Renting versus buying: The great debate
The buy or rent argument is a long-time favourite in the financial press and social conversations in Australia.
Blogger: Tim Boyle, executive chairman, Finalytics Financial
It seems everyone has a view. Unfortunately, these types of debates can be quite superficial and only cover a subset of the considerations. Given the importance of the topic, it naturally deserves a lot more attention.
I firmly believe that given the structure of the property market, population demographics, and our tax laws, owning your own property is generally the best financial and lifestyle choice.
However, just as strongly, it is not the right answer for everybody all the time and it often makes sense for people to rent according to their current circumstances.
Weighing up the decision
It is important to split the consideration into two groups of criteria:
- Financial considerations – these are relatively easy to assess, though often are more wide ranging than many people consider, and they do require future assumptions to be made. We can classify them into short-term and long-term impacts as the nature of them differs.
- Non-financial considerations – these are more difficult to assess – they are more personal and qualitative. However, starting with a comprehensive and complete list enables you to ensure all implications are fully considered and prioritised.
Financial considerations
Obviously, financial factors are a big part of the rent or buy decision. Although we all think we consider them pretty well, in actual fact we don’t.
The first thing is to split them into short-term and long-term implications. What you inevitably find is that the shorter the time frame you consider, renting is more attractive, but as you lengthen the time horizon, the balance tilts towards owning.
For a home buyer, short-term costs include the one-off purchase and then the annual ongoing costs:
One-off costs:
- Stamp duty: up to 0.5 per cent of the property value (varies by state)
- Legal/other costs: such as building inspections, etc.
- Moving in expenses: not to be sneezed at
On-going costs:
- Mortgage interest repayments: only includes the interest portion of your mortgage as a true expense
- Rates/body corporate fees, maintenance, insurance: will all vary depending on building type (e.g. apartment versus detached house)
For tenants it is simpler:
One-off costs:
- Moving in expenses: furniture and belongings moving
On-going costs:
- Monthly rent!
NB: Moving costs for tenants are often under estimated. You will be moving house more often than an owner, and apart from being one of the less pleasant tasks of life, it can also be pretty expensive.
You should assume that as a tenant you can expect to move house on average every two years; whether you like it or not.
No doubt though it is generally more expensive to own rather than rent on a year-by-year basis. So why buy? Of course the big financial benefit over the long term is that you are owning an asset that increases in value (assuming it doubles every 10 years) whereas long-term tenants have nothing to show for it. Yes, money saved can be invested elsewhere, but very few investment vehicles in Australia provide the same tax advantages, leverage possibilities, and long-term steady growth as well located residential property.
Non-financial considerations
These can be categorised into four areas:
- Emotional factors
- Life stages
- Family/community
- Your long-term aspirations
1. Emotional factors
Although these are a very individual thing, they are a key aspect of any purchase decision and for many, at least as important as the financial factors. If the following aspects are important to you, then they are compelling arguments for home ownership and indeed lead to many stresses for some long-term tenants.
- Life stability and certainty: As noted above, as a tenant, you can be forced to move more often than you prefer. This can cause stresses such as finding a suitable home, organising another move, potentially moving children schools, social circles, etc.
- Creating a home environment: For some people, it is important to create a 'home' that provides an environment for many long-term memories. This is particularly the case if you have children – think of the house you grew up in – I bet you remember every nook and cranny of it.
- Pride of ownership: This is all about having a place to call your own – if you live in it for a long time, the chances are you will improve and adapt it as your needs change – for some this is a positive, whereas others hate spending their weekends working on their property!
A first home buyer summed this up pretty well to me recently: “For the first time in my life, I planted a tree in our garden and know I will be here when it is fully grown.”
2. Life stages
These are the events in our lives that have major impacts on our lifestyles. What stage you are at will be a big determinant of whether buying or renting is right for you.
Generally, if you are at or approaching one of these points, it will affect your requirements; so if you have not yet bought, then it may be best to hold off until things are a bit more stable.
The main stages in most people’s lives relevant to home ownership are:
- Starting full-time work
- Long-term relationships
- Having children
- Career advancement
- Children getting independence
- Empty nesting
3. Family/community
For many people, being part of a community that may include extended family, friends, sports, interests, etc, is an important thing. If you are renting, you may need to relocate from an area thereby away from these communities that you value.
The real problem is that tenants get stuck in a 12-month mindset. That is, every year they have to put themselves in the landlord’s hands as their lease expires.
Also, if you have to move, don’t think it will be easy to find another. The vacancy rate in many suburbs or major cities is less than two per cent, so it can be difficult to find a suitable new property to rent.
4. Your long-term aspirations
This is all about where you want to be in three, five, and 10 years from now.
This covers all the considerations above – both financial and non-financial. As a starting point, roll forward five years from now and think about what you want to have done in each of these.
This provides you with a brief view of the factors to be considered when making one of the biggest decisions of your life. Although the weighting and priority of these will differ by person and by time, the considerations are all very similar.
