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An investor’s take on the renting versus buying discussion

Friday, 1st Aug 2014

home

There has been a lot of media coverage lately about the difference, financially speaking, between buying a home and renting one.

It stemmed from a paper released by the Reserve Bank of Australia, which was largely interpreted by journalists as an endorsement for renting.

One of the problems with the paper, a fact rightly acknowledged by the authors, is that it didn’t take into account the non-financial benefits of home ownership, such as pride, security of tenure and the freedom to renovate.

But for those with an investment mindset, there was another gaping hole in the discussion: what it all means in terms of wealth creation.

Sure, it might be cheaper to rent on a week-to-week basis than buying a home. But what are you left with at the end of the day when the time comes to retire? Will you be able to rely on your superannuation or the age pension for an income? Will you have to rent throughout your retirement years?

One can only make an economic argument in favour of renting if the ‘extra’ money that would have been spent buying and owning a home is used to build wealth (ideally through property investment).

And there are plenty of people who have successfully executed the strategy of renting a home and ploughing all their additional income into building a property portfolio.

But ultimately most people aren’t financially disciplined to do this and they value the other benefits of home ownership too much.

This is why for most people, owning a home will always be the preferred choice, not just from a lifestyle point of view but as part of a plan for building wealth.