Rent vs Buy: An Australian "Cost Comparison"

Discussion in 'Property Market Economics' started by hobo-jo, 17th Nov, 2010.

  1. hobo-jo

    hobo-jo Not a bear just a realist

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    http://www.bullionbaron.com/2010/11/rent-vs-buy-australian-comparison.html

    I for one am happy to do without a mortgage and rent for a lot less than it would cost to buy the equivalent in my area. That said I've got the discipline to use the savings in other investments rather than to squander it.
     
  2. Player

    Player Live Every Day

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    It is nearly always cheaper to rent in the area you wish to live than to have a mortgage on the same property.


    hobo-jo, you and there are some others on this site, do just that. Pay less to rent and invest the arbitrage (saved interest and running costs) in income/growth producing assets and optimising the tax effectiveness of gearing. Excellent strategy.

    Others, require the "stability" that home ownership provides and then leverage off that equity to invest. Others still, like myself are at a stage of life, where not only do I own my PPOR outright, I will not expose that title to any lender. Some may say that is a poor and sub-optimal use of your net total equity. Perhaps, however it is another layer of stability and protection for my family.

    Back to renters. I very much doubt that the majority rent for the sake of using the excess (non - mortgage committed funds) to invest with the discipline that you, and other investors do. I dare say that a significant proportion live paycheck to paycheck and instead of improving saving and investing
    skills are dedicated consumers.
     
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  3. hobo-jo

    hobo-jo Not a bear just a realist

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    No doubt that stability is an aspect that can't be mapped in a financial example but regardless there still has to be a point where it simply is not worth the cost for the majority!

    If buying is 80% more expensive than renting and buyers are still lining up then at what point do they switch to renting over purchase? 150% more? 200% more? There will always be those very few that would buy regardless of the cost, but most do not have this luxury.

    What would be a fair percentage for ownership over renting? I personally think 80% higher than rent is way too much and if this percentage does not shrink then I may very well never buy again.
     
  4. vbplease

    vbplease Still on my L plates

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    Even in the more "realistic" example - it's only for one year.. How about an example over the life of a loan? Rents go up while a buyer's loan stays the same.. so maybe after year 10 they are paying the same (sorry haven't modelled this).. and at the end of the loan, the buyer owns his house.. Hopefully in the first 10years the renter did some good investing.
     
  5. hobo-jo

    hobo-jo Not a bear just a realist

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    Can the buyer afford to make principal repayments on top of the $865 per week in interest and other costs :p?

    Does anyone have an excel spreadsheet they can upload which you can enter mortgage figures to calculate length of loan, etc. Wouldn't mind running some longer term scenarios...
     
  6. RPI

    RPI Member

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    HoboJo
    Good in theory and it really does make sense, at least in the short to medium term. But I don't think it will become mainstream. Here are my reasons:
    -the aussie emotional attachment to their own home
    -vast majority of renters won't invest the money they saved
    -most people spend all of their pay packets and dont invest, at least if it is going towards mortgage payments they are getting some equity
    -discipline of mortgage payments, they are not optional where you can just skip your savings this week etc etc.

    I just don't think the majority of people have the financial interest or discipline to invest the difference between rent and mortgage payments.

    It will work for the few who are.
     
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  7. vbplease

    vbplease Still on my L plates

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    Ok, lets assume the buyer doesn't make pincipal repayments.. lets calculate the term for the rent to catch up with the buyers repayments

    n = {\log(FV) - \log(PV)} / {\log(1 + i)}

    assuming rent goes up with inflation i = 3%
    FV = 865
    PV = 480

    n = 20years

    naturally there are a lot of other variables in there.. e.g an offset account would cut down the period.
     
  8. vbplease

    vbplease Still on my L plates

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    actually a lot of the buyers costs i.e. rates, insurance, cost of maintenance, goes up with inflation too :(
     
  9. MellyBelly

    MellyBelly Member

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    We rent a large 3 bed house in Melbourne in the inner eastern suburbs. It costs us $680 a week.

    To the investor who bought our rental recently:
    Cost of house plus stamp duty - $1.69 million
    Interest cost per annum: $122,000 (@7.25%)
    Rates: $2,000 (? no idea)
    Insurance: ?
    Maintenance: ?
    Agent's annual fees ?

