The better the question. The better the answer. The better the world works. У вас есть вопрос? У нас есть ответ. Решая сложные задачи бизнеса, мы улучшаем мир. У вас є запитання? У нас є відповідь. Вирішуючи складні завдання бізнесу, ми змінюємо світ на краще. Meilleure la question, meilleure la réponse. Pour un monde meilleur. 問題越好。答案越好。商業世界越美好。 问题越好。答案越好。商业世界越美好。

 

Buoyed by a combination of cultural aspirations around home ownership, favourable legislative treatment and rapid capital gains in a booming market, residential property is an incredibly popular investment class no matter where you live in Australia. The flip side of this boom has been a housing affordability crisis. Median house prices in Sydney – the most expensive city in the country - tipped $1 million in 2017. While the market has cooled recently, affordability is still at a historical low, with the average house in Sydney still costing 10.9 times the average NSW income. With the recent correction, prices have only fallen to levels last seen in late 2016.

EY - Why renting shouldn’t be the poor cousin to home ownership

These house prices mean the buyer of an average Sydney home needs to save for over 9 years, or seven years for those buying an apartment, to make the 20 per cent deposit required by most banks. Despite nominal housing prices increasing 5-fold nationwide1 since the mid 1990’s, the cost of servicing a mortgage is around the historic average, so it’s the difficulty of saving a deposit that locks many new entrants out - although that may change if interest rates rise, and interest-only loan periods end.

Our initial research in this series, Sydney Housing Conversations: Moving from Affordability to Accessibility, investigated the underutilised housing supply in Sydney, finding that there are effectively 190,000 empty dwellings in Sydney, comprising 600,000 empty second, third or fourth bedrooms which are not occupied to their full capacity by the current residents. This analysis put a spotlight on the tax and policy settings that make it prohibitive for some to sell or down-size and free up under-utilised housing stock.

In this report we examine the attitudes and societal norms that got us to where we are now: a housing affordability crisis for many coupled with an unerring belief that home ownership is the only way to ‘get ahead’. While our argument applies to anyone weighing up the decision whether to buy residential property, EY has focused its research on Sydney, given its dramatic house price rises in recent years – and falls in recent months.

Why do people compromise on quality of life just to buy a home? Many families choose to put themselves under risk of financial stress, others choose to move out of Sydney just to hit this ‘milestone’

Against this backdrop, we set out to answer whether it’s time we changed the narrative about rent versus buy and found some surprising results.

1In nominal terms

Is renting really dead money?

According to EY Sweeney research, two out of three Sydney residents think renting is a waste of money. Our economic modelling tells a different story.

In our model we gave two home seekers the same starting capital, equal to 20% of the average unit price at the time. One invested in home ownership (taking out 80 per cent loan-to-value ratio (LVR) for a unit). The other rented a similar dwelling in the same location and instead purchased an ASX200 index fund (purchased with a margin loan at 50 per cent LVR)2 . The renter then continued to place the ongoing savings in housing costs compared to the buyer (i.e. the difference between the rent and the sum of interest, principal and other housing costs the buyer faced) in the ASX200 (including dividends). We then compare the performance of their combined housing and investment choices over time.

We then analyse the net wealth position of the joint investment and housing strategies for the two individuals 10 years later, comparing 43 local government areas in Sydney between 1994 and 2017. We found that in 62 percent of each equivalent 10-year comparison, people were better off renting and maintaining a leveraged investment in the ASX200, compared to owning a unit in the same area. It is important to note, that in this model the renter is taking on a risk profile that is perhaps higher than most are likely to take and put in place a savings framework that is more stringent that most would want. When we remove the ability for the lender to be able to leverage their ASX200 investment, the results shift in favour of the home owner.

Adhering to this playbook, rent is no more ‘dead money’ then paying interest on a mortgage.

We need to start new narrative about different ways for people to generate wealth while consuming housing as a product, not as an investment. There is also an education piece, lifting financial literacy around alternative investments. While our tax regime, banks and tenancy laws still favour owners, this will be difficult to achieve.

But it will not be an easy shift. Part of that must include a strong new narrative about different ways for people to generate wealth while consuming housing as a product, not as an investment. There is also an education piece, lifting financial literacy around alternative investments. While our tax regime, banks and tenancy laws still favour owners, this will be difficult to achieve.

2Assumed to result in equal or lower risk exposure than the home owner. Given there would only have been one margin call during the 25 year period covered, we did not include the impact of a margin call on this analysis

Spatial Bounds

The Department of Family and Community Services classifies Sydney by three rings – outlined in the figure below.

EY - Special Bounds

We have completed the analysis for all of Sydney’s 43 LGA’s, whilst we discuss each of the three rings, the focus of this paper is the high demand - Inner and Middle rings, the dark grey and yellow areas in the above map.

