Renting Vs the Great Australian Dream? .....The age old question.
I read recently that first-home loans have hit a record low this past month. It made me think about the benefit of home ownership versus renting for not only first home buyers, but for people in general.
Most Australian’s have been bought up with the inbred thought that to own their own home is the “Great Australian Dream”. This is proving to be harder and harder for many Australians to achieve given the rise in property prices in the past decade, and also the shift towards a more conservative approach to finance in general from not only the general public, but also the banks with their lending criteria.
So, are you really worse off if you are not living “the Great Australian Dream”?
Many first home buyers that are currently being shut out from getting their toes into the property market are probably thinking they are missing the boat towards their dream. This may not be the case however. From a financial perspective, you can be just as well off renting, if not better, than someone paying off a mortgage if you have the discipline to invest your money on a continual basis.
Take for example, two identical houses, side by side, market value of $400,000. As a rule of thumb, the property would generate $20,000p.a rent, and a normal mortgage based on current interest rates you would be paying around $28,800p.a in mortgage repayment.
From the homeowner’s perspective, the equity they are gaining each year is the principal portion of the repayments, plus any increase to the value of the home. So, for example in year 1, if the principal portion of the repayments was $6,000p.a, and the property price increases by $5,000, then the equity gained would be $11,000.
From the renter’s perspective, the difference in rent v mortgage repayment is $733 per month. If you were to invest the difference into an interest bearing security @ 5% return, you would have $10,000 equity at the end of year 1. So, depending on the property price change, and also the investment return, you can actually gain a similar amount of equity year to year, especially in the first few years, if you are renting.
Other benefits of renting are not having ownership costs such as council rates, insurance etc. If these costs were invested by the renter this would also increase the equity gained.
The possible downside of renting is the possibly of a landlord selling and leaving you having to move house. This must be taken into consideration when thinking about an investment strategy via renting. The security that ownership provides is strong, particularly for those people with young children who are looking for a stable home environment.
I guess the main point is that people should not feel lost or down if they are in a position of not being able to purchase their own home. There are many possibilities of making your money work via renting if you have the discipline to put aside the difference between rent and mortgage money to an investment periodically.
For those who believe the housing bubble has neared or reached its peak, renting may actually be a better way for them to build equity, as homeowners will not be gaining equity via house price increase, but only the principal portion of their repayments.Do not feel you are missing out if you are renting and looking to buy. Investing the difference into sound investments can work just as well from an equity point of view.