The cost of housing in Australia is ridiculous!
At least, it is if you believe all the crap you see in the media.
Perhaps I’m in the lucky (unlucky?) situation, living in Perth, where house prices are around the same levels they were 10 years ago.
Now I will agree, it ain’t cheap living in the big cities of Australia. But it doesn’t have to turn into modern-day slavery either. There is a balance, and most importantly there is a choice… something the media and people often forget.
It’s the age old question that everyone asks… Is it better to rent your house or buy it?
Different people and indeed different generations, will have opposing answers to that question.
It’s a very important decision. And one which will greatly affect your ability to achieve financial freedom, in a short space of time.
Let’s dive in, and see how the two choices stack up…
Renting offers the most room for optimising your cashflow, increasing your savings, and ultimately reaching financial independence at a young age.
The numbers are usually more attractive than owning in Oz, and don’t forget, it doesn’t mean you can’t buy a house later.
What makes the numbers more compelling, is that even though interest rates are at record lows, renting is still cheaper. It’s more likely than not, interest rates will increase from here, making mortgages more expensive.
There are many success stories about young people who have shunned home ownership at a young age, in order to plough as much cash as possible into investments. I think there’s a strong argument for focusing on investing first.
Later, once you’ve built wealth and escaped the rat race, you can buy your house outright if you so wish.
Buying a home offers greater happiness and security for many. It is a lifestyle choice, and it should be treated as such.
For example, buying a $1.5m house in Sydney is not a basic human right… it’s a lifestyle desire.
Being a home-owner can be profitable, tax-effective and offers benefits that can’t be measured in numbers. For some people, having a mortgage-free house gives immeasurable happiness.
I rented for a few years before I met my partner, and it has it’s good and bad points. We currently live in an average-priced mortgaged house.
I love the fact we can stay as long as we want, but hate paying strata fees, council rates and water rates!
Despite the higher cost of owning, we have remained in our mortgaged house, mainly due to our room-rent situation, making it less expensive.
We’ve considered renting quite a bit in the last few years, mainly because we plan to move out further away from the city so we can have a bigger yard for veggie gardening and fruit trees.
It makes sense we try out different locations we’re interested in, before we buy.
This is because, if we move and buy, we’ll have to pay selling agent fees ($10k minimum) and stamp duty on the new place ($20k minimum), amounting to at least $30k for an average capital city property.
It’s not something we want to get wrong, $30k is a gigantic amount of money!
It’s likely, by moving locations, our housing will cost around $100k less. This means extra funds will get ploughed into dividend-paying shares, strengthening our position and pumping more cashflow back to us.
Edit: we ended up renting for multiple years, and then bought a house in our new location. We now have a larger share portfolio and a more enjoyable place to live 🙂
We also decided, not to pay off any of our mortgages along our journey, because it was far more effective to invest the extra money, instead of paying down debt.
If we started again right now, we would either buy a low-cost house, or we would be renters.
To achieve financial independence as fast as possible, the main strategy is to reduce costs and maximise your savings rate.
Since housing is such a large expense, it should definitely be the most optimised. It can literally make the difference between early retirement, and permanent wage-slave.
After we had built wealth, we could then look at buying wherever we like.
Reaching financial independence gives you location freedom, and there are many more lifestyle options available to you, at that point.
My approach is, always treat investing as the number one priority. Everything else comes second to that. Once you’ve built wealth through investing, you can then buy a house, even with cash!
My preferred housing strategy is, pick an affordable place to buy, or rent until you’re rich.
There are plenty of regional places where houses are cheaper and rental yields are higher, making buying more favourable.
But in general, the numbers are in favour of renting and investing, instead of owning, in my opinion.
Renting works doubly well in blue chip locations, where property is more expensive. In these areas, rental yields tend to be very low (around 2-3%).
To buy these properties with a mortgage, will cost 5-6% after including all the costs like rates, strata, maintenance etc.
