Or perhaps its not as simple as this…
There has been an interesting debate running in our office over the last week or two, about whether it is better to rent or buy a home. It’s interesting timing around this debate as we reflect on the last 10 – 12 years of property related investment returns when compared to equity markets which despite a global viral pandemic have produced pretty remarkable results in that same period.
I thought I’d do some of my own research and see what was out there in the for or against camp for this argument. In so doing I found an interesting article which was is based around a rule that a Canadian Portfolio manager has developed in his decision making process for renting vs buying a home. You can find the article link at the bottom of this post*.
He has created a rule called the 5% rule, which loosely suggests that if you can rent an equivalent home for less than 5% of the value of that same home, you would be better off “financially” having rented.
Feeding into this argument is the costs to own which include council Rates, water rates, maintenance costs and then the cost of capital (both the cost of interest on a loan and the opportunity cost of not having your equity invested elsewhere).
Using this 5% rule I have looked across available homes in Perth WA (this is where I live) and I can see that right now there is a pretty strong argument for renting vs buying. However I’ve also noticed this isn’t the full story. Other things need to be considered – let me explain:
- Buying a home to some degree caps the cost of accommodation. To some extent this cost is capped as it is a purchase at one point in time as your cost of capital is tied to the value of that house when you buy it plus the cost of interest while you pay it off.
- Owning your own home in your retirement years does help in planning for funding the cost of your retirement if you are likely to live a long one.
- Having a family and being faced with the thought of having to move on a regular basis can be a serious deal breaker. For me (actually more my Wife). The idea of uprooting and moving our two kids to another home with all our worldly belongings every time you are forced to under a rented house would be a cost that is too high to compare.
After all of these areas what I have realised though is the decision of Buying vs Renting can’t be compared financially. It’s a very personal decision that someone should make, based on a number of considerations, financial considerations, personal considerations and long term lifestyle impacts. Each part is important and must be factored in. The and only then you know whether “you” should rent or buy.
Articled published by Andrew on LinkedIn on the 17th August 2020
* https://medium.com/makingofamillionaire/the-5-rule-2a0af60d345c
