The average rental yield in Australia is 4.1%, which means that on average a property owner will earn 4.1% of their properties value in rent throughout the year. Using this percentage, rent for a $700,000 property would come out to $28,700 per year or $2391.67 per month.
A quick thing to note is that you could be splitting this cost with another renter, however, you could of course also be splitting your home loan with a partner. Though, when renting you also potentially have the chance to split rent among three to five (or even more) people.
This is further complicated by the fact that people are likely to rent a property that’s more valuable than what they could afford.
Before we complicate things too much, lets rather use the median rent for Melbourne, which is $440 a week or $1906.66 a month for a house.
30 years of renting at that price comes out to $686397.6.
This leaves you with $245,369.4 less spent than the homeowner over the same period, which is a hefty sum of extra cash. However, the catch is of course that they own a house and you don’t, not to mention that house could’ve risen hugely in value over that time.
However, there’s one final calculation to make.
The renter’s extra cash of $245,639 equates to $682.33 per month over the course of the 30 years. What if you took 60% of this each week and invested it, with a modest initial deposit of $1000?
This would mean investing $409.40 a month. Let’s say you invested it into an ETF with an average return of 8% p.a, you’re suddenly shaking things up.
According to the Money Smart compound interest calculator Investing $409.40 a month at 8% p.a for 30 years with a $1000 initial deposit earns you a massive $620,493 in total savings, with $472,253 of that coming from earned interest.
Suddenly, 30 years have gone by but you have a cool $620,493, as well as any other savings you might have, to get you by.
These numbers don’t come close to settling any sort of debate and as any financial adviser would likely say, it’ll come down to your own personal circumstances on what’s right for you.
However, the key message is, if you’re priced out of the market or don’t have a lifestyle suited for home ownership and are scared of falling behind financially, taking what you save by renting rather than having a mortgage and putting it into smart and reliable investments can take you a long way.