by Scott Pape - August 11th 2011
THE lead story on 60 Minutes last Sunday night was called ‘The Big Squeeze’. It contrasted a distraught couple who were drowning in debt and about to lose their home, with another much happier family who’d chosen to rent rather than buy.
The message of the story was clear: right now it’s better to rent than buy.
If only it were that simple. Last week I did the figures for a young couple wanting to buy their first home, and on a pure numbers basis it worked out to be a line-ball decision on whether they should buy or continue renting.
That wasn’t the outcome I was expecting – I’d had a feeling that renting would be much cheaper.
What I hadn’t counted on was that the figures were skewed by the thousands of dollars in government bribes they would be given to buy a home (which, by the way, distort the market and encourage exactly the wrong people to move into mortgage stress misery).
Let me be clear: this particular couple was following the ‘Barefoot 20-10 Rule’ (they had a 20 per cent deposit and had factored in making repayments as if they were at 10 per cent).
Had they not been able to clear those hurdles I wouldn’t have advised they buy. (And if they didn’t listen, I’d have made them go to the 60 Minutes site, watch the story, and see the pain in those poor people’s hearts).
Yet it’s a much different story if you’re older and looking at trading up to a million-dollar trophy home. In that case you’re much better off renting than buying – and investing the difference.
Here’s why: A $300,000 property may rent for $300 a week, an $800,000 may rent for $800 a week, but a $2.5 million home may still only rent for $1,200 a week.
Case in point: a few weeks ago I caught up with a successful real estate agent who lives in the expensive inner city Sydney suburb of Balmain. He confessed that with the sky-high price of real estate he’d chosen to rent rather than buy: “The house I rent for $1,000 a week would cost me $3,000 a week to own – so I’m well in front.”
Tread Your Own Path!
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20 comments
Are you aware of the goverment assistance for renters, Scott? It is called CRA and I believe we dish out 2.6 billion a year. There are “bribes” all over the place that skew figures and do not encourage sound financial management. I think you are right in your other story about the Millionaire Next Door, we buy into the facade.
Yes, Lucky are the poor people who qualify for CRA! NOT!
@Bibi – government assistance for renters? You got any info on this?
I thought it was interesting that in the 60 minutes program they only mentioned very briefly that the real estate agent who was advocating renting over buying was investing the excess cash. The other young family who was renting was spending all their excess cash on themselves and the kids which I’m not sure makes all that great financial sense either? I thought it was quite a misleading program and didn’t provide much useful advice for viewers. Just my view!
I thought the program was misleading as well – insomuch as it sounded at one point as though the wealthy couple were renting out the home that they already owned. The other couple with the 4 kids owned a 5 double bedroom house so they were probably over-commited to begin with given their average salaries/occupations. My husband and I are planning to buy but only because we are sick of no security in renting. If I could get a 40 year rental lease and for all intents and purposes it would become my home – I would not buy, but that market is non-existent in this country. Its much beter in Europe. When the only option is a standard 12 month lease – it means you can be forced to moved out virtually every nine months, unless you are granted an extension.
I agree with you Julia, but it is good to finally see news coverage for once depicting that renting is ok and that right now you are the clever one if you rent (well for those that don’t have a huge deposit).
I am busy getting rid of my debts at the moment (your book opened my eyes big time, thank you) so can’t consider saving for a home or a home loan at present… I have moved 13 times in the last 20 years (luckily I was an Air Force brat so it is something I am used to).
The problem with the rent thing is that unlike Europe we generally are not able to rent long term and settle into a place as if it was our home. Having to move everytime a landlord shuffles their portfolio, or has their own financial crisis is expensive and mentally draining.. I now consider how much a moving van will cost me to change rentals, before I consider a rent-rise. At the moment, its better to cop the rent rise!
However I still dream of my own place, mainly for stability.. even if I dont pay it off until I am about to go into the retirement home.
Until we have confidence in long term permanent rentals (that are not community housing) I think we will always have the home ownership dream.
Tatania, the only time when it is wrong to buy is when you cant afford it. I got my first mortgage two years ago age 36. My father at the same time got a mortgage…age 70.