Essentially in these prime locations, it costs 2 to 3 times as much to live in the same property, if you want to own it. Don’t believe me? Here’s an example of using real numbers from our own investment property.
Remember, renting is only more effective if you actually save and invest the extra cash!
We’re trying to build financial strength here, so we will not be loading ourselves up with a million-dollar-plus mortgage on our place of residence 😉
The issue I see is, most people try and buy the most expensive house they can afford, as soon as they can.
Then they’re basically stuck paying it off for the next few decades, because they have no ability to wait until they set themselves up first.
Delayed gratification is a hugely important skill in building financial strength.
The aim of housing is to provide a roof over our heads, with a relatively comfortable and secure place to live. Somewhere along the lines, the goal turns into postcode status.
This is just plain sad on so many levels.
You can easily optimise your housing by not having more rooms than you need. Does a 2 person household really need a 3-4 bedroom house?
Also, you could perhaps spend a bit extra to live closer to work, and it may save you a fortune in transport costs, if you can switch to a 1 car or car-free household.
Too many people get sucked in to thinking, if they don’t buy now, they’ll miss out forever. This is exactly what drives the mania in housing markets from time to time.
Australia is an enormous place – there are plenty of more affordable housing options out there.
Just recognise, you do get a choice.
Even if you move to a lower-cost city and have to accept a lower-paying job, it’s possible that the numbers work out better than living in the high-cost city.
Whatever you choose, be sure to crunch the numbers and remember to treat your personal finances like a business.
And it does make a difference!
For example: If a couple decides to spend $500 per week on housing, instead of $700 per week like their friends…what happens?
Well, assuming they invest the $200 per week savings into investments, and get a return of 7% per annum – they’ll end up $150k richer after just 10 years!
You’re probably throwing away $30k of equity every-time you move, in agents fees and stamp duty.
I know a couple who has moved so many times, they literally have only half-a-house paid off, after almost 40 years of having a mortgage.
Every time they moved, they burnt up a bit more of their equity. Sadly they thought they had done well with property over the years, since the house price got higher each time they bought and sold.
It was just an illusion, because their mortgage kept increasing too. This is incredibly unfortunate. They hadn’t bothered to crunch the numbers at all, or consider whether they were actually getting any further forward or not.
Renting is considered a non-option by many, since apparently it’s dead money. But I think this is an outdated way of thinking. The numbers don’t suggest this at all!
It can’t be considered any more ‘dead-money’ than interest, stamp duty and agents fees.
Just like all our expenses, housing can be as expensive as you want it to be.
It doesn’t have to kill our chances of financial freedom. Just be reasonable about it and choose a modest place that’s not too much house for your circumstances.
Don’t let your dream house kill your freedom.
The best gift you can give yourself is to be truly honest about what you need and what you want. There’s a big difference.
What it boils down to is, the numbers favour renting, but our emotions favour buying.
Whatever you choose, don’t let it affect your savings rate too much.
Most people get trapped into the work-to-pay-the-mortgage lifestyle for far too long, never focusing on investing, and never building freedom into their life.
This is the overall wealth approach I recommend…
Reduce expenses, increase income, build solid financial habits. This lets you save aggressively and invest constantly, growing your wealth and investment income over time.
The happy end result, of course, is financial strength and a life of freedom.
What do you think? Is it better to rent or buy when striving for financial independence? What’s your housing strategy?
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Can we go back in time 2 generations and ask my grandparents to live in a regional area please. That way all my family and friends would be there and I could live in a low cost area 😉
Sydney is killer but I don’t want to leave. Definitely staying a renter for now.
Ha! Yeah that would prob be ideal 🙂
Nothing wrong with renting, can always buy later. With rental yields now so low in Syd/Melb, renting is way cheaper. And in my opinion, the people who are smart with their money will never be ‘locked out’ of the housing market!
