When renting a unit beats buying a house

The news last week that the Reserve Bank of Australia  thinks young people might be better off renting rather than buying had a resonance in strata more than any other area of housing.

Right now more than 50 percent of residents of strata units are renters, while there seems to be broad acceptance that the creaking ‘Australian Dream’ of your own house on your own block is being replaced by a “have it all” attitude where young  people want to work, play and sleep in the same area.

But that’s not to say they all want to live in the city centre.  According to one developer I spoke to recently, research shows that most people want to live near their friends and family but you can’t cram two or three generations of locals into the same number of detached houses.

However, build apartments in or near their neighbourhood,  allowing them to stay connected  and enjoy the modern lifestyle, then they will snap them up.

Getting back to the debate between owning versus renting, it’s interesting that the notion of not ever owning a home is even being canvassed.  Home ownership has long been one of the basic elements by which we measured the success or otherwise of our lives.

But attitudes change, and they certainly have towards living in apartments. Only a decade ago, the idea of people choosing to live in strata units (rather than being forced by circumstances to do so) was considered bizarre.

Not so today. According to some reports, Generations X and Y are boosting the owner-occupier figures in apartments by as much as 5 percent in some areas, and the desirability of apartment living means the median rents of units and houses in both Sydney and Melbourne are so close – only $10 a week apart – that they are almost certain to be on a par soon.

So, buying or renting, how do the figures stack up? It’s still true that you can rent a better place than you can afford to buy.  The Sydney median rent of about $500 a week will get you into a $500,000 home, give or take.  Convert that into a 25-year, no deposit mortgage at the best current variable rate of about 5% and that will get you a $350,000 house or unit (taking into account stamp duty and legal costs).

Put it another way, the home you can rent for about $370 a week – the median unit rent in Melbourne – would cost you an extra $130 a week to buy.  That’s $6,800 a year, or nearly $170,000 over the life of the loan,  that you don’t get to spend on YOU.

And let’s not forget that the current low interest rates will, inevitably, get higher.  Anyone just now paying off a 25-year mortgage will have known a time when the interest rates were up in the mid to high teens and just one percentage point more means an extra $30 a week on the $350,000 loan.

So why don’t more people just rent? The oft-quoted downsides include that you are paying off someone else’s mortgage.  So what?  They and the taxpayer are subsidising your lifestyle through negative gearing.  And that’s before we even mention the dreaded levies (which are factored into rents, of course, but at least it’s not another bill for tenants).

Also, there’s the fear of having to move home at someone else’s whim. But it’s not that easy to get rid of long-term renters and, in any case, landlords will attach themselves like limpets to good reliable tenants.

One upside of renting is that if your choice of home (or neighbours) turns out to be a mistake, you only have to wait till the lease is up, at the latest,  and you can move somewhere better. As an owner, there are all kinds of additional hassles and costs associated with moving home.

With the RBA announcement, it feels like we are witnessing the evolution of a different species of Australian home dweller. No longer obsessed with the ideas of home ownership and the quarter-acre block, they are looking to  Europe and North America where renting your home and living in apartments are two concepts that have been happily married for centuries.

While we dreamed of backyards and rumpus rooms in the suburbs, New Yorkers fantasised about rent-controlled apartments in Manhatten.  Even so, we are a fundamentally conservative lot here.  The new breed of homebuyer may well have a bet each way and purchase an investment apartment, just to get a toe in the market, but rent a better one so they get the best of both worlds.

You can read more about the ups and downs of renting in strata on the Flat Chat Forum.

A version of this article has also appeared on the Sydney Morning Herald’s online pages and in the print edition of Domain.

 

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