Is buying better than renting?

Australians pride themselves on their strong commitment to home ownership, and renting is often dismissed as an inferior choice. Aussies are often told that “rent money is dead money” and are warned to “stop paying off someone else’s mortgage.”

Buying a home of one’s own, however, comes with additional financial commitments. There’s stamp duty, maintenance costs, conveyancing, local council charges, strata levies, and building insurance to consider. Homebuyers also need to consider the hundreds of thousands of dollars in interest payments that need to be settled over time.

This begs the question: does it make more financial sense to purchase a home or keep renting and investing the extra cash? Economists Dominic Crowley and Shuyun May Li have attempted to answer this question in a new research paper.

“Renting is often derided as an inferior choice,” they wrote. “However, it is not clear whether owning a home is superior to renting from a financial point of view. If a prospective buyer decides to rent, rather than buy, she could invest the difference in ongoing costs into other assets.”

While it’s impossible to predict accurately how financial decisions will play out, the economists crunched the numbers and compared the benefits of renting versus buying using data from 1983 to 2005. They wanted to find out if it was financially smarter to purchase property and then sell it after 10 years or rent and invest the same amount into a mix or shares and term deposits.

Buying is better than renting

The economists concluded that buying is generally better than renting.

“Our results suggest that buying was financially more favourable than renting over much of the past three decades in all Australian capital cities,” they said.

The results of the study suggest that buying is currently the better option in Sydney, Melbourne, Perth, and Darwin. However, neither buying nor renting is clearly favourable for the other capital cities.

While their findings appear to be a done deal, their conclusion is not quite so clear cut.

The economists constructed two alternative scenarios. In the first scenario, a first-home buyer puts down a 20% deposit on a median-priced, free-standing home. The buyer is assumed to take out an interest-only loan and will make no additional repayments. At the end of the 10 years, the buyer sells and realises a capital gain from which the upfront and ongoing costs (including interest) of property ownership (excluding strata fees) are deducted, with the value of the future net gain expressed in today’s value.

In the second scenario, a person rents and invests the deposit amount into a mix of shares and term deposits. The renter pays rent for 10 years on similar properties to the purchased property in the first scenario. While the homebuyer stays put for a decade, the renter moves three times during this period, incurring moving costs and a month of paying double rent each time.

Dividends from shares are reinvested, though no additional savings are made. After the 10 years, the renter’s investments are sold and capital gains tax is applied. The value of the renter’s net gain is also expressed in today’s value.

The two values for the net present value of ownership and renting are computed from 1983 to 2005, with results for each capital city. For Sydney, buying property emerges as the financially superior strategy in all but four years. In Melbourne, buying was deemed the financially superior strategy in all but six years. The other capital cities had similar results.

While this hasn’t been true in every year, over the past three decades, the financial return on property ownership has exceeded the return available to renters who invest in alternative asset classes.