Buying vs renting

Falling property prices have renewed the debate about renting versus buying a home.
Image: © Andy Dean - Fotolia.com

Listen up: If rent money is “dead” money, it’s no more “dead” money than mortgage interest.

So, that is what you compare. Short term, renting is far cheaper. Long term, however, buying ... kicks ... ass.

Let’s assume two identical houses, side by side. One is up for rent, the other for sale. The rent is $1670 a month. The mortgage (assuming 7 per cent, 25-year loan) is $3280 a month, or nearly double.

The mortgage will bounce around with interest rates. Rent will rise with the value of the property (assumed 5 per cent). Now, let’s compare the “dead” money.

After 25 years, the total rent bill will have been $954,000. The buyer has paid about $458,000 in interest.

After maintenance, let’s say the buyer is ahead $400,000. But she also owns an asset worth $1.7 million. The benefits are exponential from there.

“If you decide not to buy, you will rent until you die.” Catchy tune, hey?

In year 26, the renter will be paying $67,000 a year. The buyer will be paying ... nothing. Well, some rates and maintenance.

I’m a fan of buying when you can afford to. Whether prices are high, or low, is less important than starting the mortgage habit.

If you’re the sort of person who thinks beyond your next few pay cheques, the buying versus renting argument isn’t a fair one.

Nationally, prices have fallen around 5 per cent in the last year. Add inflation and they’re down 8 per cent.

Low home prices are just a bonus. But a bonus worth taking.

Bruce Brammall responds

I asked Bruce to respond to a number of the comments below. The Editor - 10/07/2012.

This whole house buying versus renting thing divides people like AFL and NRL. Love one, hate the other. And, by the look of the responses, there’s no shortage of happy renters out there. And good luck to you all.

But I’ve been asked to respond.

Q: “If the rent is $1670 and the interest is double, how can it possibly make sense to buy?”

A: Because the mortgage cost of $3280 is not all interest. A part of it is principal. The interest is roughly $2625 in the first month. The interest falls each month, while the principal repayment increases.

There was a claim that I’d assumed house prices rose 10% each year. No, I didn’t. I’d used a growth rate of 5% and a rental return of 4% (rent plus capital returns for total investment return of 9%). The calculation was, therefore: $500,000 x (1.05^25).

An average of 5% is not a “bit of a stretch”. Ask your parents and grandparents what they paid for their first house. What’s it worth now? Property returns have exceeded 5% going back decades.

And if house prices are going to be around $400,000 in 25 years from now, we will have had the granddaddy of all depressions. That’s the most pessimistic thing I’ve ever heard.

“Renters can invest the money they’re not paying to a mortgage and they’d be ahead.” Sure they could. But show me them. I’ve heard that argument a thousand times. Those with the discipline to do that are as rare as a man happily drinking a warm beer. Home ownership is about enforced savings – a bit like super – with the payoff being a (virtually) free roof over your head when the mortgage is repaid.

I might have been a little light on with the maintenance. But let’s take it to the other extreme and make the maintenance bill $300,000. At the end of the period, the buyer is still miles ahead. The renter is paying $67,000 a year, which will rise forever.

And let’s not forget “lifestyle”. Two points. Firstly, by calling it a “lifestyle prison”, you are asserting that mortgagees hate owning their home and that they derive no joy from owning the house they live in. Wow. Seriously? Secondly, the lifestyle benefits of the extra cash. Sure, but you can’t have it both ways. You either need to argue that you’ll do better by investing wisely what you’re saving ... or you’re going to blow it on lifestyle.

For more updates Like: BigPond Money on Facebook.

Related links:

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.