Should I buy a property or continue to rent?

With Australia’s property rising at an alarming rate, buyers are being urged to rethink their strategy when entering the market.

Rent or buy? It‘s a very good question.

If I make the assumption that you’re in the position to buy a property – in other words, you have an income that can service a debt and you have a deposit to allow you to buy a property – then it comes down to this: the return you can get on your money.

Wanting to own your dream home is a personal factor that is up to you. I’m taking the sentimental value or the security value out of this question and thinking about it solely in investment terms. I’m talking purely about yield. I can’t answer the question in any other way.

Risk vs. reward

There’s a lot of data around what they call the Sharpe ratio. In finance, this index measures the performance of an investment compared to a risk-free asset.

Over a limited period time it can show whether the share market outperforms the property market in terms of yield or vice-versa. It depends on what the period of time is and when the end date of that period of time is.

Is buying a house a better investment in terms of yield than the share market?

When anyone wants to invest their spare capacity in income and their deposit, I think that real estate is a safer bet than other asset classes of investment. It’s more tangible, it’s more understandable and there’s a more ready market for it.

Therefore, I would only continue to rent and not invest my money in property if I was very confident that the other asset classes that I could invest my spare capacity in – my spare income in and my deposit in – would outperform real estate.

On balance, in my opinion, that’s a rare event and that property is always the best investment. Therefore, if I look at it purely as an investment, I would buy rather than rent.

Expectation vs. reality

“I can’t afford to buy in the area I’d like to live in but I want to get on the property market.”

If the question becomes: should I continue to rent until I can afford to buy where I want to live, that’s a different matter. My opinion on that is no, you shouldn’t, because where you can afford to live will probably outgrow your ability to save a deposit.

Buy where you can afford. Don’t try and save a deposit for a house in South Yarra in Melbourne or Paddington in Sydney if you’re on an average income because you’ll be saving forever. That needed deposit will increase at a faster rate than your savings will increase.

Buy in area where you can afford, not where you want to live. Picture: Gaye Gerard/NCA NewsWire

I would hedge my position, buy where I can afford to buy and rent where I want to live. Use your deposit for something you can afford to buy and just get into the property market.

What that does for you, is it allows the deposit you put into that property to keep up naturally with the property market increases. The return on a deposit at the moment, at a bank, is lucky to be 1 per cent per annum, whereas the property market is going to increase by a number north of that.

In Sydney, the average property increase has been 18.8 per cent in the past 12 months, you’re never going to get that on your deposit money anywhere. Never.

However, if you put that deposit into a property you can afford to buy – in the regions or a growing suburb – then that deposit, by definition, will keep pace.

Mark Bouris is a financial advisor and executive chairman of Yellow Brick Road Home

Loans.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.