Is it worth buying a property?

If we have data, lets’ look at the data. If all we have are opinions, then let’s go with mine.

Would you prefer to pay off your mortgage or someone else’s? For most people, the former is the obvious answer.

Who wants to live in someone else’s house, have to ask permission to put a picture on the wall, have strangers ‘inspecting’ their personal possessions every 3 months without warning, have their rent increased, and all the while knowing that any moment, the owner may sell and they will have nowhere to live.

So yes, for most people, they want to buy.

The question is, is it worth it?

To answer this, we need to zoom out and get our data nerd on.

Firstly, here are a few assumptions we are going to work with.

Let’s assume the question we are asking is should we buy a property for $595,000, or should we rent that same property for $550 per week?

Let’s take a look at the costs.

Total costs for renting include rent and that’s it. It’s one of the benefits of renting.

Unfortunately, rents increase.

Over the last 50 years, rents have increased at roughly 2% above inflation. The RBA’s long-term inflation target is 2% to 3%, we will assume inflation will average 2.5%, therefore, rental increases we will assume to be 4.5%.

Therefore, the total cost of renting is $351,433

Owning a house comes with more costs. These include purchase costs, rates, insurance, mortgage repayments, etc.

For the purpose of this example, we will assume a flat interest rate of 4.5%. Obviously, interest rates will not remain the same over the next 10 years and to be honest, no one knows what they will be. This is a weakness in the discussion, but we must pick a number, so 4.5% it is.

When you purchase a property, you have costs, legal costs, transfer fees, lenders’ mortgage insurance, and more. On a $595,000 purchase, assuming a 95% loan-to-value ratio and after deducting the First Home Owners Grant, these would be estimated at $38,000.

Rates, insurance, etc. have been estimated at $3,000 per year.

The cost over 10 years comes to approximately $57,431 in favour of renting. This is $5,743 per year or roughly $110 per week

At first, it would seem financially that you are better off to keep renting. But dig a little deeper and there’s more to the story.

Firstly, when you pay rent money, 100% of that is dead money used by your landlord to pay off their mortgage.

When you make repayments on your home, a percentage of the money pays interest, which is also dead money but a percentage pays down your debt and if you are ever to resell the home, you get that money back. Almost like a forced savings plan.

In our example, the loan began at $560,500 but by the end of the 10 years, the loan will be down to $468,764 meaning you have paid $91,736 off the loan.

Whereas before it seemed we were $57,431 better off renting if we include the $91,736 we paid off the loan, we are actually $34,305 better off owning our own home ($91,736 – $57,431 = $34,305).

This hasn’t even taken into account the elephant in the room, compounding capital growth. This is the secret to property wealth. Property goes up in value. Depending on who you ask and where you look, you will get differing answers as to how much property goes up in value and that’s because not all properties are created equal. Historically, houses have increased in value more than apartments and capital cities have increased more than regional areas. For the purpose of this example, we are going to assume property will increase by 7% compounding annually.

That means by the end of 10 years, your $595,000 property would be worth $1,093,883

$1,093,883 property value minus $468,764 loan value equals equity of $625,119

You will make $625,119, minus the costs of purchase and owning $408,874, which equals $216,244. In other words, owning a property will make you $216,244.

Whereas renting a property will cost you -$351,422.

The financial difference between owning and renting is $567,666 in favour of owning.

So, is it worth buying a property?

Yes, for sure.