This mentality of having to own your own home lost us a lot of money during our working years. Work and career “frequently” required us to move “unexpectedly”. So given the huge transaction costs of buying / selling a home, moves after only a couple of years of ownership generally resulted in a significant loss. Can’t believe it took us so long to learn. So strong is the brain washing of always being told when young that “rent is dead money”. In our circumstances it would have been just the opposite.
The critical thing when renting is to treat investing like paying off a mortgage so you don’t end up blowing the extra cash available from renting vs the much more expensive option of paying off a home especially in the earlier years.
In general studies have shown that a renter who is a disciplined saver can accumulate significantly more wealth over their lifetime compared to a home owner.
In fact overall I can’t say that owning homes and numerous investment property ever made us much money. It’s main benefit came from forced savings due to having the stress of a pile of debt weighing on your mind. Thank Christ for Shares as the growth in income in particular has been extraordinary.
Great story Austing, thanks for sharing!
Fully agree with your comments. It’s very common for the ‘savings’ of renting to end up getting entirely spent. A lot of people need the ‘forced saving’ aspect of it, and they can still do ‘forced investing’ if renting. It just takes some discipline to set up and to stick to it 🙂
Managing money effectively is really a mental game more than anything.
My issue with renting is always the agents, the landlords, the dealing with houses that fall apart and then getting absolutely no response from the agents who are meant to be your contact. At least not till you run out of patience 6 months later and scream at them to fix a garage door that had fallen off the hinges. Even when we had a really nice landlord, the minute he was busy, all the repairs halted and we only got a response when we hunted down his physical address and went to look for him.
Where I am in Australia, for my suburb / house price etc, it actually works out cheaper to buy for the term of the loan than to rent.
And I agree, we have a choice. To move away from your comfort zone / support network is a choice. Not a choice that many will make, but for the folks crying about high house prices, so many are also unwilling to give up the conveniences, lights and glam of the city life / inner city suburb life. I moved countries and states, and while it’s always daunting, you can always rebuild your support network of friends. (Family being in another country anyways so that takes it out of the equation for us)
Damn you must have had some bad experiences. Our tenants (unfortunately) get basically whatever they want lol.
The numbers are different for all over Australia, hence why I didn’t really have examples with numbers. Definitely some locations where buying makes more sense. Especially since the cashflow savings from renting often get spent anyway!
Haha you nailed it Pia, well said. Many expect to have it all, just as a right, because life is expensive. I call bullshit on that, life is not that expensive. Some people are genuinely struggling, but it’s not the whinging middle class we see on tv and hear all around us.
I don’t think there’s an easy answer to this one and even the experts can’t agree! Certainly, the financial side of buying our house never really featured as a consideration. That said, we did rush to pay it off as quickly as possible. But I think I have a slight obsession with security, so being in our own place and laying down roots I feel gives me the freedom to take risks in other areas of my life. Not exactly rational, but that’s the way it’s worked out for me.
Thanks for stopping by Eliza.
It’s true, everyone will have a different preference, and not everything can be measured in numbers!
Hi there, enjoying your blog. They really should teach this stuff at school! My wife and I have a large mortgage (Sydney), but feel it’s worthwhile as we expect to be here for years to come and the security of that is priceless. I also like the idea of a garden and whatnot that will be mine for the long term. You are 100% correct that it’s an emotional thing. However, I believe you missed one crucial point.
You mentioned that you lock in a price, and therefore enjoy capital growth. But you forgot that with wage growth, over time, the interest paid on your debt will be lower as a proportion of your wage (a superior measuring tool for comparison). Rent on the other hand will rise with inflation, and thus remain constant as a proportion of wage.
Another thing to consider is welfare. Whilst I plan not to ever have to rely on it, the welfare system currently rewards those who live in their own house. A GFC style event could have a large impact on a self funded retiree.
Thanks Todd. You make some very good points 🙂
It’s hard to fit everything in, the post was already pretty long!
We’re actually now renting, and enjoy it so far. We’ll see how it goes longer term.
