Tuesday, 9 October 2007

Experts on Home Renting v. Buying

Denis Orrock, the general manager of InfoChoice, crunched the numbers based on sales and rental figures for the average home in a mid-ring suburb of Sydney and Melbourne.

Disregarding rates and maintenance costs for the homeowner, and tax for both the owner and the renter, over a five-year period renting comes out tops by a margin of $38,000 in Sydney and $7170 in Melbourne. However, if the house grew in value by an average of 8 per cent a year, rather than 6 per cent, the homeowner would be in front by $40,206 in Sydney and $47,818 in Melbourne.

The final outcome will depend on personal circumstance, the property you buy or rent and the relative returns of property and shares over the life of your investment.

However, Australia's most vocal renter, IBISWorld chairman Phil Ruthven, is in no doubt about the best course of action. Ruthven says it takes exactly double the rate of household income to buy the average Australian home today compared with 20 years ago.

With average household income approaching $108,500, and the cost of an established home about $475,000 across the country, it takes 4.4 times average anual household income to fund the purchase. In 1987 it took 2.2 times average household income to buy a home, while a multiple of three is generally regarded as affordable.

But that's only half the equation. Using national averages again, the average rent is under $300 for an established home, or $15,600 a year, which equates to 3.3 per cent of the value of the average house.

"Why pay an interest rate of 8.3 per cent to buy the same house before you even start repaying the capital? [Renting's] a no brainer," Ruthven says.

Property enthusiast Edward Chan of Chan Naylor Accountants suggests a better strategy is to buy a home with an interest-only loan. "Interest-only is similar to paying rent but the capital [value of the house] is increasing in the background. It's better than paying rent," he says.

"I'd go as far as saying it's better to buy your own home and pay interest only and use the amount that you would otherwise put towards the principal to fund a negatively geared investment property. It's better than paying down the mortgage - I've done the numbers."

Ruthven says that investment returns are better elsewhere. He estimates the net capital gain on the average house is about 5 per cent a year after deducting maintenance, rates and selling costs, compared with long-term net returns from shares of 12 per cent.
Source: Wake up to a New Australian Dream, Brisbane Times.

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