Owning still beats renting

Take cries of buyer beware with a grain of salt: purchasing your own home still beats renting.

An auctioneer in action at a Port Melbourne home same. Picture: Nicki Connolly

Should you buy or rent property? It takes a declining market for the question to be taken seriously and now that we have a residential sector on the way down the issue is back with a vengeance.

Accountancy group EY (formerly Ernst & Young) has gamely jumped into the subject with a report — based on Sydney only — that came up with the startling conclusion that most people would be financially better off renting.

As EY suggests: “It’s time to give up on the mindset that renting is dead money … with today’s property prices you could be better off renting somewhere affordable and investing the cash you’ve saved.”

Well, hold it right there.

Before even trying to compare these utterly different ways of investing money allow me to offer two slices of personal history.

The last time renting over buying was being discussed as a serious issue was in the soft housing market in the mid-1990s and I sat with some reporters as two economists earnestly explained to us we would mostly be better off renting. Most of those young reporters would have been renting. Someone asked the sensible question if the economists owned their own homes? And of course, they did.

What’s more, I’ll wager the EY executives aren’t renters either.

I asked EY this question … and I’m still waiting for an answer.

Consider this story: in the mid-1940s a policeman, Michael Morgan, bought a home in Drumcondra on the north side of Dublin. When Michael died, his widow inherited the property and lived there for many years. When she died, Michael’s son Pat inherited the house and lived there with his wife, my aunt. When Pat died, my aunt lived there. When my aunt died, my mother inherited the property. The house bought by the policeman in post-war Dublin is a very useful part of my parents’ retirement income today.

We underestimate the utility and potential longevity of property investment. The Drumcondra story might just as easily have been set in Sydney. Present day house prices in the two cities are similar in terms of their relation to incomes — in both cities it costs close to 10 times the average income to buy an average home.

And it is that steep multiple of income required to buy a house that has the number crunchers out again looking at whether renting beats buying.

If we look a little more closely at the EY survey, it says 62 per cent of the Sydney population who bought property between 1994 and 2017 would have been better off renting and putting the spare money in the sharemarket.

But there are a few things that colour this conclusion. The first is that EY correctly compares apples with apples so it doesn’t just compare house prices with sharemarket returns. Rather, it compares a typical mortgaged property (bought with a 20 per cent deposit) with an ASX 200 index fund share portfolio that is 50 per cent geared.

Almost nobody takes out loans to buy shares any more: the GFC, poor financial advice and a lack of attractive lending products have made sure of that. Unfortunately, if you don’t borrow to buy the sharemarket portfolio, then EY concedes “the results shift in favour of the homeowner”.

Are renters or homeowners better off in your suburb? Check the map

The other issue that EY — or any other economic agency — cannot measure is the savings made by staying in one property against the ongoing resettlement costs faced when renting for long periods. In our market we have very short leases by global standards. Again it is anecdotal, but among the people I know who have tried renting as an alternative to buying a house, the inability to get a long-term tenancy was the killer.

No doubt there are exceptions. Property is after all “local” … you cannot generalise on property investment in the same manner as the wider sharemarket. The survey points out that there were significant geographical variations in its findings, with some Sydney suburbs at various times showing renters would not have been better off than buyers.

EY then puts forward some ideas of how the narrative around how “renting is dead money” might be changed. They include rent control, which is well established in cities such as New York. Sadly, the endless chicanery and rorts around rent control are also well established.

We also now have the first stirrings of build-to-rent schemes, which will be encouraged by new tax treatment if the ALP wins the election. This is a scheme where developers get tax concessions to build with long-term tenants in mind and the tenants pay less than market rates. It has been a mixed success overseas, but the authorities behind the programs in Australia will now hopefully have learnt how to optimise such plans.

I don’t doubt the EY raw numbers, if you had the choice and if you were prepared to borrow money to place in the sharemarket — and if you stayed in the market through its wrenching cycles. And if throughout that time you stayed renting (and never moved, and never lost money in changing ­accommodation) and you did it in ­selected Sydney suburbs between 1994 and 2017 then you most likely would have been better off on paper. But the hypothetical notion that renting makes you richer is simply unconvincing.