To buy or to rent?
That question that has vexed young Australians for decades here in Australia, with most preferring to buy and cash in on capital gains if they can afford to. But is buying really the better option? Research papers from The University of Melbourne and the Reserve Bank of Australia found that renting can be just as rewarding financially.
Young singles, keen travellers and the career-focused in particular should consider renting because of the superior flexibility it allows.
Unlike buying, if you don’t like your neighbours, want to get up and travel or have to relocate for work all you’ll need to do is give a months notice and go.
This benefit shouldn’t be understated, as renting can be the best way to live the lifestyle you want to while you’re younger.
+ Free up your savings and diversify
When you rent, you won’t have to pay a massive deposit, or huge interest on a home loan so it’s likely that you’ll have plenty savings left over. It’s what you do with these savings that counts.
ASX’s 2016 Long Term Investment Report suggests that residential property has been the best performing investment class over the last year, returning on average 8 per cent. But others are close behind, require far less capital, and may also present less risk.
For example, global bonds returned 7.3 per cent, and conservative managed funds returned 5.6 per cent during the same period. Take the funds you have left over after rent goes out, get professional advice and you may find renting is just as financially productive as buying. What’s more you won’t have all your eggs in one basket and if the housing market busts you could be insulated.
– Less security
Renting comes with more flexibility but that also means less security. Depending on the laws of the state or territory you live in your landlord can usually evict you with a month’s notice, leaving you scrambling to find another place to call home.
For millennials looking to start a family this could be a massive downside so buying may prove the smarter option.
+ Appreciation in house prices
House prices in Australia have increased by 7.25 per cent on average every year for the last 30 years, according to Reserve Bank data. That’s a brilliant number, which doesn’t even include the added returns you’ll receive if you rent the property out (which could be an extra 3 to 7 per cent.).
If you’re in Sydney or Melbourne, you may enjoy even greater returns. However, if you’re in Perth, or Darwin where CoreLogic RP Data shows house prices have fallen over the last 12 months your investment could even decrease in value.
Before you buy pay close attention to trends in the area and seek the help of a local real estate agent you trust to make sure you’re making the right decision.
+ Forced savings
When you take out a home loan, the bank effectively owns a large part of your property. You’ll have monthly repayments to make that will slowly increase the equity you hold in your property, and therefore your wealth.
If you get behind on these repayments, the bank may eventually repossess your home and sell it to recoup their losses, leaving you out in the cold. This worst-case scenario is an effective incentive to keep you putting money into paying off your mortgage – one which just doesn’t exist when you’re renting.
This may force you to become more disciplined with your money, helping you to increase your wealth quicker than if you were renting.
When you purchase a home it’s yours. Short of mortgage non-payment or some sort of disaster, you can’t be evicted by any one or anything. This will give you peace of mind knowing that you will always have a place to call home, helping you to feel secure and safe.
This might not rank as a high priority for some, but for young families, newlyweds and the risk averse it’s a huge draw card.
– Risk and expenses
Property isn’t cheap in Australia. The average house price here is around $670,000, according to the Australia Bureau of Statistics – meaning that you may have to save $67,000 or more for a deposit.
Then there’s costs like stamp duty, maintenance, mortgage interest, moving, lender’s mortgage insurance, inspections, strata fees, council and water rates and much more. These costs will vary according to your location and several other factors, however, Your Mortgage’s analysis suggests extra costs alone could set you back almost $60,000.
What’s more, property isn’t a surefire investment. There’s always a chance that yours could decrease in value, eroding your equity and decreasing your wealth.
The question ‘should I buy or rent’ is such a tough one because there is no right answer. What’s best will differ according to what you want and need out of property and what your preferences are.
No need to despair though! If you’re struggling to make a decision there are countless professionals you can turn to for advice from mortgage brokers to real estate agents and financial advisors.
Get the right advice, take time to consider the pros and cons of each option and choose whatever helps you best achieve your goals for the best possible results.