The great Australian dream of owning a home once drove a fairly predictable housing pattern.
People would rent for a while, save for a deposit then dive into home ownership at the first opportunity.
Times have changed. Rising house prices and a need for lifestyle flexibility have many making the choice to be long-term tenants instead of homeowners.
Let’s take a look at some of the pros and cons of buying versus renting.
A case for renting
Location: A long work commute takes a real toll.
For those who work in the central business district but can’t afford the skyrocketing prices of an inner-city home, the trade-off for purchasing a home in a more-affordable suburb is long hours spent on a train, bus or in the car.
To maximise convenience and boost general wellbeing, renting for location makes sense.
Shorter commutes free up time to pursue other interests, socialise, or enjoy a little more downtime.
No maintenance costs: Maintenance costs are constantly ignored in house price data yet stack up quickly.
Houses wear out and setting aside about 1 per cent of the property value annually for maintenance costs is a common rule of thumb.
It doesn’t end there though. You have recurring costs of council rates, insurance and, if you’re an apartment owner, body corporate fees, too.
Renting means these ongoing expenses aren’t your problem.
Flexibility: Your ideal home as a single in your 20s is likely quite different from a dream home in your 30s with a growing family, or downsizing later for retirement.
Buying and selling is expensive. Stamp duty (if you are buying), agent fees (usually 2 per cent to 2.5 per cent of the sale price) and legal costs can add significant amounts to any sale or purchase.
In Melbourne, for example, the median house price is about $800,000. That a little over $43,000 payable in stamp duty alone.
Renters can update their housing arrangements with far less financial friction.
The case for ownership
Wealth building: Most real estate wealth is created thanks to rising properties prices.
In the past, buying rather than renting has proven to be a wise financial decision.
Given those ongoing costs of home ownership, though, you need growth of at least a couple of per cent price appreciation each year just to break even.
Then there’s the wealth generating power of gearing and nothing is more gearing friendly than residential property.
For a relatively small deposit, banks will lend you most of the property purchase price.
Financial discipline: Repaying a mortgage builds the habit of financial discipline. By making the payments, you’re continually investing in your financial future.
Sure, renters need to pay their rent every month but the money builds their landlord’s future, not their own.
Home to call your own: As an owner, you have autonomy to create your home exactly how you would like.
From putting picture hooks in the walls for family photos to total renovations, being an owner allows you to live in a home from which you can’t be moved on, if the landlord decides to sell.
Rent + own: Best of both worlds?
One strategy is to rent where you want to live and buy an investment property where you can afford.
Advocates of the “renter + owner” strategy say this approach takes optimal advantage of the tax system.
The reality is there are tax breaks on both owner-occupied homes and investment properties – they are just different.
The renter plus landlord strategy can be worthwhile, but the final decision shouldn’t be made based solely on tax considerations. It’s largely a life stage decision.
Paul Benson is a financial planner and creator of the podcast Financial Autonomy.