Inner Ring Time period Renter comes out ahead Time period Buyer wins
Ashfield 1998 – 2008 $163,960.60 2007 – 2017 $164,783.23
Botany Bay 2004 – 2014 $224,449.38 1995 – 2005 $241,621.63
Lane Cove 1998 – 2008 $316,153.05 2007 – 2017 $205,027.99
Leichhardt 1998 – 2008 $328,089.03 1994 – 2004 $215,922.77
Marrickville 2004 – 2014 $115,396.66 2007 – 2017 $208,560.01
Mosman 1998 – 2008 $460,585.19 2007 – 2017 $275,924.88
North Sydney 1998 – 2008 $409,773.52 2007 – 2017 $213,770.15
Randwick 1998 – 2008 $309,661.43 2007 – 2017 $173,936.94
Sydney 2003 – 2013 $124,619.62 2007 – 2017 $261,077.95
Waverley 2004 – 2014 $292,959.81 1994 – 2004 $300,476.81
Woollahra 1998 – 2008 $608,032.14 2007 – 2017 $303,771.44
Middle Ring 1998 – 2008 $211,994.85 2007 – 2017 $119,476.21
Auburn 2004 – 2014 $226,693.77 1995 – 2005 $210,472.32
Bankstown 2004 – 2014 $216,389.36 2006 – 2016 $166,645.90
Burwood 1998 – 2008 $258,426.42 2007 – 2017 $199,257.90
Canterbury 1998 – 2008 $91,215.94 2007 – 2017 $204,007.89
Canada Bay 2004 – 2014 $380,490.73 1995 – 2005 $88,447.96
Hunters Hill 1998 – 2008 $607,313.27 2007 – 2017 $168,249.67
Hurstville 1998 – 2008 $256,698.80 2007 – 2017 $158,565.07
Kogarah 1998 – 2008 $186,538.21 2007 – 2017 $152,658.61
Ku-ring-gai 1998 – 2008 $582,542.44 2007 – 2017 $ (14,362.01)
Manly 2003 – 2013 $415,316.11 2007 – 2017 $253,872.03
Parramatta 2004 – 2014 $150,333.86 2007 – 2017 $99,517.26
Rockdale 1998 – 2008 $237,755.97 2007 – 2017 $225,849.46
Ryde 1998 – 2008 $194,520.93 2007 – 2017 $124,307.31
Strathfield 1998 – 2008 $395,281.07 2007 – 2017 $98,382.93
Willoughby 1998 – 2008 $304,494.53 2007 – 2017 $149,283.04

Winners and losers

In Sydney’s inner ring, the suburbs where renters came out on top were North Sydney, Mosman and Leichardt, beating ownership 70 percent of the time.

On the other side of the spectrum, home ownership produced superior outcomes in a number of suburbs, with Marrickville, the CBD and Botany Bay leading the charge, and beating renting 67% of the time.

Timing, as they say, is everything. And it holds true in real estate purchases. While homebuyers in Woollahra buying in 2007 and selling in 2017 yielded biggest gains to buyers, coming out $303,771 ahead of renters. Those who bought in 1998 and sold in 2008, lost out to renting by a whopping $608,032.

The same story holds for other suburbs, take Mosman, a home buyer in 2007 would have ended up $275,924 better off than a renter making a leveraged investment in the share market. At the same time, a 1998 apartment buyer, in 2008 would have been $460,585 behind their renting peers.

The story also holds true in suburbs such as Marrickville. A suburb in which over our appraisal period the buyer has done particularly well, especially the 2007 buyer - who was more than 200k better off than their renting counterpart. However, a 2004 buyer, selling in 2014 was still $115,396 worse off than a renter, while maintaining a leveraged position in the share market.

Compare the pair

  • Marrickville – renters came out ahead if they moved in in 2004, but if they’d purchased three years later in 2007 they’d have come out ahead.
  • Leichhardt – renters came out ahead if they moved in in 1998, but if they’d purchased four years earlier they’d have come out ahead.
  • Manly – renters came out ahead if they moved in in 2003, but if they’d purchased four years later in 2017 they’d have come out ahead.
  • Botany Bay – renters came out ahead if they moved in in 2004, but if they’d purchased nine years earlier in 1995 they’d have come out ahead.

The benefits of being in the inner ring

It’s not just when, but where you buy that matters. Buying a home in Sydney’s inner and middle suburbs yields a better financial outcome more often than in the outer ring.

 

Owner versus renter outcomes in Sydney between 1994 and 2017, time of sale.

EY - Buyer wins   EY - Inner Ring

Source: EY analysis of FACS data

 

Source: EY analysis of FACS data

This chart summarises the number of years in which renters – or owners – were better off in each of the local government areas we examined. Source: EY analysis of FACS data

Buyers in the inner ring – areas like Ashfield, Lane Cove, Woollahra and North Sydney - tend to outperform renters, whereas renters were more likely in the outer ring – areas like Baulkham Hills, Camden, Liverpool and Penrith.

