Should I rent or buy a home?

Whether to rent or buy is a hotly-debated question. The answer might come down to where in Australia you live.

With the housing market continuing to boom in many parts of Australia, it’s no wonder some potential home buyers are wondering if they’d be better off continuing to rent. While for others, who are priced out of the property market or can’t save enough for an initial deposit, buying may not be an option.

With rent money often referred to as ‘dead money’ you’d be forgiven for thinking that renting was the inferior choice, but there are transactional costs to do with buying a home, such as stamp duty and home loan interest payments that might be regarded the same way.

So is it better to rent or buy? The answer, like most things to do with the economy, is far from simple.

AMP Capital economist Diana Mousina says that while the question of buying versus renting mainly depends on each individual’s circumstances and stage of life, which city you live in also has an impact.

Sydney or Melbourne

Diana explains that the ‘phenomenal’ house and apartment price growth in Sydney and Melbourne over the past three years has coincided with a large increase in housing construction in these cities (particularly for apartments).

The result of more new properties in Sydney and Melbourne is that rent increases are slowing as an oversupply of property hits the market.

As a consequence, investment returns for property investors are also slowing and Diana says this will lead property price growth in Sydney and Melbourne to slow over the next 2-3 years (especially for apartments).

The combination of slow growth in rents – and the expectation that house price rises will also slow in the next few years – makes renting the better choice in Melbourne, and particularly Sydney, Diana says, as rents become comparatively more affordable and the opportunity for buyers to benefit from the kind of capital gains seen in recent years diminishes.

The rest of Australia

In the other major capital cities, slower house price growth and less new housing construction compared to Sydney and Melbourne in recent years means that rent increases have been stronger, Diana says.

‘The difference between renting or buying is more balanced outside of Sydney and Melbourne,’ she concludes.

What do the statistics tell us?

Statistics from the latest Census reveal that more and more Australians are renting.

In 1991, 26.9% of the population were renting their home compared to 30.9% in the 2016 census.1

In line with the rise in renting, less Australians owned their home – either outright or with a mortgage – in 2016 than they did in 1991, with home ownership dropping from 68.6% to 65.5%.2

Diana says these numbers show the impact that the recent boom in housing prices, coupled with low wages growth, has had on housing affordability, with more households choosing or in many cases having to rent, rather than to buy because of increased difficulty in gaining a foothold on the property ladder.

Weighing the pros and cons

Economics and statistics only tell part of the story, as both renting and buying have their pros and cons:

Benefits of renting:

  • You’ll have more short-term financial freedom because you don’t have to pay interest on a home loan, or for landlord expenses such as building maintenance, repairs, rates and property insurance.
  • You’re more likely to be able to afford to live in the suburb you want (because you’re not paying for the expenses of owning a home).

Downsides of renting:

  • You generally don’t have the same freedom to change or renovate the property like you would if it was your own.
  • You’re never sure how long you can stay in a rental property. This might be fine while you’re young and flexible, but as you grow older you might want more certainty and stability.

Benefits of buying:

  • You could own your home within 25 to 30 years, or sooner if you pay your home loan off more quickly, and will own an asset which will hopefully have increased in value.
  • Owning a home gives you certainty around where you’ll be living and additional security in retirement.
  • Because you own your property, you can renovate it, nail pictures into the wall or even remove the walls if you want to!

Downsides of buying:

  • The costs of buying a property add up – stamp duty, legal and conveyancing fees, interest, loan fees, pest and building inspections, bank valuation fees, rates, possible strata fees, title registration and ongoing costs of property maintenance and insurance.
  • There’s no guarantee the value of your property will increase – it could fall, leaving you with an asset that’s worth less than what you paid for it.

What’s right for you?

Diana says that as the housing market goes through cycles every few years, the longer you plan to live in the property the more attractive buying is because home owners will be able to ride out any medium-term price fluctuations.

‘Over the longer term we remain positive on the housing market because of solid fundamentals in the Australian economy,’ she concludes.

For more help

Use our rent vs buy calculator, which illustrates the potential benefit of either renting or buying a property over time, to explore your situation, or our borrowing power calculator to work out how much you could afford to borrow.

For more information about the process of buying a property, check out our Goals info centre page, and whatever you decide, it’s best to seek professional advice and talk to your financial adviser. If you don’t have an adviser but would like to speak to one call us on 131 267 or use our online tool.

1, 2 Census 2016, Australian Housing section