The cost of housing in Australia is ridiculous!!!
At least, it is if you believe all the crap you see in the media.
Perhaps I’m in the lucky (unlucky?) situation, living in Perth, where house prices are around the same levels they were 10 years ago.
Now I will agree, it ain’t cheap living in the big cities of Australia. But it doesn’t have to turn into modern-day slavery either. There is a balance, and most importantly there is a choice… something the media and people often forget.
It’s the age old question that everyone asks… Is it better to rent your house or buy it?
Different people and indeed different generations, will have opposing answers to that question.
It’s a very important decision. And one which will greatly affect your ability to achieve financial freedom, in a short space of time.
Let’s dive in, and see how the two choices stack up…
Why You Should Rent
- Renting is typically cheaper than owning, since rental yields in our cities are so low. (currently 3% for houses, 4% for units). Buying a house today means a mortgage with a 4% interest rate, plus council rates, water rates, strata fees, insurance, repairs, maintenance, upgrades etc. It will easily add up to at least 5% of the value of the house each year. Plus you will be paying it off, so the weekly outgoings will be even higher, as a bit of your mortgage payment will pay down the balance. Not a bad thing, but should be considered, since it means higher weekly costs and less cashflow available for investing.
- There’s more flexibility in where you live. You can move suburbs or to a different city for work, all at minimal cost. It also reduces the problem of getting stuck with bad neighbours.
- No need to take on any debt. There’s no interest being paid to the bank. Some people are uncomfortable with debt, and they will naturally feel better without a mortgage. This is an advantage, especially when interest rates increase.
- No capital is tied up in your house doing nothing. All your funds are going straight into income-producing investments.
- It’s possible to take advantage of mispriced suburbs. (A group of expensive suburbs may have a cheaper suburb next door, with no major difference in lifestyle quality, allowing you to take advantage of living in the cheaper location).
- Allows you to better manage cashflow. No sudden repair costs. Large rental increases can be managed by moving to a different location or different style of property if desired. This allows you to better maximise your savings rate at all times, especially if your needs change, such as having a family or one spouse loses their job.
- Can experiment more with locations. Try living in the city, at the beach, in the country… all as a test to see what you really like. It’s the ultimate version of try-before-you-buy!
Renting offers the most room for optimising your cashflow, increasing your savings, and ultimately reaching financial independence at a young age.
The numbers are usually more attractive than owning in Oz, and don’t forget, it doesn’t mean you can’t buy a house later.
What makes the numbers more compelling, is that even though interest rates are at record lows, renting is still cheaper. It’s more likely than not, interest rates will increase from here, making mortgages more expensive.
There are many success stories about young people who have shunned home ownership at a young age, in order to plough as much cash as possible into investments. I think there’s a strong argument for focusing on investing first.
Later, once you’ve built wealth and escaped the rat race, you can buy your house outright if you so wish.
Why You Should Buy
- Buying a home gives you security. You can stay as long as you like, decorate however you like and you don’t need to answer to anyone.
- Having a mortgage is a good form of forced-saving. I admit some people need this, or they just don’t save anything at all. To be fair, you can also do ‘forced-investing’, where you automatically transfer some of your pay every week to be invested.
- The fear of debt can be embraced here too. These folks can just pay off their mortgage ASAP, then continue with the same repayments… but put the cash into investments (like LICs or index funds) instead. I know some people who use this approach with great success.
- You effectively ‘lock-in’ your house price which sets your 30 year repayments at a certain level (interest rates permitting), and you also benefit from any capital growth that occurs.
- It might offer a greater level of happiness as memories are built up in the home, as you raise your family. This can be an important mental benefit for some.
- You can sell the property later and pay no capital gains tax. It’s possible your property increases in price quite a lot, you can then sell it tax-free, and invest the money into dividend-paying shares. You can then move anywhere, or travel, with an attractive income stream paying all your bills.
Buying a home offers greater happiness and security for many. It is a lifestyle choice, and it should be treated as such.
For example, buying a $1m house in Sydney is not a basic human right… it’s a lifestyle desire.
Being a home-owner can be profitable, tax-effective and offers benefits that can’t be measured in numbers. For some people, having a mortgage-free house gives immeasurable happiness.
I rented for a few years before I met my partner, and it has it’s good and bad points. We currently live in an average-priced mortgaged house.
I love the fact we can stay as long as we want, but hate paying strata fees, council rates and water rates!
Despite the higher cost of owning, we have remained in our mortgaged house, mainly due to our room-rent situation, making it less expensive.
We’ve considered renting quite a bit in the last few years, mainly because we plan to move out further away from the city so we can have a bigger yard for veggie gardening and fruit trees.
It makes sense we try out different locations we’re interested in, before we buy.
This is because, if we move and buy, we’ll have to pay selling agent fees ($10k minimum) and stamp duty on the new place ($20k minimum), amounting to at least $30k for an average capital city property.
It’s not something we want to get wrong, $30k is a gigantic amount of money!
