House for rent or house for sale: Which property option is best for Australians?

The answer depends largely on the type of lifestyle you value

It’s a question that many Australians wrestle with: is it better to rent or to buy? We let the economists weigh in.

Increased speculation that house prices may have peaked will be music to the ears of buyers anxiously waiting to get into a hot property market. But what if they still can’t afford the house they want in the area in which they want to live? What if they lose their job and can no longer pay the mortgage? Would they be better off renting?

Two Reserve Bank of Australia (RBA) researchers recently claimed that, based on current house prices, owning a house costs 30 per cent less than renting. Interestingly, this research contradicts previous claims, also made by the RBA, stating that it is cheaper to rent.

INTHEBLACK put the much-debated question to three economists: Is it really cheaper to buy than rent in Australia?

Is it better to buy or to rent?

AMP Capital chief economist Shane Oliver says that rental yields are a guide to the cost of buying, making it cheaper to rent than to buy in the current market.

“Given rental yields are so cheap, you are better off renting. You get a lot more for your money,” he says.

According to the latest CoreLogic RP Data Hedonic Home Value Index, despite a slowdown in some capital cities in recent months, combined capital city dwelling values were 10.2 per cent higher in the year to August.

In stark contrast, there has been a consistent downwards trend in gross rental yields, with historic lows recorded for Sydney and Melbourne.

A typical dwelling is attracting a gross yield of just 3.3 per cent and 3.1 per cent respectively across Australia’s two largest cities.

Related: 3 possible outcomes for Australia's property market

What the RBA economists didn’t factor in were the long-term benefits of owning vs renting, people’s individual circumstances and lifestyle choices.

From a saving and asset-building perspective, it may be better to buy than to rent over the long term, but that depends on where a renter invests any extra money saved, says Oliver.

“If you buy a house and pay off a mortgage, you have an asset and equity to build on,” he says.

“There is also an emotional value that could swing the argument back in favour of owning. You own a little castle you can paint or rearrange, which you can’t do as a renter.”

Tax advantages of home ownership

University of NSW Economics PhD and property expert Nigel Stapledon says the tax advantage of home ownership generally makes it a better financial option over the long term, but the deposit and transaction costs are a major hurdle to getting into the market.

Owning a home outright means you are effectively earning income on which you will pay no tax.

“This imputed rent has a value that isn’t always factored into the equation,” says Stapledon, “but there is a long-term pay-off for those who do buy their own home and stay in it for years, such as those in retirement.

“There is also an emotional value that could swing the argument back in favour of owning. You own a little castle you can paint or rearrange, which you can’t do as a renter.”

“If you have the equity to get in and buy a house and you pay it off quickly, then you will get the benefit earlier.”

The high barriers to entry to the housing market make it more difficult for some than others, with transaction costs – such as stamp duty and legal fees – adding an estimated 6 per cent to the cost of the property.

Stapledon says it is no surprise that more people are buying an investment property and paying rent elsewhere.

They get the benefit of living where they want and the lower rents which come as a result of negative gearing, as well as negative gearing on their investment, he says.

Factoring in lifestyle choice

Bank of Queensland chief economist Peter Munckton says the decision to rent vs buy depends on an individual’s circumstances and what they are looking for.

“If you are in Sydney and you can’t afford to buy, then it is easy; you have no choice,” he says.

“People have cash flow constraints that determine where they have to go.”

It may also be a question of lifestyle and flexibility, which can be better if you are not tied to maintaining a property, points out Munckton.

Related: Why do house prices keep rising?

He says key considerations for most people wanting to buy include: their income and what it is likely to be in the future; cash flow constraints as to what they can afford; lifestyle choice; certainty about what they can do to a property if they own it; ability to afford to buy where they want to live.

Munckton says that while most people are relaxed about interest rates staying at or near the current low level, a major concern is the fear of losing a job.

“When the economy is strong and job growth is strong and people are confident about keeping their job, then they are happy to pay up for houses if they have to,” he says.

“If you are someone who has just got a job and you are not sure what is going to happen, then the answer might be different.”

AMP’s Oliver dismisses future income as a major reason for renting vs buying.

“You still need cash to flow in, whether it is to pay rent or a mortgage,” he says.

According to the Adelaide Bank/ REIA Housing Affordability Report for the June quarter 2015, the proportion of the median family income required to meet average monthly loan repayments is 30.3 per cent. This compares with 25 per cent of the median family income required to meet median rents.

Back to the future [house] prices

Stapledon says that people’s expectations around future house prices and interest rates will play a major part in any rent vs buy decision.

He says it is pure speculation as to what will happen around both, but if there is a stable environment for interest rates – which seems more likely than not – then house prices will rise in line with rents.

“If everyone was on the same income and the property market was in equilibrium, then from a price perspective, people would be indifferent to buying or renting,” says Stapledon.

Since that is not the case, the answer is as it has always been: it depends.

Read next: Negative gearing tax breaks: should they stay or go?