Is owning or renting property better long-term?
- WYZA Life
The headlines have been dominated lately by discussions about the 'property market boom' playing out across the nation. With some analysts and top-level insiders suggesting that a 'housing bubble' is about to burst, the age-old controversial conundrum continues over the long-term merits of renting versus buying. So what's the answer?
We investigate if it is better to rent or to own your home.
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For those nearing or reaching retirement age, this issue remains important. Selling the family home is becoming more common, with many older Australians opting out of the home-ownership game.
What is happening to the ‘Australian dream’?
Conventional wisdom has long dictated that owning your home is preferable to renting. The argument that 'you shouldn't pay off someone else's mortgage' has long been the adage of many home-buyers. Similarly, people have long claimed that 'rent money is dead money'. But are these antiquated ideas applicable to the modern Australian context? For working and older aged Australians, the question is interesting from a financial and socially perspective.
The traditional 'Australian dream' has included a house with a big backyard, and for decades many prospered within the nation's major cities and urban areas. However, modern Australia, with its rising house prices and high inflation rates, has seen many people opt out of home ownership. For many of us, the financial burden of owning a home has simply been too great. But there are other, surprising benefits associated with renting.
What’s happening in the European market?
In contrast to the typical view of home ownership, Europeans tend to have a more relaxed attitude about long-term renting. It's true that tenancy laws are particularly skewed towards tenancy, but it seems there is some method to their collective madness. Germany, the EU's most financially solvent member state, provides a curious and enlightening case study. German citizens are wealthier than their French, Italian and Spanish neighbours when assessed on an income (not asset) basis. But surprisingly, recent OECD statistics indicate that a whopping 60% of Germans rent. This raises a critical question - can renting really more financially responsible than owning a home long-term?
According to a recent research paper published by the Reserve Bank of Australia (the RBA), the economic data suggests that the Germans may be on the right track. Ryan Fox and Peter Tulip's 'Is Housing Overvalued?' study found that renting and owning were roughly equivalent in the long-term. In fact, the paper went so far as to suggest that buying a house is about as costly as renting (and in some scenarios, more costly). The report also found that if the lower growth rate were maintained over future projections, then it would be 19% cheaper to rent a house instead of buying one. Fascinating stuff.
These experts say if real house prices were to continue to grow at the average rate of the past six decades, then buying a house now would be about as costly as renting. Essentially the expectations of future capital gains implied by current house prices are in line with historical norms. So, in more simple terms, if house price growth were to be slower than the historical average, as some forecasters predict, then the average home buyer will be financially better off renting long-term.
Is selling your home a serious retirement option?
Australians are also increasingly opting to rent their homes out. The rate of home ownership has historically hovered above 70%. However, according to the ABS, this rate fell between the census dates. In 2011, 67% of Aussies owned their home (down by about 1.1% from 2006). Similarly, the number of homes owned fell from 34% to 32.1%. Expert analysts and economists predicted that this is evidence of a larger, more positive shift in attitudes towards renting.
For many retirement aged Australians, the lure of selling the family home is significant. By 'cashing in' their most significant asset, retirement aged Aussies are finding that there are many positive benefits associated with down sizing. Below are some of the positive (and a few negative) aspects of this shift.
Renting or buying property?
There are many positive and negative things to consider before making the decision to rent or buy. Here are some ideas to consider.
- Benefits to downsizing: why own that extra space if you're not using it? Retirement age Australians often remain in oversized family homes, a factor that can be important as you age.
- Forget about extra bills: Maintenance fees, council rates, water bills, strata and owner's corporation related fees and other costs can disappear. Instead, renters pay the rent, amenity bills and very little else.
- You can lead a healthier, happier lifestyle: With more disposable income, you can spend more on maintaining a better lifestyle. Food and entertainment budgets can be restrictive during retirement or the mortgage period. It's a quality of life thing!
- Spend more time and money on travel: With less tying you down, and more disposable income, you can finally visit all your dream destinations.
- Create a trust or investment portfolio with the money from the sale: Selling the family home need not be detrimental to your children's inheritance. Visit a financial adviser and seek out a portfolio with a robust rate of return (equal to or higher than the capital gain on your home). A family trust, with low transaction costs associated with it, can also guarantee financial security for generations to come.
- If you sell your family home, you won't attract the capital gains tax (CGT): CGT has serious implications for those preparing the sale of a home. But for owners parting with their main residence, the ATO offers an exemption from the tax. Owners must have resided in the dwelling and several other criteria must be also be satisfied (see the ATO website for more information. Partial exemptions are also offered for part-possession of the land (rental income and the length of ownership are determinative factors).
- Moving takes too much effort: This was identified as a very common reason for continuing to live in the family home (the National Seniors Survey found that 29% of respondents agreed).
- Having to pay stamp duty and CGT: In certain instances, the payment of stamp duty and the occurrence of a CGT event must be considered.
- Impact on the age pension: The sudden rise in your disposable income may result in a lower pension payment.
- Personal attachment to the family home: This one speaks for itself - it's hard to sell the place you love and start a fresh chapter. Then again, it could be exactly what you need!
What have your experiences been with renting vrs buying property? Join the conversation below…