At the time of writing this post i am twenty six years of age, which makes me a “Millennial” – or if you prefer, a part of Generation Y. I currently do not own a property. To provide a little further context about my background and perspective on the rent vs home-ownership conversation, i live in Australia, grew up in a middle class family that was pay cheque to pay cheque and have received no inheritance (nor will i ever). I grew up with the traditional Australian dream pumped into me. The idea that owning your own home with the quarter acre block with the big backyard and all of the social acceptance and praise that comes with it is what i should strive for and any less is a failure.
So, what do i think about the prospect of owning my own home vs renting?
Short answer – I think owning a home is possible, if extremely difficult and potentially financially crippling in today’s market unless you are a high income earner – i also believe that renting is a viable alternative that should not be dismissed or something to be ashamed of. Let me elaborate.
Home-ownership for under 40s (so people like myself and my girlfriend) has plunged from 36% to 25% since 2002. The median price of a residential home in Australia’s cities is in excess of $700,000. The median price for a home in the city i live in, Melbourne, is $809,468 as of March 2019.
To put this in context I would need $140,000 in the bank plus some to put down a 20% deposit on a $700,000 home, or if i go off of the Melbourne average i need $161,893.. Just to get me in the door and not have to pay lenders mortgage insurance. If I don’t have the 20% i can still get a mortgage but I’ll be paying mortgage insurance (this protects the bank) and I’ll be getting a wayyyyy higher interest rate, glorious. Now, let’s quickly do some maths and figure out how/if i can potentially achieve this.
So, I’ll be generous with this example and say we are going to buy a house for $600,000, $209,468 less than the median price for a house in Melbourne and i will use the Australian average income – 82,436 a year 2018. (Seasonally adjusted wages – Bureau of Statistics). So lets assume by the time you are earning this amount you are several years into your career and living out of home in your late 20s (otherwise sorry people, you aren’t making this amount).
This income equates to $1,200.93 after tax, per week – the 20% needed for a $600,000 home is $120,000 (and some more for associated fees). In order to achieve this i would need to save $12,000 a year for 10 years and hope and pray the price of property does not go up in the next decade.. That is a saving rate of $230 a week for a decade, assuming nothing changes. Lets say i wish to buy this house in 5 years, yay! bump that up to $460 a week savings and you start to paint a picture as to how difficult this prospect is, saving 1/3 of our salary, per week, for 5 years. For some more added context – the average Australian is paying $427 a week for a standard 3 bed house outside of the city centre – in suburbia.
So, lets wrap up these calculations and say that i committed to wanting to buy a $600,000 home – If i were to save $460 a week and pay $427 in rent this leaves me with a measly $313 a week for all my other bills, fuel, food and just living life. This means, no holidays, no buying anything, no dining out, or even living in a nicer area for a better lifestyle etc etc for pretty much all of your younger adulthood. Doesn’t sound too crash hot does it? Now, this is all taking into consideration if the above salary is the average salary that means there is a massive portion of the Australian population that makes under this amount of money – making it near on impossible for them to get the money together.
Let’s throw another interesting fact in for us – right now we have historical lows in interest rates. I have calculated the total interest paid over 30 years for a $600,000 home is $347,971.87 at a rate of 3.89% p.a– That is $347,971.87 dollars to the bank purely in interest – if rent is dead money then what name do we have for the money spent on interest rates? Walking dead money? I do not know, but that’s over $340,000 down the drain to the bank just for the pleasure of being allowed to get a loan from them. Total over 30 years $947,971.
Okay – so let’s ask ourselves why we are even buying a home and investing all of our money for 30 odd years into a piece of land with some bricks and mortar. Most people will say freedom and security – i would argue being shackled to a bank for 30 years is the opposite to freedom.. but each to their own. I truly believe in wealth creation however and in my opinion the real reason should be just that – wealth creation. So that you can live the life you want to live, travel a lot and do all the things you want to do and have a stress free retirement. A decision this big should never be based on emotion (the idea of i “want” a house so i can paint the walls or smash the kitchen and rebuild etc) and always based on analysis, a financial plan and taking a lot of different variables into consideration – not just because our parents told us it was right or society expects us to. Let’s start to look at alternatives.
With buying a house you have the risk of poor diversification, all of your eggs are in one basket so your wealth is almost completely reliant on the success of one asset. Renting allows you to spread those risks much more widely diversifying your risk and asset classes. Such as renting fairly cheaply and spending the remaining money that you would usually spend on land and interest rates etc on a different asset class such as the stock market or your own business etc. So then, what are these alternatives?
In my opinion they are – Renting for the long term (and investing in other assets) & or buying in more remote/rural areas.
Now this is a very confronting idea for a lot of people, especially the 40+ year old population who seem extremely emotionally attached to the idea of home ownership. Let’s think about the demographic of younger people today – we value travelling, we value flexibility with our lifestyles and careers, we also don’t like the idea of being stuck paying back a bank for 30+ years or stuck to the one place. This is all purely just lifestyle factors and a change in values – So lets get back to the economics and finances.
Below is a graph of how the two asset classes have performed over a 90 year period. This highlights the comparison between real estate and the Australian share market and their general returns for the 90 years (also shows how bad an idea of just “saving” as an investment in the cash line below). As you see – the share market actually out performed the residential property market. So, maybe we shouldn’t put all our eggs in the one basket?
Okay, so i just want to quickly clear something up and surprise you all – i wish to own my own home and it is a goal of mine. Maybe that looks like “rentvesting” renting an affordable home in a desirable location whilst investing in a cheaper area and renting the property out. That is something my beautiful partner and i will need to decide, but the purpose for this post is to provide a little bit of food for though for whoever is reading this and to pose a few different ideas to the “Australian dream”. Get the brain working and trying to entertain different ideas as to how life is “meant” to be lived (if thats such a thing).
The motivation for this post comes from my interest in property – and that I have seen personally my parents marriage strain and eventually break due to financial stress (and other issues). I vowed at that point to assess all different avenues of wealth creation and not put myself into a crippling financial situation just “because its whats done”. Home ownership should still be something worth pursuing but not at the expense of a happy, stress free life filled with joy, love and contentment.
I hope i can look back on this post in the on coming years and hopefully be sitting in my own home in a good financial situation, time will tell. 🙂
Thank you for taking the time to read this post and feel free to comment with any of your own ideas or comments !