It’s likely, by moving locations, our housing will cost around $100k less. This means extra funds will get ploughed into dividend-paying shares, strengthening our position and pumping more cashflow back to us.
We also decided, not to pay off any of our mortgages along our journey, because it was far more effective to invest the extra money, instead of paying down debt.
So for now, we’re owners, but we may well rent in a few years. Then we will figure out exactly where we want to live long term and most likely buy a house. Update: We now rent and it’s actually great so far!
If I Started Over…
If we started again right now, we would either buy a low-cost house, or we would be renters.
To achieve financial independence as fast as possible, the main strategy is to reduce costs and maximise your savings rate.
Since housing is such a large expense, it should definitely be the most optimised. It can literally make the difference between early retirement, and permanent wage-slave.
After we had built wealth, we could then look at buying wherever we like.
Reaching financial independence gives you location freedom, and there are many more lifestyle options available to you, at that point.
My approach is, always treat investing as the number one priority. Everything else comes second to that. Once you’ve built wealth through investing, you can then buy a house, even with cash!
My preferred housing strategy is, pick a low-cost house to buy, or rent until you’re rich.
There are plenty of regional places where houses are cheaper and rental yields are higher, making buying more favourable.
But in general, the numbers are in favour of renting and investing, instead of owning, in my opinion.
Renting works doubly well in blue chip locations, where property is more expensive. In these areas, rental yields tend to be very low (around 2-3%).
To buy these properties with a mortgage, will cost 5-6% after including all the costs like rates, strata, maintenance etc.
Essentially in these prime locations, it costs 2 to 3 times as much to live in the same property, if you want to own it. Don’t believe me? Here’s an example of using real numbers from our own investment property.
Remember, renting is only more effective if you actually save and invest the extra cash!
We’re trying to build financial strength here, so we will not be loading ourselves up with a million-dollar mortgage on our place of residence 😉
The issue I see is, most people try and buy the most expensive house they can afford, as soon as they can.
Then they’re basically stuck paying it off for the next few decades, because they have no ability to wait until they set themselves up first.
Delayed gratification is a hugely important skill in building financial strength.
Housing choice… is a choice
The aim of housing is to provide a roof over our heads, with a relatively comfortable and secure place to live. Somewhere along the lines, the goal turns into postcode status.
This is just plain sad on so many levels.
You can easily optimise your housing by not having more rooms than you need. Does a 2 person household really need a 3-4 bedroom house?
Also, you could perhaps spend a bit extra to live closer to work, and it may save you a fortune in transport costs, if you can switch to a 1 car or car-free household.
Too many people get sucked in to thinking, if they don’t buy now, they’ll miss out forever. This is exactly what drives the mania in housing markets, like Sydney and Melbourne is experiencing right now.
Inner-Sydney is not Australia. There are plenty of lower-cost housing options out there.
Just recognise, you do get a choice.
Even if you move to a lower-cost city and have to accept a lower-paying job, it’s possible that the numbers work out better than living in the high-cost city.
Whatever you choose, be sure to crunch the numbers and remember to treat your personal finances like a business.
And it does make a difference!
For example: If a couple decides to spend $400 per week on housing, instead of $600 per week like their friends…what happens?
Well, assuming they invest the $200 per week savings into low-cost LICs, and get a return of 7% per annum – they’ll end up $150k richer after just 10 years!
If you decide to buy… don’t move!
You’re probably throwing away $30k of equity every-time you move, in agents fees and stamp duty.
I know a couple who has moved so many times, they literally have only half-a-house paid off, after almost 40 years of having a mortgage.
Every time they moved, they burnt up a bit more of their equity. Sadly they thought they had done well with property over the years, since the house price got higher each time they bought and sold.
It was just an illusion, because their mortgage kept increasing too. This is incredibly unfortunate. They hadn’t bothered to crunch the numbers at all, or consider whether they were actually getting any further forward or not.
Renting is considered a non-option by many, since apparently it’s dead money. But I think this is an outdated way of thinking. The numbers don’t suggest this at all!
It can’t be considered any more ‘dead-money’ than interest, stamp duty and agents fees.
Here’s my main points: Just like all our expenses, housing can be as expensive as you want it to be.
It doesn’t have to kill our chances of financial freedom. Just be reasonable about it and choose a modest place that’s not too much house for your circumstances.
Don’t let your dream house kill your freedom.
The best gift you can give yourself is to be truly honest about what you need and what you want. There’s a big difference.
What it boils down to is, the numbers favour renting, but our emotions favour buying.
Whatever you choose, don’t let it affect your savings rate too much.
Most people get trapped into the work-to-pay-the-mortgage lifestyle for far too long, never focusing on investing, and never building freedom into their life.
This is the overall wealth approach I recommend…
Reduce expenses… Build strong financial habits… Save aggressively… Invest constantly… Wealth Builds… Investment income stream grows…
The sum of these parts equals – Financial Strength and a Life of Freedom
What do you think? Is it better to rent or buy, when striving for financial independence? What’s your housing strategy?