Rent or buy
 To rent or to buy? That is the question.
With the Australian housing market in a state of flux, the age-old question of whether to rent or buy is a highly relevant one and a range of factors affect this important decision-making process.
A man’s home is his castle
Or as Dorothy said as she closed her eyes and tapped her shiny red heels, “There is no place like home.” Central to the case for buying are factors which cannot be quantified in financial terms, namely, security, control and privacy.
The most significant problems related to buying include saving the large deposit, maintenance costs and a lack of flexibility. On the flipside, fiscal benefits include scheduled saving (money which you may not have saved otherwise) and equity (creating and growing wealth, obtaining a foothold in the property market).
Preliminary estimates from the Australian Bureau of Statistics (December quarter 2005 to December quarter 2006) show that over twelve months established house prices rose 8.3%, generally supporting the case for buying.
According to the Real Estate Institute of Australia (REIA), Perth and Darwin had an exceptional year for median house price growth in 2006, although there is evidence that the 2006 boom times are slowing in Perth. It was predicted that that Sydney and Adelaide prices would probably remain flat into 2007 with the more moderate growth in Melbourne, Brisbane, Canberra and Hobart during 2006, already beginning to decline in all cities except Hobart.
The Australian rental market
Whilst renting can represent low financial risk and flexibility, unless you have strong self-discipline, most people are unlikely to save the equivalent of the monetary contributions they make via their mortgage repayments. There is also the problem of dealing with difficult landlords, the threat of eviction and rent rises. An even greater concern is that your hard-earned money is paying off the landlord’s mortgage rather than paying off your own home.
Deciding whether or not you should rent requires consideration of the recent rental ‘crisis’. REIA reports that the demand for rental properties is outstripping supply in every capital city in Australia, with a weighted Australian average vacancy rate of 1.7%, well below the industry vacancy rate benchmark of 3.0%. Evidence showed that rents increased by an average of 9.8% over the year to September 2006, well above the CPI increase of 3.9% and the increase in median weekly family income of 2.7%.
JP Morgan chief economist Stephen Walters predicts that as a result of the tight housing market, first-home buyers and investors may be attracted back into the market causing it to recover earlier than anticipated.
Finally, an examination of the state of the Australian building industry is also necessary. REIA’s comprehensive study surmised that the two year slowdown in residential building activity in the Eastern States will result in reduced availability of housing stock for sale or rent during 2007.
So should you rent or buy? A sample calculation
Let’s say you borrowed $510,000 at 7.7% over 25 years. Taking into account $25,000 transaction costs and $200 quarterly council rates, you would be $135,151.23 better off over the next 7 years if you bought as opposed to rented.
That is, if you were to rent the property and pay $1440 monthly rent, the savings balance at the end of 7 years would be $394,196 (provided you put aside the money you would have otherwise contributed to the mortgage) whilst the equity in the home would have been $529,288 had you purchased it.
Of course, numerous factors and assumptions weigh in on this calculation. If you can afford the deposit and monthly payments, plan to remain in the property long enough for the appreciation to cover the costs of selling and buying, can cope with the maintenance fees and ride the bumps of interest rate rises, then buying is the ideal option.
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