Renting vs Buying

Steve Pierson at The Standard takes issue with the statements from the Property Investors’ Federation that it is better to rent than buy. He notes:

First, it’s comparing the average rent to the cost of buying a median house. Rental properties tend to be lower quality, cheaper – so are likely on average to be worth well below the national median. Comparing apples with apples would look at the rent on properties of the same value.

This is a fair point. However would be useful to have some data on the average GV of rental properties compared to properties for sale to see how significant this is.

Secondly and most importantly, if you’re buying the house at the end of 25 years, you own a house. If you rent, at the end of 25 years you have nothing. That’s a pretty serious difference. If you buy rather than rent you might pay some more (less than the difference in the graphic though) but you end up with an asset in the end.

Now this is absolutely key. It is why I purchased back in 2001 – even though mortgage payments were way more than my old rental payments.

However does this asset compensate for the extra costs? Let us look at the graphic referred to:

Now I have not got the time to calculate inflation and interest adjustments so am going to do a simple linear calculation.  Over 25 years you will pay a total of $396,500 if you rent and $968,500 if you buy. So that extra $572,050 you pay renting is well in excess of the $345,000 value of the house.

Now again interest, inflation and changing house values will affect this equation. But the point is that the gap between buying and renting is now large enough to make buying significantly less attractive.

I am so glad I purchased in 2001. If I had waited a few more years, I would really struggle with being able to afford to buy.