The Experts

Renting vs. Buying

These days we hear a lot about Gen Y actively choosing to rent where they want to live rather than saving up to buy in more affordable areas. They love living in the fun-filled affluent lifestyle locations close to beaches and cafes – and who can blame them?

But it concerns me that many young people are not giving the value of home ownership more thought. They seem to dismiss the idea of buying property because they assume they’ll have to live far away from the city and they assume that renting is cheaper.

Some people have to rent for life – they’re on very low incomes and can’t afford to buy. But there’s a growing proportion of young people on good incomes who seem willing to accept a life of renting. It allows them more pocket money to buy what they want and they’re unperturbed by the “New York lifestyle” of lifelong renting.

Renting will definitely give you a bit more disposable money but not as much as most youngsters think. And this week we got some cold hard facts to prove it.

Newly released figures from the Bureau of Statistics show the average Australian home owner uses 18 per cent of their gross income to pay the mortgage, while renters use 17 per cent to pay their rent. This data is based on FY07-08, prior to the GFC and interest rates dropping to 49-year lows (hence reducing the cost of mortgages while rents have been steadily rising).

Comparing the states, Tassie is the most affordable place in Australia to rent or pay off a mortgage and NSW is the most expensive overall (no surprise). In terms of renting alone, NSW is NOT the most expensive – that title belongs to the ACT. And Victoria has the highest proportion of homeowners without a mortgage (36.7 per cent). Interesting.

Now, bear with me while I break this down for you. Stats can be pretty boring sometimes but these numbers are really worth thinking about if you’re a renter.

Comparing FY07-08 to FY94-95, the average cost of paying off a mortgage has increased by $112 per week. The average cost of renting has increased by $68 per week. Over the same timeframe, the average household income for both home owners and renters has increased by $545 per week. What’s the difference? Renters have an extra $44 per week on average in their pockets while home owners’ properties have risen in value by an average $202,000 – equity you could use to re-invest and create more wealth.

The lifestyle that our homes provide has become even more important over the past 15 years given we’re working longer hours. Part of getting a better work/life balance is living in a desirable location that affords the lifestyle we want. Our value systems have also changed. Rewind 30 years and the most common goal among young people in terms of property was achieving the Australian Dream of home ownership. Today, many young people can’t afford the quarter acre block but apartments provide a fantastic affordable alternative in areas close to major cities. And if you’re willing to spend a few years living in a city’s outskirts, there are some great buying opportunities for houses in areas where an over-supply due to a spike in mortgagee sales caused a drop in values over the past two to three years.

It’s worth remembering that your young, fun days will not last forever. Owning your own home is the quintessential cornerstone asset for a secure financial future. Think about this now because the next market upswing is upon us and both rents and property prices are set to rise over the next five years. I firmly believe that right now the smarter option is to buy.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Thursday, December 10, 2009