Rent Or Buy? 6 Things First Home Buyers Must Think About…

August 12th, 2009

Rent Or Buy? 6 Things First Home Buyers Must Think About…

Rent or Buy??

Australians have one of the highest home-ownership rates in the world. We are a nation that likes to own the roof over our heads and our residential property market has proved to be one of the world’s most resilient in the face of global economic bad news. But is buying always better than renting? Here are five things to think about when making the decision to jump from being a tenant to a home owner.

1. POPULATION GROWTH PUSHES UP PRICES OF HOUSES TO RENT AND BUY

New Australian Bureau of Statistics population figures show this country’s population is growing faster than any time since the 1960s, which puts pressure on demand for housing. Typically, this means the supply of houses barely meets demand for people to live in them. Australia’s population increased by 1.9% during the 2008 calendar year, with the nation’s total population at more than 21.6 million people. Based on the average household size across Australia, projected by the ABS to be 2.48 persons in 2008, population growth has created demand for approximately 164,000 new dwellings. Yet only 147,000 residential dwellings were commenced last year, highlighting an undersupply of homes for our ever-growing population. This puts pressure on rents and house prices as more people compete for an ever-shrinking supply of homes.

2. RENT IS NOT THE ONLY DEAD MONEY

Home

Plenty of European nations prefer the convenience of renting in a desirable location rather than buying a home. Australians tend to think of rent as “dead money” that pay off the landlord’s mortgage while the renter never prospers. Yet hefty interest payments on ever-increasing mortgages are just as “dead” as rent money. Of course, a well-purchased house will provide you with a debt-free home by the retirement age – an admirable goal – but beware how much of a premium you are prepared to pay in interest rather than rent.

Many of us mistakenly believe that house prices always go up, but it isn’t always the case. For the first time in a long time, many Australian states experienced house prices that went backwards in the last 12 months. Some house prices at the top end of the market have dropped by more than 20% in price. In most Australian capital cities, the most desirable suburbs are more affordable to rent than buy. Most home owners are prepared to trade off location or house-size for the privilege of paying a mortgage and gaining that much-longed-for security of home ownership, so they may not live in as good a location as renters.

3. RENTERS HAVE MORE FREEDOM

People who rent have the freedom to move house easily and take up jobs wherever they may be located. With rising unemployment on the cards, most home owners would find it difficult to quickly re-locate to take advantage of another job offer. A home owner must take the time to sell a property before being able to move or access their equity Renters usually only need to pay four weeks bond and weekly rent to secure their tenure while home owners have hefty stamp duty costs to bear upfront.

4. BUT HOME OWNERS HAVE MORE SECURITY

For many home owners, the extra cost of buying property is worth it because:there is greater security of tenure. You cannot be thrown out of your home on the whim of a landlord, you can own as many pets as you choose (provided your strata laws allow it) and a home owner can change, renovate and add value to their property as they wish. By retirement age, a home owner will hopefully own their home mortgage-free and have no or minimal accommodation costs when their income is reduced. Equally, flexible mortgage products allow home owners to access their equity through features like redraw accounts and offset accounts, so home owners can still invest in other asset classes such as shares or property.

5. RENTERS GAIN TAX ADVANTAGES TOO

Home Security

Renters who legitimately work from home can claim the proportion of floorspace dedicated to their home office as a rental cost, which can be deducted against their income tax. Renters may then have more disposable income free to invest in higher growth assets such as shares or their own business, which could perform better than residential property.

6. LOOK BEFORE YOU LEAP

Is your income stable enough to take on a mortgage? Renters are easily able to reduce housing costs by moving to a cheaper location, but it takes longer for a home owner to sell up and cash out. Ideally, first home buyers will have saved a deposit of 20 per cent of the purchase price of their desired property so they can avoid paying the bank’s hefty mortgage insurance fees. The younger a home buyer is, the less likely they want to be tied to a mortgage but the more time they have to reap the benefits of building equity.