Is it better to rent or buy? I ran the numbers to find out...
Updated: Nov 11, 2022
August 14, 2021 — 11.00pm
Senior economics writer
Just before purchasing my first home nearly two years ago, I was paying $650 a week rent to live in a similar, two-bedroom unit in an adjacent suburb.
Property enthusiasts would no doubt bemoan this money as “dead money” and celebrate my entry into the hallowed halls of home ownership.
But am I really ahead? Are the substantial costs I’ve incurred for home ownership – including stamp duty, mortgage interest and strata fees – really less than the rent I was paying? Or is it true, as some argue, that you are better off renting and investing your savings in some alternative vehicle, such as shares?
This week, I decided to run some of my own numbers to find out.
First up, please know that I have always hated the term “dead money” to describe rent. Paying for the provision of an essential service – a roof over one’s head – seems like a pretty great purchase to me.
Do we begrudge money spent on food as “dead money”? No, it’s all pretty necessary stuff to buy and consume. Only, it’s just that: consumption and not investment. When you buy a home and start paying off a mortgage, your outlays are a combination of both.
Money paid as interest on your loan could be considered “dead money” just like rent. Instead of paying a landlord, you are paying the bank for the service of lending you money for housing.
But unlike rent, a portion of your mortgage repayments goes towards paying off the principal of your loan – and that is a type of investment because it increases your ownership stake in an asset that will hopefully appreciate in value over time.
However, if you choose to rent, you could always choose to invest your surplus savings into other investments, such as shares, achieving the same mix of spending and saving.
The real question is: Which housing path produces the lowest ongoing “dead money” costs, thereby leaving you the biggest surplus to invest – be it in a principal place of residence or elsewhere?
After refinancing to a new lender and locking in my interest rate at 1.84 per cent for two years, my weekly interest costs are about $240. (It’s worth noting that figure has almost halved since I took out the mortgage, thanks to rate cuts and savvy refinancing!)
Right, so $240 is clearly cheaper than the $650 I was paying – I’m winning, right? But wait, there’s more. So much more.
On settlement, I dutifully handed over about $34,500 to the state government in stamp duty. Assuming the average home tenure of about 10 years, that’s an annual cost of $3450, or $66 a week.
Alternatively, if I live here until I die (at the ripe old age of 100) that cost falls to $11 a week. We shall see, I guess! For this analysis, let’s assume 10 years.
On buying, I also paid $1875 for conveyancing and a couple of hundred dollars in government fees and bank charges. Call that $2500 and, again assuming the 10-year tenure, that’s another $5 a week.
As a unit owner, I am also up for the large ongoing costs of strata management. I live in a block with a pool and a lift, so my strata fees are $6818 a year, or $131 a week. Ouch!
This covers the cost of building insurance but not my interior furnishings and fitout, so I’ve gone from paying no home and contents insurance (my stuff isn’t worth that much) to paying $233.30 a year in home insurance – about $4.50 a week.
Then there’s the water bill, which came to $584 last year – $11 a week. Local council rates came to $1156 for the year, so $22 a week.
And if anything breaks – like the dishwasher or hot water system – I’m on the hook for all repairs or replacements. Let’s assume $500 a year for this, or $10 a week.
Looking ahead, one day my property will be sold, either because I have died or moved to another place. The Reserve Bank of Australia puts the average selling costs, including agent fees, advertising and government charges, in the region of 3 per cent of a property’s price. That would be $26,100 based on my original purchase price – so that’s another $50 a week, assuming the 10-year tenure.
Adding that all up, I get a total “dead money” cost of ownership of about $540 a week at a 10-year tenure and $440 if I don’t move. Yes, it’s a bit less than the rent, but not overwhelmingly so.
Of course, fast-forward 30 years – or however long it takes me to pay off my loan – my interest costs will disappear. If I didn’t buy, I’d be facing rental costs for my entire lifetime.
In reality, there are so many unknowns here. How much will interest rates go up? By how much will rents rise? Will property prices appreciate faster than shares, or vice versa?
And then there’s the non-financial costs and benefits to consider, which only an individual can answer. Do you like a sense of security that you don’t have to move, or does it make you feel pinned down?
But I think several things become clear. If you do buy a principal place of residence, try to move as little as possible, as the transaction costs like stamp duty and selling fees really add up.
Sometimes it’s better to wait until you’re sure where you want to live, and – even more critically – with whom. The costs of getting those decisions wrong can be hefty (both financially and emotionally).
It’s also worth considering if getting a mortgage could force you to be more disciplined with your saving and investments – it certainly has for me. And if you don’t take out a mortgage, remember that you will have to save a higher amount to cover greater housing costs in retirement.
It’s also important to consider the tax implications of buying versus renting, including the tax-free treatment of capital gains on your principal place of residence and its exemption from the age pension assets test.
Finally, leverage is also something to think about. Banks are typically happier to lend more against the value of property than shares, enabling you to potentially turbo-charge your investment returns. Overall, my take-out is that the rent versus buy decision is one you have to make for yourself, depending on your own unique circumstances. Yes, in my case, I feel home ownership has been a good decision, so far. But it’s a more finely balanced equation than many would imagine.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.