    On interest alone I am better off renting by 86,639 p.a. Yes, we save/reinvest the difference. We plan to use the savings to buy (outright) in the West eventually. In a few years the reasons we live in our current suburb will cease to exist and we can then move to the western suburbs.
     
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  10. hobo-jo

    hobo-jo Not a bear just a realist

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    The interesting thing is that the difference between these costs (rent vs buy) would have been a lot closer in early 2009; one might even say they were at a reasonable level.

    That’s only a 33% premium to buy over rent (compared to an 80% premium currently); of course assuming the borrower went variable at the time instead of fixed then their cost would have increased as rates rose. Had buyers locked in rates for 5 years at the 2009 lows then they would have done well. Proof in my opinion that “timing the market” can be as (if not more) important as “time in the market”.
     
  11. tom32

    tom32 Member

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    Yes the maths on a 100% or near 100% mortgage fall in favour of renting.

    Run the numbers again though at 50% or 100% deposit and all of a sudden due to the tax implications of where you put that money buying starts to be comparable to renting. Remember the rent saved is in effect tax free income wherever else you put it is not. In effect you have a 40% odd bonus on top of the rent saved. I think buying your PPOR if you have lazy capital, i.e. bank deposits etc is as good a thing to do as any.

    This is about where house prices have gotten to compared to rents in this country and I suspect it is one of the reasons why, i.e. tax.

    I am not there yet and my tax bill on interest each year while cruel does not make me itch to buy a house as much as the missus prodding me does. By July 2011 we will have about 40% of our cash in the FHSA's which are taxed at 15% this helps.

    As I see it with a 50% deposit and a yield of 4% you are at break even when house prices are rising at 2% per annum. With a 100% deposit they can do nothing capital gains wise ever and you are still the same as loading the 500k into a deposit and paying near 40% tax on the interest. In effect the tax takes your 6.5% yield down to a 4% yield! Is this a coincidence that this is about the capital city house yield?

    Looking at all the other costs, I suppose you then could say it does not even stack up with or without a deposit but I guess these are the costs you pay to have your own place? Though you putting them all there on paper at once does make you appreciate they are not insignificant either. You could also throw $3000.00 per annum at the rental given that you have to move about every 12months if you are a renter. Before you ask what removalists I use as thats pricey, I do value my own time and frankly I would be rather working than moving. I f'ing hate moving! Plus usually you end up paying rent on two places for a week or two in the transition as well.

    I should stress I do agree in the general case it is not financially smart plugging in 0% c.gs for the average punter to still buy.
     
  12. Luv2Travel

    Luv2Travel Member

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    I have never rented, however I would always prefer to buy than rent. Main thing is the security and being able to do as I please with a property. Knowing that I could be evicted at any time if landlord decided to sell or move in or whatever wouldn't be appealing to me.

    As for numbers, I bought my first home 10 years ago for $95K in Melbourne. Equity grew quickly and allowed me to upgrade a couple of years ago. I now have a PPOR thanks to that equity valued at almost $500K and my weekly repayments are only $348 (P&I), when to rent the same place it'd be about $440. All this has stemmed from an initial outlay of $8,000 on my first PPOR plus holding costs. I don't think I've spent much more to own my place over renting due to the good growth in that time. I plan to pay it off sooner, but even if I took it to the full 25 year loan (which is what those $348 repayments are based on), at the end of that I own it (and just pay a few rates & repairs), whereas someone renting will be paying rent forever.

    Comparing rent today vs. repayments at today's value it definately seems cheaper to rent, however if look forward at the growth (as in the 10 years I experienced) then rents will go up, whilst the major holding cost (interest) as someone else pointed out goes down or stays same if IO. In my example above of my first PPOR which I bought for $95K, today would be valued at about $250K, rent would be about $240/week. Interest on the loan would be about $127/week.

    I've never done serious numbers on this subject as it's a non consideration for me. I will always own rather than rent. I appreciate some do rent and do great things with the money they save and do well, but I think the key is that most of the average Australian families wouldn't put the extra money to better use and so I personally think they are better off buying if they don't have the discipline to invest.
     
  13. devo76

    devo76 Member

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    On paper for many properties it makes sense to rent. No question. But the fact remains that the majority do not save the difference. This is the real world truth. Property can/is forced savings for the masses. They could do better but generally speaking they will not.

    Take two average joes. One buys one rents.
    In 15 or so years one will own his house or have equity. The other will probably have nothing.

    There are exceptions but the majority fall into this catagory.
     