 

It’s clear that when you buy and sell makes a huge impact. Renters were better off if they moved in between 1997-2005, but buyers fared well had they bought 10 years before the top end of the current housing cycle in 2016, 2017 and 2018. At whatever time you buy, it’s clear that the gains – and losses – are bigger in inner ring suburbs ranging from Botany to Ashfield, Woollahra and North Sydney. Source: EY analysis of FACS data

Our research does not predict future performance and is not intended to represent financial advice. We use this to emphasise the need for a new narrative around the alternative ways a person could fulfil their desires for secure housing and wealth creation. Critically – from a financial returns perspective, renting is not an inferior choice.

It’s not just when, but where you buy that matters. Buying a home in Sydney’s inner and middle suburbs yields a better financial outcome more often than in the outer ring.

EY - Underlying cash balance

Source: EY analysis of FACS data

This chart summarises the number of years in which renters – or owners – were better off in each of the local government areas we examined. Source: EY analysis of FACS data

Buyers in the inner ring – areas like Ashfield, Lane Cove, Woollahra and North Sydney - tend to outperform renters, whereas renters were more likely in the outer ring – areas like Baulkham Hills, Camden, Liverpool and Penrith.

Owner versus renter outcomes in Sydney between 1994 and 2017, time of sale.

EY - Inner ring

Source: EY analysis of FACS data

It’s clear that when you buy and sell makes a huge impact. Renters were better off if they moved in between 1997-2005, but buyers fared well had they bought 10 years before the top end of the current housing cycle in 2016, 2017 and 2018. At whatever time you buy, it’s clear that the gains – and losses – are bigger in inner ring suburbs ranging from Botany to Ashfield, Woollahra and North Sydney. Source: EY analysis of FACS data

Our research does not predict future performance and is not intended to represent financial advice. We use this to emphasise the need for a new narrative around the alternative ways a person could fulfil their desires for secure housing and wealth creation. Critically – from a financial returns perspective, renting is not an inferior choice.

Is it time to farewell the rent vs buy debate?

The traditional narrative is that many people rent because they can’t afford to buy where they want to live – and that these individuals should make sacrifices to save a deposit and buy.

However, this assumes that everyone is better off owning their own home – an unerring belief that home ownership is the only way to ‘get ahead,’ the only way to access a stable place of residence and a foundational element of the Australian dream.

Our research shows that many people could be better off by renting permanently rather than buying – if policy settings supported this choice. However, for many, the relative lack of tenant rights currently enshrined in legislation is an important factor that pushes them to buy rather than rent.

Accordingly, reform is needed to change this roadblock and make renting a more feasible option for households looking for greater stability in tenancies.

In countries such as Germany, lease agreements are typically five to ten years, as opposed to the 12-month lease typical in Australia. For many Europeans, particularly in large cities, it is not uncommon to live their adult life in a rented house or unit. New York City is famous for its rent controlled apartments which tenants can live in for decades.

If we had lower transaction costs for property ownership, people could also be more nimble. They may decide to own their home for periods, but rent at other times.
Stamp duty costs up to seven percent of the asset value per transaction, with legal fees, and agency fees on top of this.

The benefits of renting to satisfy lifestyle choices is becoming more widely recognised.

Renting provides a significant mobility dividend, one where individuals are able to easily relocate from suburb to suburb, city-to-city and even country-to-country, without incurring the significant transaction costs imposed on the transfer of property. This is particularly important for younger generations, who value mobility.

The share economy has imbued people with a preference for access over ownership. And their numbers are growing. For a single-income household the preference might be to rent a two-bedroom unit with water views, which is affordable as a percentage of weekly income.

Whereas to save a deposit and purchase something at the same percentage of disposable income would mean buying in a different location, or choosing smaller, lower quality lodgings. Are we approaching a tipping point in the conundrum between renting for convenience versus buying for future gains?

At the end of the day

Ultimately, renting does not have to be an inferior housing choice. But policy settings, banking practices and social attitudes currently make ownership seem a more desirable option for people. That bias has not only created anxiety amongst those unable to put up the growing starting capital to buy a house, but also a level of leverage in the household sector that could impact future financial stability in Australia, with the rush towards ownership heavily contributing to household indebtedness rising to nearly 200 per cent of disposable income.

Supporting households to purchase, where renting might provide similar or better long-term wealth creation outcomes, without the accompanying mortgage stress, is something governments and banks can help change the narrative on.

To do so, the conversation needs to shift from ‘how can we make homes more affordable to purchase’, to ‘how can we make more versions of housing arrangements affordable, appropriate and stable’.

Contact us

EY - Andrew Price

Andrew Price

Managing Partner, Sydney EY
+61 411 694 531
EY - Selina Short

Selina Short

Oceania Leader, Real Estate
Ernst & Young Australia
+61 459 842 115
EY - Bonnie Barker

Bonnie Barker

Manager
TAS, CT-Lead Advisory
Ernst & Young Australia
+61 292 484 268

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