Rent or buy? The evidence is in

[muppet]

Rent or buy? The evidence is in

Jessica Irvine
Published: January 9, 2017 - 12:00AM
There is perhaps no question more vexing for young Australians today than the decision whether to buy or rent a home.
Of course, for many, there is no choice at all. Lacking the substantial deposit required to enter the property market in many Australian cities, they rent by default.
But for many, the logic of home-ownership is unquestionable. Rent money is dead money. Why pay off someone else's mortgage? Property prices always go up.
But this one-eyed view of property ownership overlooks some of the substantial costs involved. There's stamp duty, maintenance, local council charges, water bills and strata levies to consider. Plus the hundreds of thousands of dollars in interest payments.
It is almost impossible to know exactly, in advance, what those relative costs and returns will be. With the benefit of hindsight, however, it is possible to look back and see what the returns to renting and buying have been in the past.
Which is exactly what two young economists, Dominic Crowley and Shuyun May Li, set out to do in a new research paper, motivated by Crowley's own experience at being outbid at an auction and deciding to rent instead.

Read more at

http://www.smh.com.au/comment/rent-or-buy-the-evidence-is-in-20170107-gtnj2a.html

[Nick G]

It's hard to get past a) the benefit of leverage, b) the enforced savings strategy and c) the inflation hedge benefits of property for home owners. My parents are secure in their retirement with a freehold house, a handful of shares, some savings and a pension. They don't know much about investment and don't need to.

However its always possible to paint a scenario where property was a worse investment.

[Learning]

Have the economists missed something? No additional savings, investments or early repayments were made by either party so are they assuming the renters and home owners finanses were balanced? Renter expenses = home owner expenses over 10 year period?

[elguapo]

It's hard to get past a) the benefit of leverage, b) the enforced savings strategy and c) the inflation hedge benefits of property for home owners. My parents are secure in their retirement with a freehold house, a handful of shares, some savings and a pension. They don't know much about investment and don't need to.

However its always possible to paint a scenario where property was a worse investment.

Enforced savings is the most significant advantage. For people following the baby boomers, knowing something about investment will be required, the pensions the baby boomers are getting will not be available to the next generation.

[BigDreamer]

The two economists attempt to be more forward looking. They construct 144 possible future scenarios. For Sydney, 100 per cent of those scenarios suggest buying remains the best strategy, For Melbourne, buying wins in about 70 per cent of scenarios

How interesting. I'm all for statistics but 100 per cent for buying across those 144 future scenarios sounds a bit off...

[ivanp]

How interesting. I'm all for statistics but 100 per cent for buying across those 144 future scenarios sounds a bit off...

I just had a quick look at full text of the article (http://fbe.unimelb.edu.au/__data/ass...submission.pdf), and I think the 'journalist' have not read the article - there's no statement about 100 per cent and Sydney. In fact, in the article authors write something very different (see page 20 of the PDF):

For Sydney, Adelaide and Canbarra, neither tenure type appeared to be clearly favourable, with
both buying and renting are favourable in about 50 per cent of the scenarios.

[BigDreamer]

I just had a quick look at full text of the article (http://fbe.unimelb.edu.au/__data/ass...submission.pdf), and I think the 'journalist' have not read the article - there's no statement about 100 per cent and Sydney. In fact, in the article authors write something very different (see page 20 of the PDF):

Aha - Good on you for doing a better research than the so called journalist. I knew it sounded far too unrealistic when I read it.

[Wayne]

There is one major factor in buy over rent - people will not invest the difference between the 2, they will spend it!
Therefore they will still be renting and have no savings when retirement comes.
Seems people forget human nature when they study these things.

[Kbkiwi]

There is one major factor in buy over rent - people will not invest the difference between the 2, they will spend it!
Therefore they will still be renting and have no savings when retirement comes.
Seems people forget human nature when they study these things.

This is the most important thing in this argument, couldn't agree more.

[Learning]

There is one major factor in buy over rent - people will not invest the difference between the 2, they will spend it!
Therefore they will still be renting and have no savings when retirement comes.
Seems people forget human nature when they study these things.

Yes, home owners are forced to tie up money in their home but the savings sword swings both ways. Home owners often make the mistake of assuming that the increased capital in their house will pay for a bigger chunk of their retirement than it actually does.
The rates, insurance and maintenance costs of keeping a house after retirement is higher than people usually plan for. These costs go up each year much faster than the pension.

Downsizing often doesn't free up as much equity as people think it will because they want to remain in the same area and/or keep an extra room for visitors. The money freed up is gone in 4 or 5 years.

After owing their own homes for decades people find it hard to let go and rent. Losing the freedom to do what they want have having someone tell them how they should look after it.

[Wayne]

Yes, home owners are forced to tie up money in their home but the savings sword swings both ways. Home owners often make the mistake of assuming that the increased capital in their house will pay for a bigger chunk of their retirement than it actually does.
The rates, insurance and maintenance costs of keeping a house after retirement is higher than people usually plan for. These costs go up each year much faster than the pension.

Downsizing often doesn't free up as much equity as people think it will because they want to remain in the same area and/or keep an extra room for visitors. The money freed up is gone in 4 or 5 years.

After owing their own homes for decades people find it hard to let go and rent. Losing the freedom to do what they want have having someone tell them how they should look after it.

Downsizing doesn't free up as much capital as people think - as you say.
But the cost of rates, insurance and maintenance is less than the cost of renting.
Studies have shown that people going into retirement (on Nat Super) are better off if they own their own home rather than renting.

[investorak]

Are they comparing buying a home vs renting and investing in shares

How about renting and investing in property?

[Wayne]

Are they comparing buying a home vs renting and investing in shares

How about renting and investing in property?

Sounds fine but would the average person do that?
They'd rent and spend.
I've seen it with people who have lived in a company house (school houses included) at a cheap rent all their lives.
Had a great time until they retired.

[investorak]

Average person, probably not

I see your point, its a force savings in a way

My point is that they are not comparing renting and buying, they are comparing property vs shares

[sidinz]

Are they comparing buying a home vs renting and investing in shares

No, they specifically said that neither the renter nor homeowner put any extra money in. So apart from the initial 'deposit' money which the renter invests, they invest no further. To maintain comparability, the homeowner makes no further payments on their mortgage or investments.

So they are comparing renting vs. buying.