To Rent or Buy Part One (The Pros of Buying)
To Rent or Buy Part One (The Pros of Buying)
The saying goes that rent money is dead money but with Australian Housing prices going through the roof many people are finding the dream of being able to afford their own home is slipping further and further away and for many of us the only option right now is to rent. Many speculate which of the two buying or renting is best most people tend to assume that buying always comes out on top. Remember that this myth is often perpetuated by plenty of people in the real estate industry, whilst in reality, it is often renters that come out on top. This five-part blog will attempt to provide some clarity on both sides of the argument and let you make up your own minds.
The Reserve Bank of Australia (RBA) conducted studies recently that since 1955, there hasn’t been much difference between renting or buying, interesting isn’t it. We are constantly being bombarded about houses breaking the price record for the suburb and another record is set seemingly week after week with auction clearance rates but the findings of the Reserve Ban indicate that both buyers and renters over the last sixty years have pretty much ended up the same. That of course relied on renters being equally disciplined about saving, and investing those savings outside of cash deposits, though in many cases this doesn’t happen.
As with any decision relating to money, there are costs and benefits associated with both buying and renting. The five parts of this blog will hopefully help you weigh up the important pros and cons to consider when deciding whether to rent or buy, and work out which is likely to give the best results.
Pros of buying
The appreciation (rise) in house prices over time. How crazy has this current property boom been with the average Sydney property rising 26% just from the beginning 2013 with the other capital cities not far behind, though we have seen a decline in Perth recently. That is of course wonderful news for anyone that own their home. You also need to remember that whilst housing prices have risen over the long-term, they are also periods of weak growth. Current interest rates at record lows for sustained periods have created a rush for people looking to purchase however, sooner or later interest rates will continue to rise and with Australians holding one of the highest levels of debt in the world you can’t help but wonder how many homeowners may buckle under the extra payments per month, thereby creating glut of extra housing stock.
Buying does however provide you the benefit of leverage. When you borrow money to buy a property, the bank lends a percentage of the purchase price to you. In Australia, banks often lend a high percentage of the total value which means the use of borrowed money to invest in the property, or the leverage, can be quite high.
For instance, it’s typical to contribute a 20% deposit and the bank mortgage covers the remaining 80%, or an 80% Loan to Value Ratio (LVR). Let’s say you buy a property for $1,000,000 with a deposit of $200,000 and borrow the remaining $800,000. If you sell the property a year later for $1100,000, the property itself has risen 10% in value but your return on investment is 50% since you have made $100,000 profit on a $200,000 investment (i.e. original deposit). That’s 5x leverage because you earned a 5x 10% return. It should be noted that after transaction costs, interest and principal repayments, the actual return is likely to be lower. Also, the opposite would be true if the house price fell from $1000,000 to $900,000. Your profit would be -50% or worse after costs are accounted for.
There are some benefits of buying that can’t be measured, such as the security of ownership means never having to move should your landlord and not you decide to kick you out, plus the benefit of being able to renovate your property at any time and to your own style.