What I meant was that you lock-in the price and therefore repayments stay the same (unless interest rates go up). Since I put it as a ‘pro’ for buying, I was implying that it’s not the case with rent. Sorry it probably wasn’t clear!
Don’t forget, the renter will be investing at a (likely) higher rate of return than home ownership, which would counter that to some extent. The rent would also reduce as a proportion of income, due to the increasing investment income the renter has.
Yes you’re right with the welfare system. It’s very geared towards the home-owner. But to be fair, the renting investor could always sell his investment portfolio down later in life to buy a house with cash, and then go on welfare at any time. I would also hope a self-funded retiree had some sort of a backup plan, like a cash buffer to smooth their dividend income. A GFC style event would effect the value of that portfolio though, if wanting to cash out. Perhaps being flexible is the best option, to be open to both avenues.
It really helped when you said that a pro to renting a home was that there was no need to take on the debt of a mortgage. When we knew we had to move, we looked into rental and purchasing options and my husband did not want to take on debt. Thank you for the information about how to prioritize renting versus buying, especially with how comfortable not having a debt with a large interest attached is.
Glad it was helpful for you.
Many people are naturally shy of debt – which is ok. There’s no law that says you must buy a house. The catch is, renters need to invest that extra cash so they end up with a pile of investments – instead of no house and no investments 🙂
Hi Dave,
Great blog and very relevant. Yours is the first one I’ve really seen where the person spruiking early retirement didn’t or isn’t on a six figure income. I’ve never been on a six figure income either and the same with my wife. I liked your post on LIC’s vs index investing.
Just a question with renting and no job. Did you find it hard to rent a place with no employment? I imagine it would be difficult to obtain a rental for a retired person living solely off investment returns.
I would also like your thoughts on mine and my wife’s current situation, which is;
– Own home owned outright in Sydney worth approx. $700K.
– “Investment” property and future retirement home worth approx. $840K. (We have approx. $570K debt).
– Share portfolio worth approx. $500K (about half is in Vanguard VAS ETF and the other half in individual Australian shares).
– Managed fund in small cap Australian shares worth approx. $350K (We have approx. $190K debt on this).
– Managed fund in Global shares worth approx. $100K.
– My Super is worth approx. $230K.
– Wife’s Super is worth approx. $160K.
– Cash worth approx. $80K.
I’m 38 and my wife is 35, we each have never earned six figures, nor sponged (lived with parents) while working. We rented for 5 years before buying our home.
Thanks.
Chris, thanks your comment 🙂
Yeah I hear you, sometimes it’s hard to relate when the writer and wife made over 100k each or live in the US with decent houses for 200k.
I’ll flick you an email with some of my thoughts.
Hi Dave,
Great article. Love your writing!
A fundamental difference between the 2 approaches, which is worth noting, is that taking out a mortgage on a property is by definition a leveraged investment. For comparisons sake, let’s say that the ROI on real estate and shares is the same. If you’d taken out a $1M mortgage, and paid it off over 20 years, paying down principal + interest, Vs investing only the difference into shares (what you would have otherwise paid on mortgage – rental payments), slowly building up to that $1M portfolio, would you not be financially ahead with the house purchase? (Assuming ROI is higher than the interest rate). Would love to hear your thoughts.
Cheers,
J
Thanks James. It’s a much debated topic and there’s no right answer as everyone has their own opinion on future returns etc. In your scenario it is likely that the house would win out. But I can’t say I agree with the return assumptions, especially going forward.
Right now, capital city property is yielding 4% at best, most less than this, closer to 3 – 3.5%. After all the expenses, plus repairs and maintenance it is much closer to 2%. If we add in capital growth of 3-4% which is much faster than wages growth so that’s generous, we get a total return of 5-6% before leverage.
Shares in Australia currently have a yield of around 4%, which becomes around 5.5% after franking credits. Add in reasonable growth of 3% per annum, much less than long term average, and we get a total return of 8.5% unleveraged. Of course there’s tax and purchasing costs in both scenarios so there’s no perfect comparison.