  14. Corey Batt

    Corey Batt Finance Broker

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    Even with 100% lend property still comes ahead due to the magic of time.

    Using the above stats, with rent increase input of 2.5%, 8% CG increase of property and a 7 year time frame, the wealth comparison comes out at:

    Renting: Savings balance of $238,793
    Equity in Home: $401,175, remaining loan of $455,737 (this is assuming P+I), new estimated value at $856,912
    Putting buying a home ahead by $162,382.

    Source: http://www.yourmortgage.com.au/calculators/rent_vs_buy/

    I think it was The Times that had a nifty calculator a couple of years ago that factor in all attributes to provide which is the better option. I'll see if I can dig it up tonight.

    The biggest reason in my opinion where buying is a better option is the lack of continual rent increases. I know of people who couldn't afford to rent now on their wage, however have a mortgage which is extremely manageable meaning they can put money into the market as investment.

    Short term pain, long term gain.
     
  15. Ausprop

    Ausprop Member

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    guessing what someones behaviour may be does not detract from the argument tho. the point is if you rent and invest you are better off... at worst buy a house and let it out and rent your own place.

    i am currently in a rental - $510/wk, i know the house cost the owner over $800k to develop. And boy it feels good when the gardener turns up to sort out the garden. The agents keep forgetting that lawns and gardening are in the rent... on the last inspection they advised me to clean up some weeds on the side of the drive, so i must lodge a complaint and tell the owner to put some sunscreen and a hat on and sort it out.

    I recently did the numbers on the sale of my PPOR. I thought I had made a huge profit but when you sit down and put in all the bibs and bobs it is a bit of an eye opener.

    anyway i am keeping na eye ont he market but for now I am focussed about lifting value of the land i have, then ineed to come back and sort a PPOR out for the missus, hopefully before the next property run!
     
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  16. Ausprop

    Ausprop Member

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    very bullish. how about CG of nil for 5 years then 10% for 2 years? Or a 20% drop in year 1 followed by 6 years of 3%?
     
  17. MellyBelly

    MellyBelly Member

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    Doesn't a lot depend on whether you actually do want to live in the suburb you can afford to buy in? A lot of considerations to take into account - e.g. schools, transport/infrastructure, work etc. When renting is significantly cheaper in my neighbourhood then why would I want to buy here, especially as I would have a huge concentration risk (divest from a pool of assets to buy a single asset especially when prices are way too high here)? I'd rather rent where I live currently and later on if I feel the need to buy will think about it.
     
    Last edited: 17th Nov, 2010
  18. Steve Basin

    Steve Basin -

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    Rent Vs Buy? Good question, and a question that has been argued for many years. Same as there are both camps to "negative gearing" and "positive gearing"

    I thing it all comes down to the individuals DNA. Are you living in the moment or are you willing to take a risk - buying an investment for possible future gain.

    There is no doubt you will live comfortably and will be better off in the short term, if you decide to rent. Having more money in your savings account, allows you to spend on other luxuries of life today.

    From my own personal upbringing and DNA, I have always favoured buying. I could not stand to rent. The maximum period of time I rented was 6 months, and I could not wait to purchase my own home.

    With the purchase of my own home, I was able to secure 2 more investment properties and piggy back from there. If I had been renting, I still would be in my same position, as I was many years ago.

    Yes, there were risks, but in the last 100 years, property has been a consistent winner, the chances of you losing money is very slim, especially if you do some research before hand and not purchased on the fly.

    A great quote that I recently read by Robery F Kennedy.

    "Only those that dare to fail greatly can only achieve greatly" and I think this quote fits well here.

    By investing, yes, it can be risky, BUT you have the chance of increasing your wealth from it. Renting - well you won't, really!

    Something to think about...
     
  19. HomeBuyerStrike

    HomeBuyerStrike Member

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  20. bene313

    bene313 Member

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    Those of us who rent invest our spare cash, not spend on luxuries.

    All good several years ago Steve, but this strategy relies on your PPOR increasing in value. With the very real prospect of no growth within the next "x" number of years, this would not be a wise strategy in todays market - that is, it may not be wise to assume capital growth within the short to medium term.

    So for a person looking to invest and either having the option of (a) renting and investing the spare cashflow, or (b) buying a house to live in, the option for me is (a).

    Obviously buying a home to live is a lifestyle choice as well as an investment decision.