Blog Buying versus renting - pros and cons

Buying versus renting - pros and cons

10 September 2015
Buying versus renting - pros and cons

In recent years, booming house prices have made it significantly more difficult for first time buyers to secure a home in many regions across the country.

Despite the property values skyrocketing in many capital cities - Sydney and Melbourne in particular - record low interest rates have kept the cost of home loans down, giving buyers the leverage necessary to enter such a frothy market. In fact, research from the Australian Bureau of Statistics (ABS) found that the number of people investing in owner occupied housing (typically a sector dominated by first home buyers) increased by 4.4 per cent between May and June 2015.

Home ownership rates dropped 1.1 per cent between 2006 and 2011.

Nevertheless, home ownership is ultimately decreasing. The ABS' most recent figures showed that in 2011, 67 per cent of Australians owned their home (either outright or with a mortgage), a drop of 1.1 per cent from five years earlier. This highlights the growing number of people who are, out of choice or necessity, renting their homes rather than purchasing them.

Not sure whether you should be committing to a mortgage? Let's take a look at some of the pros and cons involved with renting a house and buying property:

Renting - pros

1. Less expensive

As noted, affordability is the key reason people choose to rent over buying. Saving for the down payment on a home is challenging, time consuming and may take many years to achieve, particularly if you're purchasing alone.

As also pointed out, rental rates are typically lower than mortgage repayments. If your lifestyle requires a high level of disposable income, renting may be the way to go.

2. You're unaffected by negative swings in the market

Throughout 2015, we've seen that the property market isn't quite as impervious as it once was. This is particularly evident in Perth, where the median house price dropped $20,000 in the June quarter, according to figures collated by the Real Estate Institute of Western Australia.

As a renter, of course, you never need to worry about these fluctuations.

3. More freedom

An intangible but important benefit to renting is the flexibility it provides. If you ever get sick of the house or the suburb you're living in, you have the freedom to simply give notice, pack up and move out.

Renting - cons

1. You can't make home modifications without consent

Think the living room would look better with a lick of paint? Feel like redoing the tiles in the kitchen? Even if you're a DIY extraordinaire, there's a good chance your landlord won't allow you to make any of these changes. It's not surprising - after all, for better or worse, your work could directly impact the value of his or her asset.

2. Less certainty

While there are a number of policies to protect tenants, your living situation depends entirely on your landlord. For example, he or she may choose to raise rent prices or even evict you entirely (with the proper legal warning, of course). This creates a level of uncertainty about the future, which can be particularly stressful for those with family.

Buying - pros

1. You're making capital gains

Perhaps the biggest benefit to buying a house is that you're investing in an asset that will (hopefully!) increase in value over time. In the future, when the market's looking favourable, you may be able to sell for far more than you originally paid. It also opens up other options for capital growth, such as using the equity in your home to re-invest in other property.

2. Renovate to your heart's content

Feel like knocking out a wall to open up the kitchen? Want to redo the entrance way? This is your house, so you can redecorate, remodel and refurbish as you see fit. Just make sure that your changes are actually adding value to the property.

3. Higher level of security

As long as you make your mortgage repayments, you can rest assured knowing that you have a secure home to call your own. Fixed rate home loans also offers financial certainty, enabling you to more easily meet your obligations without the risk of market shifts driving repayment amounts up.

Buying - cons

1. Maintenance expenses

If you're renting and something goes wrong with the property, in most cases the landlord is responsible for organising and paying for the repairs. In your own home, of course, this burden rests entirely on your shoulders. Think twice before buying that seemingly cheap fixer upper.

2. Requires a large down payment

Sydney's median house price hits $1 million: Domain Group
— Domain (@Domaincomau) July 22, 2015

Generally speaking, you'll need to pay 5 per cent of the total cost of the house to buy a property. This might not sound like much, but in high value areas such as Sydney, where median house prices hit $1 million in July, according to Domain Group, this still equates to a hefty price tag of $50,000.

3. You're taking a risk

Historically speaking, houses tend to grow in value. Nevertheless, there's always a risk that the prospective location of your new home is the exception. With many experts believing the market will flatten out somewhat in the next few years, buyers should be cautious and practice due diligence before taking out a home loan.