Should you rent or buy a house?
The Reserve Bank of Australia has recently released a report where they have done an analysis of average property growths and rental yields since 1955. The report is called “Is Housing Overvalued?” You can find it here (http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf) or you can search the name using Google and it should appear. Some of the main points to come out of the report are the following:
Property prices have risen in Australia by an average of 2.4% above inflation since 1955.
The average rental yield for a property over this time period was 4.2%.
The main conclusion is that house prices would need to rise by around 2.9% above inflation for buying a home to be the better financial option.
This is an interesting and thought provoking conclusion but we feel that some important considerations have been neglected that may affect the outcome. Average prices – the report looked at property prices from all over the country. Some cities have growth levels above the average such as Sydney and Melbourne, and properties in rural non-mining areas traditionally have lower growth rates. Forced saving – at least in the early years of buying a home, the mortgage payments will be higher than the rent you would have to pay. In a perfect world you would invest the difference in a portfolio of investments that would ideally achieve investment returns higher than property returns. In reality, very few people have this financial discipline, and most people will fritter away the difference on other lifestyle expenses. Improving the value – you can improve the value of your home by more than the cost by painting and making superficial changes. Stress of renting – the nature of renting means that your landlord can decide that they want to sell the property or move into the property at any time. This will usually mean moving house a lot more often than someone who buys their home, and this can mean greater stress due to not having a sense of permanency. Limited rental options – you can only rent the type of property that is available on the market. Many people buy houses that aren’t exactly as they like and then they renovate to make their desired changes. With a rented house you don’t have this freedom and you are stuck with the property in the state it comes in. So what are our thoughts? We feel that if you would buy a similar property to what you would rent then in the long run you will be better off by actually buying a home. You will have a forced saving plan when you make the mortgage payments, as many people retire with their home being their only significant asset outside of superannuation. You will also benefit from the capital growth and there is a certain satisfaction from owning your own home. Some situations where we feel that renting would be better however, are the following:
If you purchased an investment property and you rented. This would be beneficial as you could claim the tax benefits of negative gearing and you won’t miss out on the capital growth of the property market.
If you don’t plan to be too long in the one place. The buying and selling costs associated with properties are expensive and if you move around a lot these can add up to a significant amount.
If you would rent a smaller home than if you bought your own home. This is especially true for younger people who may live in shared accommodation and pay a relatively low rent, but if they bought a home they may share with fewer people or live alone.
If property prices are overvalued. This will ofter be difficult to know, but in some situations such as in the USA around 2005-2006 many people purchased homes only to find the values plummet in the following years.
If you are facing this conundrum of whether to buy or rent and would like to discuss this further with a team of experienced financial planners, please contact us for a FREE no obligation consolation.