The deterioration of home affordability because of rising property prices has been a critical issue for a number of years, particularly among young Australians wanting to buy a first home.
Maybe the solution is… don’t buy but rent instead.
We know Australians love their bricks and mortar, but maybe we have taken that love affair a little too far. The latest property data suggests that’s the case, with renting arising as the most financial confidence move right now.
As property prices sustained to soar on the east coast last year, RP Data research shows that capital city rents increased by just 0.3 percent in 2015. While it may be a bitter pill for investors who depend on a good rental return to swallow, it should make potential homebuyers hiatus to consider their next move.
Australia was lucky to avoid a house price crumple during the financial crisis but that’s not to say it can’t happen here. Many academics and economists have been advising of the possibility of something similar in Australia. But provided it doesn’t happen and prices continue to raise, leverage will benefit those who own. Over the long term, the value of leverage is approximately equal to (annual return – mortgage interest rate) x leverage.
Of course, buyers build up equity as they pay off their loan, which can make up for superior monthly costs. However, short term, we’d say that most people are better off renting right now.
But, and this is a big but, renting where it’s cheaper than owning is only a better financial decision if you invest the difference between the cost of renting and the cost to buy.
If you blow the money saved from renting instead of investing it, you’re better off servicing a mortgage and having an asset to show at the end of the day. Think of it as enforced saving.
If you do have that financial self-control, then renting is probably a better option. We don’t just say that because of the greater financial burden of a mortgage compared to a lease in the current market, but also because of the less tangible benefits.
The opportunity cost of a mortgage is noteworthy. By that, we mean that having your money tied up in a mortgage means you don’t have it to pay out on other opportunities… Investing in a business, selling shares, funding further education.
The most current research from the Australian Housing and Urban Research Institute shows a surge in the proportion of renters who are long-term tenants. One-third of all private renters were long-term in 2013, up from one-quarter two decades ago.