Property expert Chris Gray talks to moneysaverHQ’s Moira Geddes about current property market conditions and settles the score over whether to buy or rent.
Is home ownership weighing you down? There could be a reason for that. Illustration: John Tiedemann
Source: News Limited
BELIEF in the financial benefit of home ownership is a deeply held conviction for many Australians.
Rent money is dead money. You have to get a foot in the door before it’s too late; the financial advice from parents and peers comes thick and fast.
(Declaration of interest: I rent.)
But a new paper by two researchers at the Reserve Bank, Ryan Fox and Peter Tulip, has committed the financial equivalent of blasphemy by casting doubt on whether it’s always better to buy. (Declaration from the authors: one owns and one rents).
Their startling discovery is that over the past 60 years, the average cost of home ownership (after any offsetting increase in home value) has been about the same as the average cost of renting.
The historical answer to the age-old question of whether it’s best to rent or buy? It’s a lineball call.
But how can that be, when we all know house prices have gone through the roof?
Well, in calculating the benefits of home ownership, most people overlook the significant — and often hidden — costs of home ownership.
For renters, they pay rent and that’s where the buck stops.
But homeowners face a myriad of costs including interest on their mortgage (which is substantial over the life of a loan), ongoing running costs like council rates and water, the need to invest in home improvements and significant transaction costs, like stamp duty and conveyancing fees.
These significant costs must be deducted from any increase in house prices.
And the long run average increase in house prices is not as large as most people probably think.
While property moves in cycles, the value of the average home has only grown by an average of 2.4 per cent plus inflation over the past 60 years.
Owning a home has proved about as expensive as renting.
So should you rent versus buy? It turns out that depends entirely on where you think house prices are heading from here.
House prices … where to from here?
“If real house prices grow at their historical average pace, then owning a home is about as expensive as renting,” the authors of the paper state.
If house prices were to grow more quickly, you’d be better off buying.
However, “if prices grow more slowly, as some forecasters predict, the framework used in this paper suggest that the average homebuyer would be financially better off renting.”
Where is that crystal ball when you need it?
House prices are notoriously unpredictable and depend upon many factors including population growth and the pace at which new homes can be built.
The real point of the Reserve’s research was not to provide financial advice about whether to rent or buy, but to test whether house prices — high historically compared to incomes — are overvalued. The title of their paper was, after all, “Is Housing Overvalued”.
They find that while it’s true that house prices have risen dramatically compared to incomes, that doesn’t necessarily mean they are overvalued — particularly given the shift to structurally lower interest rates which has boosted borrowing capacity.
Fox and Tulip prefer a different yardstick for whether property is overvalued: whether people are paying significantly more to own a home than to rent it.
Their conclusion is: we’re not.
“Recent data do not show signs of a bubble,” they find.
So would-be homeowners waiting for prices to fall before they enter the market could well end up frustrated.
Those looking for an easy answer to the question of rent versus buy will be disappointed by the Reserve’s research. In short, the answer is: it depends.
It depends on future house price growth in the area in which you plan to buy.
It also depends how long you intend to stay in a property — with longer stays shifting the equation in favour of buying. Staying longer in a home — the typical owner stays for 10 years — spreads out the upfront cost of stamp duty. And given property prices move in cycles, longer stays make you less exposed to a couple of years of weak house price growth.
Whether it makes sense to buy or rent also depends on your personal preferences. Do you value the security of homeownership and the ability to drive nails into walls? Or do you value the flexibility and freedom to move that renting brings?
The Reserve Bank hasn’t answered any of these questions for you.
What it has shown is that, over a long period of time, the cost of renting has been about on par with the cost of owning.
Main message: don’t assume it’s always best to buy. If house prices grow at below their long term average pace, it may well be better to rent.
Property ownership is not worth it at any cost.
Originally published as Property: to buy or not to buy?