While it may not apply as much to younger generations, if you pop your head out the door in Australia and ask someone their opinions on home ownership, they will invariably tell you that it is an “enforced way to save” and that it builds wealth in the longterm, setting you up for security later in life. True! Home ownership is one of the surest ways to provide longterm wealth for you and your family through the accumulation of capital, based on the simple understanding that population growth will continue to drive demand for homes the further in towards a city centre they are.
Things are changing in Australia. You don’t need to be told that housing affordability has become a major political and social issue in Australia since we entered the 21st century, which means that a greater diversity of people are remaining as renters for longer.
But there are advantages to renting, especially if you have particular goals or lifestyle aims that suit renting more than owning a home. While buying a home may, in the long run, be the easiest way to accrue longterm wealth (as opposed to actively building share portfolios, investing in businesses etc. which are other avenues to build wealth), renting can give you freedoms that you would not have otherwise.
6. No need to sacrifice on lifestyle
The most touted benefit of renting is that it allows you to enjoy a lifestyle you may not have if living further out from the city to pay for a mortgage. This can include spending less time travelling to work, having greater work opportunities as a result as well as enjoying the benefits of living within a city (amenities, transport, entertainment, healthcare, education).
This is traditionally why so many in their twenties have remained as renters as they enjoy both the vibrant lifestyle of a city and save for a home. This is changing as more families and older generations remain as renters due to the high costs of owning a home.
5. Renting allows for an unrestricted cash flow
If you a building a young family or are more interested in the benefits of travel than staying home, renting can initially keep more money in your pocket. This can help parents meet those hidden costs of parenting, such as healthcare and childcare costs, without feeling the strain that so many Australians who are paying mortgages currently feel.
4. Freedom to move whenever you like
One reason it may be so popular in Europe to rent a home rather than own one is that it allows for greater freedom to travel, especially for work. With access within Europe to other cities so easy for people, there is less emphasis on living in the one home for 35 years and more on living and working in different countries due to the opportunities and a desire for travel.
In Australia, the scale of the country has tended to keep people both in the country and in the cities in which they grew up. The result has been a traditional emphasis on home ownership. With access to other parts of the world and other cities and regional areas within Australia as options for work, the hold that homeownership has on the Australian mentality is very gradually relaxing. Do remember that owning a home does not stop you from leasing it out while you live overseas or interstate. You can even enjoy excemptions from capital gains taxes under the 6 year rule (if you return to your PPOR within 6 years).
3. Opportunity to build wealth in other areas
Despite recessions and dips in house prices, Australian home prices have seen almost constant growth over the past forty years. That makes us very special compared to other markets, especially the US, who have seen significant falls in house prices since the GFC of 2008.
Many people will point to our country’s continued growth in house prices to bolster their argument that regardless of dips in the market, home ownership is a longterm builder of wealth. This does tend to assume that Australia will never see the sorts of house price falls countries like the US have seen, which places significant faith in our economy as it continues to become more integrated with the economies of its regional partners (i.e. with its membership of the Trans Pacific Partnership) and less sure of itself since the end of the mining boom.
Renting can give you the opportunity to build wealth in other ways, which tend to be more active. You can diversify your capital by investing in stocks, bonds and businesses, as opposed to having it all in the one asset class (a home). On top of this, diversifying your assets does two things: it affords you a larger safety net if one or more of those asset types suffer a fall in value; second, you have greater liquidity in your assets if they are not tied to a property (it is easier to sell shares in a business than in a home).
2. No upkeep on your home
You may simply not have the time or the desire to manage a property, which is the unsung hero of renting, as you are free to leave the major maintenance of a home to the landlord. What this also means is that you are saved the potential 2-3% of the value of a home that is spent each year on the ongoing management costs of running a home.
1. You don’t have to pay interest
If rent money is dead money, then what do you call interest? With interest rates at 3.75% for example, you would pay $26,250 per year on a $700,000 mortgage, which is most likely more than you would pay renting a home for the entire year, and this does not include the cost of paying off the principal on your mortgage. Again, their is a lot to be said for accruing long term wealth through property and it may be the right move for you, but don’t forget to look at other options that having more cashflow may provide you in terms of diversified interests.