I hear it quite often. The never ending argument of whether it’s “better” to rent than buy a house. Now first of all “better” is a subjective term and there will always be someone who thinks something is “better” because of their unique situation. One might think renting is “better” because it gives you more freedom to be nomadic. Another might think buying is “better” because it gives you more freedom to upgrade your house. Everyone’s different so ignoring these obviously personal differences I’m going to purely analyse the renting vs buying argument based on finance and math alone.
If one option is cheaper than the other, then the cheaper option is “better” and wins.
I acknowledge that something being cheaper isn’t always the decision maker and that you personally may still chose to rent/buy because you need to be free/upgrade but that is for you to figure out after you’ve seen the math. You might decide that the more expensive option is STILL “better” because of those personal reasons but to begin with let’s at least do the math. Now that the semantics are out of the way I’d like to happily introduce another unique and (I think) extremely useful spreadsheet to you all. The base data has been taken from RP Data and is only a few months old. The provided data they gave in PDF form was quite useless as you couldn’t sort it and their method of calculation was quite cryptic so I modified it a smidgen. So in the spirit of providing you the reader with unique, useful and amazing information I give you:
This spreadsheet lists every suburb in Victoria, the median house price, the median rent amount and distance from the CBD that suburb is. All this information is sortable and searchable. Simply open the above link, select “File -> Make a copy…” and it will be saved to your Google Drive account for editing/sorting. You can do many things with this sheet such as find the top 100 most expensive (or cheap) suburbs to rent or to buy. You can find out which suburbs are better to buy or rent in and you can even alter the interest rate at which the calculations are made at.
So for example if you’re looking to rent and want to rent somewhere that’s cheap, sort the entire list from “Z->A” in the Median Weekly Rent column. In the far left column you’ll have the suburb name as well as a number that tells you how close in km’s it is to Melbourne. There is also another column that automatically calculates (based on the interest entered at the top) if it’s better to Rent or Buy in that suburb. Simple!
Now that I’ve introduced this spreadsheet I’d like to go into a bit more detail on how exactly to calculate whether or not it’s cheaper to rent or buy as most people seem to have no idea…
For this example calculation I’m choosing Blackburn as the suburb. From our handy spreadsheet we find that a median house will set us back $816,389 and if we were to rent there it’d cost us $403/week.
|Mortgage (principal & interest, 30 years @ 5%):||$1,006/week|
|Council Rates:||Roughly >$1,000/year|
|Stamp Duty:||$1,468/year ($44,053 spread over 30 years)|
So we have a yearly cost difference of $55,280 vs. $20,956. That’s $34,324 EVERY year that you’d save just by renting in Blackburn.
Now there’s one more important fact and that’s that at the end of the 30 year period the person that’s “bought” will own that home where as the renter will own nothing. This is where we have to start to estimate likely earnings. Over the course of the 30 years the renter has $34,324 to do something with each year. Now if they simply piss this up the wall on fancy cars, iPhone’s, dinners and so on obviously the buying option comes out on top. They have a house paid off whilst the renter has nothing. This is often why people sprout the notion that “renting is worse than buying” because most people can’t control their finances. If you can however and know how to invest money wisely then things turn out slightly different most of the time…
Say our renter takes that $34,324 extra each year and invests it in shares/bonds/REIT’s that return (on average over the 30 years) about 8% return (or 5% real return when you count inflation). Heading on over to our trusty compound interest calculator we find out that after 30 years our renter ends up with $2,280,447.
That’s $2,280,447 in today’s dollars too as we’ve already accounted for inflation.
So now we have a renter with $2,280,447 and a buyer that ends up with a house. How much is that house worth? That’s an interesting question that I can’t answer unfortunately. It is entirely possible that the $816,389 house they bought will end up being worth more than $2,280,447 however it’s VERY unlikely. Based on historic data a well-diversified portfolio of shares has always grown at a faster rate than housing. In fact up until quite recently (the past 10-20 years) Australian houses have grown at about the same rate as inflation.
As you can see, it wasn’t until about the 1990’s that house prices exploded. Before then they hadn’t really gone anywhere in real terms. Now this certainly doesn’t mean that they won’t “boom” again but it’s very unlikely and even if it does happen, it’ll be on a much smaller scale than the rest of the economy so says history.
All this leads me to believe that it’s a LOT cheaper in the long run to RENT in Blackburn. In fact, when you do a number of calculations and simulations it’s always cheaper to rent in EVERY suburb of Victoria when the interest rate is >6% or so. Given that we’re at the lowest interest rates in about 60 years I think it’s not too hard to imagine that these rates won’t hang around for long which means over a 30 year period they’ll go up making renting the smarter option financially.
Of course all this financial talk doesn’t change the social nature of people here in Australia. The “Australian Dream” (aka the American/British/Where ever Dream) seems to be far more powerful than people’s ability to do math or follow common sense otherwise we wouldn’t have “starter houses” going for close to $1,000,000 in Sydney currently. I wonder if that big red line in the graph above will ever return to its historic level…
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).