Emma Reynolds | 2nd May 2016 | News.com.au
AS housing shapes up to be a major election issue, the debate over whether it’s better to rent or buy continues to rage.
For years, getting on the property ladder was seen as a vital part of becoming a successful adult, but lately, that concept has been rubbished.
Experts now say renting for life is a financially sound option, especially when compared with taking on a crippling mortgage or a home that may not prove a sound investment.
So in this confusing, politically charged landscape, what exactly should we do?
Lifehacker’s US site this week dismissed the rent versus buy debate as “completely pointless”, saying each individual needs to “learn the rules, crunch the numbers, then do what works.”
But in Australia, the truth looks a little different.
THE HOME OWNERSHIP DREAM
The idea that renting is throwing money away is a bit of a misconception. It isn’t a waste of funds if you’re getting somewhere to live.
When you pay a mortgage, you hope to eventually own your house outright, but there’s always a danger it won’t be worth what you’ve spent on it when you come to sell.
There are all sorts of hidden costs on top of your home loan interest: repairs, maintenance, property tax, insurance.
What’s more, if your savings are tied up in a mortgage, there’s an “opportunity cost”. That’s the opportunity to put your cash in a high-interest savings account or stocks and shares instead.
Many people in European cities comfortably rent for life. So why the obsession with ownership?
There is, of course, a reason owning a home is such an attractive prospect. Bricks and mortar is usually a solid investment. In most cases, eventually your home will appreciate more than you’ve paid in mortgage, interest, taxes, and maintenance, so you’ll be free from payments in your retirement and may start making a profit.
If you choose wisely in terms of property and location, that could happen sooner rather than later. Plus, you can offset some costs with tax benefits or first-home buyer incentives.
WHY YOU CAN’T AFFORD TO RENT
“One of the most important issues is that on the income support system, you can’t afford to be a renter when you retire,” Terry Burke, professor of housing studies from the AHURI Research Centre at Swinburne University of Technology, told news.com.au. “If you’re on a single pension of $23,000 and rent for a one-bedroom home is $18,000, you’re left with $5000-$8000 to live on.
“Even for a couple getting $35,000, rent for a two-bedroom place would be $25,000, leaving you $10-15,000 to live on. That’s well below the poverty line.
“You could be in real trouble if you haven’t decided to buy.”
If you can afford a mortgage, Prof Burke believes it’s typically a better place to put your money than in savings.
For example, a home in an outer suburb of Melbourne or Sydney might cost $500,000. If you rent, you might pay $450 a week. If you buy, your mortgage could be $580.
“If you saved that $130 and invested it in a compound interest account for ten years, you’d have $85,000. But if you paid $580 with three per cent capital gains, which is quite low, you’d have about $90,000.”
DON’T RUSH INTO IT
What you don’t want to do is rush into buying a home before you can afford it. If your mortgage repayments are too high, there’s a serious risk you could be left “house poor”.
“Many people who choose home ownership are being pushed into fringe cities and have a diminished quality of life,” said Prof Burke. “The ability to be mobile because of traffic congestion, a long journey to work, you have to factor it in.
“It can put quite substantial stress on households.”
In the short-term, you should consider your lifestyle. Most young people want to live in the inner city, where they work and socialise, and where most of the entertainment is found.
However, most young people can’t buy in inner cities because it’s so expensive, so renting is the only option.
That’s fine for 10 or 15 years, say, from the age of 20 to 35, but can then become “more problematic,” according to Prof Burke. “If you can do it, buying is better.”
HOW TO KNOW YOU’RE READY
While there is an inherent risk in a house purchase, Prof Burke says those who have predicted a decline don’t understand the unique characteristics of the market in Australia, where a fall in capital value has been relatively unusual, particularly in the long term.
“A large percentage is propped up by investors, a large portion of mortgages are covered by rent so they’re not as vulnerable as homeowners,” he said. “We don’t have a major supply surplus. Detached housing is contract built, there’s no spec building.
“To some extent it’s the same in a multi-unit … banks only lend if 70 per cent is pre-sold. The American and European financial crises were characterised by overbuilding. We can’t do that.”
While some believe in a “25 per cent rule” — i.e. your mortgage should be no more than 25 per cent of your take-home pay — Prof Burke says that doesn’t work for every household. A child-free couple may be able to spare a larger percentage of their wages than a family with three children — even if it’s just for the first few years.
If you’re not sure you’ll stay in the area long term, it’s no cause for delay, since you can rent the home out. A relatively large portion of renters are also owners — around 12 per cent.
Unlike in Europe, most leases here are only for 12 months, so renters will struggle to find a secure long-term option where they can build a life.
They could be evicted at any time by a landlord who wants to increase the rent, live in the home or sell it.
That makes the renting ideal hard to achieve.