Buying a home has been heralded as the way to get ahead for generations of Australians. But with housing affordability a rising concern for would-be first home buyers and their parents, many younger Australians are beginning to weigh up whether it’s better to buy, rent or invest in residential property.
Despite record low interest rates, getting a foot on the property ladder has become increasingly difficult.
Against this backdrop, it’s hardly surprising that the proportion of first home buyers has fallen to less than 14% of all home buyers, the lowest level in more than a decade.ii
As the numbers of first home buyers fall, many younger Australians are focusing on buying an investment property instead. A recent survey by Mortgage Choice found 50.8% of investors who purchased a first investment property were 34 or younger, up from just 33.8% three years ago.iii
So which is best – buy, rent or invest?
Home sweet home
One of the best arguments for buying a home is that it forces you to save. Most of us find it difficult to save money today for long-term goals, but that is what paying the mortgage forces us to do. The pay-off is eventual ownership of an asset that enjoys favourable tax treatment when you sell or when seeking eligibility for the age pension and other means-tested benefits in retirement.
Unlike rents, which rise along with the cost of living, mortgage payments are fixed to the initial cost of the property and tend to fall relative to rents for similar properties over time.
Buying also provides the security of being your own landlord and the flexibility to renovate. After building up equity in your home you may choose to borrow against it to kick-start an investment portfolio.
On the downside, saving for a home deposit and transaction costs is a major hurdle for first timers. Ongoing costs for rates, maintenance and insurance can also be significant. While mortgage interest rates are currently at record lows, buyers also need to factor in the possibility of higher rates over the term of the loan.
When renting makes sense
Renting has the potential to free up money to invest in assets with a higher return than residential property. For this strategy to work, your rent must be less than you would otherwise spend on mortgage repayments. You also need the discipline to invest the savings if you want to get ahead.
Renting rather than buying can be a profitable strategy when other asset classes provide higher returns. Yet over the past 10 years residential property has been the best-performing asset class with an average annual return of 8% a year compared with 5.5% for Australian shares. iv
While this is no guarantee of future performance, it helps explain why many would-be first home buyers are taking a new approach to the old rent or buy equation.
The middle way
First time buyers often find they can’t afford to buy in an area where they want to live. So to get a foot on the property ladder they continue living in rental accommodation – or at home with Mum and Dad – and purchasing an investment property.
The advantage of this strategy is that your tenants help pay off the mortgage. And unlike a home you live in, costs such as mortgage interest, repairs, rates and insurance are tax deductible.
At the end of the day, the decision to buy, rent or invest will depend on your personal financial situation, the state of the housing and rental markets, the returns available on other investments and lifestyle. The important thing is to have a long-term housing strategy that won’t disadvantage you in later life.
If you or your children are weighing up whether to buy, rent or invest in property, give us a call on 03 5434 7690 to discuss the options in the context of your overall investment strategy.
i ABS Housing Finance Australia, May 2016, 5609.0
ii Mortgage Choice, 2016 Investor Survey,17 June 2016
iii ASX Russell Investments 2016 Long-term Investing Report