I dont recommend waiting that long as the only reason Dad could get a mortgage is because it was for 50% of the property value, he is in good health, still working full time and has no plans to retire. in other words he stood a chance of paying it off but the bank stood no chance of loosing.
I write this so you know there is always hope if that is truly what you want.
We were lucky enough to buy a house within our price range and budget, a 1970s box on stilts. 6 months later our equity had already grown $80,000. So we have been here almost 4 years and the equity is now around $110k, maybe more as we have made some improvements. If we paid rent for 4 years and left we would leave with nothing this is the beauty of owning your own home. If you can find somewhere that is within budget, I still think it’s better to own, you would have to be extremely unlucky not to increase your equity by some amount over a number of years. If you are going to be in serious financial strife paying off your mortgage, then renting is the way to go – you have to live a life and have some enjoyment, you can’t just go to work to spend every cent on the bills! We are very happy and this is home, even if it isn’t the most modern of places!
Jan is right, but only because this is australia, and you probably did not buy at the peak of the market. If we then use this exercise over in America, the story would be alot different. I don’t see Australia having that problem any time soon, but the market has already slowed with the reduction in first home grants It will be interesting to see what happens when this government is out, and the libs have to pay off the debt. No more cushy programs for those that can’t really afford it.
I think the only reason what happened in America cant happen here is because we cant simply walk away from our mortgage.
House prices can (and I think will) go down but we cant just say “oh well” walk away and start again leaving the bank to foot the bill.
If we walk away we still owe the bank.
This gives us incentive to work harder and do everything in our power to keep our house…after all you have only lost money on an asset if you sell it for less than you have bought it, if you hang on to it you have lost nothing.
Actually the same thing can happen in Australia. But be much worst because people can’t walk away. If they can’t pay it won’t matter. Look for more suicides. Why do you think they are pressing so hard to sell life insurance in Australia …become our storm is coming and it will be deadlier because people owe more and will lose more.
ah, you don’t live in a mining town… the rent is so sky-high here in Kal right now and properties for rent so few you are better buying, if you have the deposit as really the property price is much cheaper for what you get than in the city (Perth). Unfortunately, we don’t have the deposit yet as we’re saving madly with a First Home Savers Account, which we can’t access for another 2 years. And we’re anxiously trying to find another (scarce) rental within the next fortnight. If we don’t succeed we’ll be living on the streets or shifting to somewhere more reasonable…
Like most people i enjoy investing particuly right now in the sharemarket with price to earnings so attractive; that is to say value buying. Real estate in Australia is no doubt an amazing investment; but it”s over valued and needs to be carefully approached. Ultimately it will run out of puff and come back to fair value again!
I thought the 60 minutes program was misleading because it compared a couple who had both lost their jobs and were now under mortgage stress but the couples who were renting were still employed. I think renting couples would also be under financial stress if both people had lost their jobs too. It wasn’t a fair comparison in my opinion.
a valid point but the renter must invest the difference or else the buyer at least is gaining an asset.
The 2010 rule is a great rule.
20% deposit meaning no mortgage insurance (for the bank not you) and proves you can save.
The 10% Interest Rate rule another golden piece of advice which I am assuming is the last 25 years of Interest rates looking at the highest point, anything below this is extra repayments!
Nice work Scott, 2020 vision for those that do there triple R’s – Research Research Research.
Caveat Emptor people.
Nice post Scott, TM.
So when will the best time to buy? and will it go down like what happened in the US. I am 53 years old and ‘am still waiting to save until I will be able to give 20% deposit…shall I just wait until I retire and get into retirement village.
Rent to buy homes otherwise known as Vendor terms finance homes has been around for many centuries in England. It came to Australia at the first settlement and has been a concept used in the purchase of housing and property for many years until the banks were de-regulated in the 1970s. This method of purchasing houses is still widely used in board room and corporate biddings for properties (hotels, resorts, industrial, etc) in Australia, especially in the higher echelon of the business system.Unfortunately for the general public, very little of what is known as Rent to Own homes or rent to buy homes is understood.
This is some excellent information, that you have provided through the article. Is there a way that someone can utilize it when they lack much money?