Fincal Verdict: Rent or Buy?

AUSTRALIA’S love affair with property seems to know no end.

AUSTRALIA'S love affair with property seems to know no end.

But is it actually a better financial decision to buy your own home, or keep renting and invest your cash?

Economists Dominic Crowley and Shuyun May Li have done the sums, putting housing, rental and share market data into their massive spreadsheets to answer the question once and for all.

In their research paper on the topic, the University of Melbourne boffins note that home ownership is an aspiration that is "deeply entrenched in Australian culture", with 70 per cent of people owning their own homes, while renting is dismissed as an inferior choice with slogans such as "rent money is dead money" and "stop paying off someone else's mortgage".

But, they said, it was not so clear whether owning a house was superior to renting from a financial point of view.

Not only do home buyers need to save up a deposit - and increasingly challenging task, which would take a Sydney couple more than eight years to do - but they face a long list of upfront and ongoing costs.

There's stamp duty, conveyancing, inspections, maintenance costs, local council rates, water bills, building insurance and strata fees - not to mention the interest paid to the bank.

"If a prospective buyer decides to rent rather than buy, she could invest the avoided one-off costs of buying, plus any difference in ongoing costs, into other assets," the researchers said.

While it is impossible to predict exactly how financial decisions will play out, they crunched the numbers to compare the benefits of renting versus buying in the past, looking at the period from 1983 to 2005.

It's not the first time the question has been tackled; A United States study found that median-income families would often end up with more net wealth if they rented instead of buying over the 10 years from 2013.

TIMING IS CRUCIAL

So what's the verdict Down Under - is it better to rent or buy?

According to Crowley and Li, the answer in most situations is "buy". Cue knowing smiles from smug homeowners across the nation.

"Buying was financially more favourable than renting over most of the past three decades across Australian capital cities," the authors concluded.

"The results suggest that buying is currently favourable in Sydney, Melbourne, Perth and Darwin, and neither buying nor renting is clearly favourable for other capital cities."

But there is a disclaimer; the timing of purchase would have a big impact on whether the capital gains from home ownership would outweigh the potential earnings from other investments such as shares.

Looking back on the historical data, it was clear that while a well-timed house purchase would put homeowners ahead, buying at the wrong time would send them backwards.

"In each capital city, there were prolonged periods where the median house price rose strongly ... In each city there were at least four years where the median house price increased by more than 10 per cent in real terms," the authors wrote.

"On the other hand, there were also multi-year periods in each city where the median house price was stable or fell slightly in real terms."

HOW BUYERS FARED

The study compared a homebuyer who sold after 10 years with someone who continued renting and invested the same amount - the deposit, plus all the other costs of ownership - into a mix of shares and term deposits. Both renters and buyers were assumed to be housed in a median-priced detached, established house.

The hypothetical home buyers were taken to have put down a 20 per cent deposit on an interest-only loan, then the capital gains earned when the property was sold were tallied.

Because renters typically move around more frequently than homeowners, an average of three moves at $2000 each were tallied into the renter's costs - plus a month of double rent for each move.

With all this factored in, it worked out to be more financially savvy to buy in Sydney in almost every year of the period studied - except for 1989 to 1990, and 2003 to 2004.

Buying was favourable in Brisbane for most of the 1980s, and every year from 1993. In Melbourne and Perth, renting was only a favourable strategy around 1990, the study found, while in Adelaide and Canberra it was better to rent in the 1980s and to buy from the early 1990s onwards.

So, the conventional wisdom that home ownership is the key to financial success appears to ring true.

But before you jump on the home ownership bandwagon - or fall into a depressed heap over the difficulty of breaking into the market - keep in mind that the period studied will not necessarily predict the future.

WILL THE MARKET DROP?

Real house prices have increased more than threefold since 1983, much faster than income growth, and commentators have warned that Australia may be in a housing bubble that is about to burst.

Even the Reserve Bank of Australia has judged renting and buying to be roughly equal from an investment point of view, depending on market conditions; in a 2014 report, it warned that house prices would have to continue to rise at the same rate as they had for the past six decades for owners to be as well off as renters.

Ultimately, it's a decision that can only be made by weighing up the pros and cons of renting vs. owning, and taking a leap of faith.

"Buying versus renting is a complicated and important decision for prospective first homebuyers in Australia and worldwide," Crowley and Li concluded.

"This paper demonstrates the importance of timing, choice of investment portfolio, as well as frequency of moving for this decision."

For many, the non-economic benefits of ownership - such as having the freedom to renovate, and knowing that a landlord can't turf you out or hike the rent - make achieving the Australian Dream the obvious choice.

And don't forget, a mortgage can be like a forced savings plan; if you choose the rental route, you will need to be a disciplined saver.