Whats better? Buying a home or Renting and investing?

Over the two decades to December 2012 Australian residential property earned an average of 9.5% per annum.

Most clients who owned properties did well, and those who own properties in the next two decades will probably do well too.

But not everyone agrees.

Phil Ruthven is a well-known economics and social commentator. He argues owning a home as an investment is irrational (His article on Domain.com.au ‘Rent your way to real wealth’)  and unlikely to produce optimum investment results.

“The surest way to become a millionaire is renting. Don’t believe me? OK, so it’s the rare millionaire who rents – and the poor are forced to – but don’t let that fool you.”

— Phil Ruthven

He says home ownership is nice emotionally but most will be better off renting a home that suits us now, and implementing a disciplined investment strategy based purely on rational grounds.

Mr Ruthven says this is particularly the case once the hidden costs of home ownership are considered, such as hours and dollars spent improving the home, rates and repairs, and stamp duty, legal fees and other transaction costs when we move every seven years.

There is something in what Mr Ruthven says. This is particularly the case if you move more than once every seven years or if your home is not in a well-performing suburb.

Paying a mortgage is forced savings

On balance many would not agree with Mr Ruthven. Fundamentally, the great advantage of home ownership is forced savings, and apart from super most people would not save a cent without regular home loan repayments!

Because, the reality is, the forced saving of a home loan and the legislated saving in Super tend to be the only ways most people save).

Yes, there may be other ways of doing things that are more ‘efficient’ in the pure sense of the word…but few people actually do things these other ways.

Over the two decades to December 2012 residential property earned 9.5% per annum. Most clients who owned properties did well, and those who own properties in the next two decades will probably do well too.

Is Housing Overvalued?

And on balance we expect the Reserve Bank’s 2.9% price increase to be easily beaten by the better suburbs in most capital cities: 2.9% is essentially the inflation rate, and well below the historical rates of return actually generated in these markets. If prices simply keep track with inflation, then buying will make more sense than renting over the long-term.

In July 2014 the Reserve Bank released a report (‘Is Housing Overvalued?‘) saying that house prices need to go up by more than 2.9% a year for buying to beat renting.

What conclusions can I draw from this?

Renting and investing the difference is a very valid option that could produce comparable or better results to buying a home.

However, for the vast majority of people, homeownership is the fail-safe option for long term wealth building. It takes extreme patience and discipline to stick to investing each week for 30 years, and for many people, they will not stick to that.

“However, for the vast majority of people, home ownership is the fail safe option for long term wealth building.”

– Joe Gardiner

There are just too many temptations of things to spend money on!

But, paying debt back – they will stick to that ‘forced savings plan’ like glue and make sure they do not miss a beat, each month for 30 years.

No wonder many of our relatives that have paid off a home loan feel amazing about that!

Also, rents rise, but mortgage repayments remain relatively constant due to payments being spread over the term of a typical 30-year mortgage. 

Leave a Reply

Your email address will not be published. Required fields are marked *