While the residential property market has cooled over the past year, affordability is still at a record low, with the average house in Sydney costing 10.9 times the average New South Wales annual income.
At that level, a buyer of an average Sydney home needs to save for over nine years (seven years for those buying an apartment) to accumulate the 20 per cent deposit required by most lenders. New research suggests that, in many cases, people would be better off putting that money to another use.
With interest rates at historic lows, the cost of servicing a mortgage is around the long-term average, so it is the difficulty of saving a deposit that locks many new entrants out of the market.
According to EY Sweeney research, two out of three Sydney residents think renting is a waste of money and it is much smarter to buy a home buyer. EY’s modelling comes up with a different conclusion.
EY compared two people: one putting their savings towards a 20 per cent deposit on an average priced Sydney unit and borrowing to fund the balance; and another putting the same amount of savings into an S&P/ASX 200 index fund, leveraged with a margin loan with a 50 per cent LVR, and renting in the same area.
The renter reinvested their dividends and also regularly invested the difference between their rental cost and the buyer’s borrowing costs in their fund.
EY measured the outcomes over 10 years, conducting the comparison for all of Sydney’s 43 local government areas. It found that in 62 per cent of the comparisons people came out ahead if they rented and maintained a leveraged investment in the Australian equity market.
“It is important to note that in this model the renter is taking on a risk profile that is perhaps higher than most are likely to take and put in place a savings framework that is more stringent than most would want,” EY says.
EY also conducted the comparison without the margin loan and in that case the outcomes favoured home buyers.
Outcomes varied when different time periods were analysed. Renters tended to come out ahead in the late 1990s and early 2002, while buyers tended to come out ahead in the 10 years to 2017.
Buying a home in Woollahra in 2007 and selling in 2017 was a smart move, putting buyers ahead of renters by more than $300,000. But those who bought in 1998 and sold in 2008 lost out to renters, falling behind by more than $600,000.
In Sydney’s inner ring, including areas such as North Sydney, Mosman and Leichhardt, renters came out ahead 70 per cent of the time over all periods. EY found that buying a home in Sydney’s inner and middle suburbs leads to a better financial outcome than buying in the outer ring. Outer ring local government areas include Baulkham Hills, Camden, Liverpool and Penrith.
EY says: “The traditional narrative is that many people rent because they can’t afford to buy – or buy where they want to live. People feel they should make sacrifices to save a deposit and buy.
“This assumes that everyone is better off owning their own home. Our research shows that many people could be better off renting permanently, rather than buying.”
Renting provides a significant mobility dividend, allowing people to relocate without incurring high costs
However, for many the lack of tenant rights is a factor that pushes them to buy. Reform is needed to change this roadblock.”
In countries such as Germany, lease agreements are typically five to 10 years, comparedwith the 12-month lease that is typical in Australia.