Is Renting Really Dead Money? Not Always If You Invest Right
Research into Sydney's housing market has shown that buying may not always be the better option -- but there's a catch.
Two out of three Sydney residents believe renting is a waste of money, according to new research by Ernst Young (EY).
However that may not always be the case -- if renters make stock market investments.
EY Sydney Managing Partner, Andrew Price, said that people "automatically assume" home ownership is the best way to go because it is a tangible asset.
"People understand the property market, they can touch it, see it," Price told 10 daily.
"But our analyse shows that it is not always the case that home ownership is the better option."
The research model gave two home seekers the same starting capital, which was equal to 20 percent of the average unit price at the time. One invested in a mortgage, taking out an 80 percent loan-to-value ratio on a unit. The other rented a similar place in the same location and invested their capital in an ASX200 index fund.
Ongoing savings made by the renter (i.e. the difference between the rent and the sum of interest, principal and other housing costs the buyer faced, according to EY Sweeney) were also put into the ASX200.
Comparing 43 of Sydney's local government areas between 1994 and 2017, researchers found that in 62 percent of cases people were better off renting and maintaining a leveraged investment in the ASX200, over a 10 year period.
"Adhering to this playbook, rent is no more ‘dead money’ then paying interest on a mortgage," EY said.
The numbers heavily rely on the time and place. For instance, buyers in Woollahra in 2007 who sold in 2017 yielded $303,771 more than renters. But a 1998 apartment buyer in the same area would have been $460,585 behind renters if they sold in 2008.
The research divided the city into three rings -- with buying a home in the inner and middle rings of Sydney yielding a better result than renting more often.
The data found that renters were mostly better off if they moved in between 1997 and 2005, but buyers were better off in they bought between 2006 and 2008.
Price pointed out that when buying, by the time legal fees, stamp duty and others costs associated with buying property are paid, the buyer is already in the red.
And this can mean renters, who may not be in a position to buy or whose lifestyle does not allow for it, could make greater gains from stocks in a shorter amount of time.
"Financial literacy is important, people don't understand that they can in fact buy whole share portfolios," he said.
Price also pointed out that people intend to keep bought property for longer periods of time, meaning their money is tied up and hard to access should they need it.
Those with shares can sell them quicker than property, which is a benefit for those who aren't in a position to commit to a mortgage.
But Price warns it can be difficult to know what the future might hold in the current markets.
"We can't tell the future from looking at the past data," he said.
"The disadvantages of shares is they are more volatile."
This volatility was seen during the Global Financial Crisis in 2007. In most cases, in the 1990s, renters who invested their money in shares saw a bigger yield than buyers. But after 2008, it was buyers who yielded the bigger amounts as 40 percent of value was wiped from the world's stock markets.
Price this report hopes to make people think differently about renting, and know that with the right investments it can be a financially viable option.
"These findings show that there are things to think about, to think differently and to consider renting rather than buying."