Buy or Rent?

Should you buy or rent? It’s a question that often occupies the waking hours and the sometimes-sleepless nights, of many people looking for a home.

Current market conditions are again putting the spotlight on what looks like both a deceptively simple and yet highly complex question. Prices have been falling, developers are offering incentives, interest rates may soon be heading below 3% and there’s far less competition from investors. So, is it the ideal time to take the plunge and buy?

But then on the other hand many rental markets are more competitive than they have been for years, the supply of rental properties is up, there’s lots of new stock looking for tenants and rentals have fallen across some suburbs, there are even incentives on offer. So, is it the ideal time to find a great rental property and avoid the costs, and the ups and downs of home ownership?

The Advantages of Buying

Owning a home is still the holy-grail for many Australian’s and the big motivations are generally security, the ability to create your own personal space plus and get a leg-up to build your future wealth.

Homeownership allows you the freedom to paint and decorate, renovate to your hearts content or the depth of your wallet, or create a garden full of gnomes without your landlord’s permission.

Although with an apartment (as mentioned last week) there may be some body corporate restrictions and by-laws to follow.

Creating future wealth

While local markets will always fluctuate, if you own your home there’s the potential it will increase in value. However, while prices generally rise fairly consistently, it’s wise to take the long-term view and carefully consider all aspects of and property including location, current and future services and surrounding developments. All of these factors will impact future value.

If you have a mortgage, the repayments are made up of interest and the principal of your loan and this creates a form of savings. These days interest only loans are far less-common which, some commentators see as a positive. Accepting that interest rates do fluctuate, they are currently very low and mortgage payments are usually more predictable then paying rent.

Security of tenure

‘My home is my castle’ – among the big attractions of homeownership is the sense of security rather than the pitfalls of renting. Living in your own home largely takes away the nasty risk of having to move when a lease expires, or when the property is sold, or rents become unaffordable. While longer lease terms are often sighted as desirable in rental markets, they are not common, and it is ownership that gives security that most buyers crave.

Are there any disadvantages?

Despite the attractions of owning your own home there are potentially some negatives, even if they are not common, when you purchase rather than renting.

In an era of very conservative lending arguably the possibility of repossessions are rare. However, the spectre is there if you fail to make mortgage repayments, and this weighs heavily on buyers who may experience financial difficulty. Continued or excessive missed repayments can see your lender start legal action and in the worst cases repossess and sell your home to recover the mortgage debit and related costs.

However, what’s a bigger and more common focus of attention is the up-front costs associated with buying a home. Saving a deposit and paying associated costs, are obstacles faced by many home buyers and that’s despite a range of government incentives.

Among many lenders the traditional 10% deposit has now been replaced with a more general trend towards 20% deposits, lenders are looking for greater equity. Taking ABS figures, the average price of an Australian home in March 2019 was $636,900, so a 20% deposit would be $127,380 plus, depending on individual circumstances, there’s stamp duty, legal fees, insurances and moving costs to pay.

Beyond these costs banks are now very concerned about how their home loan customers manage their ongoing expenses, including direct property costs like rates and insurances that a landlord would usually cover if you were renting. Affordability and individual credit worthiness to enter the housing market are now major hurdles.

The Advantages of Renting

Renting should not be seen as ‘the second best’ form of housing as there can be advantages to renting. We should also not forget the dynamics of the relationship between the rental market and private investment. Debates around negative gearing often make the point that private housing investment is a big factor in the supply of housing.

However, some key advantages include the ability to plan and save money while living in a neighbourhood where prices are beyond your ability to buy. There’s also greater flexibility to up-size or down-size without having to buy and sell.

Renting, depending upon location, may free-up cash to invest or save and help reduce financial stress if you were just starting a business or planning a family.

However, the idea that rent is “dead money”, may not be true as rent payments can be seen as being no different to the interest anyone would have to pay on a mortgage and that can be for 20 years or more.

Maintenance is the ‘owners’ problem

Renting a residential property also means few ongoing costs, you do not have to pay council or water rates, home insurance or general maintenance and repair costs. They are generally covered by your landlord, and in most states, there are strict rules that govern how these repairs are managed.

Renting can also deliver greater flexibility to live in a suburb that you love but might not otherwise afford. There’s also much more flexibility to move as and where you wish, this can help make job changes easier which can be a big leg-up whilst establishing a long-term career.

Renting can generally be far easier and more cost-effective to change your home to suit your changing needs. There’s also an up-side when markets deliver lots of new stock, with new apartments more easily secured to boost your lifestyle in a modern new project with great facilities.

There are disadvantages

However, just like buying there can also be disadvantages to renting a home. The most obvious point is that a mortgage will eventually be paid-off, rental payments can and do go on forever. Rent also essentially helps pay another person’s loan or creates investment income.

Volatile property markets, property managers and landlords can make renting unpredictable at times. When an investor sells for example you may have to move, and that’s stressful and expensive. Tenants also often lament the possible lack of privacy, although landlords and professional property managers are generally sensitive to such issues.

While renting can offer greater flexibility, it does impose other restrictions including the ability to make cosmetic changes.

However, when deciding to buy or rent an apartment or house, your personal circumstances and lifestyle options are often the driver of what choices are available.

Most often the decision to rent or buy will depend upon the financial merits each offers alongside individual circumstances and location. In many areas rents have not kept up with gains in local property prices and so renting rather than buying, looked a better in expensive markets.

For some individuals low interest rates and falling house prices in some markets, may have changed those dynamics. While prices are in a state of flux it makes sense to rent and wait for the best value.

However, right now the time to act may be limited. Even if it’s cheaper to rent than buy, for most of us it’s a lifestyle choice around wanting a property you can call your own, perhaps in the end it comes down to security in an increasingly ‘crazy’ world.