Often when real estate values climb as strongly as they did in recent years, rent levels lag behind. Consequently, many people wonder if it isn’t better to keep renting and buy later when prices level?
However, this imbalance between rents and mortgages is usually short-lived. Current data from REIWA show that typical rents increased by around $40 per week in 2008, despite a 12 per cent decline in median house prices. Rents in Perth are now typically around $360.00 per week.
Not everyone is in a position to borrow and meet loan repayments, but for those singles and couples who can afford around $445 a week at current interest rates, a mortgage of $340,000 will buy a very nice unit, villa or townhouse around much of Perth or a modest house with land in the outer suburbs. (In this example I am assuming a deposit of $20,000 and access to the $14,000 First Home Owners Boost, so the purchase price of the dwelling would be around $370,000 - the current median price for first home buyers). Of course, there are also many cheaper properties around than used in this example.
Obviously, the bigger your deposit the smaller your loan, so saving up during renting can be a smart short-term strategy towards a purchase. Renters don’t pay council rates and other utility charges which home owners do, so buyers need to also factor in about $40 per week to cover this.
The real cost of renting is not in the fortnightly payments, but in the loss in savings compared to accumulating equity in a home. There are also good financial reasons to support home ownership, however two key factors demonstrate its superiority over renting.
First, home ownership is a stepping stone to increased wealth and long term financial security. Property is highly regarded by financial institutions as security for borrowing to fund another property investment, a business venture, or personal expenditure such as a holiday. It’s more difficult to borrow against other assets.
Second, home ownership opens up lifestyle opportunities for households and for individuals. With your own place you can invest time and money in maturing the garden, paint and decorate as you wish, have pets as they suit you and generally create a home with the liberty and security that can bring.
This in turn flows into the socially positive outcomes that come from home ownership, including more stable communities.
Households which experience financial difficulty in retirement years are more likely to be living in rental properties, so investing in a home is a better way to secure your retirement circumstances. The early decisions you make around real estate can affect your long term outlook.