I personally don’t think property is all that attractive these days, having experienced both property and shares, I’d go with shares from the beginning if I was starting today. I don’t think people’s expectations for property going forward are very realistic, growth rates are unlikely to be anywhere near as good as the past for many reasons.
I provide more thoughts on this topic in the following blog posts, and in the comments too. Hope it helps… https://strongmoneyaustralia.com/our-adventures-with-leveraged-property/ and this one https://strongmoneyaustralia.com/equity-rich-cashflow-poor/
For someone who likes to move all the time renting is the way to go, but I don’t see renting being a strategy for saving up money. Try and save money in Melbourne while renting inorder to put down your new house deposit and you will be renting for the rest of your life. Price increase on average $70000 each year. Last year some eastern suburbs even saw an increase of over $100000 in just a year. By the time you save your 20% deposit for your $600k home the price would have gone up again. Not to mentioned all the hurdles the government makes you jump these days with tight lending criteria. As a result many are forced to rent unless they move really far out in the country and leaves family and friends behind. Major parties have made us their guinea pig, their cash cow!!
Thanks for your comment. I can’t agree with many of your sentiments though.
You seem to think we’re defeated from all angles. Of course renting is far far cheaper in our capital cities. Melbourne is actually the best city to be a renter, the yields are the lowest in the country and the have been for some time. There’s also a wide variety of locations in Melbourne which are not expensive to rent.
As an example, we previously owned an investment property in Melbourne’s eastern suburbs and the cost of owning it – mortgage, rates, repairs, insurance, etc was roughly double what the rent was. So the tenants were paying say $500 per week, to live in a property that would cost them $1000 per week to buy. That’s a significant saving. We’re renting right now and it’s actually pretty good.
Another thing is people can rent and invest in the sharemarket and eventually buy a house with cash if they so desire. To compare your 12 month period, the sharemarket went up around 13% in the last 12 months – so it’s not exactly a case of buy property of your screwed.
The problem is people’s expectations. Can a first home buyer afford a fancy 4 bedroom house in the eastern suburbs? Of course not. Why should they be able to buy a big house (Aussies have the largest homes in the world by sqm) in one of the nicest suburbs in one of the wealthiest countries in the world? They shouldn’t. It’s not an entitlement or a basic human right. There are plenty of low-cost options in Melbourne to rent and buy, they’ll just be smaller properties.
Your assumption is that prices are going to grow at $70-$100k per year every year, forever. That’s complete nonsense. It’s called a property boom. They don’t last forever. It’ll slow, just like Sydney’s boom has. Once affordability is exhausted prices simply cannot increase any further by definition, so we’ll see a slowdown, which also won’t last forever.
It is not the government that has changed lending criteria, it’s the financial regulator APRA, and they’ve done so to protect the stability of our financial system from loose borrowing and people taking on more than they can afford, which in part is what has created the spike in prices. You can’t have it both ways – easy borrowing, a strong economy and low prices.
If people want to own a home for lifestyle reasons then they should absolutely save for it and they’ll get there. And when they get a mortgage they should be happy about it, because it was their choice. They should not complain about their situation or expect someone to make it easier for them. I understand you may not feel that way, but despite perhaps being in the middle of the mania, it does not go on forever, it’s simply not possible. That fear of missing out that you’re displaying is exactly what drives these things, strangely enough.
The rent vs buy issue is complicated when first time home owners go to BoMaD to secure additional low-cost finance to assist them to buy into the more aloof suburbs. May be the well meaning parent should place some caveats on how that money is used before dishing it out – i.e. not to be used to purchase any real estate within a certain distance of a major capital city or over a certain value.
Thanks for your post and blog, very good insights.
The debate is a big one, renter vs buyer, often subject of discussion with friends at BBQ time.
