Is Rent Money Dead Money?

The received financial wisdom on housing has always been that people are better off paying off a mortgage than paying rent. However, Ernst & Young’s 2019 Safe as Houses report challenges this assumption – at least in the Sydney market.

EY analysed 25 years’ worth of data from the Reserve Bank of Australia (RBA), the Australian Bureau of Statistics (ABS) and the Department of Family and Community Services (FACS) to conclude that “in 60 percent of the cases examined between 1992-2017, homebuyers would have been better off renting and maintaining a leveraged ASX200 investment than purchasing a home.”

Investing vs. Renting A Property

The rent vs buy debate has often argued the pros of renting, which allows you to live in suburbs you might not otherwise be able to afford, gives you more flexibility and costs less overall. Investopedia cites the absence of maintenance or repair costs for the renter, along with not having to find a lump sum for a deposit. Forbes echoes these benefits, including a list of home-owning costs to take into account.

EY’s report reiterates several of these issues, with it’s Chief Economist, Jo Masters, saying, “in addition to considering financial wealth, long term renters can also enjoy significant lifestyle benefits – particularly a mobility dividend from being able to easily relocate for work and no long term maintenance and depreciation risk.”

Well, that’s in 60% of cases in the Sydney area in that 1992-2017 period, anyway.

Ms Masters spoke more on the issue to Peter Ryan of the ABC, encouraging people to investigate their options and consider the pros and cons more deeply. Ms. Masters also thinks some reform to rent regulations to allow more flexibility – such as long term leases, having pets and being able to repaint, in the way renting works in places like New York – is called for.

In the Sydney-centric EY analysis, the financial benefits of renting over buying depended on the period of time or the suburb in question EY’s research indicated renters were overall better off in the northern suburbs of Sydney 70% of the time; but in places like Marrickville and the city centre, buyers better off 67% of the time in the same period.

A Lane Cover renter would have been $316,153 ahead from 1998-2008, but a buyer who bought in 2007 and sold ten years later would have been ahead $205,027. In Woollahra, someone who rented 1998-2008 would have been $608,032 ahead, but a homeowner 2007-2017 comes out $303,771 on top.

What’s The Final Choice?

Naturally, the financial pros of renting also depend on a tenant renting an affordable home and ensuring they invest the funds that might otherwise be paid into a mortgage.

Renting/investing instead of buying won’t always be the better option, but with any investment strategy, it’s worth looking at the broader picture.

Jo Masters is mindful of the need to see beyond home ownership as the sole way to create future wealth. She says: “We shouldn’t be pushing an entire generation into unsustainable debt levels – we need to change the wealth creation narrative to explore options other than property.”

If you are considering the pros and cons of renting and want to investigate investment strategies, contact United Global Capital today.

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