Owning a house has long since been an Australian dream. The process was the same; rent at first, save for a deposit then jump into ownership at the earliest. This way of life made for a predictable housing pattern. Nowadays, however, behaviours have changed, especially in Western Australia. A need for lifestyle flexibility, difficulties in saving for a home deposit and a lack of confidence in the housing market has led some to become long-term tenants instead of homeowners.
Let's look at the pros and cons of buying versus renting, how the Perth market looks today, and what options are available to those looking to buy their first home.
Benefits of Buying:
1. Record low housing prices
As of the release of this blog, Perth remains the weakest capital city property market in Australia. In stark contrast to eastern capital cities, Perth house prices have continued to fall with local rates dropping by 8.8% in the past 12months. With a median house price of around $437,558 (according to the CoreLogic home value index), this presents an exciting scenario for those looking to move into their first home. With Regional WA also reporting an 11.6 % decrease in prices in the past 12 months, buying a property now would make sense to those looking to get a good deal. It must be noted, however, that there are a few other factors one would have to consider before jumping in, as addressed later within the blog.
2. Tax benefits (for both investment and main residence)
With the housing market facing hard times, the Reserve Bank of Australia has slashed interest rates to as low as 1% (cash rate), and under the supervision of the ATO, the Federal government established tax benefits and breaks to assist homeowners and property investors. As you may already be aware, homeowners stand to benefit from paying no Capital gains tax after selling their main residence, and rental property owners can claim as deductions the ongoing expenses, they incur from renting out their property. In addition to this, the lower cash rate means that mortgage payers get to save more money as a result of reduced variable home interest rates charged by banking institutions. At this point, it is essential to know about negative gearing, what it is, and some tax benefits that you could potentially gain from a negatively geared property. Read our ‘Negative gearing: what does this mean’blog to learn more.
3. Appreciation of house prices over time
Land, with a select few other assets such as stocks and bonds, tend to increase in value over the long term. Traditionally seen as a stable investment, property can provide worthwhile returns in the long run and be a source of steady, reliable income in a varied and somewhat volatile pool of investment securities. With WA's spring selling season fast approaching, Perth house prices are set to rise, and although the uplift is expected only to be slightly stronger than the typical seasonal rise, this should give property owners an excellent opportunity to put their houses up for sale.
4. Benefits of leveraging can be utilised
When you receive money to purchase a property from a bank, it loans a portion of the price tag to you. In Australia, banks frequently lend a high level of the total worth of a property. This means that the borrowed money used to acquire a property (the leverage) can be very high. For example, a bank mortgage could constitute anything from 75-80% of a property's purchase price while potential buyers deposit between 20-25% as a home loan deposit. Suppose you purchase a property for $1,00,000 with a deposit of $250,000 and obtain the remaining $750,000.
On the off chance that you sell the property a year later for $1,100,000, the property itself would have risen 10% in worth however your return on investment would be 40% (overlooking interest and other expenses) since you have made a $100,000 benefit on the $250,000 initial deposit. It's worth mentioning, however, that after transaction costs, interest and principal repayments, the actual return could be noticeably lower as well.
According to the Real Estate Institute of Australia (REIA), housing affordability in WA improved with the proportion of income required to meet loan repayments decreasing to 22.4%, a decrease of 0.2% over the quarter and a decrease of 1.5% compared to the June quarter 2018.
5. Intangible benefits
Becoming a homeowner also provides some immaterial benefits as well. For instance, the feeling of security that springs from the knowledge that you can't be uprooted if the landlord chooses to show you out, and the ability to redesign the property to your whims and fancy.
Disadvantages of Buying
1. It's a long-term game
The Perth housing market is currently trading at 20% less than it did at its peak in 2014. Even with buyer demand and confidence responding to the positive effect of a stable federal government, lower interest rates, tax cuts and a subtle easing in credit policies, experts expect that it should take some time for values to return to their previous highs. This means that a long-term perspective is paramount for homebuyers who may be looking for more short-term returns instead.
