The Real Buying versus Renting Story

Today we will return to the old buying vs renting argument. RP Data yesterday released their July 2013 Buy versus Rent Report and it found that in 13% or 692 suburbs it was cheaper to buy than rent. This is a considerable increase from the November 2012 report, where in only 7% of suburbs it was found to be cheaper to buy than rent.

RP Data’s methodology is somewhat questionable in calculating its ratio; you can download the report from here to view the full assumptions. We have have picked out a few assumptions below that seem suspect when RP Data calculates its ratio:

  1. A loan to value ratio (LVR) of 90% which means that the purchaser is borrowing 90% of the value of the home (i.e. they have a 10% deposit).
  2. A variable mortgage rate of 5.4% per annum.
  3. A loan period of 30 years.

With the first assumption, RP Data does not take into account lenders mortgage insurance. LMI can be a large input cost and would definitely add to the cost of buying over renting. Even so, a recent article from the Home Loan Experts states that LMI has increased by almost 50% in recent months, putting further pressure on buying a home over renting.

The next assumption is the interest rate. Obviously, as interest rates fall it is cheaper to borrow and service a mortgage meaning more people can afford to buy. However, we are currently at generational low interest rates and many people understand that they need a buffer when borrowing large sums of money, meaning that, even though interest rates are low not everyone will leverage up to buy.

The loan period of 30 years is another false assumption. Many people these days live in a house for up to 8 years before moving, which roughly means paying stamp duty, legal costs, agents’ fees and other associated costs three to four times in that 30 year period and thus adding a substantial amount to the buying scenario.

Debunking the above assumptions means you could safely add a further $100 a week to buying over renting. If we add another $100 a week to purchasing, the list of 692 suburbs would shrink to around 350 suburbs. If we go further and remove suburbs that have a median of sub $250,000 and are in a mining town that list would further shrink to around 100 suburbs in which it is cheaper to buy than rent. This means that for the majority of Australians in only 2% of suburbs it is cheaper to buy than to rent.

Many people bring out the argument that when renting you have to move every year, you are at the mercy of the landlord and the property manager and you have little rights with how to treat the property, but these are all misconceptions. From a landlord’s perspective they don’t want you to leave, they don’t want to have any vacancies and they don’t won’t multiple tenants going through the property moving their furniture and causing a large amount of wear and tear. As long as the tenant keeps the place neat and tidy and pays the rent you can live in the property for multiple years.

Buying a property to live in today is as much of a financial decision as it is a lifestyle decision, so it is important to take into account the financial consequences of buying. Around 98% of people reading this who are looking at buying a property to live in would be better off renting. Check out Blue Wealth’s video (click here) on buying vs renting to see the financial advantages that renting can bring.


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