A recent report from the Australian Bureau of Statistics shows that today’s 24 to 39 year olds are far more likely to rent than their parents at the same age. While not surprising, the result is timely given the noise around property prices at the moment, and a subsequent drop in confidence amongst first home buyers. Long term, buying your first home is the best financial decision that a person can make and when you buy ends up mattering very little.
1. Poverty is more likely at retirement as a renter
Most first home buyers are young and therefore most are thinking very little about retirement. As people age however, and more particularly once they hit retirement, being a homeowner means you are far less likely to be in poverty than someone who rents. Paying market rents once you are on a retirement income, versus having a fully paid off home, is a major expense differential.
2. Market forces hit renters hard
Consider if you bought in Sydney 10 years ago, you would be paying less on your mortgage now for a home that is worth double what you paid for it. If you rented, you would be paying $9,360 more per year for a home that you hold no equity in.
Effectively when you buy, you are locking in repayments at the price you paid. Obviously, this will fluctuate according to interest rate changes but ideally over time you pay down your mortgage reducing this sensitivity. If you rent, then you will always need to pay market rent.
This translates into housing stress – there are more than double the number of people under rental stress than there are under mortgage stress.
3. Leverage leads to greater wealth
Even small increases in the value of your home can lead to a much bigger financial gain than putting a deposit into alternative investments and then renting. As a very simple example, consider someone (let’s call him John) with $100,000 saved. John is considering whether to use his savings to get a mortgage and buy a $1 million home or put his deposit into a share portfolio instead. Both shares and housing are seeing the exact same capital growth of five per cent per annum. If John doesn’t buy a home, he will pay rent instead of paying off a mortgage
After just one year, you already have a vastly different scenario. If John bought the house, the value of his home has increased by $50,000. Alternatively, the value of his shares would have increased by $5000 – 90 per cent less than the capital gain of the house. Obviously there are other costs that need to be considered such as stamp duty, potential cost differences between rent and mortgage repayments, etc., but over time, you can see why the idea of getting on to the “property ladder” is a reality.
4. Forced savings
While we became much better savers during the pandemic (household savings rates hit record highs), the reality is that most people are not great savers. This means that even if you were able to save money by renting, you may not put this money into savings. And then as we saw above, you would unlikely benefit from the same capital growth from your savings as you would if you bought a home.
5. Greater certainty of tenure
Certainty of tenure is also problematic with renting. The owner of a rental property may decide to sell, which could mean that you also have to move if an owner occupier buys the property. This can be particularly challenging in tight rental markets (like now) where it may be hard to find another suitable property.
How do we increase home ownership?
The simplest solution to get people into their own homes is to throw them money, generally in the form of stamp duty concessions, cheaper loans, lower (or no) cost mortgage insurance or even cash. This is very effective but is expensive for governments and as a recent Productivity Commission report has shown, has also resulted in lower levels of affordability.
The better solution is a much harder one and unfortunately takes a lot of time and this is to make sure there are enough homes for people to live in. In cities where high levels of development take place, house prices and rents are more stable and in the long term more affordable. Doing this will solve affordability for renters and buyers.