2. The opportunity cost may be substantial
If a homeowner buys a property outright or makes a sizeable down payment for a property loan, then a considerable amount of their money may end up locked in that property. This tied up money can no longer be utilized elsewhere for other pressing needs. Opportunity cost is simply the cost of having your cash locked in property instead of being used for other purposes. The money could have been used to receive returns from bank deposits, income from a diversified portfolio (historically 8% per year), or for investing in a business.
3. High ownership costs
With the RBA estimating costs of purchasing a property as high as 4.3% on average (including buying costs such as stamp duties or conveyancing), the transaction costs of owning or selling a property can be quite substantial. When you add other costs such as real estate agent commissions, advertising costs, and ongoing costs such as council rates, repairs & maintenance, depreciation or body corporate fees etc., the total cost of owning or selling a property can approach or exceed 7%.
Benefits of Renting
1. Rental affordability
According to a report by REIA; rental affordability in WA is on an 11-year high and has improved during the June 2019 quarter with the proportion of family income required to meet the median rent decreasing marginally to 16.4%. The percentage of income needed to meet rentals experienced a decrease of 0.1% over the quarter but an increase of 0.1% compared to the year before. With many individuals and families able to keep more of their income by renting, it's no wonder why this is a leading cause of why many choose to become long-term tenants instead of homeowners.
2. Your money is freed up to be utilised elsewhere
Renting frees up your savings to earn a return elsewhere and depending on where those savings are invested, they may be able to obtain a higher yield than would be possible in property. Yields available in term deposits and savings accounts have been falling recently as the RBA has cut interest rates. However, other investments like shares and bonds, remain attractive options with a balanced portfolio of stocks and bonds, historically providing a return closer to 8% over the long-term.
3. Flexibility – moving between houses
While being a property owner provides more stability, renting gives more flexibility. This may be an attractive option for young Australians and families who may need to migrate from place to place due to work, schools or other commitments.
3. Diversification of risk
Buying a property may effectively mean you are placing all your eggs in one basket. One property in one suburb in one city in one country. The purchase could constitute a sizeable amount of your savings and with various factors at play, some that may be outside your control, it wouldn't be hard to see why many people would prefer renting to buying. By renting, you can spread risk across a broad range of investments and use your saving in a manner that best suits your risk appetite.
Disadvantages of Renting
1. Renting might not encourage responsible saving practices
In contrast to purchasing a property where you may be compelled to pay towards a mortgage every month (which includes interest and principal repayments), renting does not encourage forced savings. This can entice tenants to spend extra money as opposed to saving and lead to poor money management practices.
2. Reduced freedoms
As a homeowner, you have the independence to model your property exactly how you would like. From placing picture hooks in the walls for family photos to total renovations, being an owner allows you to live in a home from which you can't be moved on if the landlord decides to sell. Renting comes with increased restrictions as to what you could do with the property and may come with additional charges if anything is found damaged or missing at the end of your lease agreement.
Some options available:
1. Apply for a 'Home of my Own' $5,000 grant.
Raising money for a home loan deposit can be a tough task. In-between weekly rent payments, providing for yourself or a large family and building up your savings, it can take years before you manage to reach the amounts required by a bank to issue a loan.
Move homes - a family-owned building company recognized this and became one of the founding supporters of the Home of my Own Foundation. The purpose of this not-for-profit is to provide grants to eligible clients of up to $5,000 to be used for a deposit to build a new home.
So, if you're looking for a low deposit or no savings loan, a grant from the Home of My Own Foundation could be the difference between building your own home or renting. You can check out their Foundation's website here to learn more about whether you are eligible for the grant or not.
2. Other options
If you are committed to becoming a property owner, some alternatives to explore could be becoming a renting investor – a situation where you rent where you live and lease out what you own or targeting rent-to-buy opportunities (although very rare in the market). These options come with their own unique sets of advantages and drawbacks which you could talk to your Mortgage broker about and plan out a strategy to answering that million-dollar question!