With many people put off by rising property prices, the RBA has recently added fuel to the fire by releasing a discussion paper suggesting that Australians could be better off renting as opposed to buying.
The Rent vs Buy argument is not a new one. In fact it’s one that has been on the table for a long time in the case of prospective buyers who are weighing up their options as to which scenario will see them better off financially.
However, the RBA report has been widely criticised by a multitude of respected economic analysts and property researchers who disagree with the sentiment entirely, purporting issues with the underlying formulas and assumptions used to arrive at their pro-rent conclusion.
The most common problem highlighted is that the report is based only on economic factors, largely ignoring the other fundamental reasons why people purchase property. Considerations including:
- long-term growth
- security; and
As well as a whole host of other social and psychological factors that come into play when we consider how and why we purchase property.
The report compares the cost of renting a home with the cost of owning a similar property, based on an average historical house price growth of 2.4 percent since 1955. So the RBA has established that - based on current prices, rents, interest rates and costs - the average household is better off renting.
In 1955, things were pretty different. Bearing in mind things like population growth and the maturing of our economy on an international scale, the housing supply shortage and expected ongoing levels of demand will see property prices remain at a steady level. As property guru, John McGrath states, “Even at a growth rate of 2.4 per cent per year long-term, that’s $24,000 in new equity on a $1 million house every single year. Would you rather own an asset that is appreciating by $24,000 every year or would you rather have a few extra dollars in your pocket every week of your working life as a permanent renter?”
The report has also been deemed to be largely ignorant of the rising costs of renting, especially with low vacancy rates in some major city locations. You also need to consider the overall costs of renting over a long period of time including money for bonds and moving costs.
There is always the added option of becoming a rentvestor, buying an investment property and renting somewhere to live or living with your parents. While this may deliver long-term growth, forced savings and tax depreciation benefits, you will still need to consider the ramifications of capital gains tax when you come to sell the property. You can read more about rentvesting here.
A few experts have urged us to exercise caution when reading the RBA report, surmising that perhaps it is an attempt to talk down the market and halt today’s record level of investment in real estate.
As with all property purchases, it should be a long-term, strategic decision based on your unique set of circumstances. Renting may be a viable solution for you for a short-term period, but you must consider what you are sacrificing in the interim as well as how you are using the ‘saved’ money i.e. Investing in shares. If you’re not investing this ‘saved’ money elsewhere, you may not be better off financially in the long run. Think big picture and consider the risk vs. return of your options.
So weigh it up and think carefully about the best option for your long-term financial wealth creation and security. As we’ve said, there are many factors to consider and some which will be unique to you, but it’s worth noting that according to the ABS, over 70% of Australians own their home (either outright or with a mortgage). This simply wouldn’t be the case if renting were the better option. Food for thought.
If you’d like to discuss your situation with one of our brokers, please give us a call or email us to make an obligation free appointment.
* All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.