Saturday, July 26, 2014

Putting people back in the rent or buy decision

So, the Reserve Bank has done the numbers and killed the Great Australian Dream: owning your home is no more lucrative than a lifetime of renting. Somehow, I doubt that will be the end of the matter - and nor should it be.

The strongest conclusion we should draw from the Reserve’s figuring is that, when you view home ownership purely as a financial investment, buying rather than renting isn’t the deadset winner most people assume.

It can be a close run thing, mainly because people take insufficient account of the costs of home ownership - not just all the interest they pay but the stamp duty and conveyancing costs, insurance, repairs and maintenance and the rates and other payments not borne by renters.

But our deeply ingrained belief that home ownership is a great investment is only one of our motives for wanting to own rather than rent. The other big one is security of tenure.

It’s nice to own your own place and make your own decisions about alterations and improvements, minor and major, about painting it or not painting, building up the garden or not bothering.
 It’s also nice to know you’re unlikely to have to leave it unless it’s your choice. Renters generally have a lot less say over how long the rental lasts, rent rises and changes of landlord.

The Reserve’s calculations take no account of these non-monetary considerations, which could easily be sufficient to bring ownership in as a clear winner in many people’s minds (starting with me).

And though those calculations are as careful and impartial as you would expect of the central bank, that doesn’t stop them being based on assumptions and averages like all such calculations, meaning they may or may not be a good fit with your own circumstances and preferences.

For instance, what’s true for average home prices across Australia, may not be true for Sydney. And what’s true for the whole of Sydney may not be equally true for inner ring, middle ring and outer ring homes.

We know the authorities expect huge growth in Sydney’s population over the next 20 or 30 years. And unless they greatly improve their performance on congestion, my guess is we will see inner-ring property prices grow a lot faster than Sydney prices generally.

The Reserve’s calculations roll together home owners and renters of all ages and stages. But switching rental accommodation is not the problem for young adults that it can be for families with school-age children.

The calculations assume home owners change homes every 10 years. If you have already, or intend to, stay put a lot longer than that then your investment is already performing, or is likely to perform, better than the figures suggest.

Of course, no calculations based on what’s happened to home prices and rents over the past 60 years is a foolproof guide to what they’ll do over the coming 60.

And remember, the low level at which the age pension is set tacitly assumes people own their homes outright. The value of your home isn’t included in the means test, but other investments are.