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.
Now that you’re over the shock, think about it. It does stack up, but it needs discipline to work.
We know Australians love their bricks and mortar, but maybe we take that love affair a little too far. The latest property data suggests that’s the case, with renting emerging as the most financially savvy move right now.
As property prices continued to soar on the east coast last year, RP Data research shows that capital city rents increased by just 0.3 per cent in 2015. While it maybe a bitter pill for investors who depend on a good rental return to swallow, it should make potential homebuyers pause to consider their next move.
The January 2016 CoreLogic RP Data Rental Review revealed that rental growth is now at its lowest level on record, with average rent inching up to $443 per week across our combined capital cities.
Against an average capital city property price of $572,500, even a novice buyer will suspect a gap on the mortgage repayments. And they’d be right.
Running those numbers through a mortgage calculator, assuming a 20 per cent deposit and rock bottom mortgage interest rate of 4 per cent, weekly repayments on the average property will be $504 per week.
So mortgage repayments will be $61 MORE per week than renting the same property. That’s over $3000 a year before adding council rates, insurance and the huge costs of buying the property (stamp duty, legal fees etc).
Performing the same calculation for each capital city individually, it appears that only Hobart, Brisbane and Darwin are cheaper to repay a mortgage than rent in. Add back maintenance and council costs, and these would be pretty marginal.
Of course, buyers build up equity as they pay off their loan, which can make up for higher 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 significant. By that we mean that having your money tied up in a mortgage means you don’t have it to spend on other opportunities… Investing in a business, buying shares, funding further education.
Renting also provides greater flexibility to move for work, upsize your digs for a growing family and move around to find a neighborhood that fits your lifestyle better.
There is also diversification to consider. Often people are so stretched in affording a deposit on a house that they end up with all their savings in one spot; their property. This is a risky investment strategy, because if property prices fall in your suburb, so does your wealth.
Smart investors reduce this risk by spreading their investments across different assets – shares, bonds and property – to ensure that if one market falls, there’s a greater chance those falls will be compensated by gains in their other investments.
However, as we mentioned, this approach only works if you have the discipline to invest the money you save from renting into other areas. The big benefit of buying has always been the way it forces you to save and, if you stick with it, wind up owning an asset.
So really, whether to rent in the short term all boils down to self discipline.
THE GOLDEN RULES OF SHARE INVESTING
As the sharemarket rollercoaster continues, it’s worth just taking a deep breath and reviewing the golden rules of share investing.
- Do your homework before buying… don’t buy or sell on rumour, hunch or impulse.
- Balance the risk and reward factors… look closely at past performance and future prospects and remember the sleep test. If the worry of your shares falling keeps you awake at night, don’t buy them.
- Keep checking after you’ve bought… investment conditions, company management and objectives can change.
- Be patient… don’t expect to become wealthy overnight..
- Don’t forget shares can bring income and capital appreciation.
- Be alert to trends… try to put political, economic, scientific events through an investment filter and implications for companies.
- Be prepared for unexpected events….review the situation promptly before taking any action..
- Don’t try to back every horse in the race… it is far better to hold a smaller portfolio of shares which you know well and are comfortable with than to invest in a larger number of companies in the hope of picking more winners.
- Check the environment… be reassured the economic and market prospects look fair for the company, for the year ahead. Don’t buy a share just because the price looks cheap.
- Take a loss quickly… don’t let pride or stubbornness prevent you from accepting a mistake and correcting it.
- Consider upgrading your portfolio at regular intervals… check your portfolio every six.
- Follow the market… don’t try to beat the trend. In bear markets, be cautious; in a fluctuating market, think twice; in bull markets, take greater risks.
- Take a profit… it is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market in a stock which is overpriced.