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 among 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% 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.