The Pros and Cons of Buying vs. Renting Australian Real Estate

A housing affordability crisis is hitting both renters and home buyers, but we need to live somewhere - so what are the pros and cons of each?

Residz Team 6 min read

The Pros and Cons of Buying vs. Renting Australian Real Estate

It used to be a rite of passage for young Australian adults. Leaving home to rent a property, then saving a deposit with a view to buying a home of their own. However, since the pandemic, things have changed. Fewer than 1% of rental properties are available to rent in most Australian cities, and buying a home means up to a decade of solid saving before you get hunting for unaffordable properties.

No wonder many aspiring homeowners and tenants are grappling with the decision of whether to buy or rent a property.

In this blog, we'll delve into the pros and cons of buying versus renting in the current Australian real estate landscape, taking into account the changes since COVID that have influenced the market dynamics.

Buyers and Renters Both Face Stiff Challenges

In recent times, the decision to rent or buy has become even more challenging due to significant changes in the market.

Over the past year, the country has witnessed a surge in rental prices, soaring nearly 10%, while research shows the number of homes available to rent in Australia’s capital cities tightened by a further 5.4% in May 2023 to a crisis level and a new historic low – a 54% drop in 3 years.

Available rentals range from a critical 0.3% in Adelaide to 0.4% in Hobart, 0.6% in Brisbane and rise to only 1.4% in Sydney and 1.6% in Melbourne.

A healthy rental market is said to be one with a 3% rental vacancy rate – although anything under 5% is classified in New York as a “housing emergency”, says Leo Patterson Ross, chief executive of the Tenants Union of NSW, quoted in Queensland Property Investor.

It’s made renters competitive, and landlords able to ask for higher rents as a result. But renters can’t just keep squeezing more people into their share houses, nor is it as easy to bolt to the country.

The crisis has hit both capital cities and regional areas, cutting off options for cash-strapped renters looking to reduce monthly expenses.

With Domain listing the median rent in Sydney at $700 per week, Canberra and Darwin at $675 and $650 respectively, and Melbourne, Brisbane, Adelaide, Perth, and Hobart hovering around the $520 to $580 per week, many renters are considering buying a home as viable alternative.

That’s where they run up against another wall.

New research shows it takes up to eight years to save a deposit, the cost of borrowing has surged since COVID, and there’s rising FOMO thanks to a persistent shortage of affordable houses and units available for purchase to further complicate the situation.

It’s a bit of a Sophie’s Choice, and you’ve got to feel for young Australians looking to buy or rent. With that in mind, here are the pros and cons of buying or renting a home.

Pros of Buying

Stability and Long-term Investment

One of the primary advantages of buying a property is the stability it provides. As a homeowner, you have control over your living space and are not subject to sudden eviction notices or changes in rental terms.

Moreover, real estate is considered a long-term investment, which can appreciate in value over time, potentially yielding substantial returns when you decide to sell.

Building Equity

With each mortgage payment, a portion goes towards the principal, helping you build equity in the property. As the value of the property increases, your net worth also grows.

This equity can later be leveraged for various purposes, such as funding other investments or renovations.

Freedom of Customisation

Every renter knows the frustration of not being able to drive a nail into the wall to hang a picture. Homeownership grants you the freedom to customise your living space according to your preferences. You can make structural changes, paint walls, and add amenities without seeking permission from a landlord.

Stable Mortgage Payments

Opting for a fixed-rate mortgage allows you to have consistent monthly payments, unaffected by interest rate fluctuations, offering financial predictability.

Tax Benefits

With investment properties, the Australian government provides several tax benefits to homeowners, including deductions for mortgage interest, property taxes, and depreciation, which can lead to significant savings.

These tax deductions are part of the investment strategy known as negative gearing.

Cons of Buying

High Entry Costs

Buying a property involves significant upfront costs, including the deposit, stamp duty, legal fees, and building inspections. These costs can be a barrier, especially for first-time buyers.

Unaffordability

For most young people, Australian properties are simply becoming unaffordable. With predictions of record prices in 2024 and another potential rise or two in mortgage interest rates, very few average earners can afford the payments. Coupled with the high cost of living, there’s very little left in the pocket once they’ve committed to buying a property.

Limited Flexibility

While owning a property provides stability, it can also limit your flexibility, making it challenging to move for job opportunities or personal reasons.

Maintenance Expenses

As a homeowner, you are responsible for the maintenance and repair costs of the property. Unexpected issues can arise, putting a strain on your finances.

Market Volatility

The real estate market can be subject to fluctuations, and the value of your property may not always appreciate as expected. Economic downturns can lead to potential depreciation, impacting your investment.

Pros of Renting

Lower Initial Costs

Renting typically requires a smaller initial financial outlay, as it usually involves a security deposit and the first month's rent. This makes renting a more accessible option for those with limited savings.

Flexibility

Renting offers a higher degree of flexibility, allowing you to relocate easily at the end of the lease period without the burden of selling a property.

Lower Maintenance Responsibility

Unlike homeowners, renters are generally not responsible for major maintenance and repair costs, as those are the landlord's responsibility.

Opportunity to Save

With lower upfront costs and reduced maintenance expenses, renters may have more disposable income to save or invest in other assets.

Cons of Renting

Uncertain Rent Increases

In a market where rent prices have risen nearly 10% in the past year, renters may experience uncertainty and financial strain due to unpredictable rent hikes. There have been calls for caps on annual rent increases. Dorina Pojani, Associate Professor in Urban Planning at The University of Queensland suggests in The Conversation they could be tied to the annual inflation rate.

Limited Control and Customisation

Renters have limited control over their living space. Customisation options are often restricted, and major renovations may require landlord approval.

No Equity Building

Unlike homeowners, renters do not build equity in the property and miss out on potential wealth accumulation through property appreciation.

Subject to Landlord's Decisions

Renters are subject to the decisions and policies of the landlord, which can impact their living conditions and lease terms.

Summary

As the Australian real estate market faces challenges like rising rental prices, increased mortgage interest rates, and a shortage of rental properties and quality houses to buy, the decision between buying and renting becomes more complex.

Each option has its own set of advantages and disadvantages, and the choice ultimately depends on individual circumstances, financial goals, and personal preferences.

For those seeking stability, a long-term investment, and the opportunity to build equity, buying a property may be the preferred choice. However, potential homebuyers must be prepared to bear the initial high costs, maintain the property, and face market fluctuations.

On the other hand, renting offers more flexibility and lower initial costs, making it an attractive option for those who prioritise mobility and do not wish to commit to a long-term investment. However, renters must be cautious of potential rent increases and limited control over their living space.

In any case, it is crucial to thoroughly assess one's financial capacity, future plans, and risk tolerance before making a decision. Consulting with a financial advisor or a real estate professional can provide valuable insights and help navigate the complexities of the current Australian real estate market.

Remember, the key is to do your research, and make an informed choice that aligns with your unique circumstances and aspirations.

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