We’ve all heard the saying ‘Rent money is dead money’, a myth that has been transmitted from real estate agents for decades. But, recent analysis by the Reserve Bank of Australia (RBA) and Stockspot, has surfaced that this is anything but the truth.
Recent research by the Reserve Bank of Australia established detailed that since 1955, there has been little to no difference between renting and buying a property. Renters and owners with equal discipline on savings, ended up in relatively the same position financially, over the previous 60 years.
Financial decisions such as renting or buying always coincide with positive and negative outcomes. In their study, Stockspot elaborated on some of these pros and cons:
Pros of Buying
Buying can provide intangible benefits – flexibility in revamping the property, as well as the security of not being able to be kicked out by a landlord wanting to sell up.
Property prices appreciate over time – Housing prices have been increasing rapidly during the last decade, with the average property in Sydney rising 26% from 2013. This is of great benefit to those who own a property although, periods of weak growth or depreciation in value often occur as well.
Cons of Buying
Interest – In 2015, average variable interest rates are around 4.50%. This means that when purchasing a $500, 000 house with a loan of $400, 000, you would be paying $18, 000 a year. Similar to the amount you would pay to rent a property of the same value. Although, mortgage payments may increase even more in the near future. Considering interest rates are at an all-time low, the RBA have estimated a long term variable mortgage rate of 6.20%.
Opportunity cost – This refers to the money you have tied up in buying a property that you could be using for other things. It is costing you the opportunity on making money on investments elsewhere.
Pros of Renting
Flexibility – Renting a property comes with the flexibility of not being stuck in one place. This may be ideal for venturesome young people as well as young families deciding on an ideal neighbourhood to raise the family.
Returns on savings – Renting provides the opportunity to earn investment elsewhere with your savings, instead of it being spent on a property deposit. The RBA has recently cut interest rates which means that returns in term deposits and savings accounts have been falling. This has in turn made other investments more attractive.
Cons of Renting
Rent prices – The weekly cost of renting a property in Australia has increased steadily in recent years. The interest of a mortgage is equivalent to rent, it is the cost of borrowing the asset. Stockspot found that the average rental yields have been 4.2% in comparative to a 6.2% average variable mortgage rate. This has encouraged people in recent years to look at buying, although buying must keep in mind higher average rates for a mortgage of 30 years.
Renters aren’t saving – When buying a property you are forced to save money in order to contribute to a monthly mortgage whereas renting does not encourage these savings. This leaves renters to spend their spare income rather than placing it on a valuable investment. Although, with applications such as Stockspot and Pocketbook, Australian renters are becoming more able to keep up with homeowners financially. The services provide assistance in budgeting, savings and investment.
Stockpot has also conducted analysis on whether an individual would be better off buying, or renting a property so that they can invest their savings elsewhere over the next seven years. Results evidence the difference of financial position based upon different potential return rates for property and investing.
Considering this analysis as well as the pros and cons of renting or buying, the RBA and Stockspot both concluded that renters are likely to be in a better financial position than property owners based on long-term assumptions. The RBA’s assessment stated that Australian property is 19% overvalued in comparative to renting.
When considering property investment, Australian buyers should think twice before throwing their savings into a vault and throwing away the key. The focal benefit of buying a property has always been said to be the encouragement of savings. Although in contemporary society, with technology services that provide more options for renters to save, this argument has become irrelevant.