My question is, if you are confident you are going to live in the same city for the next 20/30 year and your job is stable, you crunch the number and find your repayments (loan + rates) will be the same of our rent, isn`t better to buy? I would say yes, however the point is that to make this real you need to buy probably in a lower class suburb compared to the one you currently renting 😉
Cheers Luca, appreciate it.
Good question, in that case it probably is better to buy. The problem is, people dramatically underestimate how much owning a house costs. There’s also repairs, maintenance, small upgrades here and there, and the fact that they’ll likely move house every 5-10 years which will suck away 5-10% of the property value each time from stamp duty, agents fees, bank fees and other settlement costs. This and the other extras I mentioned equate to many thousands of dollars per year.
Very good point – the renters can afford a vastly better standard of housing than the owners can for the same weekly cost in many cases!
Great article.
My wife and I are close to paying off our 2 bedroom unit in Melbourne (after only 5 years!) and are considering next steps.
I think the strategy that we’ll likely take is to move to a slightly bigger place (eg townhouse) with no owners corp or noisey neighbours. Doing so will likely require another mortgage but we’d aim to keep it modest ($200K or so).
From there we would pay the base amount each month (P&I) and invest any extra into our share portfolio.
This way we get the best of both worlds.
Still mulling this over as we get ready to pay the current one off by end of the year.
Gives us time to work out our investment strategy too.
Fantastic work on the mortgage Tom – that’s some solid money management!
Your plan sounds pretty good to me – try and make sure it’s a place you’ll stay in for a long time. As you probably know, stamp duty and agents fees are a real killer when moving, eating away tens of thousands of dollars!
You’re off to an excellent start, all the best with your next steps 🙂
Thanks for this Post
I have been debating this for a while. I am 10 years in to a Sydney Mortage (i.e, very expensive shoe box – unless we move in to a bed sit). Definitely, we could rent a bigger place than the equivalent mortgage that we are currently paying. I’m older (53) so i still have ‘get a mortgage pay off your mortgage mentality’.
On the other hand i am ready to pull out of paying off 50% extra off of the mortgage each fortnight and putting the money towards shares / EFT / LIC. Just trying to work out if that will get me paid off in 7 years. whats the best calculator for that?. The ones the banks have on their websites?
Shaun
Thanks for reading Shaun. Most banks have a calculator to help you work that out – here’s one that looks okay – https://www.ing.com.au/home-loans/calculators/extra-loan-repayments.html
Plug in your appropriate numbers, and you should be able to figure out how much extra it’ll take to pay it off in 7 years. Hope that helps, and all the best.
Many thanks Dave – much appreciated.
I see you survived the winds there in Perth!
Shaun
Hi Dave,
I am saving super aggressively at the moment and have moved back in with my folks to get a kickstart over the next 12 months while renting out my apartment. I have about $200k left on my mortgage but I am trying to pay it off in the next 3 years.
After reading your great blog (and others in this space) I have realised that renting is actually really smart if you can keep pouring money into shares. Also, that we have been brainwashed with property in Australia.
I definitely won’t be buy another property in the future and I look forward to being debt free.
My plan is to continue renting the apartment out even after it is paid off as I want to rent near the beach for a lifestyle change.
I wanted to ask your thoughts on putting 100% of my savings to just pay it off over the next 3 years and then move my strategy to go 100% into shares after it is paid off
or
Put everything into shares and investments and build this up first
Or the last option, straddling both – so going semi-aggressive on the mortgage while building up shares semi-aggressively as well?
Thank you and love your content. It is world class!
Thanks Richie!
If I was going for 100% efficiency, I would prob invest. But given what you’ve told me and how you’re looking forward to being debt free, I would prob continue on with that plan. Then you can focus 100% on investing afterwards. I like to focus on one thing at a time, and the debt free position will be a great feeling for you, and you may even work harder at it because you’ve got a goal with a timeline and a number you’re looking at constantly.
Any of those options is excellent tho, and it’s great to see you so motivated. All the best 🙂